UNITED STATES SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

________________

Form 10-Q

 

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2015

 

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

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DRESSER-RAND GROUP INC.

(Exact name of registrant as specified in its charter)

 

 

 

(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 ☒    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 ☒    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): 

 

 

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

 

The number of shares of common stock, $.01 par value, outstanding as of May 1, 2015, was 76,928,710.

 

 

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See accompanying notes to consolidated financial statements.

 

 

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See accompanying notes to consolidated financial statements.

 

 

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See accompanying notes to consolidated financial statements.

 

 

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See accompanying notes to consolidated financial statements.

 

 

 

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See accompanying notes to consolidated financial statements.

 

 

 

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1.Basis of Presentation

 

Unless the context otherwise indicates, the terms “we,” “our,” “us,” the “Company,” “Dresser-Rand” 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 adjustments that are, in the opinion of management, necessary for the fair presentation of the Company's Consolidated Balance Sheets as of March 31, 2015, and December 31, 2014; the Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2015 and 2014; and the Consolidated Statements of Cash Flows and Changes in Stockholders’ Equity for the three months ended March 31, 2015 and 2014.  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, as amended, for the year ended December 31, 2014, and our other filings with the Securities and Exchange Commission.  Operating results for the three months ended March 31, 2015, are not indicative of the results that may be expected for the year ending December 31, 2015.  Certain amounts in the prior periods consolidated financial statements have been reclassified to conform to the current period’s presentation.

 

On September 21, 2014, the Company entered into an Agreement and Plan of Merger with Siemens Energy, Inc. (“Siemens”) whereby Siemens will acquire the Company (the “Merger”).  Additional information regarding the Merger and the related terms and conditions is set forth in Note 1, Basis of Presentation, to the consolidated financial statements in Item 14, Exhibits, Financial Statements and Schedules, of the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2014. 

 

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:

 

 

 

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.

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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 and impairments.

 

Fair Value of Financial Instruments — Recurring fair value measurement of financial instruments consist principally of foreign currency derivatives, an interest rate swap and fixed rate long-term debt.

  

Input levels used for fair value measurements are as follows:

 

 

 

 

2.New Accounting Standards

 

Effective January 1, 2015, the Company adopted FASB Accounting Standards Update (“ASU”) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). The amendments in ASU 2014-08 change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, disposals representing a strategic shift in operations should be presented as discontinued operations. Additionally, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income and expenses of discontinued operations. The adoption of ASU 2014-08 did not have a material impact on the Company’s consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early application not permitted.  Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU and the Company is currently evaluating which transition approach to use.  In April 2015, the FASB issued an exposure draft of a proposal to delay the effective date of ASU 2014-09 by one year.  The Company is currently evaluating the new pronouncement to determine the impact it may have to its consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation (“ASU 2014-10”). The amendments in ASU 2014-10 remove an exception provided to development stage entities in Topic 810, Consolidation, for determining whether an entity is a variable interest entity. The revised consolidation standards are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period, with early application permitted.  The adoption of ASU 2014-10 is not expected to have a material impact on the Company’s consolidated financial statements.

 

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In June 2014, the FASB issued ASU 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period (“ASU 2014-12”). The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period, with early application permitted.  Companies may use either a prospective or a retrospective approach to adopt this ASU and the Company is currently evaluating which transition approach to use.  The adoption of ASU 2014-12 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (“ASU 2014-15”). Prior to the issuance of this standard, there was no guidance in U.S.  GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosure.  ASU 2014-15 requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the  date that the  financial statements are issued  (or within one year after the date  that the  financial statements are available to be issued  when applicable) in connection with preparing financial statements for each annual and interim reporting period. ASU 2014-15 states that substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In January 2015, the FASB issued ASU 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”). The amendments in ASU 2015-01 eliminate from U.S. GAAP the concept of extraordinary items. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period, with early application permitted provided that the guidance is applied from the beginning of the fiscal year of adoption.  Companies may use either a prospective or a retrospective approach to adopt this ASU and the Company is currently evaluating which transition approach to use.  The adoption of ASU 2015-01 is not expected to have a material impact on the Company’s consolidated financial statements

 

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). The amendments in ASU 2015-02 change the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The amendments in this ASU are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. A reporting entity may apply the amendments in this ASU using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively. The adoption of ASU 2015-02 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amendments in this ASU are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The amendments should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The adoption of ASU 2015-03 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”). The amendments in ASU 2015-05 provide guidance to customers about whether a cloud computing arrangement includes a software license.  As a result of the amendments, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with

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other licenses of intangible assets. The amendments in this ASU are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. An entity can elect to adopt the amendments either prospectively or retrospectively. The adoption of ASU 2015-05 is not expected to have a material impact on the Company’s consolidated financial statements.

