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DRESSER-RAND GROUP INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ($ in millions)(Edgar Glimpses Via Acquire Media NewsEdge) Overview We are among the largest global suppliers of custom-engineered rotating equipment solutions for long-life, critical applications in the oil, gas, chemical, petrochemical, process, power generation, military and other industries worldwide. Our equipment and service solutions are also used in energy infrastructure, including oil and gas, environmental solutions and power generation. Our products and services are widely used in oil and gas applications that include hydrogen recycle, make-up, wet gas and other applications for the refining industry; cracked gas, propylene and ethylene compression for petrochemical facilities; ammonia syngas, refrigeration, and carbon dioxide compression for fertilizer production; a number of compression duties for chemical plants; gas gathering, export, lift and re-injection of natural gas or carbon dioxide ("CO2") to meet regulatory requirements or for enhanced oil recovery in the upstream market; gas processing, main refrigeration compression and a variety of other duties required in the production of liquefied natural gas ("LNG"); gas processing duties, storage and pipeline transmission compression for the midstream market; synthetic fuels; and steam or gas turbine mechanical drives or power generation packages for floating production, storage and offloading ("FPSO") vessels and offshore platforms as well as for a variety of compression and pumping applications in various segments of the oil and gas market. We are also a supplier of diesel and gas engines that provides customized energy solutions across worldwide energy infrastructure markets based upon reciprocating engine power systems technologies. Our custom-engineered products are also used in other advanced applications in the environmental markets we serve. These applications use renewable energy sources, reduce carbon footprint, recover energy and/or increase energy efficiency. These products include, among others, compression technologies for carbon capture and sequestration ("CCS"); hot gas turbo-expanders for energy recovery in refineries and certain chemical facilities; co- and tri-generation combined heat and power ("CHP") packages for institutional and other clients; and a large number of steam turbine applications to generate power using steam produced by recovering exhaust heat from the main engines in ships, recovering heat from mining and metals production facilities and exhaust heat recovery from gas turbines in on-shore and off-shore sites. We also have experience in the design, construction and development of power generation and cogeneration plants and mini-hydroelectric plants, and the development and exploitation of wind farms and biomass, used oil and landfill gas, photovoltaic solar energy and farm waste processing. Other biomass and biogas applications for our steam turbine product line include gasification of municipal solid waste or incineration of wood, palm oil, sugar or pulp and paper residues to generate power. Our equipment is used for compressed air energy storage ("CAES") for utility sized power generation. A CAES plant makes use of our classes of axial compressors, centrifugal compressors, gas expanders, controls and rotating equipment system integration capabilities. These applications are environmentally-friendly and provide unique response features for grid management. Other general industrial markets served include steel and distributed power generation. We operate globally with manufacturing facilities in the United States ("U.S."), France, United Kingdom ("UK"), Germany, Spain, Norway, Brazil and India. In addition to our products and services, we provide complete, turnkey compression and power generation solutions to our clients in the oil, gas and environmental markets we serve. These solutions typically incorporate one or more of our products and services into the compression or power generation facility, which may include process equipment, such as coolers, vessels, gas dehydration systems, process and utility piping and valves, process instrumentation, transformers and switch gears, and facility controls, as well as civil works and structures. We manage the complete project, including engineering, project controls, procurement, construction, installation, commissioning and start-up of the facility. We provide a wide array of products and services to our worldwide client base in over 150 countries from our global locations in 18 U.S. states and 32 countries through our 73 sales offices, 49 service and support centers, including six engineering and research and development centers, and 14 manufacturing locations. Our solutions-based service offering combines our industry-leading technology, extensive worldwide service center network, deep product expertise, project management capabilities and a culture of safety (which we believe to be industry-leading) and continuous improvement. This approach drives our growth as we offer integrated service solutions that help our clients lower the life cycle costs of their rotating equipment, minimize adverse environmental impact and maximize returns