##### Table of Contents



Securities and Exchange Commission
 Washington, D.C. 20549
 Form 10-Q
 þ
    
    Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended June 30, 2006
 o
    
    Transition Report under Section 13 or 15(d) of the Exchange Act
 For the Transition Period from            to
 Commission file number 001-32586
 Dresser-Rand Group Inc.
  Delaware
    
    20-1780492(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)1200 West SamHouston Parkway, No.Houston, TX
    
    77043(Address of principal executive offices)
    
    (Zip Code)
  
  
  þ o
  o o þ
 o þ




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##### 



PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited):Consolidated Statement of Operations for the three months and six months ended June 30, 2006 and 2005
    
    
    3Consolidated Balance Sheet at June 30, 2006, and December 31, 2005
    
    
    4Consolidated Statement of Cash Flows for the six months ended June 30, 2006 and 2005
    
    
    5Notes to Unaudited Consolidated Financial Statements at June 30, 2006
    
    
    6-18Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19-29Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    31-34PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 6. Exhibits
    
    
    36Signatures
    
    
    37Exhibits
    
    
    38-41EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION
  Page 2 of 41




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PART I.  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 Three months ended
    
    
    Six months endedJune 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Net sales of products
    
    $
    349,575
    
    
    $
    247,143
    
    
    $
    579,243
    
    
    $
    425,591Net sales of services
    
    
    74,406
    
    
    
    55,335
    
    
    
    136,293
    
    
    
    110,887Total revenues
    
    
    423,981
    
    
    
    302,478
    
    
    
    715,536
    
    
    
    536,478Cost of products sold
    
    
    275,563
    
    
    
    197,066
    
    
    
    455,846
    
    
    
    340,881Cost of services sold
    
    
    52,027
    
    
    
    41,634
    
    
    
    96,276
    
    
    
    84,110Total cost of products and services sold
    
    
    327,590
    
    
    
    238,700
    
    
    
    552,122
    
    
    
    424,991Gross profit
    
    
    96,391
    
    
    
    63,778
    
    
    
    163,414
    
    
    
    111,487Selling and administrative expenses (2006 amounts include
$16,812 of stock based compensation  exit units)
    
    
    65,989
    
    
    
    41,156
    
    
    
    112,485
    
    
    
    78,517Research and development expenses
    
    
    3,195
    
    
    
    1,864
    
    
    
    5,278
    
    
    
    3,496Curtailment (gain)
    
    
    
    
    
    
    
    
    
    
    (11,796
    )
    
    
    Income from operations
    
    
    27,207
    
    
    
    20,758
    
    
    
    57,447
    
    
    
    29,474Interest expense, net
    
    
    (12,342
    )
    
    
    (14,420
    )
    
    
    (26,015
    )
    
    
    (29,653
    )Other income (expense), net
    
    
    4,064
    
    
    
    (400
    )
    
    
    5,964
    
    
    
    (580
    )Income (loss) before income taxes
    
    
    18,929
    
    
    
    5,938
    
    
    
    37,396
    
    
    
    (759
    )Provision for income taxes
    
    
    8,235
    
    
    
    7,463
    
    
    
    14,386
    
    
    
    4,784Net income (loss)
    
    $
    10,694
    
    
    $
    (1,525
    )
    
    $
    23,010
    
    
    $
    (5,543
    )Net income (loss) per common share
basic and diluted
    
    $
    0.13
    
    
    $
    (0.03
    )
    
    $
    0.27
    
    
    $
    (0.10
    )Weighted average shares outstanding
basic and diluted
    
    
    85,447,000
    
    
    
    54,219,000
    
    
    
    85,446,000
    
    
    
    54,219,000
  Page 3 of 41




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June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    49,050
    
    
    $
    98,036Accounts receivable, less allowance for doubtful
accounts of $9,963 and $8,649 at 2006 and 2005
    
    
    251,047
    
    
    
    268,831Inventories, net
    
    
    182,621
    
    
    
    145,762Prepaid expenses
    
    
    28,030
    
    
    
    25,887Deferred income taxes, net
    
    
    11,712
    
    
    
    10,899Total current assets
    
    
    522,460
    
    
    
    549,415Property, plant and equipment, net
    
    
    224,852
    
    
    
    228,671Goodwill
    
    
    413,346
    
    
    
    393,300Intangible assets, net
    
    
    454,171
    
    
    
    460,919Other assets
    
    
    24,882
    
    
    
    25,566Total assets
    
    $
    1,639,711
    
    
    $
    1,657,871Liabilities and Stockholders EquityCurrent liabilitiesAccounts payable and accruals
    
    $
    276,060
    
    
    $
    303,430Customer advance payments
    
    
    78,429
    
    
    
    84,695Accrued income taxes payable
    
    
    10,236
    
    
    
    4,988Loans payable
    
    
    72
    
    
    
    67Total current liabilities
    
    
    364,797
    
    
    
    393,180Deferred income taxes
    
    
    29,418
    
    
    
    22,586Postemployment and other employee benefit liabilities
    
    
    103,989
    
    
    
    113,861Long-term debt
    
    
    553,036
    
    
    
    598,137Other noncurrent liabilities
    
    
    19,707
    
    
    
