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Dresser-Rand Group 10-Q 2013
fe6d579591254f1

 

 

 

 

UNITED STATES 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, 2013

 

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: 001-32586

________________

DRESSER-RAND GROUP INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

Delaware

 

20-1780492

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

 

 

 

 

 

West8 Tower, Suite 1000

10205 Westheimer Road

Houston, TX, U.S.A.

 

112 Avenue Kleber

Cedex 16, Paris, France

 

77042

 

 

 

75784

(Addresses of principal executive offices)

 

(Zip Codes)

 

(713) 354-6100 (Houston)

33 156 26 7171 (Paris)

(Registrant’s telephone numbers, 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.  Yes x    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).  Yes x    No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one): 

 

 

 

 

 

Large accelerated filer

x

Accelerated filer

¨

Non-accelerated filer

¨    (Do not check if smaller reporting company)

Smaller reporting company

¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨     No x

 

The number of shares of common stock, $.01 par value, outstanding as of October 24, 2013, was 76,290,473.

 

 


 

TABLE OF CONTENTS

 

 

 

 

PART I. FINANCIAL INFORMATION

Page

Item 1. Financial Statements (unaudited): 

 

Consolidated Statement of Income for the three and nine months ended September 30, 2013 and 2012 

3

Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012 

4

Consolidated Balance Sheet at September 30, 2013 and December 31, 2012 

5

Consolidated Statement of Cash Flows for the nine months ended September 30, 2013 and 2012 

6

Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2013 and 2012 

7

Notes to Consolidated Financial Statements at September 30, 2013 

8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

27

Item 3. Quantitative and Qualitative Disclosures about Market Risk 

40

Item 4. Controls and Procedures 

40

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings 

40

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

41

Item 6. Exhibits 

41

Signatures 

43

Exhibits

 

 

 

 

 

     

Page 2 of 43


 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

 

DRESSER-RAND GROUP INC.

CONSOLIDATED STATEMENT OF INCOME

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales of products

 

$

430.2 

 

$

390.3 

 

$

1,592.4 

 

$

1,312.4 

Net sales of services

 

 

203.7 

 

 

204.1 

 

 

613.2 

 

 

579.6 

Total revenues

 

 

633.9 

 

 

594.4 

 

 

2,205.6 

 

 

1,892.0 

Cost of products sold

 

 

303.7 

 

 

279.5 

 

 

1,222.0 

 

 

989.1 

Cost of services sold

 

 

147.4 

 

 

144.3 

 

 

430.6 

 

 

419.6 

Total cost of sales

 

 

451.1 

 

 

423.8 

 

 

1,652.6 

 

 

1,408.7 

Gross profit

 

 

182.8 

 

 

170.6 

 

 

553.0 

 

 

483.3 

Selling and administrative expenses

 

 

93.1 

 

 

90.2 

 

 

287.7 

 

 

267.4 

Research and development expenses

 

 

8.3 

 

 

6.4 

 

 

31.2 

 

 

17.6 

Income from operations

 

 

81.4 

 

 

74.0 

 

 

234.1 

 

 

198.3 

Interest expense, net

 

 

(7.8)

 

 

(15.7)

 

 

(35.5)

 

 

(47.9)

Other (expense) income, net

 

 

(8.1)

 

 

1.2 

 

 

(7.1)

 

 

0.8 

Income before income taxes

 

 

65.5 

 

 

59.5 

 

 

191.5 

 

 

151.2 

Provision for income taxes

 

 

15.5 

 

 

17.4 

 

 

52.7 

 

 

49.8 

Net income

 

 

50.0 

 

 

42.1 

 

 

138.8 

 

 

101.4 

Net income attributable to noncontrolling interest

 

 

(0.6)

 

 

(0.9)

 

 

(3.2)

 

 

(2.6)

Net income attributable to Dresser-Rand

 

$

49.4 

 

$

41.2 

 

$

135.6 

 

$

98.8 

Net income attributable to Dresser-Rand per share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.65 

 

$

0.55 

 

$

1.78 

 

$

1.31 

Diluted

 

$

0.64 

 

$

0.54 

 

$

1.77 

 

$

1.30 

Weighted-average shares outstanding - (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

76,263 

 

 

75,542 

 

 

76,092 

 

 

75,455 

Diluted

 

 

76,890 

 

 

76,351 

 

 

76,790 

 

 

76,168 

 

 

See accompanying notes to consolidated financial statements.