 

3.Restructuring Charges 

 

On February 25, 2015, the Company’s Board of Directors approved a series of actions intended to improve operating performance.  The Company announced a planned reduction in workforce of approximately 8%, which covers its world-wide operations and associated overhead costs from the different support disciplines. The announced actions result in reduced overhead through the optimization of the Company’s workforce and certain non-cash charges (impairments and other charges) related to the restructuring or disposal of certain facilities and assets. The Company currently estimates the overall pre-tax costs of the program to be between approximately $40.0 and $50.0. These strategic initiatives originate from the prevailing view that oil prices are expected to remain under pressure in the near future leading our clients to either delay large projects in order to reschedule their investments (or optimize their cash flows), or apply pressure on their suppliers to reduce their prices.  As a result, the Company is taking appropriate measures to continue its emphasis on operating earnings growth, even in what is expected to be a relatively stable year in sales in 2015.  The  Company initiated the announced actions in the first quarter of 2015 and expects to complete the actions by the end of 2015.

 

The restructuring charges in the consolidated statement of income totaled $18.1 for the three months ended March 31, 2015.  Detailed information related to the restructuring program activities during the three months ended March 31, 2015, is outlined below:

 

 

 

 

In addition to the above charges, the Company recorded inventory charges of $9.8 during the three months ended March 31, 2015, related to the planned exit of certain non-core businesses primarily in North America.  In accordance with ASC 420-10-S99-3, these charges were not included in the restructuring charges line item in the consolidated statement of income.  The Company has included these charges in the cost of products sold line item in the consolidated statement of income.

 

Employee Severance and Other Related Costs

 

During the three months ended March 31, 2015, the Company initiated a reduction in workforce which includes the elimination of approximately 400 personnel worldwide.  As of March 31, 2015, the Company eliminated approximately 200 personnel, and the Company expects to eliminate the remaining 200 personnel by the end of 2015.  Included in the restructuring charges for the three months ended March 31, 2015, are $6.6 of employee severance and other related costs.  Total employee severance and other related costs associated with the plan are expected be approximately $13.0.  Amounts related to employee severance and other costs have been accrued as required by ASC 712, Compensation – Nonretirement Postemployment Benefits.

 

Asset Impairments and Other Charges  

 

As part of the restructuring program, the Company is exiting certain non-core businesses and/or disposing of certain facilities and assets.  Intangible asset impairments related to the planned exit of certain businesses were $11.4 for the three  

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months ended March 31, 2015.  The impairment charge is primarily related to existing technology, customer relationships and trade names for the planned exit of a European manufacturing location.  The fair value of these assets was based on market offers to purchase the assets.  The impairment charge also includes a trade name that was part of a separate non-core business in Europe that we plan to exit.

 

The Company intends to sell the European manufacturing location; however, these assets have not been classified as assets held for sale as of March 31, 2015, as the necessary approvals to sell the assets have not yet been received.  In the event we do not sell the facility, additional restructuring charges may be recorded to dispose of the assets.

 

Segment profit is determined based on internal performance measures used by the chief operating decision maker to assess the performance of each segment. The chief operating decision maker has excluded restructuring charges from the assessment of segment performance, and as such, we have not assigned the restructuring charges to either segment, but rather have included the charges as unallocated expenses for segment reporting.

 

4. 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 expects to 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, subject to the project reaching full financing. Although the project is not yet fully financed, management believes that even in the event the project is not fully financed, it will not have a material adverse effect on the Company’s financial condition.  As of March 31, 2015, the Company had invested a total of $5.0 for an approximate 5.7% ownership interest in Bethel.  The remaining 94.3% 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 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.    On February 14, 2014, the Company entered into a term loan agreement with Bethel to help fund the construction of the CAES facility.  The Company may loan Bethel an aggregate principal amount of up to $25.0, with interest rates ranging from 8.0% to 16.0% per annum.  Loans made under the arrangement mature no later than eight years from the date of issuance.  As of March 31, 2015, Bethel has borrowed $18.6 from the Company.  The Company’s maximum exposure to loss on its investment in Bethel is limited to amounts invested (including amounts loaned) plus any amounts the Company may choose to invest in the future. In determining whether the Company should consolidate Bethel, the Company considered that its board participation, ownership interest and loan would not give the Company the power to direct the activities of Bethel and, consequently, would not result in the Company being the primary beneficiary.  The investment in Bethel 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 $4.9 at March 31, 2015.  The Company has recognized no revenues from APEX in the three months ended March 31, 2015 or 2014.  

