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 March 31, 2004
OR
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 333-60778
DRESSER, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 75-2795365 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
15455 Dallas Parkway, Suite 1100
Addison, Texas 75001
(Address of principal executive offices) (zip code)
(972) 361-9800
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
The number of shares outstanding of common stock (par value $0.01 per share) as of May 13, 2004 was 1,000.
INDEX
2
PART I. FINANCIAL INFORMATION
DRESSER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions)
(unaudited)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Revenues |
$ | 436.3 | $ | 371.4 | ||||
| Cost of revenues |
311.9 | 271.5 | ||||||
| Gross profit |
124.4 | 99.9 | ||||||
| Selling, engineering, administrative and general expenses |
104.7 | 88.6 | ||||||
| Operating income |
19.7 | 11.3 | ||||||
| Equity earnings of unconsolidated subsidiaries |
0.9 | 0.8 | ||||||
| Interest expense |
(36.0 | ) | (20.4 | ) | ||||
| Interest income |
0.3 | 1.3 | ||||||
| Other income (expense), net |
(0.2 | ) | 3.1 | |||||
| Loss before income taxes |
(15.3 | ) | (3.9 | ) | ||||
| Provision for income taxes |
(3.2 | ) | (2.2 | ) | ||||
| Loss before minority interest in income of consolidated subsidiaries |
(18.5 | ) | (6.1 | ) | ||||
| Minority owner’s share of consolidated subsidiaries |
0.1 | — | ||||||
| Net loss |
$ | (18.4 | ) | $ | (6.1 | ) | ||
See accompanying notes to condensed consolidated financial statements
3
DRESSER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share information)
| March 31, 2004 |
December 31, 2003 |
|||||||
| (unaudited) | ||||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 106.3 | $ | 148.9 | ||||
| Restricted cash |
0.5 | 0.7 | ||||||
| Receivables, net of allowance for doubtful accounts of $14.7 and $15.1 |
286.1 | 280.6 | ||||||
| Inventories |
296.1 | 290.3 | ||||||
| Other current assets |
16.2 | 20.5 | ||||||
| Total current assets |
705.2 | 741.0 | ||||||
| Property, plant and equipment |
213.0 | 208.1 | ||||||
| Investments in unconsolidated subsidiaries |
7.9 | 7.3 | ||||||
| Deferred financing fees and other assets |
42.3 | 57.0 | ||||||
| Prepaid and intangible pension assets |
65.0 | 59.8 | ||||||
| Deferred income taxes |
10.4 | 8.8 | ||||||
| Goodwill |
314.8 | 315.2 | ||||||
| Other intangible assets |
5.7 | 7.0 | ||||||
| Total assets |
$ | 1,364.3 | $ | 1,404.2 | ||||
| LIABILITIES, MINORITY INTEREST, MANDATORILY REDEEMABLE COMMON STOCK AND SHAREHOLDERS’ DEFICIT |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 180.1 | $ | 198.4 | ||||
| Short-term debt, including current maturities |
7.9 | 5.6 | ||||||
| Deferred revenue |
34.2 | 27.0 | ||||||
| Payroll and other compensation |
45.6 | 47.6 | ||||||
| Accrued expenses |
123.4 | 118.2 | ||||||
| Total current liabilities |
391.2 | 396.8 | ||||||
| Pension and other retiree benefit obligations |
350.9 | 340.1 | ||||||
| Long-term debt, net of current maturities |
918.9 | 941.4 | ||||||
| Deferred income taxes |
3.2 | 3.1 | ||||||
| Other liabilities |
22.0 | 22.1 | ||||||
| Total liabilities |
1,686.2 | 1,703.5 | ||||||
| Commitments and contingencies |
— | — | ||||||
| Minority interest |
0.3 | 0.4 | ||||||
| Mandatorily redeemable common stock of Dresser, Ltd |
12.9 | 12.9 | ||||||
| Shareholders’ deficit: |
||||||||
| Common stock, $0.01 par value; issued and outstanding: 1,000 shares |
— | — | ||||||
| Additional paid in capital |
442.8 | 442.5 | ||||||
| Dividends in excess of net book value |
(595.8 | ) | (595.8 | ) | ||||
| Accumulated deficit |
(131.1 | ) | (112.7 | ) | ||||
| Accumulated other comprehensive loss: |
||||||||
| Unrealized gain on derivatives, net |
1.1 | 3.5 | ||||||
| Cumulative foreign currency translation adjustment |
32.9 | 34.9 | ||||||
| Minimum pension liability adjustment |
(85.0 | ) | (85.0 | ) | ||||
| Total accumulated other comprehensive loss |
(51.0 | ) | (46.6 | ) | ||||
| Total shareholders’ deficit |
(335.1 | ) | (312.6 | ) | ||||
| Total liabilities, minority interest, mandatorily redeemable common stock and shareholders’ deficit |
$ | 1,364.3 | $ | 1,404.2 | ||||
See accompanying notes to condensed consolidated financial statements
4
DRESSER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (18.4 | ) | $ | (6.1 | ) | ||
| Adjustments to reconcile net loss to cash flow (used in) provided by operating activities: |
||||||||
| Depreciation and amortization |
11.2 | 10.5 | ||||||
| Equity in earnings of unconsolidated subsidiaries |
(0.9 | ) | (0.8 | ) | ||||
| Loss on repayment of debt |
16.9 | 0.1 | ||||||
| Loss on foreign currency exchange |
0.3 | — | ||||||
| Amortization of deferred financing fees, net of amortization of bond premium |
1.0 | 1.5 | ||||||
| Deferred income taxes |
(1.5 | ) | 0.1 | |||||
| Impairment of assets |
— | 4.4 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Receivables |
(1.5 | ) | (15.4 | ) | ||||
| Inventories |
(5.8 | ) | 9.5 | |||||
| Accounts payable |
(18.7 | ) | (3.5 | ) | ||||
| Accrued expenses |
3.2 | 21.6 | ||||||
| Pension and other retiree benefit obligations |
10.8 | 6.5 | ||||||
| Other |
(3.3 | ) | (4.1 | ) | ||||
| Net cash (used in) provided by operating activities |
(6.7 | ) | 24.3 | |||||
| Cash flows from investing activities: |
||||||||
| Asset acquisitions |
— | (15.4 | ) | |||||
| Capital expenditures |
(12.9 | ) | (1.9 | ) | ||||
| Net cash used in investing activities |
(12.9 | ) | (17.3 | ) | ||||
| Cash flow from financing activities: |
||||||||
| Proceeds from the issuance of long-term debt |
360.0 | — | ||||||