 

 

Page 3 of 43


 

DRESSER-RAND GROUP INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

50.0 

 

$

42.1 

 

$

138.8 

 

$

101.4 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

22.4 

 

 

18.7 

 

 

(18.2)

 

 

(1.4)

Unrealized gain (loss) on derivatives - net of tax of $0.0 and $0.0 for the three months ended September 30, 2013 and 2012, respectively, and $0.1 and $0.04 for the nine months ended September 30, 2013 and 2012, respectively

 

 

 -

 

 

 -

 

 

0.2 

 

 

(0.1)

Pension and other postretirement benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost and net actuarial loss included in net periodic costs -  net of tax of $0.8 and $0.8 for the three months ended September 30, 2013 and 2012, respectively, and $2.4 and $2.5 for the nine months ended September 30, 2013 and 2012, respectively

 

 

1.4 

 

 

1.5 

 

 

4.1 

 

 

4.3 

  Total other comprehensive income (loss)

 

 

23.8 

 

 

20.2 

 

 

(13.9)

 

 

2.8 

Total comprehensive income

 

 

73.8 

 

 

62.3 

 

 

124.9 

 

 

104.2 

Comprehensive income attributable to noncontrolling interest

 

 

(0.8)

 

 

(0.8)

 

 

(2.5)

 

 

(2.2)

Comprehensive income attributable to Dresser-Rand

 

$

73.0 

 

$

61.5 

 

$

122.4 

 

$

102.0 

 

 

See accompanying notes to consolidated financial statements.

 

 

Page 4 of 43


 

DRESSER-RAND GROUP INC.

CONSOLIDATED BALANCE SHEET

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2013

 

2012

 

 

 

 

 

 

 

 

($ in millions)

Assets

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

174.4 

 

$

122.8 

Restricted cash

 

 

12.3 

 

 

17.6 

Accounts receivable, less allowance for losses of $9.3 at 2013 and $9.6 at 2012

 

 

706.7 

 

 

565.9 

Inventories, net

 

 

711.1 

 

 

552.5 

Prepaid expenses and other

 

 

79.0 

 

 

66.7 

Deferred income taxes, net

 

 

30.3 

 

 

30.5 

Total current assets

 

 

1,713.8 

 

 

1,356.0 

Property, plant and equipment, net

 

 

468.2 

 

 

466.9 

Goodwill 

 

 

917.8 

 

 

911.3 

Intangible assets, net

 

 

485.0 

 

 

506.9 

Deferred income taxes

 

 

18.2 

 

 

14.9 

Other assets

 

 

96.5 

 

 

77.0 

Total assets

 

$

3,699.5 

 

$

3,333.0 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

Current liabilities

 

 

 

 

 

 

Accounts payable and accruals

 

$

672.7 

 

$

600.4 

Customer advance payments

 

 

168.7 

 

 

282.3 

Accrued income taxes payable

 

 

36.3 

 

 

44.4 

Short-term borrowings and current portion of long-term debt

 

 

43.6 

 

 

35.9 

Total current liabilities

 

 

921.3 

 

 

963.0 

Deferred income taxes

 

 

47.2 

 

 

35.8 

Postemployment and other employee benefit liabilities

 

 

127.1 

 

 

142.8 

Long-term debt

 

 

1,295.9 

 

 

1,014.9 

Other noncurrent liabilities

 

 

71.3 

 

 

81.6 

Total liabilities

 

 

2,462.8 

 

 

2,238.1 

Commitments and contingencies  (Note 13)

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

Common stock, $0.01 par value, 250,000,000 shares

 

 

 

 

 

 

authorized; and 76,286,174 and 75,675,854 shares issued and

 

 

 

 

 

 

outstanding at September 30, 2013 and December 31, 2012, respectively

 

 

0.8 

 

 

0.8 

Additional paid-in capital

 

 

157.4 

 

 

140.5 

Retained earnings

 

 

1,220.2 

 

 

1,084.6 

Accumulated other comprehensive loss

 

 

(147.9)

 

 

(134.7)

Total Dresser-Rand stockholders' equity

 

 

1,230.5 

 

 

1,091.2 

Noncontrolling interest

 

 

6.2 

 

 

3.7 

Total stockholders' equity

 

 

1,236.7 

 

 

1,094.9 

Total liabilities and stockholders' equity

 

$

3,699.5 

 

$

3,333.0 

 

 

See accompanying notes to consolidated financial statements.