 

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 using a proprietary supercritical carbon dioxide process technology. The Company agreed to pay Echogen a royalty based on future equipment sales in these markets. Aggregate minimum royalties of $6.0 were to be paid in the first five years of commercialization (which has not begun), regardless of the amount of revenues generated, or the license would become non-exclusive.  On March 26, 2014, the Company entered into an agreement for exclusive license rights to certain of Echogen’s intellectual property in exchange for $2.5 of cash and the relief of the Company’s obligation to provide certain equipment which was required under the original agreement. These exclusive license rights are represented by the remaining shares of Echogen held by the Company, which will be exchanged for an exclusive license if Echogen’s intellectual property is proven. On March 18, 2015, the Company amended its agreement with Echogen to satisfy the minimum royalty requirement with a prepaid royalty of $4.0 and to change the effective period of the license to five years from the date of receiving third party funding from a source other than the Company. No additional royalties are required to be paid during this period. As of March 31, 2015, the Company had invested a total of $26.5 for a 33.9% noncontrolling interest in Echogen. The Company’s maximum exposure to loss on its investment in Echogen is limited to amounts invested plus any amounts the Company may choose to invest in the future. In determining whether the Company should consolidate Echogen, the Company considered that its board participation and ownership interest would not give the

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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 $14.0 at March 31, 2015.

 

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 was formed to execute manufacturing, repair, and other services, and to provide 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 determined that its ownership, board participation and other related contractual rights 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.

 

At March 31, 2015, D-R Arabia has total assets of approximately $58.1, consisting principally of property, plant and equipment, and total liabilities of approximately $87.0, consisting principally of intercompany loans. The assets have been classified accordingly in the Company’s consolidated balance sheet, and the loans have been eliminated in consolidation. Both parties to the joint venture have signed resolutions committing to provide financial support to D-R Arabia, as needed, to meet D-R Arabia’s obligations as they become due through 2013.  For the year 2014, ARPIC has signed neither D-R Arabia’s audited financial statements nor the current resolution, wherein the two parties to the joint venture would commit to continue the operations and provide financial support as needed, to meet D-R Arabia’s obligations as they become due.  If ARPIC fails to sign these documents, it may affect D-R Arabia’s ability to renew its commercial registration and continue operations, which could have a material adverse effect on the Company’s ability to do business in the Kingdom of Saudi Arabia and on our assets associated with that business.

 

5.Costs and Estimated Earnings on Uncompleted Contracts

 

Costs and estimated earnings on uncompleted contracts were as follows:

 

 

 

 

 

 

 

 

 

6.Intangible Assets and Goodwill

 

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

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assets:

 

 

 

 (a)Research and development intangible assets are considered indefinite-lived until the abandonment or completion of the associated research and development efforts.    Upon completion of the associated research and development efforts, in-process research and development is reclassified to existing technology and amortized based upon the Company’s estimate of its useful life at that time.

 

Intangible asset amortization expense was $8.7 and $8.3 for the three months ended March 31, 2015 and 2014, respectively, and is estimated to be $20.7 for the remainder of fiscal year 2015.  Estimated amortization expense for each of the subsequent five fiscal years is expected to be as follows: $29.5 in 2016, $29.3 in 2017, $28.8 in 2018, $26.1 in 2019 and $25.0 in 2020.

 

The Company recorded a non-cash impairment charge of approximately $11.4 in the three months ended March 31, 2015, related to the restructuring program described more fully in Note 3.

 

The following table represents the changes in goodwill in total and by segment (see Note 16 for additional segment information):

 

 

 

 

 

 

 

 

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7.  Inventories, net

 

Inventories were as follows:

 

Finished parts may be used in production or sold to customers.  Progress payments represent payments from clients based on milestone completion schedules or advance billing terms.  Any payments received in excess of inventory investment are classified as “Customer Advance Payments” in the current liabilities section of the consolidated balance sheet.  Progress payments to suppliers are included in work-in-process and were $77.8 and $96.0 at March 31, 2015, and December 31, 2014, respectively.  The total allowance for obsolescence for slow-moving inventory for all categories of inventory was $35.6 and $38.4 at March 31, 2015, and December 31, 2014, respectively.

