dresser-rand group inc - final

8/6/2019 Dresser-Rand Group Inc - Final

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DRESSER-RAND GROUP INC.

A Brief Company Profile, Project Impact Analysis and Marketing Strategy Review Performed for Realization Technologies



COMPANY PROFILE



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•Dresser-Rand is among the largest global suppliers of custom-engineered rotating equipmentsolutions for long-life, critical applications primarily in the oil, gas, petrochemical andprocess industries. It derives its revenue from the following end-use industries:

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•The Company reports in two business segments representing the following revenue share:

Dresser-Rand BusinessSegments by Revenue Share

Dresser-Rand Revenue by Industry



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•The Company operates in 18 U.S. states and 29 countries, with the following geographicdistribution of revenue:

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•The Company has approximately 6,100 employees, 64% of which are located in the UnitedStates. It operates 65 sales offices, 37 service centers and 12 manufacturing locations

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•Key clients include Chevron, Royal Dutch Shell, ExxonMobil, BP, Statoil, Total, Petrobras,Pemex, PDVSA, Petronas, Saudi Aramco, ConocoPhillips, LUKOIL, Marathon PetroleumCompany, Repsol, and Dow Chemical Company

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No single client comprises more than 5% of total revenue•

•The Company serves clients in over 140 countries

Dresser-Rand Revenueby Geography



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•The Company operates in what it characterizes as a highly fragmented industry, believing theNew Unit market and Aftermarket Parts and Service (“AP&S”) market to be $5 billion and $9billion respectively. By implication, the Company believes it has the following market share:

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•Over the last 25 years, the market segments in which the Company competes have recentlyexperienced consolidation:

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•The turbo compressor industry has consolidated from more than 15 to 7competitors

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•The reciprocating compressor industry has consolidated from more than 12 to 6competitors

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•The steam turbine industry has consolidated from more than 18 to 5 competitors

Dresser-Rand NewUnit Market Share

Dresser-Rand Aftermarket Parts& Services Market Share



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•The largest competitors can be classified by product category:•

•Competitors in the turbo compressor industry include GE Oil and Gas/NuovoPignone, Siemens, Solar Turbines, Inc., Rolls-Royce Group plc, ElliottCompany, Mitsubishi Heavy Industries and MAN Turbo

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•Competitors in the reciprocating compressor industry include GE Oil andGas/Nuovo Pignone, Burckhardt Compression, Neuman & Esser Group, ArielCorp., Thomassen and Mitsui & Co., Ltd

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•Competitors in the steam turbine industry include Elliott Company, Siemens, GEOil and Gas/Nuovo Pignone, Mitsubishi Heavy Industries and Shin NipponMachinery Co. Ltd.

•The New Unit business segment is highly exposed to fluctuations in oil and natural gas prices,which had peaked in 2007 and experienced a dramatic downturn in 2008 and 2009

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•The Company as a result experienced a drop in new unit bookings of 49.1% in2009, and a fall in aftermarket bookings of 14.6% during the same period

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•The AP&S business segment, on the other hand, is generally dependent on the rate of depreciation of capital goods in the oil and natural gas industry, which is relativelyconsistent

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•The Company anticipates that the market will improve going forward, with sales in 2015projected to reach over $4 billion



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•The Company’s business model centers around having a flexible, responsive manufacturingcapacity for New Units that is reliant upon outsourced suppliers

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•In cyclical upswings, the Company can “flex” this capacity to satisfy marketdemand

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•The Company can rely upon revenues from Aftermarket Parts and Services andlow fixed cost to work through the nadir of market cycles

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•The Company states it has “demonstrated an ability to run our business … withnet working capital and capital expenditure requirements of approximately 5%and 1.5% to 2% of sales, respectively”

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The Company has established the following strategic goals in furtherance of its businessmodel during the current downturn:•

•Increase Sales of AP&S to Existing Installed Base•Expand AP&S Business to Non-Dresser-Rand OEM Equipment •Grow Alliances•Expand Performance-Based Long-Term Service Contracts•Introduce New and Innovative Products and Technologies•Continue to Improve Profitability •Selectively Pursue Acquisitions