    15,447Total liabilities
    
    
    1,070,947
    
    
    
    1,143,211Commitments and contingencies (Notes 7 through 11)Stockolders EquityCommon stock, $0.01 par value, 250,000,000 and 101,200,000 shares
authorized; and, 85,478,511 and 85,476,283 shares issued and
outstanding, respectively
    
    
    855
    
    
    
    855Additional paid-in capital
    
    
    510,928
    
    
    
    493,163Retained earnings
    
    
    67,334
    
    
    
    44,324Accumulated other comprehensive loss
    
    
    (10,353
    )
    
    
    (23,682
    )Total stockholders equity
    
    
    568,764
    
    
    
    514,660Total liabilities and stockholders equity
    
    $
    1,639,711
    
    
    $
    1,657,871
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Six Months Ended June 30,2006
    
    
    2005Cash flows from operating activitiesNet income (loss)
    
    $
    23,010
    
    
    $
    (5,543
    )Adjustments to arrive at net cash provided by operating activities:Depreciation and amortization
    
    
    25,803
    
    
    
    33,610Stock based compensation
    
    
    17,765
    
    
    
    2,857Curtailment gain
    
    
    (11,796
    )
    
    
    Deferred income taxes
    
    
    5,667
    
    
    
    (285
    )Amortization of debt financing costs
    
    
    2,915
    
    
    
    4,804Provision for losses on inventory
    
    
    93
    
    
    
    1,004Other
    
    
    (343
    )
    
    
    92Working capital and otherAccounts receivable
    
    
    24,439
    
    
    
    76,839Inventories
    
    
    (33,832
    )
    
    
    8,178Accounts payable
    
    
    (20,249
    )
    
    
    7,006Customer advance payments
    
    
    (9,546
    )
    
    
    79,824Other
    
    
    (16,988
    )
    
    
    (19,992
    )Net cash provided by operating activities
    
    
    6,938
    
    
    
    188,394Cash flows from investing activitiesCapital expenditures
    
    
    (8,748
    )
    
    
    (5,001
    )Proceeds from equity investment disposition
    
    
    
    
    
    
    10,000Proceeds from sales of property, plant and equipment
    
    
    1
    
    
    
    241Net cash (used in) provided by investing activities
    
    
    (8,747
    )
    
    
    5,240Cash flows from financing activitiesPayments of long-term debt
    
    
    (50,000
    )
    
    
    (121,162
    )Payments of short-term borrowings
    
    
    
    
    
    
    (2,658
    )Net cash used in financing activities
    
    
    (50,000
    )
    
    
    (123,820
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    2,823
    
    
    
    (5,142
    )Net (decrease) increase in cash and cash equivalents
    
    
    (48,986
    )
    
    
    64,672Cash and cash equivalents, beginning of the period
    
    
    98,036
    
    
    
    111,500Cash and cash equivalents, end of period
    
    $
    49,050
    
    
    $
    176,172
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1. Basis of presentation
  2. Recently issued accounting standards
 ,
Inventory Costs, an Amendment of Accounting Research Bulletin No. 43, and Chapter 4
 Share-Based Payments Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 Exchanges of Non-monetary Assets Accounting for Non-monetary Transactions
 Accounting Changes and Error Corrections
 Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109
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3. Stock based compensation  exit units
    4. Curtailment gain
  5. Intangible assets and goodwill
  June 30, 2006
    
    
    Weighted
    
    December 31, 2005Accumulated
    
    
    Average
    
    
    
    
    
    Accumulated(In thousands of dollars)
    
    Cost
    
    
    Amortization
    
    
    Useful Lives
    
    Cost
    
    
    AmortizationTrade names
    
    $
    87,600
    
    
    $
    3,545
    
    
    40 years
    
    $
    87,600
    
    
    $
    2,448Customer relationships
    
    
    235,696
    
    
    
    9,886
    
    
    40 years
    
    
    232,219
    
    
    
    6,806Software
    
    
    30,553
    
    
    
    5,101
    
    
    10 years
    
    
    30,553
    
    
    
    3,571Existing technology
    
    
    126,577
    
    
    
    8,456
    
    
    25 years
    
    
    126,577
    
    
    
    5,800Order backlog
    
    
    26,325
    
    
    
    26,325
    
    
    15 months
    
    
    26,325
    
    
    
    25,561Non-compete agreement
    
    
    4,382
    
    
    
    3,649
    
    
    2 years
    
    
    4,382
    
    
    
    2,551Total amortizable intangible assets
    
    $
    511,133
    
    
    $
    56,962
    
    
    
    
    $
    507,656
    
    
    $
    46,737
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June 30,(In thousands of dollars)
    
    2006Beginning balance
    
    $
    393,300TES acquisition
    
    
    1,186Translation adjustments
    
    
    18,860Ending balance
    
    $
    413,346
   (In thousands of dollars)
    
    FinalAccounts receivable
    
    $
    12,454Inventory
    
    
    7,309Prepaid expenses and other current assets
    
    
    515Total current assets
    
    
    20,278Property, plant and equipment, net
    
    
    19,029Amortizable intangible assets
    
    
    19,600Goodwill
    
    
    7,119Total assets acquired
    
    
    66,026Accounts payable and accruals
    
    
    9,435Other liabilities
    
    
    2,016Total liabilities assumed
    
    
    11,451Cash paid  net
    
    $
    54,575
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6. Inventories
  June 30,
    