 

Page 5 of 43


 

DRESSER-RAND GROUP INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

2013

 

2012

 

 

 

 

 

 

 

 

 

($ in millions)

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

138.8 

 

$

101.4 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

67.1 

 

 

64.2 

Deferred income taxes

 

 

4.4 

 

 

7.4 

Stock-based compensation

 

 

22.8 

 

 

26.7 

Excess tax benefits from stock-based compensation

 

 

(6.8)

 

 

(4.0)

Amortization of debt financing costs

 

 

2.9 

 

 

2.9 

Provision for losses on inventory

 

 

0.9 

 

 

0.7 

(Gain) loss on sale of property, plant and equipment

 

 

(0.4)

 

 

0.8 

Loss from equity investments

 

 

4.0 

 

 

1.0 

Changes in working capital and other, net of acquisitions

 

 

 

 

 

 

Accounts receivable, net

 

 

(142.7)

 

 

67.1 

Inventories

 

 

(165.4)

 

 

(95.9)

Prepaid expenses and other

 

 

(13.8)

 

 

(20.7)

Accounts payable and accruals

 

 

57.8 

 

 

(64.7)

Customer advances

 

 

(109.0)

 

 

(15.7)

Taxes payable

 

 

(9.3)

 

 

(17.4)

Pension and other post-retirement benefits

 

 

(9.1)

 

 

(5.6)

Other

 

 

(4.6)

 

 

1.1 

Net cash (used in) provided by operating activities

 

 

(162.4)

 

 

49.3 

Cash flows from investing activities

 

 

 

 

 

 

Capital expenditures

 

 

(56.3)

 

 

(48.9)

Proceeds from sales of property, plant and equipment

 

 

1.4 

 

 

0.8 

Acquisitions, net of cash acquired

 

 

 -

 

 

(48.8)

Other investments

 

 

(12.5)

 

 

(13.2)

Decrease in restricted cash balances

 

 

5.8 

 

 

5.2 

Net cash used in investing activities

 

 

(61.6)

 

 

(104.9)

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

4.0 

 

 

2.5 

Proceeds from borrowings

 

 

1,445.6 

 

 

387.6 

Excess tax benefits from stock-based compensation

 

 

6.8 

 

 

4.0 

Repayments of borrowings

 

 

(1,161.8)

 

 

(316.2)

Repurchase of common stock

 

 

(1.5)

 

 

 -

Payments for debt financing costs

 

 

(4.7)

 

 

(0.4)

Net cash provided by financing activities

 

 

288.4 

 

 

77.5 

Effect of exchange rate changes on cash and cash equivalents

 

 

(12.8)

 

 

0.8 

Net increase in cash and cash equivalents

 

 

51.6 

 

 

22.7 

Cash and cash equivalents, beginning of period

 

 

122.8 

 

 

128.2 

Cash and cash equivalents, end of period

 

$

174.4 

 

$

150.9 

 

See accompanying notes to consolidated financial statements.

 

 

 

Page 6 of 43


 

DRESSER-RAND GROUP INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Non-

 

Total

 

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

Controlling

 

Stockholders'

 

 

Stock

 

Capital

 

Earnings

 

(Loss) Income

 

Interest

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2012

 

$

0.8 

 

$

140.5 

 

$

1,084.6 

 

$

(134.7)

 

$

3.7 

 

$

1,094.9 

Stock-based compensation

 

 

 -

 

 

18.4 

 

 

 -

 

 

 -

 

 

 -

 

 

18.4 

Stock repurchases

 

 

 -

 

 

(1.5)

 

 

 -

 

 

 -

 

 

 -

 

 

(1.5)

Net income

 

 

 -

 

 

 -

 

 

135.6 

 

 

 -

 

 

3.2 

 

 

138.8 

Other comprehensive (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 -

 

 

 -

 

 

 -

 

 

(17.5)

 

 

(0.7)

 

 

(18.2)

Unrealized gain on derivatives, net of tax of $0.1

 

 

 -

 

 

 -

 

 

 -

 

 

0.2 

 

 

 -

 

 

0.2 

Pension and other postretirement benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost and net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

actuarial loss included in net periodic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

costs - net of tax of $2.4

 

 

 -

 

 

 -

 

 

 -

 

 

4.1 

 

 

 -

 

 

4.1 

At September 30, 2013

 

$

0.8 

 

$

157.4 

 

$

1,220.2 

 

$

(147.9)

 

$

6.2 

 

$

1,236.7 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Non-

 