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PROJECT IMPACT ANALYSIS



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•Realization’s solution primarily impacts the following at client organizations throughimplementation of Theory of Constraints/Critical Chain:

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•Throughput •Work-in-Process and Inventory •

Lead Times•On-Time Completion•

•Secondarily, clients have also seen a cost impact as a result of increasedefficiencies and reduced inventory costs

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•Looking back at the strategic points outlined by Dresser-Rand, we can see how Realization’ssolution touches almost all of the critical goals expressed by management:

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•Dresser-Rand’s primary business segments represent two categories served by RealizationTechnologies’ consulting services and Concerto software:

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•‘New Units’ represents an Engineer-to-Order (“ETO”) segment, characterized byproducts requiring substantial added engineering value before completion

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•‘AP&S’ represents a Maintenance/Repair/Overhaul (“MRO”) segment,characterized by ongoing maintenance services to existing assets

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•Realization Technologies’ project experience with a variety of business units with core ETOand MRO responsibilities allows us to look at the impact of Realization’s product on similar clients’ operations, and forecast anticipated benefit to Dresser-Rand

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•We will look at the impact of comparable projects in the ETO and MRO categories,and assume analogous results for Dresser-Rand’s business segments

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•Combining pro forma ‘New Units’ and ‘AP&S’ segment results, we can thenaccurately project the result of a full scale implementation on the entireCompany

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•Realization Technologies has extensive project experience working in the ETO segment, witha likely comparable project at Škoda Power :

Engineer-to-Order Project Before After ABB AG, Power Technologies Division Electrical Power Transmission, Engineer-to-Order

Throughput was 300 bays per year. Throughput increased to 430 bays per year.

ABB CórdobaPower Transformers,Engineer-to-Order

Engineering cycle time was 8 months. On-time delivery was 85%.

Engineering cycle time reduced to 3months. On-time delivery improved to95%. 16% increase in manufacturingthroughput (revenues).

Alcan Alesa TechnologiesMaterial Handling Solutions, Engineer-to-Order

Completed an average of 6.9 projects per year.

Completed 10 projects in first 8 monthsof 2009. 31% increase in throughput-dollars.

Ismeca Semiconductor Engineer-to-Order

84 days overall cycle time. 24 daysproduction cycle time. 15 machines in 8months was highest ever throughput.

64 days overall cycle time (25%reduction). 10 days production cycle time(60% reduction). 22 machines in 5months (47% higher throughput). 22%improvement in EBIT.

Škoda Power Engineered-to-Order Steam Generators

20 casings per year. 60% on-time delivery. 27 casings per year (30% increase).90% on-time delivery. 20-30% faster cycle time.

ThyssenKrupp (Johann A. Krause, Inc.)Automotive Assembly Systems, Engineer-to-Order

70% of projects were late. High overtimeand outsourcing.

Lateness reduced by 50%. 63% gains inproductivity. 15% more projectscompleted.

Von ArdenneEquipment for Manufacturing Solar Panels,Engineer-to-Order

Revenues of €130 M. Profits of €13 M.Cycle time was 17 weeks. On-time deliverywas 80%.

Revenues of €170 M. Profits of €22 M.Cycle time reduced to 14 weeks. On-time delivery improved to 90%.



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•Realization Technologies also has extensive project experience working in the MRO segment,with a comparable project at Delta Airlines:

Maintenance/Repair/Overhaul Project Before After

ABB, Halle Transformer Repair and Overhaul

42 projects completed in 2007.On-time delivery was 68%.

54 projects completed in 2008.On-time delivery improved to 83%.

Delta Air Lines, Inc. Aircraft Engine Repair and Overhaul

476 engines produced per year. 4-8weeks piece-part cycle time. 60 dayslanding gear turnaround time.

586 engines produced per year (23%increase). 30% reduction in engineturnaround time. 15 days piece-part cycletime (70% reduction). 25% increase inthroughput. 30 days landing gear turnaroundtime (50% reduction). $60M monetized inassets from reduced turnaround time. 10days piece-part turnaround time (30% further reduction).