 

The Company recorded a non-cash inventory charge of approximately $9.8 in the three months ended March 31, 2015, related to restructuring actions, which is described more fully in Note 3.  In accordance with ASC 420-10-S99-3, this charge was not included in the restructuring charges line item in the consolidated statement of income.  The Company has included these charges in the cost of products sold line item in the consolidated statement of income.

 

8. Property, plant and equipment

 

Property, plant and equipment were as follows:

 

 

 

Depreciation expense was $13.7 and $15.3 for the three months ended March 31, 2015 and 2014, respectively.

 

9. Financial Instruments

 

The Company manages exposure to changes in foreign currency exchange rates and interest rates through its normal operating and financing activities as well as through the use of financial instruments.

 

The purpose of the Company’s hedging activities is to mitigate the economic impact of changes in foreign currency exchange rates and interest 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 or interest rate swaps.  Major

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exposure areas considered for hedging include foreign currency denominated receivables and payables, firm committed transactions, forecast sales and purchases and variable interest rates.

 

None of the Company’s derivative financial instruments are designated as hedges for accounting purposes.  Changes in the fair values of derivatives that are not designated as hedges for accounting purposes are immediately recognized in the consolidated statement of income in other expense, net.

 

All of the Company’s foreign currency derivative contracts are subject to master netting arrangements.  These arrangements provide for the option to settle contracts with a given counterparty on a net basis when they settle on the same day and the same currency.  In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event, and do not require the Company to post any cash collateral.  The Company has elected to present the derivative contracts on a gross basis in the consolidated balance sheet.  The Company recognizes derivatives in prepaid expenses and other, or accounts payable and accruals, as appropriate, on the consolidated balance sheet and measures them at fair value each reporting period.  As of March 31, 2015, had the Company presented its derivative contracts on a net basis, the assets and liabilities presented in the table below would be reduced by $7.1, resulting in net foreign currency exchange contracts assets and liabilities of $11.6 and $29.3, respectively.  As of December 31, 2014, had the Company presented its derivative contracts on a net basis, the assets and liabilities presented in the table below would be reduced by $4.0, resulting in net foreign currency exchange contracts assets and liabilities of $6.1 and $29.2, respectively.

 

The following table sets forth the Company’s gross foreign currency exchange contracts that were accounted for at fair value on a recurring basis:

 

 

The notional amount for the forward exchange contracts outstanding as of March 31, 2015, and December 31, 2014, was $483.0 and $498.3, respectively.  The net foreign currency (losses) gains recognized for forward currency contracts were $(13.4) and $2.8 for the three months ended March 31, 2015 and 2014, respectively.

 

10.Income taxes

 

We operate in numerous countries and tax jurisdictions around the world and there is no assurance that future tax audits will not result in significant tax adjustments. Management believes that it has provided adequate estimated liabilities for taxes based on its understanding of the tax laws and regulations in those countries.

 

Our estimated income tax (benefit) provision for the three months ended March 31, 2015 and 2014, results in effective rates that differ 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, offset by state and local income taxes and valuation allowances on net operating loss carryforwards when it is more-likely-than-not that all or a portion of the asset will not be realized.  We will adjust the valuation allowances in the future when it is more-likely-than-not that all or a portion of the asset will not be realized.

 

The tax benefit for the three months ended March 31, 2015, and the tax provision for the three months ended March 31, 2014, were both negatively impacted principally due to a less favorable mix of U.S. and foreign earnings in the respective quarters than the respective full year estimates upon which our projected tax rate is calculated.

 

Except for earnings of our Indian subsidiary, and certain current earnings of our Luxembourg subsidiary remitted in 2014, management has decided to indefinitely reinvest the unremitted earnings of the Company’s foreign subsidiaries and,

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therefore, no provision for U.S. federal or state income taxes has been provided on those foreign earnings. If any indefinitely reinvested foreign earnings are distributed, in the form of dividends or otherwise, the Company could be subject to additional U.S. income taxes (subject to adjustment for foreign tax credits), as well as withholding taxes imposed by certain foreign jurisdictions.  

 

11.Long-Term Debt

 

Long-term debt consists of the following:

 

 

 

 

At March 31, 2015, the Company was in compliance with its debt covenants.

 

Senior Subordinated Notes

 

The carrying and fair values of the Company’s Senior Subordinated Notes were as follows:

 

 

 

Due to the variable rate nature of all of the Company’s other long-term debt, the carrying values materially approximate their fair values as the rates are comparable to current market rates at which debt with similar terms could be obtained.