Total

 

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

Controlling

 

Stockholders'

 

 

Stock

 

Capital

 

Earnings

 

(Loss) Income

 

Interest

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2011

 

$

0.8 

 

$

105.2 

 

$

905.6 

 

$

(138.8)

 

$

0.2 

 

$

873.0 

Stock-based compensation

 

 

 -

 

 

25.8 

 

 

 -

 

 

 -

 

 

 -

 

 

25.8 

Net income

 

 

 -

 

 

 -

 

 

98.8 

 

 

 -

 

 

2.6 

 

 

101.4 

Other comprehensive (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 -

 

 

 -

 

 

 -

 

 

(1.0)

 

 

(0.4)

 

 

(1.4)

Unrealized loss on derivatives, net of tax of $0.04

 

 

 -

 

 

 -

 

 

 -

 

 

(0.1)

 

 

 -

 

 

(0.1)

Pension and other postretirement benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost and net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

actuarial loss included in net periodic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

costs - net of tax of $2.5

 

 

 -

 

 

 -

 

 

 -

 

 

4.3 

 

 

 -

 

 

4.3 

At September 30, 2012

 

$

0.8 

 

$

131.0 

 

$

1,004.4 

 

$

(135.6)

 

$

2.4 

 

$

1,003.0 

 

 

See accompanying notes to consolidated financial statements.

 

Page 7 of 43


 

DRESSER-RAND GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

($ 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 (“U.S. GAAP”) for interim financial information.  The information furnished herein reflects all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the Company's Consolidated Balance Sheets as of September 30, 2013, and December 31, 2012; the Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2013 and 2012; and the Consolidated Statements of Cash Flows and Changes in Stockholders’ Equity for the nine months ended September 30, 2013 and 2012.  The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. 

 

In preparing financial statements in accordance with U.S. GAAP, management makes informed judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses.  Management evaluates its estimates and related assumptions regularly, including those related to fair values, allowance for losses on receivables, depreciation and amortization, inventory adjustments related to lower of cost or market, the carrying value and estimated useful lives of long-lived assets, valuation of assets including goodwill and other intangible assets, product warranties, sales allowances, taxes, pensions, postemployment benefits, stock-based compensation, stage of completion and ultimate profitability for certain long-term revenue contracts accounted for under the percentage of completion method, contract losses, penalties, environmental contingencies, product liability, self-insurance programs and other contingencies (including purchase price contingencies).  Changes in facts and circumstances or additional information may result in revised estimates and actual results may differ from these estimates. 

 

These financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2012, and our other filings with the Securities and Exchange Commission.  Operating results for the three and nine months ended September 30, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.  Certain amounts in the prior periods consolidated financial statements have been reclassified to conform to the current periods presentation.

Revenue recognition 

 

We recognize revenue when it is realized or realizable and earned. Generally, we consider revenue realized or realizable and earned when we have persuasive evidence of an arrangement, delivery of the product or service has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Delivery does not occur until products have been shipped or services have been provided to the client, risk of loss has transferred to the client, and either any required client acceptance has been obtained (or such provisions have lapsed) or we have objective evidence that the criteria specified in the client acceptance provisions have been satisfied. The amount of revenue related to any contingency is not recognized until the contingency is resolved.

 

Multiple-element arrangements

 

A substantial portion of our arrangements are multiple-element revenue arrangements or contracts, which may include any combination of designing, developing, manufacturing, modifying and commissioning complex products to customer specifications and providing services related to the performance of such products. These contracts often take up to fifteen months to complete. Provided that the separate deliverables have value to the client on a stand-alone basis, we use the selling price hierarchy described below to determine how to separate multiple-element revenue arrangements into separate units of accounting and how to allocate the arrangement consideration among those separate units of accounting:

 

Vendor-specific objective evidence.

Third-party evidence if vendor-specific objective evidence is not available.

Page 8 of 43


 

DRESSER-RAND GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

($ in millions, except per share amounts)

Estimated selling price determined in the same manner as that used to determine the price at which we sell the deliverables on a stand-alone basis if neither vendor-specific objective evidence nor third-party evidence is available.

 

Our sales arrangements do not include a general right of return of the delivered unit(s). If it is determined that the separate deliverables do not have value on a stand-alone basis, the entire arrangement is accounted for as one unit of accounting, which results in revenue being recognized when the last unit is delivered.