| Repayment of long-term debt (including current portion) |
(381.5 | ) | (7.5 | ) | ||||
| Net increase (decrease) in short-term notes payable |
1.6 | (2.5 | ) | |||||
| Payment of deferred financing fees |
(3.3 | ) | — | |||||
| Changes in restricted cash |
0.2 | 7.5 | ||||||
| Net cash used in financing activities |
(23.0 | ) | (2.5 | ) | ||||
| Effect of translation adjustments on cash |
— | 0.6 | ||||||
| Net increase (decrease) in cash and cash equivalents |
(42.6 | ) | 5.1 | |||||
| Cash and cash equivalents, beginning of period |
148.9 | 118.8 | ||||||
| Cash and cash equivalents, end of period |
$ | 106.3 | $ | 123.9 | ||||
| Supplemental disclosure of cash flow information: |
||||||||
| Cash payments during the period for: |
||||||||
| Interest |
$ | 6.9 | $ | 7.0 | ||||
| Income taxes |
$ | 2.5 | $ | 3.0 | ||||
See accompanying notes to condensed consolidated financial statements
5
DRESSER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| Note 1. | Organization and Basis of Presentation |
Dresser, Inc. was originally incorporated in 1998, under the name of Dresser Equipment Group, Inc., under the laws of the state of Delaware. The Company’s certificate of incorporation was amended and restated on April 9, 2001. As used in this report, the terms “Dresser,” “the Company,” “we”, “our” or “us” refer to Dresser, Inc. and its predecessors, subsidiaries and affiliates unless the context indicates otherwise.
In January 2001, Halliburton Company (“Halliburton”), together with its wholly-owned subsidiary Dresser B.V., signed an Agreement and Plan of Recapitalization with DEG Acquisitions, LLC, an entity owned by affiliates of First Reserve Corporation (“First Reserve”) and Odyssey Investment Partners, LLC (“Odyssey”), to effect the recapitalization of its businesses relating to, among other things, the design, manufacture and marketing of flow control, measurement systems and compression and power systems for customers primarily in the energy industry. Halliburton originally acquired the businesses as part of its acquisition of Dresser Industries, Inc. in 1998. Dresser Industries’ operations consisted of the Company’s businesses and certain other operating units retained by Halliburton following the consummation of the recapitalization transaction. In order to accomplish this transaction, Halliburton effected the reorganization of various legal entities that comprised the Dresser Equipment Group (“DEG”) business segment of Halliburton. Simultaneously and contingent upon completion of the recapitalization, the acquisition of certain foreign entities was consummated. The transaction has been accounted for as a leveraged recapitalization. No adjustments or revaluation of the Company’s historical basis of accounting for operations were required.
In connection with the recapitalization in April 2001, Dresser paid Halliburton approximately $1,300.0 million to redeem our common equity and acquire the stock of certain foreign subsidiaries from Dresser B.V. The recapitalization transaction and related expenses were financed through the issuance of $300.0 million of senior subordinated notes, $720.0 million of borrowings under our credit facility, and approximately $400.0 million of common equity contributed by DEG Acquisitions, LLC.
On July 3, 2002, Dresser modified its corporate structure by forming a Delaware holding company and two Bermuda holding companies between the existing shareholders and Dresser. Dresser is now wholly-owned by Dresser Holdings, Inc., a Delaware corporation. Dresser Holdings, Ltd., a Bermuda corporation, is the sole shareholder of Dresser Holdings, Inc., and Dresser, Ltd., a Bermuda corporation, is the sole shareholder of Dresser Holdings, Ltd. The former direct shareholders of Dresser collectively hold all of the shares of Dresser, Ltd. in proportion to their prior direct ownership interests in Dresser. Dresser Holdings, Inc. and Dresser Holdings, Ltd. have no assets or liabilities other than common stock holdings of Dresser and Dresser Holdings, Inc., respectively, conduct no operations outside of Dresser and have no transactions to date other than those incidental to their formation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2004, are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. For further information, refer to the financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2003.
6
DRESSER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
| Note 2. | Stock-based compensation |
Prior to 2004, we applied Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and the related interpretations in accounting for our stock based plans. No stock-based compensation was reflected in 2003 net loss, as all options granted under our stock-based compensation plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2004, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-based Compensation”. Under the modified prospective method of adoption as provided by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”, compensation cost recognized in 2004 is the same as that which would have been recognized had the recognition provisions of SFAS No. 123 been applied from its original effective date. Results for prior years have not been restated. The following table illustrates the effect on net loss if the fair value based method had been applied to all outstanding and unvested awards in each period.
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| (in millions) | ||||||||
| Net loss as reported |
$ | (18.4 | ) | $ | (6.1 | ) | ||
| Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects |
0.2 | — | ||||||
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards |
(0.2 | ) | (0.3 | ) | ||||