 

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12. Pension Plans

 

The components of net pension expense were as follows:

   

 

 

The fair value measurement of certain plan assets (approximately 3.7% of total plan assets) is derived using significant unobservable inputs (Level 3).  Level 3 assets consist of annuities held as investments within the plan that cover a set amount of liabilities and the effects of changes in the values of the related assets and liabilities are generally offsetting.  Level 3 assets also consist of annuities that require contribution premiums to fund ongoing liabilities as required by foreign governmental regulations.  Annuities are valued using standard actuarial calculations such as discount rates, mortality rates and participant population.

 

The Company made pension contributions of $3.4 and $5.5, respectively, during the three months ended March 31, 2015 and 2014, respectively.

 

13.Post-Retirement Benefits Other than Pensions

 

The components of the net post-retirement benefits expense were as follows:

 

 

 

 

 

 

 

 

 

14.Commitments and Contingencies (€ and R$ in millions)

 

Legal Proceedings

 

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 (“Ingersoll Rand”), for certain of these matters as part of Ingersoll Rand’s sale of the Company and by the sellers of Grupo Guascor for certain of these matters in connection with our acquisition of Grupo Guascor, S.L. (“Guascor”) in May

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2011.  While adverse decisions in certain of these litigation matters, claims and administrative proceedings could have a material effect on a particular period’s results of operations, subject to the uncertainties inherent in estimating future costs for contingent liabilities and the benefit of the indemnities from Ingersoll Rand and the sellers of Guascor, 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.

 

Shareholder Litigation

 

A putative class action lawsuit challenging the proposed merger with Siemens Energy, Inc. was filed on September 24, 2014 on behalf of Dresser-Rand Group Inc. stockholders in the Delaware Court of Chancery.  The action is captioned Soffer v. Volpe et al., C.A. No. 10165-CB (Del. Ch.) (the “Soffer Action”).  The complaint in the Soffer Action alleged that the directors of the Company breached their fiduciary duties to stockholders by engaging in a flawed sale process, agreeing to sell the Company for inadequate consideration and agreeing to improper deal protection terms in the Merger Agreement.  In addition, the lawsuit alleged that the Company, Siemens and Dynamo Acquisition Corporation, the Delaware subsidiary formed by Siemens in connection with the transaction, aided and abetted these purported breaches of fiduciary duty.  The lawsuit sought, among other things, an injunction barring the merger. On October 21, 2014, plaintiffs amended the complaint to allege as additional basis for relief that the directors of the Company engaged in self-dealing because they will benefit from their compensation arrangements and/or the sale of their personal stakes in the Company and that the preliminary proxy statement filed by the Company on October 9, 2014, fails to provide stockholders with material information about the transaction and/or is materially misleading.  On October 24, 2014, Construction Industry & Laborers Union Local 872 Pension A Trust v. Dresser-Rand Group, Inc., et al, C.A. No. 10285-CB (Del. Ch.) (the “Labor Union Action”) was filed in the Delaware Court of Chancery.  This complaint contained claims and allegations similar to those in the pre-amendment Soffer complaint and sought similar relief on behalf of the same putative class.  The Company believes that the lawsuit is without merit.

 

On November 10, 2014, the Soffer Action and the Labor Union Action were consolidated under the caption In re Dresser Rand Group, Inc. Shareholders Litigation, C.A. No. 10165-CB (Del. Ch.) (the “Consolidated Case”).  On November 14, 2014, the parties reached an agreement in principle to settle the Consolidated Case in exchange for the Company’s making certain additional disclosures.  Those disclosures were contained in a Form 8-K filed with the SEC on November 17, 2014.  The settlement remains subject to final documentation and court approval.

 

Guascor Purchase Price Dispute

 

On May 4, 2011, the Company acquired all of the issued and outstanding capital stock of Guascor pursuant to a Share Purchase Agreement (the “SPA”) for approximately $543.2.  The purchase price was subject to a further adjustment to the extent that net debt (debt minus cash) at the end of business on May 4, 2011, was different from €124.5. Pursuant to the SPA, this adjustment is to be computed on the basis of Spanish generally accepted accounting principles (“SGAAP”).