 

Percentage of completion

 

Near the end of 2012 we began entering into certain large contracts with expanded construction-type scope and risk.  These contractual arrangements have a scope of activity that differs in substance from the scope of deliverables found in our traditional sales agreements.  For these types of contracts, we apply the guidelines of ASC 605-35 – Construction-Type and Production-Type Contracts and utilize the percentage of completion method of revenue recognition. Non-traditional scope arrangements include activities typically performed by engineering, procurement and construction contractors. Our clients typically require us to act as a general construction contractor for all or a portion of these projects. These arrangements are often executed in the form of turnkey contracts, where the Company designs, engineers, manufactures, constructs, transports, erects and hands over to the client at the designated destination point the fully commissioned and tested module or facility, which is ready for operation.  Percentage of completion revenue represents approximately 6.7% and 7.1% of consolidated revenues for the three and nine months ended September 30, 2013, respectively.

 

Under the percentage of completion method, revenue is recognized as work on a contract progresses.  For each contractual arrangement that qualifies for the percentage of completion method of accounting, the Company recognizes revenue, cost of sales and gross profit in the amounts that are equivalent to a percentage of the total estimated contract sales value, projected cost of sales and projected gross profit achieved upon completion of the project.  This percentage is generally determined by dividing the cumulative amount of labor costs and labor converted material costs incurred to date by the sum of the cumulative costs incurred to date plus the estimated remaining costs to be incurred in order to complete the contract.  Preparing these estimates is a process requiring judgment.  Factors influencing these estimates include, but are not limited to, historical performance trends, inflationary trends, productivity and labor disruptions, availability of materials, claims, change orders and other factors as set forth in the Risk Factors included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, and in Item 1A. of Part II in the Quarterly Report on Form  10-Q for the period ended March 31, 2013.  In the event that the Company experienced changes in estimated revenues, cost of sales and gross profit, they would be recognized using a cumulative catch-up adjustment that recognizes in the current period the cumulative effect of the changes on current and prior periods based on a contract’s percentage of completion.

 

We apply the percentage of completion method of accounting to agreements when the following conditions exist:

The costs are reasonably estimable.

The contract includes provisions that clearly specify the enforceable rights regarding products and services to be provided and received by the parties, the consideration to be exchanged and the manner and terms of settlement.

The customer can be expected to satisfy all obligations under the contract.

We expect to perform all of our contractual obligations.

 

Cost of revenue for our construction-type contracts includes contract costs, such as materials and labor, and indirect costs that are attributable to contract activity.  Generally, we bill our customers based on advance billing terms or completion of certain milestones.  Cumulative costs and estimated earnings recognized to date in excess of cumulative billings are included in accounts receivable on the consolidated balance sheet.  Cumulative billings in excess of cumulative costs and estimated earnings recognized to date are included in accounts payable and accruals on the consolidated balance sheet.

 

We estimate the future costs that will be incurred related to sales arrangements to determine whether any arrangement will result in a loss. These costs include material, labor and overhead. Factors influencing these future costs include the availability of materials and skilled laborers. We record provisions for estimated losses on uncompleted contracts in the period in which such losses are identified.

 

Page 9 of 43


 

DRESSER-RAND GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

($ in millions, except per share amounts)

We recognize, as operating revenue, proceeds from business interruption insurance claims in the period in which the insurance company confirms that proceeds for insurance claims will be paid. Proceeds from casualty insurance settlements in excess of the carrying value of damaged assets are recognized in the period that the applicable proof of loss documentation is received. Proceeds from casualty insurance settlements that are expected to be less than the carrying value of damaged assets are recognized at the time the loss is incurred.

 

Fair Value Measurements

 

Fair value, as defined in U.S. GAAP, is 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). U.S. GAAP classifies the inputs used to measure fair value into 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

 

 

Recurring Fair Value Measurements —  Fair values of the Company’s cash and cash equivalents, restricted cash, accounts receivable, short-term borrowings, accounts payable and customer advance payments approximate their carrying values due to the short-term nature of these instruments.  The Company’s financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

Nonrecurring Fair Value Measurements  Fair value measurements were applied with respect to the Company’s nonfinancial assets and liabilities measured on a nonrecurring basis, which consists primarily of intangible assets, other long-lived assets and other assets acquired and liabilities assumed, including contingent consideration, related to purchased businesses in business combinations.

 

Fair Value of Financial Instruments  Financial instruments consist principally of foreign currency derivatives, interest rate swaps, tradable emission allowances and fixed rate long-term debt.