on their production and processing equipment. We believe our business model and alliance-based approach built on alliance and frame agreements align us with our clients who increasingly choose service providers that can help optimize performance over the entire life cycle of their equipment. Our alliance/frame agreement program encompasses the provision of new units and/or parts and services. We offer our clients a dedicated team, advanced business tools, a streamlined engineering and procurement process, and a life cycle approach to manufacturing, operating and maintaining their equipment, whether originally manufactured by us or by a third party. Page 27 of 40 -------------------------------------------------------------------------------- From a long-term perspective, we believe that the fundamentals driving trends in our industry include population and economic growth; maturing producing oil and gas fields worldwide that require greater use of compression equipment to maintain production levels; the advancement of shale gas technologies which require compression for both transmission and gas processing activities; the increase in demand for electricity requiring greater use of power generation equipment; the increase in demand for natural gas that is driving growth in gas production, storage, transmission infrastructure and LNG; international regulatory and environmental initiatives, including clean fuel legislation and stricter emission controls; the aging installed base of our class of equipment that is increasing demand for aftermarket parts and services, overhauls and upgrades; and the increased outsourcing of equipment maintenance and operation. With respect to our long-term business strategy, certain of our key strategic objectives include: · Increasing sales of aftermarket parts and services to the installed base of Dresser-Rand equipment; · Expanding sales of aftermarket parts and services to non-Dresser-Rand equipment in our class; · Growing alliances; · Expanding our performance-based long-term service contracts; · Introducing new and innovative products and technologies; · Improving profitability; and · Selectively pursuing acquisitions. Segment information We have two reportable segments based on the engineering and production processes, and the products and services provided by each segment, as follows: 1) New units are predominately highly engineered solutions to new requests from clients. New units also include standardized equipment such as engines and single stage steam turbines. The segment includes engineering, manufacturing, project management, packaging, testing, sales and administrative support. 2) Aftermarket parts and services consist of support solutions for the existing population of installed equipment and the operation and maintenance of several types of energy plants. The segment includes engineering, manufacturing, project management, installation, commissioning, start-up and other field services, repairs, overhauls, refurbishment, sales and administrative support. 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 and research and development expenses. Assets that are directly assigned to the two reportable segments are trade accounts receivable, net inventories and goodwill. Unallocated assets include cash, prepaid expenses and other, deferred taxes, property, plant and equipment and intangible assets. There are no significant intercompany transactions between our reportable segments. Page 28 of 40 -------------------------------------------------------------------------------- Results of Operations Three months ended March 31, 2014, compared to the three months ended March 31, 2013: Three Months Ended Three Months Ended Period to Period Change March 31, 2014 March 31, 2013 2013 to 2014 % Change Consolidated Statement of Operations Data: Revenues $ 699.1 100.0% $ 766.4 100.0% $ (67.3) (8.8)% Cost of sales 551.7 78.9 594.4 77.6 (42.7) (7.2)% Gross profit 147.4 21.1 172.0 22.4 (24.6) (14.3)% Selling and administrative expenses 99.8 14.3 96.2 12.6 3.6 3.7% Research and development expenses 7.4 1.1 10.3 1.3 (2.9) (28.2)% Income from operations 40.2 5.8 65.5 8.5 (25.3) (38.6)% Interest expense, net (13.0) (1.9) (14.3) (1.9) 1.3 (9.1)% Other income (expense), net 3.3 0.5 (1.0) 0.0 4.3 (430.0)% Income before income taxes 30.5 4.4 50.2 6.6 (19.7) (39.2)% Provision for income taxes 13.9 2.0 15.8 2.1 (1.9) (12.0)% Net income 16.6 2.4 34.4 4.5 (17.8) (51.7)% Net income attributable to noncontrolling interest - (0.1) (1.5) (0.2) 1.5 (100.0)% Net income attributable to Dresser-Rand $ 16.6 2.4% $ 32.9 4.3% $ (16.3) (49.5)% Bookings $ 594.2 $ 667.8 $ (73.6) (11.0)% Backlog - ending $ 2,749.2 $ 2,863.7 $ (114.5) (4.0)% Revenues. Revenues were $699.1 for the three months ended March 31, 2014, compared to $766.4 for the three months ended March 31, 2013, a decrease of $67.3 or 8.8%. Generally, oil prices and other macroeconomic conditions that affect the oil and gas industry have an impact on our business over an extended period of time. On a quarterly or annual basis, however, there is typically not a direct correlation of short-term volatility in these factors to our periodic financial results. Fluctuations in revenues and bookings are generally due to variability in the timing and