    
    December 31,2006
    
    
    2005(In thousands)
    
    (unaudited)Raw materials and supplies
    
    $
    105,960
    
    
    $
    83,355Work-in-process and finished goods
    
    
    213,052
    
    
    
    257,488319,012
    
    
    
    340,843Less: progress payments
    
    
    (136,391
    )
    
    
    (195,081
    )Total inventories
    
    $
    182,621
    
    
    $
    145,762
  7. Income taxes
    Page 9 of 41




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8. Pension plans
  Three months ended
    
    
    Six months ended(In thousands)
    
    June 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Service cost
    
    $
    1,473
    
    
    $
    1,232
    
    
    $
    2,910
    
    
    $
    2,593Interest cost
    
    
    4,378
    
    
    
    4,315
    
    
    
    8,699
    
    
    
    8,637Expected return on plan assets
    
    
    (5,030
    )
    
    
    (5,016
    )
    
    
    (10,006
    )
    
    
    (9,753
    )Net amortization of unrecognized
Plan net losses
    
    
    29
    
    
    
    
    
    
    
    57
    
    
    
    Net pension expense
    
    $
    850
    
    
    $
    531
    
    
    $
    1,660
    
    
    $
    1,477
 9. Postretirement benefits other than pensions
  Three months ended
    
    
    Six months ended(In thousands)
    
    June 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Service cost
    
    $
    420
    
    
    $
    547
    
    
    $
    898
    
    
    $
    999Interest cost
    
    
    587
    
    
    
    695
    
    
    
    1,241
    
    
    
    1,368Curtailment gain
    
    
    
    
    
    
    
    
    
    
    (11,796
    )
    
    
    Net periodic postretirement benefits (gain) cost
    
    $
    1,007
    
    
    $
    1,242
    
    
    $
    (9,657
    )
    
    $
    2,367
 10. Commitments and contingencies
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11. Warranty accruals
   Six Months endedJune 30,
    
    
    June 30,(In thousands)
    
    2006
    
    
    2005Beginning balance
    
    $
    21,511
    
    
    $
    21,078Provisions for warranties issued during the period
    
    
    7,794
    
    
    
    5,648Adjustments to warranties issued in prior periods
    
    
    752
    
    
    
    653Payments during period
    
    
    (7,323
    )
    
    
    (7,243
    )Translation adjustments
    
    
    1,098
    
    
    
    (989
    )Ending balance
    
    $
    23,832
    
    
    $
    19,147
 12. Segment information
  1)
    
    New Units are highly engineered solutions to new customer requests. The segment includes
engineering, manufacturing, sales and administrative support.
 2)
    
    Aftermarket Parts and Services consist of aftermarket support solutions for the existing
population of installed equipment. The segment includes engineering, manufacturing, sales and
administrative support.
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Three months ended
    
    
    Six months endedJune 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005(In thousands)RevenuesNew units
    
    $
    248,268
    
    
    $
    148,192
    
    
    $
    387,347
    
    
    $
    236,457Aftermarket parts and services
    
    
    175,713
    
    
    
    154,286
    
    
    
    328,189
    
    
    
    300,021Total Revenues
    
    $
    423,981
    
    
    $
    302,478
    
    
    $
    715,536
    
    
    $
    536,478Operating IncomeNew units
    
    $
    14,583
    
    
    $
    2,429
    
    
    $
    13,299
    
    
    $
    (3,629
    )Aftermarket parts and services
    
    
    45,487
    
    
    
    30,936
    
    
    
    79,844
    
    
    
    54,780Unallocable
    
    
    (32,863
    )
    
    
    (12,607
    )
    
    
    (35,696
    )
    
    
    (21,677
    )Total Operating Income
    
    $
    27,207
    
    
    $
    20,758
    
    
    $
    57,447
    
    
    $
    29,474Depreciation and AmortizationNew units
    
    $
    8,360
    
    
    $
    8,249
    
    
    $
    14,839
    
    
    $
    14,700Aftermarket parts and services
    
    
    4,389
    
    
    
    8,410
    
    
    
    10,964
    
    
    
    18,910Total Depreciation and
Amortization
    
    $
    12,749
    
    
    $
    16,659
    
    
    $
    25,803
    
    
    $
    33,610Total Assets (including
Goodwill)New units
    
    $
    276,931
    
    
    
    
    
    
    $
    276,931Aftermarket parts and services
    
    
    560,617
    
    
    
    
    
    
    
    560,617Unallocable
    
    
    802,163
    
    
    
    
    
    
    
    802,163Total Assets
    
    $
    1,639,711
    
    
    
    
    
    
    $
    1,639,711
 13. Stockholders equity
  AccumulatedOtherCommon
    
    
    Additional
    
    
    Retained
    
    
    Comprehensive(In thousands of dollars)
    
    Stock
    
    
    Paid-in Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    TotalAt December 31, 2005
    