  

Input levels used for fair value measurements are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Input

 

 

 

 

 

 

Description

Disclosure

 

Level

 

Level 2 Inputs

 

Level 3 Inputs

 

 

Acquired assets and liabilities

Note 3

 

Level 3

 

Not applicable

 

Income approach using projected results and weighted-average cost of capital

 

 

Financial derivatives

Note 8

 

Level 2

 

Quoted prices of similar assets or liabilities in active markets

 

Not applicable

 

 

Tradable emission allowances

Note 8

 

Level 1

 

Not applicable

 

Not applicable

 

 

Long-term debt (disclosure only)

Note 10

 

Level 2

 

Quoted prices in markets that are not active

 

Not applicable

 

 

 

 

 

 

Page 10 of 43


 

DRESSER-RAND GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ―  (continued)

(Unaudited)

 

($ in millions, except per share amounts)

2.New Accounting Standards

 

Effective January 1, 2013, the Company adopted FASB ASU 2012-02, Intangibles ― Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). The amendments in ASU 2012-02 are intended to reduce cost and complexity by providing an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The amendments in ASU 2012-02 also enhance the consistency of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset’s fair value when testing an indefinite-lived intangible asset for impairment, which is equivalent to the impairment testing requirements for other long-lived assets.  In accordance with the amendments in ASU 2012-02, an entity will have an option not to calculate annually the fair value of an indefinite-lived intangible asset if the entity determines that it is not more-likely-than-not that the asset is impaired. The adoption of ASU 2012-02 did not have a material impact on the Company’s consolidated financial statements.

 

Effective January 1, 2013, the Company adopted FASB ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). The amendments in ASU 2013-02 are intended to improve the transparency of reporting reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The adoption of ASU 2013-02 did not have a material impact on the Company’s consolidated financial statements. The required disclosures have been included in Note 17, Accumulated Other Comprehensive Income (Loss) (“AOCI”) of these financial statements.

 

Effective January 1, 2013, the Company adopted FASB ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”). The amendments in ASU 2013-01 require an entity to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement.  The enhanced disclosures are intended to enable users of an entity’s financial statements to understand and evaluate the effect of master netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments.  The adoption of ASU 2013-01 did not have a material impact on the Company’s consolidated financial statements. The required disclosures have been included in Note 8, Financial Instruments of these financial statements.

 

In February 2013 the FASB issued ASU 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date (“ASU 2013-04”). The amendments in ASU 2013-04 provide guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. In accordance with the amendments, an entity will measure the obligation as the sum of (1) the amount the reporting entity agreed to pay on the basis of its arrangements among its co-obligors, and (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. The amendments in ASU 2013-04 also require an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The amendments in ASU 2013-04 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability arrangements that exist at the beginning of the fiscal year of adoption. The adoption of ASU 2013-04 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In March 2013 the FASB issued ASU 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”). The amendments in ASU 2013-05 resolve the diversity in practice in applying Subtopic 810-10, Consolidation, and Subtopic 830-30, Foreign Currency Matters, when a reporting entity ceases to have a controlling financial interest in a subsidiary within a foreign entity. The amendments in ASU 2013-05 require the reporting entity to release any related cumulative translation adjustment into net income only if the sale or

Page 11 of 43


 

DRESSER-RAND GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ―  (continued)

(Unaudited)

 

($ in millions, except per share amounts)

transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary resided.  For an equity method investment that is a foreign entity, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment, if significant influence is retained.  Additionally, the amendments clarify that the sale of an investment in a foreign entity includes both (1) events that result in the loss of a controlling financial interest in a foreign entity; and (2) events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date (step acquisition). The amendments in ASU 2013-05 are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to derecognition events occurring after the effective date. The adoption of ASU 2013-05 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In April 2013 the FASB issued ASU 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting (“ASU 2013-07”). The amendments in ASU 2013-07 clarify when an entity should apply the liquidation basis of accounting and provide principles for the recognition and measurement of associated assets and liabilities. In accordance with the amendments, the liquidation basis is used when liquidation is imminent.  Liquidation is considered imminent when the likelihood is remote that the organization will return from liquidation and either: (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties; or (b) a plan for liquidation is being imposed by other forces.  The amendments in ASU 2013-07 are effective prospectively for entities that determine liquidation is imminent for reporting periods beginning after December 15, 2013. The adoption of ASU 2013-07 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In July 2013 the FASB issued ASU 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (“ASU 2013-10”). The amendments in ASU 2013-10 permit the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes in addition to U.S. Treasury rates and the London Interbank Offered Rate. The update also removes the restriction on using different benchmark rates for similar hedges. The amendments in ASU 2013-10 are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of ASU 2013-10 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In July 2013 the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). The amendments in ASU 2013-11 clarify that an unrecognized tax benefit, or a portion of  an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed.  In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.  The amendments in ASU 2013-11 are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013.  Retrospective application is permitted.  The adoption of ASU 2013-11 is not expected to have a material impact on the Company’s consolidated financial statements.