size of very large orders in the new units segment, which is typical in the oil and gas industry. This occurs because our equipment, in many cases, is used in very large capital projects that take years to plan and execute, and such projects do not occur on a regular or consistent basis due to their size, location, technical resources, client capital expenditure constraints and long-term relationship to global energy supply and demand. While a change in these factors at a macroeconomic level will tend to have a corresponding overall effect on our revenue, the timing of such effect on our quarterly or even annual revenues is not directly correlated because of the very long lead times required to evaluate the macroeconomic landscape and then plan, permit and execute the projects. Furthermore, the highly engineered nature of our worldwide products and services does not easily lend itself to measuring the impact of price, volume and mix on changes in our total revenues from year to year. Nevertheless, based on factors such as measures of labor hours and purchases from suppliers, revenues decreased due to lower volume during the three months ended March 31, 2014 as a result of the timing issues discussed above. Specifically, we have been impacted by (1) delays in major upstream projects by our end-user clients in an effort to address their escalating capital costs relating to projects and (2) engineering resource constraints experienced by our end-user clients and their third-party contractors. Revenues were also negatively impacted by six of our cogeneration facilities in Spain. The Spanish government released a draft regulation at the beginning of February 2014 that reflects an approximate 37% reduction in the tariffs payable to such facilities. In connection with the draft regulation being issued and the reduction of the tariffs and the temporary shutdown of the facilities, revenues for the three months ended March 31, 2014 are lower by approximately $26.4. The decrease in revenues for the three months ended March 31, 2014, is also partially attributable to a reduction in shipments to one Latin American national oil company. An adverse translation impact of foreign currency fluctuations of approximately $8.8, resulting from a stronger U.S. dollar, also impacted revenues. The decrease in revenue on extended scope projects, which are accounted for under the percentage of completion method of accounting, was $7.5 for the three months ended March 31, 2014. Cost of sales. Cost of sales was $551.7 for the three months ended March 31, 2014, compared to $594.4 for the three months ended March 31, 2013. As a percentage of revenues, cost of sales was 78.9% for the three months ended March 31, Page 29 of 40 -------------------------------------------------------------------------------- 2014, compared to 77.6% for the three months ended March 31, 2013. The increase in cost of sales as a percentage of revenues from the three months ended March 31, 2013 to the three months ended March 31, 2014 was principally the result of reduced operating leverage on fixed costs as a result of lower volumes. The proposed change in the tariffs reflected in the draft Spanish regulation discussed above contributed approximately 0.7% to the increase in cost of sales as a percentage of revenues. Gross profit. Gross profit was $147.4 for the three months ended March 31, 2014, compared to $172.0 for the three months ended March 31, 2013. As a percentage of revenues, gross profit was 21.1% for the three months ended March 31, 2014, compared to 22.4% for the three months ended March 31, 2013. We experienced decreased gross profit as a percentage of revenues as a result of the factors discussed above. Selling and administrative expenses. Selling and administrative expenses were $99.8 for the three months ended March 31, 2014, compared to $96.2 for the three months ended March 31, 2013. The increase in selling and administrative expenses was generally the result of cost inflation and higher third party commissions driven by the mix of sales. As a percentage of revenues, selling and administrative expenses increased to 14.3% from 12.6%. Research and development expenses. Research and development expenses for the three months ended March 31, 2014, were $7.4, compared to $10.3 for the three months ended March 31, 2013. The decline in research and development expenses is the result of the timing of such expenditures, as we expect our total 2014 research and development expense to be consistent with 2013. We continue to effectively execute our strategy to introduce new and innovative products and technologies with a focus on key new product development initiatives for DATUM®, DATUM® Integrated Compression System ("ICS"), subsea compression, LNG, steam turbines and reciprocating engines. Income from operations. Income from operations was $40.2 for the three months ended March 31, 2014, compared to $65.5 for the three months ended March 31, 2013, a decrease of $25.3 or 38.6%. As a percentage of revenues, income from operations for the three months ended March 31, 2014 was 5.8% compared to 8.5% for the three months ended March 31, 2013. The decrease in income from operations and income from operations as a percentage of revenues is the result of the factors