French Air Force, SIAé Clermont Ferrand

Transall Production Line Aircraft Upgrade and Repair

5 aircraft on station. Cycle time of 165days.

3 aircraft on station, 2 aircraft returned to Air Force, a replacement value of €300 M. 15%cycle time reduction, 15% increase in outputwith 13% fewer resources; 22% reduction insupport shops’ cycle time.

Railcare Wolverton, UK

Train Maintenance, Repair, and Overhaul

16 month delay in delivery of last order.

1 order executed at a time.

100% on-time delivery on all orders. 3 orders

executed in the same timeframe.

US Marine Corps Logistics Base,Barstow Army Vehicles Maintenance and Repair

Repair cycle time for MK48 was 168days. Repair cycle time for LAV25 was180 days. Repair cycle time for MK14was 152 days. Repair cycle time for LAVAT was 182 days.

Repair cycle time for MK48 reduced to 82days. Repair cycle time for LAV25 reduced to124 days. Repair cycle time for MK14reduced to 59 days. Repair cycle time for LAVAT reduced to 122 days.



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•Realization has previously achieved increases in throughput of 30% in ETO projects focusedon steam turbine producer Škoda Power, and increases of 23% for MRO throughput withengine repair operations at Delta Airlines

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•While it is reasonable to assume similar increases to throughput capacity for Dresser-Rand, itis unlikely given the current depressed state of the ETO segment that such capacity wouldtranslate to sales immediately

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•As such, it is more appropriate to assume that the capacity generated translates torevenue only in the AP&S segment for purposes of projecting pro formafinancials

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•While it may be true that increased capacity wouldn’t translate into immediaterevenue, it would increase the value of the business model by generatingadditional “flex” capability to capture value during the next cyclical upturn

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•Increasing throughput by 20+% would also enable Dresser-Rand to enter the marketplace atlower price points, putting pressure on competitors in an already consolidating industry andgenerating opportunities to increase market share

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•At cyclical highpoints, Realization’s product generates significant increased revenue; atcyclical downturns it allows clients to go on the offensive and grab market share



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•Theory of Constraints/Critical Chain methodology is very useful for decreasing Work-in-Process (“WIP”) and Inventory, as shown by Realization’s product helping Delta Airlinesreduce its piece part WIP by 60%

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•Realization also demonstrated inventory cutbacks in a MRO project with the U.S. Navy FleetReadyness Center SE, which saw a 14% reduction in WIP

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•While we do not have direct data, it is reasonable to assume that a 14% reductionin WIP corresponds to a 14% reduction in overall inventory

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•Minimizing inventory has two major impacts, the first of which is an immediate release of cashas the inventory is liquidated, boosting cash on hand

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•This increase in cash on hand will likely go towards paying down debt, as mostinventory is funded by revolvers that charge interest on outstanding loans –meaning that reduced inventory can reduce interest expense

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•The second impact is a reduction of inventory carrying costs, which as a rule of thumb areroughly 25% of total inventory value, assuming:

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•15% Capital Cost•6% Risk Cost•2% Storage Space Cost•2% Service Cost•

•A 14% MRO inventory reduction and commensurate reduction in carrying cost, is assumed inthe pro forma case together with an increase in cash on hand



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•Realization’s implementation of TOC/Critical Chain saw a 20-30% decrease in cycle time, anda jump from 60% to 90% on-time delivery with Škoda Power in an ETO application

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•On-time delivery is not just important for relationship management and marketingpurposes in ETO applications – it directly impacts revenue through early deliveryincentives and late penalties built into booked contracts

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•Delta Airlines’ MRO implementation of TOC/Critical Chain resulted in an 80% overall reductionin piece part cycle time, a 50% reduction in landing gear cycle time, and a 30% reduction inengine cycle time

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•Decreased cycle times directly influence revenue on performance-based MRO contracts aswell

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•One of Dresser-Rand’s key strategic goals is to increase the amount of long term,performance-based MRO contracts it books

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•While the throughput aspect of falling cycle times has already been addressed, there aresubstantial strategic benefits to be gained from the associated shorter lead times andincreased on-time deliveries that come with it