 

The Company and the sellers of Guascor (“Sellers”) are in dispute about the amount of the purchase price adjustment set out in the SPA. In some cases, the Sellers and the Company have opposing views as to the amount that should be included in the price adjustment.  In other cases, the Sellers and the Company are in dispute as to whether certain items should be included in the net debt computation.  In accordance with the provisions of the SPA, the parties sought resolution of this dispute under an arbitration in the International Court of Commerce (“ICC”), which has provided its opinion, portions of which are now under appeal.  The Company has commenced a further ICC proceeding on a host of other matters under the SPA.  Further, now that the award in the first ICC proceeding has been made; the parties await a ruling from a French court-appointed expert, which ruling will not be made until the parties make further evidentiary submissions to the expert.  Based upon its interpretation of SGAAP, the Company has unresolved disputes totaling approximately $29.1 with the Sellers.

 

The Company has recorded a receivable from the Sellers for the purchase price adjustment, net of an allowance for the Company’s best estimate of amounts uncollectible.  This allowance was established by considering, for each disputed item, the Company’s view of its position under SGAAP, uncertainties around the expert’s interpretation of SGAAP, and the collectability of the amounts. As additional information becomes known and disputed items are resolved, changes to the allowance will be recorded directly to earnings.  The final resolution of these amounts will take many months and potentially years if appeals are pursued.  The final amount could be materially different than the net receivable recorded by the Company. 

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The Company, however, does not believe that the difference could have a material adverse effect on its operating results, financial condition, liquidity or cash flows.

 

Painted Post Labor Litigation

 

In November 2007, Local 313 of IUE-CWA, the union that represents certain employees at the Company’s Painted Post, New York, 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 locked out these represented employees.  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 Company’s negotiations with the IUE were handled appropriately, including the NLRB’s findings that the union’s strike was not an unfair labor practice strike and the Company’s declaration of impasse and its unilateral implementation of its last offer were lawful. The Company, therefore, continued to operate under a more contemporary and competitive implemented contract offer while contract negotiations with the IUE continued in 2008 and 2009.  In November 2009, a collective bargaining agreement between the IUE and the Company was ratified, which agreement was renegotiated in 2013 and extended to March 2016.

 

The claims that proceeded to complaint before the NLRB included the Company’s 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, New York, 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 Company’s position on others.  The Company timely appealed the ALJ’s rulings against the Company to the NLRB in Washington, D.C.  On August 6, 2012, the NLRB affirmed the ALJ’s rulings.  The Company timely appealed the matter to the U.S. Fifth Circuit Court of Appeals, which stayed the proceedings in July 2013 pending a ruling by the U.S. Supreme Court on a constitutional issue, in an unrelated case, that is also in controversy in the Company’s appeal.  The U.S. Supreme Court’s decision on the constitutional matter was decided in June 2014. That decision held that the NLRB that ruled on this and other cases was invalidly appointed by the President and the matters decided by that NLRB were also set aside as invalid. As a result, this matter has been returned to the current and validly appointed NLRB to be reheard in its entirety. The Company continues to believe it complied with the law and that it will ultimately prevail with respect to these ULP allegations.  The litigation process, including further appeals, could reasonably take one to two years to resolve with finality.  Given the broad scope of possible remedies that may apply pursuant to conflicting case law, the Company cannot estimate the range of loss, if any, at this time.  Although the ultimate outcome of these matters cannot be ascertained at this time, it is the opinion of management that the resolution of such matters will not have a material adverse effect on the Company’s financial condition.

 

Banco Santos Litigation

 

In July 2004, Guascor SA and Jaguari Energetica SA, subsidiaries of Guascor (collectively, the “GG Entities”), entered into an agreement (the “BNDES Agreement”) with the Bank of National Economic and Social Development (“BNDES”) for the construction of a hydroelectric dam in Rio Grande do Sul, Brazil (the “Project”).  Pursuant to the terms of the BNDES Agreement, in August 2004, the GG Entities entered into a separate agreement (the “Banco Santos Agreement”) with Banco Santos, a Brazilian bank previously based in Sao Paulo, Brazil.  Per the terms of the Banco Santos Agreement, Banco Santos and the GG Entities agreed that: (i) in exchange for a fee paid by the GG Entities, Banco Santos would establish a reserve in favor of the GG Entities in the amount of R$3.6 (approximately $1.1) (the “Reserve”) to ensure that funds for a twelve month term would be available (if needed) by the GG Entities to fund their performance obligations under the BNDES Agreement; (ii) the GG Entities would issue twelve banking credit notes (the “Notes”) to Banco Santos (one for each of the twelve months), under which Notes the GG Entities would be obligated to make a payment to Banco Santos if the GG Entities used the applicable portion of the Reserve associated with a Note; and (iii) no portion of the Reserve would be invested by Banco Santos in any high risk investments.  The GG Entities completed the Project in December 2006 and fulfilled their obligations under the BNDES Agreement, without using any portion of the Reserve.  Accordingly, the Company believes that, pursuant

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to the terms of the Banco Santos Agreement, none of the Notes securing the Reserve became due or payable by the GG Entities to Banco Santos.  