    $
    855
    
    
    $
    493,163
    
    
    $
    44,324
    
    
    $
    (23,682
    )
    
    $
    514,660Stock based employee compensation
    
    
    
    
    
    
    17,765
    
    
    
    
    
    
    
    
    
    
    
    17,765Net income
    
    
    
    
    
    
    
    
    
    
    23,010
    
    
    
    
    
    
    
    23,010Other comprehensive (loss) incomeMinimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72
    )
    
    
    (72
    )Currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,401
    
    
    
    13,401At June 30, 2006
    
    $
    855
    
    
    $
    510,928
    
    
    $
    67,334
    
    
    $
    (10,353
    )
    
    $
    568,764
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Three months ended
    
    
    Six months endedJune 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005(In thousands of dollars)Net income (loss)
    
    $
    10,694
    
    
    $
    (1,525
    )
    
    $
    23,010
    
    
    $
    (5,543
    )Other comprehensive income (loss):Minimum pension liability  tax effect
    
    
    (72
    )
    
    
    
    
    
    
    (72
    )
    
    
    Foreign currency translation adjustment
    
    
    5,242
    
    
    
    (10,852
    )
    
    
    13,401
    
    
    
    (24,595
    )Comprehensive income (loss)
    
    $
    15,864
    
    
    $
    (12,377
    )
    
    $
    36,339
    
    
    $
    (30,138
    )
  June 30,
    
    
    December 31,2006
    
    
    2005(In thousands)
    
    (Unaudited)Minimum pension liability, net of tax
    
    $
    (6,074
    )
    
    $
    (6,002
    )Foreign currency translation adjustment
    
    
    (4,279
    )
    
    
    (17,680
    )Accumulated other comprehensive loss
    
    $
    (10,353
    )
    
    $
    (23,682
    )
  14. Supplemental guarantor financial information
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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the three months ended June 30, 2006
 SubsidiarySubsidiary
    
    
    Non-
    
    
    ConsolidatingIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Total(In thousands of dollars)Net sales
    
    $
    
    
    
    $
    221,558
    
    
    $
    238,036
    
    
    $
    (35,613
    )
    
    $
    423,981Cost of goods sold
    
    
    
    
    
    
    175,070
    
    
    
    190,642
    
    
    
    (34,927
    )
    
    
    330,785Gross profit
    
    
    
    
    
    
    46,488
    
    
    
    47,394
    
    
    
    (686
    )
    
    
    93,196Selling and administrative expenses
    
    
    17,306
    
    
    
    31,721
    
    
    
    17,348
    
    
    
    (386
    )
    
    
    65,989(Loss) income from operations
    
    
    (17,306
    )
    
    
    14,767
    
    
    
    30,046
    
    
    
    (300
    )
    
    
    27,207Equity earnings in affiliates (net of tax)
    
    
    34,520
    
    
    
    4,020
    
    
    
    
    
    
    
    (38,540
    )
    
    
    Interest (expense) income, net
    
    
    (10,652
    )
    
    
    (396
    )
    
    
    (1,294
    )
    
    
    
    
    
    
    (12,342
    )Intercompany interest and fees
    
    
    (14,785
    )
    
    
    22,122
    
    
    
    (7,337
    )
    
    
    
    
    
    
    Other income (expense), net
    
    
    3,203
    
    
    
    (352
    )
    
    
    1,213
    
    
    
    
    
    
    
    4,064(Loss) income before income taxes
    
    
    (5,020
    )
    
    
    40,161
    
    
    
    22,628
    
    
    
    (38,840
    )
    
    
    18,929Provision for income taxes
    
    
    (15,714
    )
    
    
    16,571
    
    
    
    7,378
    
    
    
    
    
    
    
    8,235Net income
    
    $
    10,694
    
    
    $
    23,590
    
    
    $
    15,250
    
    
    $
    (38,840
    )
    
    $
    10,694
 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the three months ended June 30, 2005
 SubsidiarySubsidiary
    
    
    Non-
    
    
    ConsolidatingIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Total(In thousands of dollars)Net sales
    
    $
    
    
    
    $
    195,064
    
    
    $
    133,355
    
    
    $
    (25,941
    )
    
    $
    302,478Cost of goods sold
    
    
    (46
    )
    
    
    158,094
    
    
    
    107,339
    
    
    
    (24,823
    )
    
    
    240,564Gross profit
    
    
    46
    
    
    
    36,970
    
    
    
    26,016
    
    
    
    (1,118
    )
    
    
    61,914Selling and administrative expenses
    
    
    2,295
    
    
    
    25,981
    
    
    
    13,998
    
    
    
    (1,118
    )
    
    
    41,156(Loss) income from operations
    
    
    (2,249
    )
    
    
    10,989
    
    
    
    12,018
    
    
    
    
    
    
    
    20,758Equity earnings in affiliates (net of tax)
    
    
    17,084
    
    
    
    2,895
    
    
    
    
    
    
    
    (19,979
    )
    
    
    Interest (expense) income, net
    
    
    (12,831
    )
    
    
    103
    
    
    
    (1,692
    )
    
    
    
    
    
    
    (14,420
    )Intercompany interest and fees
    
    
    1,490
    
    
    
    (2,757
    )
    