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•On-time completion of projects builds client relationships, acting as a bulwarkagainst external competition, and providing a wedge between late competitorsand their clients

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•Shorter lead times allow clients greater flexibility and capacity to handleemergencies

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•Pro Forma Income Statements have been provided below, where FY 2009 financial resultshave been adjusted for the anticipated impact of a Realization Technologiesimplementation:

Assumptions:

1) Assumes 23% increase in AP&S revenue due to throughput increases

2) Assumes no increase in New Unit revenue from increased throughput

3) AP&S COGS was increased by 23% to account for increased volumes; assumes pure variable cost

4) AP&S COGS was then reduced by 3% to account for comparableDelta MRO savings

5) New Unit COGS remains the same, as increased capacity isassumed unused 6) Corporate Tax Rate is assumed to be the average of the past threeyears, or 34.4%

7) Assumes a one-time gain from reduction of 14% of total inventory;assumes ETO & MRO both gain 8) Assumes ongoing gains from reduced inventory carrying cost of 25% of reduced inventory cost 9) Assumes no reduction in outstanding revolver from inventory

liquidation, same interest expense

Dresser-Rand Income Statement

ProForma

FY 2007 FY 2008 FY 2009 FY 2009

New Units $813.5 $1,202.7 $1,258.8 $1,258.8

Aftermarket Parts & Service 851.5 992.0 1,030.8 1,267.9

Revenue $1,665.0 $2,194.7 $2,289.6 $2,526.7

New Units COGS $686.3 $985.5 $995.9 $995.9

AP&S COGS 529.8 590.6 636.2 759.1

COGS $1,216.1 $1,576.1 $1,632.1 $1,755.0

Gross Profit $448.9 $618.6 $657.5 $771.7

Margin 27.0% 28.2% 28.7% 30.5%

Selling and Administrative $239.0 $273.8 $287.3 $287.3

R&D Expense 12.8 12.7 20.3 20.3

Inventory Reduction Gain - - - (49.4)

Inventory Carrying Cost Reduction - - - (12.4)

Curtailment Amend./Settlement - (5.4) 1.3 1.3

Operating Income $197.1 $337.5 $348.6 $524.6

Margin 11.8% 15.4% 15.2% 20.8%

Interest Expense ($36.8) ($29.4) ($31.8) ($31.8)

Other Expense, net 7.3 (6.8) (4.9) (4.9)

EBT $167.6 $301.3 $311.9 $487.9

Provision for Income Taxes $60.9 $103.6 $101.1 $167.8

Net Income $106.7 $197.7 $210.8 $320.1



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•Pro Forma Balance Sheets have been provided below, where FY 2009 financial results havebeen adjusted for the anticipated impact of a Realization Technologies implementation:

Assumptions:

1) Assumes an increase in cash balance from the liquidation of 14% of inventory

2) Assumes an increase in cash from lower carrying cost of inventory gains (25% of liquidated value) 3) Assumes a decrease of 14% for inventory as a result of liquidation

4) Assumes an increase to retained earnings from reduced carrying cost of inventory