 

3. Acquisitions and Other Investments

 

Acquisitions

 

On January 4, 2012, the Company acquired Synchrony, Inc. (“Synchrony”), a technology development company with a portfolio of technologies and products including active magnetic bearings, low power, high speed motors and generators, and power electronics for clean, efficient and reliable rotating machinery.  Founded in 1993, Synchrony is headquartered in Roanoke County, Virginia, where it operates an ISO 9001 certified production facility, in-house test cells for high-speed machinery, a model shop for prototype fabrication and assembly and an on-site software integration laboratory.  Pursuant to the terms of the acquisition agreement, the Company acquired Synchrony for approximately $48.8, net of cash acquired, at which time Synchrony became a 100%-owned indirect subsidiary of the CompanyThe acquisition gives the Company the ability to integrate Synchrony’s active magnetic bearing capability into its product development process and to offer oil-free solutions in high speed rotating equipment applications, the benefits of which include reduced footprint and weight

Page 12 of 43


 

DRESSER-RAND GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ―  (continued)

(Unaudited)

 

($ in millions, except per share amounts)

of the application and more environmentally-friendly applications. The agreement included the potential for additional contingent consideration of up to a maximum of $10.0 based on technical milestones and business performance.  As of September 30, 2013, the Company had made all contractually required contingent consideration payments totaling $4.7 to the sellers of Synchrony.

 

Goodwill from the Synchrony acquisition principally resulted from expected synergies from combining the operations of the acquired business and the Company.  The amortization of goodwill related to the acquisition of Synchrony is not deductible for income tax purposes. 

 

The acquisition price of Synchrony in 2012 was allocated to the fair values of assets acquired and liabilities assumed as follows: 

 

 

 

 

 

 

 

 

 

 

 

2012

 

 

 

 

 

Cash and cash equivalents

$

0.1 

 

Accounts receivable

 

2.1 

 

Inventory

 

1.5 

 

Prepaid expenses

 

0.1 

 

Total current assets

 

3.8 

 

Property, plant and equipment

 

2.2 

 

Amortizable intangible assets

 

22.9 

 

Goodwill

 

26.3 

 

Other assets

 

0.6 

 

Total assets acquired

 

55.8 

 

Accounts payable and accruals

 

2.6 

 

Total liabilities assumed

 

2.6 

 

Purchase price

 

53.2 

 

Fair value of contingent consideration (non-cash)

 

(4.3)

 

Cash acquired

 

(0.1)

 

Cash paid

$

48.8 

 

 

Intangible assets from the Synchrony acquisition consist of existing technology, customer relationships, trade names and non-compete agreements.

 

Pro forma financial information for the Synchrony acquisition, assuming it occurred at the beginning of 2011, has not been presented because the effect on our financial results was not considered material. The financial results of Synchrony have been included in our consolidated financial results from the date of acquisition and have been incorporated into the Company’s existing new units and aftermarket parts and services segments.

 

Other Investments

 

On June 28, 2013, the Company and Apex Compressed Air Energy Storage, LLC (“APEX”) formed Bethel Holdco, LLC (“Bethel”) to develop a 317 megawatt compressed air energy storage (CAES) facility to be constructed in the north zone of Texas.  The Company will manufacture and supply the compression trains, expansion trains, balance of plant process equipment and installation, commissioning, start-up and on-site testing services to a subsidiary of Bethel. The Company contributed $5.0 in cash in exchange for an 11.1% ownership interest in Bethel.  The remaining 88.9% interest is held by APEX.  The Company has certain rights, but no obligations, to make additional capital contributions to Bethel.    In connection with its investment in Bethel, the Company received an option to sell all of its initial ownership interests in

Page 13 of 43


 

DRESSER-RAND GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ―  (continued)

(Unaudited)

 

($ in millions, except per share amounts)

Bethel to APEX at such time on or after the second anniversary of the CAES facility achieving commercial operation that Bethel has a net positive amount of available cash to distribute to its members for a trailing twelve-month period.  The sale price under the option is the Company’s purchase price for the Bethel interests.    The investment in APEX is being accounted for under the equity method of accounting, and the amount of the investment recorded in other noncurrent assets on the consolidated balance sheet is $5.0 at September 30, 2013.