discussed above. The proposed change in tariffs reflected in the draft Spanish regulation discussed above reduced income from operations as a percentage of sales by approximately 1.3 percentage points. Interest expense, net. Interest expense, net was $13.0 for the three months ended March 31, 2014, compared to $14.3 for the three months ended March 31, 2013. The decrease is partially due to lower weighted-average debt outstanding. Additionally, we experienced higher interest income for the three months ended March 31, 2014, due to higher average interest-bearing cash balances. Other income (expense), net. Other income, net was $3.3 for the three months ended March 31, 2014, compared to other expense, net of $1.0 for the three months ended March 31, 2013. Other income (expense), net, consists principally of net currency gains and losses, gains and losses on tradable emission allowances and earnings and losses on investments accounted for under the equity method of accounting. The change in other income (expense), net for the three months ended March 31, 2014 is principally the result of losses on equity method investments discussed below, and normal foreign currency fluctuations. Other expense, net for the three months ended March 31, 2013, was impacted by the devaluation of the Venezuelan bolivar on February 8, 2013. As a result of this devaluation, the Company recorded a non-deductible foreign exchange loss in its Consolidated Statement of Income of approximately $3.1 for the three months ended March 31, 2013. Provision for income taxes. Provision for income taxes was $13.9 for the three months ended March 31, 2014, and $15.8 for the three months ended March 31, 2013. Our estimated income tax provision for the three months ended March 31, 2014 and 2013, generally differs from the U.S. federal statutory rate of 35% because of different tax rates in foreign tax jurisdictions and certain exemptions and credits allowable for income tax purposes, partially offset by state and local income taxes, and valuation allowances on net operating loss carryforwards that more-likely-than-not will not be realized. We will adjust the valuation allowances in the future when it becomes more-likely-than-not that the benefits of deferred tax assets will not be realized. The Company released the valuation allowance placed on Venezuelan deferred tax assets of approximately $1.7 during the three months ended March 31, 2014. Management's forecasts of 2014 earnings for Venezuela indicate continued profitability and future utilization of existing net operating loss carryforwards. The increase in the effective tax rate for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013, is principally due to a less favorable mix of U.S. earnings versus foreign earnings. Additionally, during the three months ended March 31, 2014, we incurred a disproportionate amount of net operating losses in certain foreign Page 30 of 40 -------------------------------------------------------------------------------- countries that resulted in deferred tax assets which more-likely-than-not will not be realized, and we have recorded a valuation allowance against the deferred tax assets, thus increasing the effective tax rate. On January 2, 2013, the ATRA of 2012 was signed into law. Some of the provisions were retroactive to January 1, 2012, including the exclusion from U.S. federal taxable income of certain interest, dividends, rents, and royalty income of foreign affiliates, as well as the tax benefits of the credits associated with that income and an extension of the research and experimentation credit. Therefore, as required by U.S. GAAP, a $4.4 benefit was reflected in the three months ended March 31, 2013 as a discrete event. These provisions were not extended for 2014 causing an increase in the effective tax rate as compared to the three months ended March 31, 2013. As a result of the devaluation of the Venezuelan bolivar on February 8, 2013, the Company recorded a nondeductible foreign exchange loss in its Consolidated Statement of Income of approximately $3.1 for the three months ended March 31, 2013. Had this amount been deductible, our effective tax rate would have been 0.4% lower for the three months ended March 31, 2013. Certain foreign subsidiaries in Brazil and India are operating under tax holiday arrangements that will expire during 2014 and 2015, respectively, subject to potential extensions. For the three months ended March 31, 2014 and 2013, the impact of these tax holiday arrangements lowered income tax expense by $1.2 ($0.02 per diluted share) and $1.0 ($0.01 per diluted share), respectively. Noncontrolling interest. Noncontrolling interest includes the share of net income and net losses in consolidated entities that are not 100% owned by us. Bookings and backlog. Bookings for the three months ended March 31, 2014, were $594.2 compared to $667.8 for the three months ended March 31, 2013, a decrease of $73.6 or 11.0%. The Company believes that the decrease in bookings is due to (1) delays in major upstream projects by our end-user clients in an effort to address their escalating capital costs relating to those projects and (2) engineering resource constraints being experienced by our end-user clients and their third-party contractors. In