    
    1,267
    
    
    
    
    
    
    
    Other (expense) income, net
    
    
    
    
    
    
    (501
    )
    
    
    101
    
    
    
    
    
    
    
    (400
    )Income before income taxes
    
    
    3,494
    
    
    
    10,729
    
    
    
    11,694
    
    
    
    (19,979
    )
    
    
    5,938Provision for income taxes
    
    
    5,019
    
    
    
    
    
    
    
    2,444
    
    
    
    
    
    
    
    7,463Net (loss) income
    
    $
    (1,525
    )
    
    $
    10,729
    
    
    $
    9,250
    
    
    $
    (19,979
    )
    
    $
    (1,525
    )
 Page 14 of 41




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##### Table of Contents



DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the six months ended June 30, 2006
 SubsidiarySubsidiary
    
    
    Non-
    
    
    ConsolidatingIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Total(In thousands of dollars)Net sales
    
    $
    
    
    
    $
    389,406
    
    
    $
    392,842
    
    
    $
    (66,712
    )
    
    $
    715,536Cost of goods sold
    
    
    
    
    
    
    302,786
    
    
    
    318,842
    
    
    
    (64,228
    )
    
    
    557,400Gross profit
    
    
    
    
    
    
    86,620
    
    
    
    74,000
    
    
    
    (2,484
    )
    
    
    158,136Selling and administrative expenses
    
    
    17,656
    
    
    
    61,590
    
    
    
    33,955
    
    
    
    (716
    )
    
    
    112,485Curtailment gain
    
    
    
    
    
    
    (11,796
    )
    
    
    
    
    
    
    
    
    
    
    (11,796
    )(Loss) income from operations
    
    
    (17,656
    )
    
    
    36,826
    
    
    
    40,045
    
    
    
    (1,768
    )
    
    
    57,447Equity earnings in affiliates (net of tax)
    
    
    52,578
    
    
    
    5,617
    
    
    
    
    
    
    
    (58,195
    )
    
    
    Interest (expense), net
    
    
    (23,173
    )
    
    
    (317
    )
    
    
    (2,525
    )
    
    
    
    
    
    
    (26,015
    )Intercompany interest and fees
    
    
    (13,351
    )
    
    
    25,808
    
    
    
    (12,457
    )
    
    
    
    
    
    
    Other income (expense), net
    
    
    4,424
    
    
    
    (70
    )
    
    
    1,610
    
    
    
    
    
    
    
    5,964Income before income taxes
    
    
    2,822
    
    
    
    67,864
    
    
    
    26,673
    
    
    
    (59,963
    )
    
    
    37,396(Benefit) provision for income taxes
    
    
    (20,188
    )
    
    
    25,775
    
    
    
    8,799
    
    
    
    
    
    
    
    14,386Net income (loss)
    
    $
    23,010
    
    
    $
    42,089
    
    
    $
    17,874
    
    
    $
    (59,963
    )
    
    $
    23,010
 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the six months ended June 30, 2005
 SubsidiarySubsidiary
    
    
    Non-
    
    
    ConsolidatingIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Total(In thousands of dollars)Net sales
    
    $
    
    
    
    $
    364,331
    
    
    $
    218,199
    
    
    $
    (46,052
    )
    
    $
    536,478Cost of goods sold
    
    
    
    
    
    
    301,662
    
    
    
    171,759
    
    
    
    (44,934
    )
    
    
    428,487Gross profit
    
    
    
    
    
    
    62,669
    
    
    
    46,440
    
    
    
    (1,118
    )
    
    
    107,991Selling and administrative expenses
    
    
    2,631
    
    
    
    49,236
    
    
    
    27,768
    
    
    
    (1,118
    )
    
    
    78,517(Loss) income from operations
    
    
    (2,631
    )
    
    
    13,433
    
    
    
    18,672
    
    
    
    
    
    
    
    29,474Equity earnings in affiliates (net of tax)
    
    
    23,335
    
    
    
    4,401
    
    
    
    
    
    
    
    (27,736
    )
    
    
    Interest (expense), net
    
    
    (26,438
    )
    
    
    (6
    )
    
    
    (3,209
    )
    
    
    
    
    
    
    (29,653
    )Intercompany interest and fees
    
    
    191
    
    
    
    (4,404
    )
    
    
    4,213
    
    
    
    
    
    
    
    Other income (expense), net
    
    
    
    
    
    
    1,343
    
    
    
    (1,923
    )
    
    
    
    
    
    
    (580
    )(Loss) income before income taxes
    
    
    (5,543
    )
    
    
    14,767
    
    
    
    17,753
    
    
    
    (27,736
    )
    
    
    (759
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    4,784
    
    
    
    
    
    
    
    4,784Net (loss) income
    
    $
    (5,543
    )
    
    $
    14,767
    
    
    $
    12,969
    
    
    $
    (27,736
    )
    
    $
    (5,543
    )
 Page 15 of 41




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2006
 SubsidiarySubsidiary
    
    
    Non-
    
    
    ConsolidatingIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Total(In thousands of dollars)ASSETSCash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    57,838
    
    
    $
    (8,788
    )
    
    $
    49,050Accounts and notes receivables net
    
    
    100
    
    
    