 

In February 2011, the Company entered into an agreement to acquire a noncontrolling interest in Echogen Power Systems, LLC (“Echogen”), a privately-held technology company that is developing and commercializing power generation systems that harness waste heat for power and cooling applications.  The Company also received an option to acquire the outstanding shares of Echogen, which expired unexercised on February 14, 2013, and certain broad license rights in certain of the Company’s key markets. The Company will pay Echogen a royalty based on future equipment sales in these markets.  Minimum royalties of $6.0 must be paid in the first five years of commercialization, regardless of the amount of revenues generated, or the license will terminate.  As of September 30, 2013, the Company had invested a total of $23.0 for a 35.5% noncontrolling interest in Echogen.  In determining whether the Company should consolidate Echogen, the Company considered that its board participation, ownership interest and the option to acquire would not give the Company the power to direct the activities of Echogen and, consequently, would not result in the Company being the primary beneficiary.  The investment in Echogen is being accounted for under the equity method of accounting, and the amount of the investment recorded in other noncurrent assets on the consolidated balance sheet is $17.9 at September 30, 2013.

 

In April 2009, the Company and Al Rushaid Petroleum Investment Company (“ARPIC”) executed a Business Venture Agreement to form a joint venture, Dresser-Rand Arabia LLC (“D-R Arabia”). D-R Arabia executes manufacturing, repair, and other services, and provides technical expertise and training in the Kingdom of Saudi Arabia. The Company and ARPIC each own approximately 50% of D-R Arabia. 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.

 

In 2008, the Company entered into an agreement by which it acquired a noncontrolling interest in Ramgen Power Systems, LLC (“Ramgen”), a privately-held company that is developing compressor technology that applies proven supersonic aircraft technology to ground-based air and gas compressors.  In addition to receiving a noncontrolling 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 November 10, 2014. The Company has made investments totaling $33.5, which have resulted in an aggregate noncontrolling interest of 41.5% at September 30, 2013.  The Company’s maximum exposure to loss on its investment in Ramgen is limited to amounts invested plus any amounts the Company may choose to invest in the future. In determining whether the Company should consolidate Ramgen, the Company considered that its board participation, ownership interest and the option to acquire would not give the Company the power 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, and the amount of the investment recorded in other noncurrent assets on the consolidated balance sheet is $28.8 at September 30, 2013. 

 

4.Costs and Estimated Earnings on Uncompleted Contracts

 

Costs and estimated earnings on uncompleted contracts were as follows:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Costs incurred on uncompleted contracts

 

$

165.0 

 

$

35.0 

 

Estimated earnings

 

 

41.9 

 

 

15.5 

 

 

 

 

206.9 

 

 

50.5 

 

Less: billings to date

 

 

(93.4)

 

 

(33.4)

 

 

 

$

113.5 

 

$

17.1 

 

Costs and estimated earnings in excess of billings

 

$

127.8 

 

$

17.1 

 

Billings in excess of costs and estimated earnings

 

 

(14.3)

 

 

 -

 

 

 

$

113.5 

 

$

17.1 

 

Page 14 of 43


 

DRESSER-RAND GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ―  (continued)

(Unaudited)

 

($ in millions, except per share amounts)

 

 

5.Intangible Assets and Goodwill

 

The following table sets forth the weighted-average useful life, gross amount and accumulated amortization of intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

 

December 31, 2012

 

 

Cost

 

Accumulated Amortization

 

Weighted-Average Useful Lives

 

Cost

 

Accumulated Amortization

Trade names

 

$

119.6 

 

$

23.5 

 

39 years

 

$

119.0 

 

$

20.9 

Customer relationships

 

 

331.9 

 

 

75.8 

 

32 years

 

 

331.7 

 

 

65.9 

Non-compete agreement

 

 

5.5 

 

 

4.7 

 

3 years

 

 

5.4 

 

 

3.8 

Existing technology

 

 

160.6 

 

 

53.5 

 

23 years

 

 

161.6 

 

 

48.0 

Contracts and purchase agreements

 

 

10.6 

 

 

1.3 

 

11 years

 

 

11.1 

 

 

1.0