addition, due to the proposed change in the tariffs reflected in the draft Spanish regulation discussed above, our 2014 aftermarket bookings are lower by approximately $26.4. The decrease is also attributable to a reduction in bookings for one Latin American national oil company client. Backlog was $2,749.2 at March 31, 2014, compared to $2,863.7 at March 31, 2013. Page 31 of 40 --------------------------------------------------------------------------------Segment Analysis - three months ended March 31, 2014, compared to three months ended March 31, 2013: Three Months Ended Three Months Ended Period to Period Change March 31, 2014 March 31, 2013 2013 to 2014 % Change Revenues New units $ 391.3 56.0% $ 443.2 57.8% $ (51.9) (11.7)% Aftermarket parts and services 307.8 44.0% 323.2 42.2% (15.4) (4.8)% Total revenues $ 699.1 100.0% $ 766.4 100.0% $ (67.3) (8.8)% Gross profit New units $ 47.3 $ 55.5 $ (8.2) (14.8)% Aftermarket parts and services 100.1 116.5 (16.4) (14.1)% Total gross profit $ 147.4 $ 172.0 $ (24.6) (14.3)% Income from operations New units $ 15.7 $ 28.6 $ (12.9) (45.1)% Aftermarket parts and services 49.8 66.4 (16.6) (25.0)% Unallocated (25.3) (29.5) 4.2 (14.2)% Total income from operations $ 40.2 $ 65.5 $ (25.3) (38.6)% Bookings New units $ 243.8 $ 268.8 $ (25.0) (9.3)% Aftermarket parts and services 350.5 399.0 (48.5) (12.2)% Total bookings $ 594.3 $ 667.8 $ (73.5) (11.0)% Backlog - ending New units $ 2,045.8 $ 2,207.7 $ (161.9) (7.3)% Aftermarket parts and services 703.4 656.0 47.4 7.2% Total backlog $ 2,749.2 $ 2,863.7 $ (114.5) (4.0)% New Units Revenues. Revenues for this segment were $391.3 for the three months ended March 31, 2014, compared to $443.2 for the three months ended March 31, 2013, a decrease of $51.9 or 11.7%. The business impact of oil prices, other macroeconomic conditions and the timing and size of orders on this segment is more fully described above in the Revenues caption in the section titled Three months ended March 31, 2014, compared to the three months ended March 31, 2013. Based on factors such as measures of labor hours and purchases from suppliers, volumes decreased during the three months ended March 31, 2014, principally as a result of the timing issues discussed in the section referenced above. Specifically, we have been impacted by (1) delays in major upstream projects by our end-user clients in an effort to address their escalating capital costs relating to projects and (2) engineering resource constraints experienced by our end-user clients and their third-party contractors. The decrease in revenue on extended scope projects, which are accounted for under the percentage of completion method of accounting, was $7.5 for the three months ended March 31, 2014. Gross profit. Gross profit was $47.3 for the three months ended March 31, 2014, compared to $55.5 for the three months ended March 31, 2013. Gross profit as a percentage of segment revenues, was 12.1% for the three months ended March 31, 2014, compared to 12.5% for the three months ended March 31, 2013. We experienced decreased gross profit as a percentage of sales in our new units segment primarily due to a shift in mix during the period, as well as reduced operating leverage on fixed costs as a result of lower volumes. Income from operations. Income from operations was $15.7 for the three months ended March 31, 2014, compared to $28.6 for the three months ended March 31, 2013. As a percentage of segment revenues, income from operations was 4.0% for the three months ended March 31, 2014, compared to 6.5% for the three months ended March 31, 2013. Income from operations as a percentage of revenues decreased compared to the prior year as a result of the factors discussed above. Page 32 of 40 --------------------------------------------------------------------------------Bookings and backlog. New units bookings for the three months ended March 31, 2014, were $243.8, compared to $268.8 for the three months ended March 31, 2013. The Company believes that the decrease in bookings is due to (1) delays in major upstream projects by our end-user clients in an effort to address their escalating capital costs relating to those projects and (2) engineering resource constraints being experienced by our end-user clients and their third-party contractors. Backlog was $2,045.8 at March 31, 2014, compared to $2,207.7 at March 31, 2013. Aftermarket Parts and Services Revenues. Revenues for this segment were $307.8 for the three months ended March 31, 2014, compared to $323.2 for the three months ended March 31, 2013, a decrease of $15.4 or 4.8%. Generally, oil prices and other macroeconomic conditions that affect the oil and gas industry have an impact on our business over an extended period of time, but less so in this segment. On a quarterly or annual basis, however, there is typically not a meaningful correlation of those factors to our periodic financial results. The decrease in revenues for the three months ended March 31, 2014, is partially attributable to a reduction in shipments to one Latin American national oil company. Additionally, in connection with the proposed change in the tariffs reflected in the draft Spanish regulation discussed above, our 2014 revenues are lower by approximately $26.4. Revenues also