 

In September 2004, Banco Santos, without the knowledge or consent of the GG Entities, transferred the Reserve to its affiliates, Santos Credit Yield (“SCY”) and Santos Credit Master (“SCM,” and together with SCY, the “BS Affiliates”).  Upon the receipt of the Reserve, the BS Affiliates invested the funds in a high risk investment, resulting in the loss of the entire Reserve.  In addition, concurrently with the transfer of the Reserve, Banco Santos assigned its rights in the Notes to the BS Affiliates.  Shortly after the assignment of the Notes, Banco Santos declared bankruptcy.        

 

The GG Entities commenced an action (the “Declaratory Action”) in the Civil Courts in the State of Sao Paulo, Brazil, in April 2005 seeking a declaratory judgment that the BS Affiliates were barred from recovering any amounts with regard to the Notes because such Notes were null and void pursuant to the terms of the Banco Santos Agreement. 

 

In December 2010, while the Declaratory Action was still pending, the BS Affiliates filed a separate action (the “BS Action”) in the Sao Paulo Civil Court seeking to recover from the GG Entities the amount of the Reserve.  The Court stayed the BS Action in September 2011 pending a final ruling in the Declaratory Action.  The GG Entities appealed the Court’s denial of their request for declaratory relief, and the Appellate Court ruled in their favor, and the GG Entities were not ordered to pay any amounts.  Banco Santos did not agree with the decision and has appealed to the Supreme Court.

 

The Company believes that the chances of losing the case in the Supreme Court are remote, based on the factual circumstances and the applicable law, that Banco Santos and the BS Affiliates violated the terms of the Banco Santos Agreement and the payment terms of the Notes, and that the GG Entities should prevail in the final decision of the Declaratory Action and a similar case filed by the BS Affiliates.  Notwithstanding the foregoing, the ultimate outcome of these proceedings is pending the Supreme Court’s decision and cannot be ascertained at this time.  The Company estimates that the total aggregate exposure for damages, interest and attorneys’ fees could be up to R$52.7 (approximately $16.4).  Moreover, the Company has an indemnification claim against the sellers of Guascor with regard to this matter.

 

Italian Value-Added Tax Claim

 

The Company is in litigation with the Italian tax authorities regarding value-added taxes for tax years 2005-2008 and the application of Italian and European Union laws.  The Company received an adverse judgment from the Italian Tax Court (i.e., the Commissione Tributaria Provinciale Di Genova) in February 2012 for tax years 2005-2006 for approximately €4.3  ($4.6).  On March 6, 2014, as requested by the Italian Tax Court with regard to tax years 2007 and 2008, the Court of Justice of the European Union issued an advisory, preliminary ruling, which ruling supported the Company’s position with regard to the value-added tax regulations that no such taxes are owed.  The Company then requested that the Italian Tax Court issue its judgment with regard to tax years 2007 and 2008, which judgment the Company intends to present to the appeals court in connection with its appeal of the Italian Tax Court’s adverse judgment with respect to tax years 2005 and 2006.  On September 24, 2014, the Italian Tax Court issued its judgment with regard to tax years 2007 and 2008 in accordance with European Union recommendations and in favor of the Company.  The Italian tax authorities had six months to file an appeal.  On November 25, 2014, the Italian tax authorities issued an order reducing the tax.  As a result of this order, the Italian Tax Court has closed the action with respect to tax years 2007 and 2008.  Based on the European Union preliminary ruling and the Italian Tax Court judgment for the tax years 2007 and 2008, the Company has requested the withdrawal of the tax authority’s claim with respect to tax years 2005 and 2006.  On February 16, 2015, the Company was notified that the tax authority waived its claim.  The Company is now requesting the Italian Tax Court to confirm the tax authority’s statement through a judgment to close the action with respect to tax years 2005 and 2006.  Upon award of the judgment, the Italian tax authorities will have six months to file an appeal.  The Company believes its exposure to this claim is remote.