    109,990
    
    
    
    140,957
    
    
    
    
    
    
    
    251,047Inventories, net
    
    
    
    
    
    
    128,315
    
    
    
    61,979
    
    
    
    (7,673
    )
    
    
    182,621Prepaid expenses and deferred income taxes
    
    
    5,676
    
    
    
    6,852
    
    
    
    27,214
    
    
    
    
    
    
    
    39,742Total current assets
    
    
    5,776
    
    
    
    245,157
    
    
    
    287,988
    
    
    
    (16,461
    )
    
    
    522,460Investment in affiliates
    
    
    1,107,996
    
    
    
    56,616
    
    
    
    
    
    
    
    (1,164,612
    )
    
    
    Property, plant, and equipment, net
    
    
    
    
    
    
    162,570
    
    
    
    62,282
    
    
    
    
    
    
    
    224,852Intangible assets, net
    
    
    
    
    
    
    515,218
    
    
    
    352,299
    
    
    
    
    
    
    
    867,517Other assets
    
    
    16,882
    
    
    
    4,695
    
    
    
    3,305
    
    
    
    
    
    
    
    24,882Total assets
    
    $
    1,130,654
    
    
    $
    984,256
    
    
    $
    705,874
    
    
    $
    (1,181,073
    )
    
    $
    1,639,711LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable and accruals
    
    $
    7,673
    
    
    $
    163,500
    
    
    $
    202,340
    
    
    $
    (8,788
    )
    
    $
    364,725Loans payable
    
    
    
    
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    72Total current liabilities
    
    
    7,673
    
    
    
    163,500
    
    
    
    202,412
    
    
    
    (8,788
    )
    
    
    364,797Long-term debt
    
    
    482,159
    
    
    
    
    
    
    
    70,877
    
    
    
    
    
    
    
    553,036Intercompany accounts
    
    
    87,736
    
    
    
    (212,035
    )
    
    
    124,299
    
    
    
    
    
    
    
    Other noncurrent liabilities
    
    
    (15,678
    )
    
    
    122,112
    
    
    
    46,680
    
    
    
    
    
    
    
    153,114Total liabilities
    
    
    561,890
    
    
    
    73,577
    
    
    
    444,268
    
    
    
    (8,788
    )
    
    
    1,070,947Common stock
    
    
    855
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    855Other stockholders equity
    
    
    567,909
    
    
    
    910,679
    
    
    
    261,606
    
    
    
    (1,172,285
    )
    
    
    567,909Total stockholders equity
    
    
    568,764
    
    
    
    910,679
    
    
    
    261,606
    
    
    
    (1,172,285
    )
    
    
    568,764Total liabilities and stockholders equity
    
    $
    1,130,654
    
    
    $
    984,256
    
    
    $
    705,874
    
    
    $
    (1,181,073
    )
    
    $
    1,639,711
 Page 16 of 41




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2005
 SubsidiarySubsidiary
    
    
    Non-
    
    
    ConsolidatingIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Total(In thousands of dollars)ASSETSCash and cash equivalents
    
    $
    
    
    
    $
    41,587
    
    
    $
    56,449
    
    
    $
    
    
    
    $
    98,036Accounts and notes receivables net
    
    
    100
    
    
    
    129,285
    
    
    
    139,446
    
    
    
    
    
    
    
    268,831Inventories, net
    
    
    
    
    
    
    99,697
    
    
    
    51,970
    
    
    
    (5,905
    )
    
    
    145,762Prepaid expenses and deferred
income taxes
    
    
    4,868
    
    
    
    5,767
    
    
    
    26,151
    
    
    
    
    
    
    
    36,786Total current assets
    
    
    4,968
    
    
    
    276,336
    
    
    
    274,016
    
    
    
    (5,905
    )
    
    
    549,415Investment in affiliates
    
    
    1,042,089
    
    
    
    50,658
    
    
    
    
    
    
    
    (1,092,747
    )
    
    
    Property, plant, and equipment, net
    
    
    
    
    
    
    168,434
    
    
    
    60,237
    
    
    
    
    
    
    
    228,671Intangible assets, net
    
    
    
    
    
    
    523,020
    
    
    
    331,199
    
    
    
    
    
    
    
    854,219Other assets
    
    
    17,146
    
    
    
    5,360
    
    
    
    3,060
    
    
    
    
    
    
    
    25,566Total assets
    
    $
    1,064,203
    
    
    $
    1,023,808
    
    
    $
    668,512
    
    
    $
    (1,098,652
    )
    
    $
    1,657,871LIABILITIES AND STOCKHOLDERS
EQUITYAccounts payable and accruals
    
    $
    7,652
    
    
    $
    155,322
    
    
    $
    230,139
    
    
    $
    
    
    
    $
    393,113Loans payable
    
    
    
    
    
    
    
    
    
    
    67
    
    
    
    
    
    
    
    67Total current liabilities
    
    
    7,652
    
    
    
    155,322
    
    
    
    230,206
    
    
    
    
    
    
    
    393,180Long-term debt
    
    
    532,160
    
    
    
    
    
    
    
    65,977
    
    
    
    
    
    
    