decreased due to an adverse translation impact of foreign currency fluctuations of approximately $7.2, resulting from a stronger U.S. dollar. Gross profit. Gross profit was $100.1 for the three months ended March 31, 2014, compared to $116.5 for the three months ended March 31, 2013. Gross profit as a percentage of segment revenues for the three months ended March 31, 2014, of 32.5% decreased from 36.0% for the three months ended March 31, 2013. Gross profit as a percentage of revenues declined by approximately 0.6 percentage points because of the proposed change in the tariffs reflected in the draft Spanish regulation discussed above. Income from operations. Income from operations was $49.8 for the three months ended March 31, 2014, compared to $66.4 for the three months ended March 31, 2013. As a percentage of segment revenues, income from operations decreased to 16.2% for the three months ended March 31, 2014, from 20.5% for the three months ended March 31, 2013. The changes in income from operations and income from operations as a percentage of segment revenues resulted principally from the factors discussed above. The proposed change in tariffs in the draft Spanish legislation reduced operating income as a percentage of revenues by 2.1 percentage points. Bookings and backlog. Bookings for the three months ended March 31, 2014, were $350.5, compared to $399.0 for the three months ended March 31, 2013. The decrease is partially attributable to a reduction in bookings for one Latin American national oil company client. Additionally, the proposed retroactive change in the tariffs reflected in the draft Spanish regulation discussed above reduced 2014 aftermarket bookings by approximately $26.4. Bookings during the three months ended March 31, 2013, included a large long-term service agreement to provide energy in Brazil. Backlog was $703.4 at March 31, 2014, compared to $656.0 at March 31, 2013. Liquidity and Capital Resources Current Liquidity As of March 31, 2014, we had cash and cash equivalents of $178.9 and the ability to borrow $552.7 under the $1,168.9 revolving portion of our Amended Credit Facility, as $83.8 was used for outstanding letters of credit and $532.4 of borrowings was outstanding. In addition to these letters of credit, $236.1 of letters of credit and bank guarantees were outstanding at March 31, 2014, which were issued by banks offering uncommitted lines of credit. At March 31, 2014, we were in compliance with our debt covenants. As of March 31, 2014, approximately $176.8 of our cash was held outside of the U.S. Except for approximately $8.5 of cash held by our Venezuelan subsidiary, there are no legal restrictions regarding repatriation from any of the countries outside of the U.S. where we have cash; however, as of March 31, 2014, approximately $90.9 of our cash is not available for general corporate use in the U.S. because such cumulative earnings have been permanently reinvested in foreign countries or foreign markets. Currently, we have no plans to repatriate any of the foreign-based cash or unremitted earnings based on our intended uses of the foreign-based cash and our existing cash and cash equivalents balances in the U.S. If foreign funds are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes, net of applicable foreign tax credits, to repatriate these funds. However, our intent is to permanently reinvest these funds outside the U.S., and our current plans do not demonstrate a need to repatriate permanently reinvested earnings to fund our U.S. operations. Although there can be no assurances, based on our current and anticipated levels of operations and conditions in our markets and industry, we believe that our cash flow from operations, available cash and available borrowings under the Page 33 of 40 -------------------------------------------------------------------------------- Amended Credit Facility will be adequate to meet our working capital, capital expenditures, interest payments and other funding requirements for the next 12 months and our long-term future contractual obligations in the U.S. and in foreign countries. Sources and Uses of Liquidity Net cash provided by operating activities for the three months ended March 31, 2014, was $59.1, compared to net cash used in operating activities of $43.2 for the three months ended March 31, 2013. The increase in cash provided by operations in the three months ended March 31, 2014, is principally the result of decreased investment in working capital. Accounts receivable decreased for the three months ended March 31, 2014, as a result of cyclically lower volume and timely cash collections from clients related to high fourth quarter 2013 sales. Additionally, costs and estimated earnings on uncompleted contracts decreased related to contracts being recognized on the percentage of completion accounting method primarily as a result of the receipt of a large payment from a national oil company. Accounts payable and accruals decreased for the three months ended March 31, 2014, principally as a result of the timing of payments. The increase in inventories related principally to LNGoTM, the Company's small-scale LNG product offering. Lower customer advances are also attributable to a higher percentage of business with large national