 

Georgia Pacific Valve Claim

 

The Company is in litigation with Georgia Pacific (“GP”).  GP alleged that the Company failed to repair the “B” trip and throttle valve on a steam turbine supplied by the Company in a reasonable period of time, though the Company successfully repaired the “A” trip and throttle valve.  The action is captioned Georgia-Pacific, LLC v. Dresser-Rand Company and Dresser-Rand Group Inc. Case No. 585122, 19th Judicial District Court, State of Louisiana.  The Company counterclaimed GP for breach of contract for failure to pay amounts due to the Company under the contract.  In addition, the Company asserted (among other things) that GP (1) failed to operate the unit properly; and (2) failed to provide clean steam; and (3)

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refused over a five year period to allow the Company to have the agreed upon access so that the Company could repair both the “A” and “B” trip and throttle valves pursuant to the warranty as agreed to in the contract.  Had it been given the opportunity to do so, the Company could have also repaired the “B” valve at no cost to GP.  On April 27, 2015 a jury in Baton Rouge, Louisiana awarded GP damages in the amount of $2.0, which sum will be reduced by $0.2, the unpaid amount that GP owes the Company under the contract.  GP may also be entitled to recover reasonable attorney fees.  The Company expects to appeal the jury’s verdict.  The Company has recorded the amounts awarded in the consolidated financial statements.

 

15.   Warranties

 

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 is adjusted as required.

 

The following table represents the changes in the product warranty liability:

 

 

 

 

 

 

 

16.Segment Information

 

The Company has two reportable segments based on the engineering and production processes, and the products and services provided by each segment, as follows:

 

 

 

These functions have been defined as the operating segments of the Company because they are the segments (1) that engage in business activities from which revenues are earned and expenses are incurred; (2) whose operating results are regularly reviewed by the Company’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and (3) for which discrete financial information is available.

 

Unallocated amounts represent expenses and assets that cannot be assigned directly to either reportable segment because of their nature.  Unallocated net expenses include certain corporate expenses,  research and development expenses,  restructuring charges (including the related inventory charges included in cost of products sold) and transaction-related expenses in connection with the proposed merger with Siemens.  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

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other, deferred taxes, property, plant and equipment and intangible assets. There are no significant intercompany transactions between our reportable segments.

 

Segment results for the three months ended March 31, 2015 and 2014 were as follows:

 

 

 

After allocating the restructuring charges to the respective segments, including the related inventory charges which are included in cost of products sold, pro forma income from operations was $11.6 and $9.0 for the new units segment and the aftermarket parts and services segment, respectively, for the three months ended March 31, 2015.  Restructuring charges are described in Note 3.

 

Total assets by segment were as follows:

 

 

 

 

 

 

 

 

 

 

17.Incentive Stock-Based Compensation Plans

 

During the three months ended March  31,  2015, the Compensation Committee of the Company’s Board of Directors, and with respect to the President and Chief Executive Officer, the independent members of the Board of Directors, approved grants of 362,288 shares of time-vested restricted stock units to employees under the Dresser-Rand Group Inc. 2008 Stock Incentive Plan.

 

The Company also granted 11,648 shares of stock to non-employee Directors in February 2015. 

 

The difference between basic weighted-average shares outstanding and diluted weighted-average shares outstanding in the computation of earnings per share presented in the consolidated statement of income for the three months ended March 31, 2014, is comprised entirely of the dilutive effect of the stock-based compensation awards described above.

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18.Accumulated Other Comprehensive Income (Loss) (“AOCI”)

 

AOCI and the changes in AOCI by component were as follows:

 

 

 

During the three months ended March 31, 2015, foreign currency translation adjustments in accumulated other comprehensive loss were $95.4, primarily due to the weakening of the euro of approximately 11.2%.

 

 

 

 

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Items reclassified out of AOCI into net income for the three months ended March 31, 2015 and 2014 were as follows:

 

 

(a)These items are included in the computation of net pension expense and net post-retirement benefits expense. See Note 12,  Pension Plans and Note 13,  Post-Retirement Benefits Other than Pensions for additional information.

 

19.  Significant Concentration of Credit Risk

 

At March  31, 2015, approximately 18.6% of the Company’s net accounts receivable was from Petroleos de Venezuela, S.A. (“PDVSA”).  The great majority of the outstanding accounts receivable are denominated in U.S. dollars, reducing the risk associated with the devaluation of the Venezuelan bolivar.    The Company believes that, based on our historical experience and discussions with PDVSA, the outstanding balance is ultimately collectible.  Consequently, a provision for bad debts has not been recorded for these accounts receivable.  At March 31, 2015, approximately 9.3% of the Company’s net accounts receivable was outstanding with the state concern Turkmengaz.  The Company believes that, based on discussions with Turkmengaz, the outstanding balance is ultimately collectible.