    598,137Intercompany accounts
    
    
    5,750
    
    
    
    (104,901
    )
    
    
    99,151
    
    
    
    
    
    
    
    Other noncurrent liabilities
    
    
    3,981
    
    
    
    105,066
    
    
    
    42,847
    
    
    
    
    
    
    
    151,894Total liabilities
    
    
    549,543
    
    
    
    155,487
    
    
    
    438,181
    
    
    
    
    
    
    
    1,143,211Common stock
    
    
    855
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    855Other stockholders equity
    
    
    513,805
    
    
    
    868,321
    
    
    
    230,331
    
    
    
    (1,098,652
    )
    
    
    513,805Total stockholders equity
    
    
    514,660
    
    
    
    868,321
    
    
    
    230,331
    
    
    
    (1,098,652
    )
    
    
    514,660Total liabilities and
stockholders equity
    
    $
    1,064,203
    
    
    $
    1,023,808
    
    
    $
    668,512
    
    
    $
    (1,098,652
    )
    
    $
    1,657,871
 Page 17 of 41




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2006
 SubsidiarySubsidiary
    
    
    Non-
    
    
    ConsolidatingIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Total(in thousands of dollars)Cash flows from operating activities:Net cash (used in) provided by operating activities
    
    $
    (33,754
    )
    
    $
    72,755
    
    
    $
    (25,043
    )
    
    $
    (7,020
    )
    
    $
    6,938Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (7,209
    )
    
    
    (1,539
    )
    
    
    
    
    
    
    (8,748
    )Proceeds from sale of property, plant and equipment
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Net cash (used in) investing activities
    
    
    
    
    
    
    (7,208
    )
    
    
    (1,539
    )
    
    
    
    
    
    
    (8,747
    )Cash flows from financing activities:Net change in debt
    
    
    (50,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50,000
    )Change in intercompany accounts
    
    
    83,754
    
    
    
    (107,134
    )
    
    
    25,148
    
    
    
    (1,768
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    33,754
    
    
    
    (107,134
    )
    
    
    25,148
    
    
    
    (1,768
    )
    
    
    (50,000
    )Effect of exchange rate changes
    
    
    
    
    
    
    
    
    
    
    2,823
    
    
    
    
    
    
    
    2,823Net (decrease) increase in cash and cash equivalents
    
    
    
    
    
    
    (41,587
    )
    
    
    1,389
    
    
    
    (8,788
    )
    
    
    (48,986
    )Cash and cash equivalents  beginning of year
    
    
    
    
    
    
    41,587
    
    
    
    56,449
    
    
    
    
    
    
    
    98,036Cash and cash equivalents  end of year
    
    $
    
    
    
    $
    
    
    
    $
    57,838
    
    
    $
    (8,788
    )
    
    $
    49,050
 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2005
 SubsidiarySubsidiary
    
    
    Non-Guarantors
    
    
    Guarantors
    
    
    ConsolidatingIssuer
    
    
    Entities
    
    
    Entities
    
    
    Adjustments
    
    
    Total(In thousands of dollars)Cash flows from operating activities:Net cash (used in) provided by operating activities
    
    $
    (5,892
    )
    
    $
    95,929
    
    
    $
    95,569
    
    
    $
    2,788
    
    
    $
    188,394Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (3,278
    )
    
    
    (1,723
    )
    
    
    
    
    
    
    (5,001
    )Proceeds from sale of equity investment
    
    
    
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    10,000Proceeds from sale of property, plant and equipment
    
    
    
    
    
    
    56
    
    
    
    185
    
    
    
    
    
    
    
    241Net cash provided by (used in) investing activities
    
    
    
    
    
    
    6,778
    
    
    
    (1,538
    )
    
    
    
    
    
    
    5,240Cash flows from financing activities:Net change in debt
    
    
    (77,140
    )
    
    
    (2,658
    )
    
    
    (44,022
    )
    
    
    
    
    
    
    (123,820
    )Change in intercompany accounts
    
    
    83,032
    
    
    
    (91,617
    )
    
    
    11,373
    
    
    
    (2,788
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    5,892
    
    
    
    (94,275
    )
    
    
    (32,649
    )
    
    
    (2,788
    )
    
    
    (123,820
    )Effect of exchange rate changes
    
    
    
    
    
    
    
    
    
    
    (5,142
    )
    
    
    
    
    
    
    (5,142
    )Net increase in cash and cash equivalents
    
    
    
    
    
    
    8,432
    
    
    
    56,240
    
    
    
    
    
    
    
    64,672Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    63,341
    
    
    
    48,159
    
    
    
    
    
    
    
    111,500Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    71,773
    
    
    $
    104,399
    
    
    $
    
    
    
    $
    176,172
 Page 18 of 41




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 Overview
    New Units.
 Aftermarket Parts and Services.
  Page 19 of 41




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##### Table of Contents



Results of Operations
 Three months ended June 30, 2006, compared to three months ended June 30, 2005
 Three months ended
    
    
    Three months ended
    
    
    Period to Period ChangeJune 30, 2006
    
    
    June 30, 2005
    
    
    2005 to 2006
    
    
    % Change(Dollars in millions)Statement of Operations Data:Total revenues
    
    $
    424.0
    
    
    