oil company clients. In addition, we made $5.5 of minimum required pension contributions in each of the three months ended March 31, 2014, in accordance with our funding policy. Net cash used in investing activities was $14.1 for the three months ended March 31, 2014, compared to $31.2 for the three months ended March 31, 2013. Capital expenditures decreased to $10.8 for the three months ended March 31, 2014, from $19.9 for the three months ended March 31, 2013. During the three months ended March 31, 2014, we invested an additional $2.5 in Echogen in connection with an agreement discussed more fully in Note 3, Other Investments in the consolidated financial statements. Net cash used in financing activities was $61.1 for the three months ended March 31, 2014, compared to net cash provided by financing activities of $109.4 for the three months ended March 31, 2013. Included in net cash used in financing activities for the three months ended March 31, 2014, are $354.0 of borrowings to fund operating cash flows and $410.9 of repayments on the Company's Amended Credit Facility. Borrowings on the Amended Credit Facility during the three months ended March 31, 2014, primarily relate to changes in working capital requirements and our ability to take advantage of favorable interest rates. Management views the Amended Credit Facility as a cost efficient funding mechanism and uses it as a primary source of funding. The Company is required to maintain sinking funds associated with certain of its borrowings, generally based on the short-term debt service requirements of such borrowings. Sinking fund requirements totaled $9.0 at March 31, 2014, and have been classified as restricted cash in the current assets section of the consolidated balance sheet. We provide a range of benefits to employees and retired former employees, including pensions, postretirement, postemployment and healthcare benefits. We have considered the impact of the provisions of the Patient Protection and Affordable Care Act ("PPACA") on our postretirement medical benefit plans as of March 31, 2014. Although there are a number of aspects of the PPACA that could affect our plans, none of these provisions have had a measurable impact on our postretirement medical benefit plan liabilities. New Accounting Standards The Company has adopted or is required to adopt certain new accounting standards which are described in Note 2, New Accounting Standards to the consolidated financial statements, none of which have had, or are expected to have, a material effect on the consolidated financial statements included herein in Part I, Financial Information, Item 1, Financial Statements (unaudited). SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Form 10-Q includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information. When used in this Form 10-Q, the words "anticipates," "believes," "estimates," "expects," "intends" and similar expressions identify such forward-looking statements. Although we believe that such statements are based on reasonable assumptions, these forward-looking statements are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those projected. These factors, risks and uncertainties include, among others, the following: Page 34 of 40 -------------------------------------------------------------------------------- · economic or industry downturns; · volatility and disruption of the credit markets; · our ability to implement our business strategy; · delivery delays by third-party suppliers; · the risk of cost overruns on fixed price contracts; · our ability to comply with local content requirements; · payment and administrative delays of certain of our national oil company customers; · our ability to generate cash and access capital on reasonable terms; · competition in our markets; · the variability of bookings and revenues due to volatile market conditions, client subjectivity in placing orders, potential preference for bundling and timing of large orders; · failure to integrate, or achieve the expected benefits from, acquisitions, joint ventures or strategic investments; · economic, political and other risks associated with our international sales and operations; · fluctuations in currency values and exchange rates; · loss of our senior management or other key personnel; · environmental compliance costs and liabilities and responses to concerns regarding climate change; · new regulations relating to "conflict minerals"; · failure to maintain safety performance acceptable to our clients; · failure to negotiate new collective bargaining agreements; · information systems security threats and computer crime; · unexpected product claims or regulations; · infringement of our intellectual property rights or our infringement of others' intellectual property rights; · difficulties implementing an Oracle-based information management system; · certain covenants in our principal debt instruments impose restrictions that may limit our operating and financial flexibility; · our brand name may be confused with others; · our pension expenses and funding requirements; · feed-in tariffs and regulations in our energy generating business; and · other factors described in this Form 10-Q and as set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. |