Dresser-Rand Balance Sheet

Pro Forma

FY 2007 FY 2008 FY 2009 FY 2009

Cash and Equivalents $206.2 $147.1 $223.2 $285.0

Accounts Receivable 311.9 366.3 289.8 289.8

Inventories, Net 265.3 328.5 353.0 303.6

Prepaid Expenses 23.0 43.4 24.9 24.9

Deferred Income Taxes, Net 19.3 22.5 45.4 45.4

Total Current Assets $825.7 $907.8 $936.3 $948.7

Property, Plant & Equipment $216.7 $250.3 $268.9 $268.9

Goodwill 447.5 429.1 486.0 486.0

Intangible Assets, Net 440.0 441.6 430.9 430.9

Other Assets 21.0 23.4 28.1 28.1

Total Assets $1,950.9 $2,052.2 $2,150.2 $2,162.6

Accounts Payable and Accruals $358.4 $430.9 $412.0 $412.0

Customer Advance Payments 239.9 275.0 165.2 165.2

Accrued Income Taxes Payable 22.0 30.2 8.1 8.1

Loans Payable 0.2 0.2 0.1 0.1

Total Current Liabilities $620.5 $736.3 $585.4 $585.4

Deferred Income Taxes, Net $48.4 $22.9 $38.5 $38.5

Employee Benefi t L iabi li ties 80.6 135.3 109.9 109.9

Long-Term Debt 370.3 370.1 370.0 370.0

Other Non-Current Liabilities 25.9 27.4 33.8 33.8Total Liabilities $1,145.7 $1,292.0 $1,137.6 $1,137.6

Common Stock, Par $0.9 $0.8 $0.8 $0.8

Add it ional Paid-In Capi tal 527.3 384.6 396 .6 396.6

Retained Earnings 229.7 427.3 638.1 650.5

AOCI 47.3 (52.5) (22.9) (22.9)

Total Stockholders' Equity $805.2 $760.2 $1,012.6 $1,025.0

Total Liabilities & Equity $1,950.9 $2,052.2 $2,150.2 $2,162.6



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•Pro Forma Cash Flows have been provided below, where FY 2009 financial results have beenadjusted for the anticipated impact of a Realization Technologies implementation:



STRATEGY



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•Realization’s product has both a tested core and additional value layered into the softwareand processes that specifically address both of Dresser-Rand’s operating segments:

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•Remaining gaps in capability are likely minimal given Realization’s past work in:•

•ETO•MRO•Rotating Equipment•Oil & Gas Vertical•

•Realization’s role as a TOC/Critical Chain implementer focusing on energy infrastructurewould ensure that Dresser-Rand would have the dedicated resources necessary to closeany small remaining gaps

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•Realization Technologies has emerged as a leader in TOC/Critical Chain implementation andenterprise software, as demonstrated by the accolades it is receiving from industry leaders:

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•“"We've learned new tools that we didn't even have with Lean … our cycle time willbe very competitive compared to the industry.”

•Tony Charaf, President,Delta TechOps (DeltaAirlines)

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•“We could build them [satellites] faster, and build more of them … It made adramatic improvement on our performance.”

•Charles Toups, VP of Engineering, BoeingIntegrated DefenseSystems

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•“It enabled us to finish the year in better profitability than the previous year,although it was a declining environment … We found ourselves in much better control. We have better mastery of the project.”

•Shalom Passy, SVP andHead of DeliveryGroup andOperations, Amdocs

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•Realization has been featured in business publications such as Fast Company, Reuters, TheTelegraph, FinanzNachrichten and MSN Money

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•Oil & Gas industry publications have also written about Realization Technologies,including Pipeline & Gas Journal, Today’s Energy Solutions, and Oil & GasFinancial Journal

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•Partners like IBM and Goldratt Consulting help provide whole product solutions of the highest



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•Dresser-Rand provides an opportunity to push Realization from a pre-Chasm to post-Chasmenterprise due to a confluence of several factors:

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•Realization is in a position given its prior experience to provide a whole productsolution to Dresser-Rand, due to the equipment manufacturer’s reliance on ETOand MRO activities as core business

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•ETO and MRO are two categories that provide optimal responses to TOC/CriticalChain, and therefore Dresser-Rand is likely to have significant gains fromRealization’s product

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•Dresser-Rand is a large supplier of one of the largest vertical markets in the world,and provides many opportunities for conquering adjacent niches:

Rotat.Equip.

Rotat.Equip.

Rotat.Equip.

Oil & Gas

Oil & Gas

Oil & Gas

Power Equip.

Clean Tech

Clean Tech

Power Equip.

Eng.Struct.

Chemicals

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•Many of the adjacent niches to Dresser-Rand’s are industries in which Realizationhas some pre-existing project experience, easing the way for future growth inthe oil and gas/energy vertical

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•Realization has already completed projects with companies working inthe rig building, petrochemical, nuclear power engineering, power transmission, electric generator engineering, rotating equipment, andsolar power industries



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dresser-rand group inc - final

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