    100.0
    %
    
    $
    302.5
    
    
    
    100.0
    %
    
    $
    121.5
    
    
    
    40.2
    %Cost of goods sold
    
    
    327.6
    
    
    
    77.3
    
    
    
    238.7
    
    
    
    78.9
    
    
    
    88.9
    
    
    
    37.2
    %Gross profit
    
    
    96.4
    
    
    
    22.7
    
    
    
    63.8
    
    
    
    21.1
    
    
    
    32.6
    
    
    
    51.1
    %Selling and administrative expenses
    
    
    66.0
    
    
    
    15.6
    
    
    
    41.1
    
    
    
    13.6
    
    
    
    24.9
    
    
    
    60.6
    %Research and development expenses
    
    
    3.2
    
    
    
    0.8
    
    
    
    1.9
    
    
    
    0.6
    
    
    
    1.3
    
    
    
    71.4
    %Operating income
    
    
    27.2
    
    
    
    6.4
    
    
    
    20.8
    
    
    
    6.9
    
    
    
    6.4
    
    
    
    31.1
    %Interest (expense), net
    
    
    (12.4
    )
    
    
    (2.9
    )
    
    
    (14.5
    )
    
    
    (4.8
    )
    
    
    2.1
    
    
    
    (14.4
    )%Other income (expense), net
    
    
    4.1
    
    
    
    1.0
    
    
    
    (0.4
    )
    
    
    (0.1
    )
    
    
    4.5
    
    
    NMIncome before income taxes
    
    
    18.9
    
    
    
    4.5
    
    
    
    5.9
    
    
    
    2.0
    
    
    
    13.0
    
    
    NMProvision for income taxes
    
    
    8.2
    
    
    
    2.0
    
    
    
    7.4
    
    
    
    2.5
    
    
    
    0.8
    
    
    NMNet income (loss)
    
    $
    10.7
    
    
    
    2.5
    %
    
    $
    (1.5
    )
    
    
    (0.5
    )%
    
    $
    12.2
    
    

    NMBookings
    
    $
    434.1
    
    
    
    
    
    
    $
    296.7
    
    
    
    
    
    
    $
    137.4
    
    
    
    46.3
    %Backlog  ending
    
    $
    1,013.1
    
    
    
    
    
    
    $
    842.3
    
    
    
    
    
    
    $
    170.8
    
    
    
    20.3
    %
 Total revenues.
 Cost of goods sold.
 Gross profit.
 Selling and administrative expenses.
 Stock based compensation  exit units.
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Research and development expenses.
 Operating income.
 Interest expense, net.
 Other income (expense), net.
 Provision for income taxes.
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Bookings and backlog.
 Segment Analysis  Three months ended June 30, 2006, compared to three months ended June 30, 2005
 Three months ended
    
    
    Three months ended
    
    
    Period to Period ChangeJune 30, 2006
    
    
    June 30, 2005
    
    
    2005 to 2006
    
    
    % Change(Dollars in millions)Statement of Segment Data:RevenuesNew units
    
    $
    248.3
    
    
    
    58.6
    %
    
    $
    148.2
    
    
    
    49.0
    %
    
    $
    100.1
    
    
    
    67.5
    %Aftermarket parts and services
    
    
    175.7
    
    
    
    41.4
    %
    
    
    154.3
    
    
    
    51.0
    %
    
    
    21.4
    
    
    
    13.9
    %Total revenues
    
    $
    424.0
    
    
    
    100.0
    %
    
    $
    302.5
    
    
    
    100.0
    %
    
    $
    121.5
    
    
    
    40.2
    %Gross profitNew units
    
    $
    30.7
    
    
    
    
    
    
    $
    15.0
    
    
    
    
    
    
    $
    15.7
    
    
    
    104.5
    %Aftermarket parts and services
    
    
    65.7
    
    
    
    
    
    
    
    48.8
    
    
    
    
    
    
    
    16.9
    
    
    
    34.7
    %Total gross profit
    
    $
    96.4
    
    
    
    
    
    
    $
    63.8
    
    
    
    
    
    
    $
    32.6
    
    
    
    51.1
    %Operating incomeNew units
    
    $
    14.6
    
    
    
    
    
    
    $
    2.4
    
    
    
    
    
    
    $
    12.2
    
    
    
    500.4
    %Aftermarket parts and services
    
    
    45.5
    
    
    
    
    
    
    
    30.9
    
    
    
    
    
    
    
    14.6
    
    
    
    47.0
    %Unallocated corporate expense
    
    
    (32.9
    )
    
    
    
    
    
    
    (12.5
    )
    
    
    
    
    
    
    (20.4
    )
    
    
    160.7
    %Total operating income
    
    $
    27.2
    
    
    
    
    
    
    $
    20.8
    
    
    
    
    
    
    $
    6.4
    
    
    
    31.1
    %BookingsNew units
    
    $
    232.2
    
    
    
    
    
    
    $
    141.6
    
    
    
    
    
    
    $
    90.6
    
    
    
    64.0
    %Aftermarket parts and services
    
    
    201.9
    
    
    
    
    
    
    
    155.1
    
    
    
    
    
    
    
    46.8
    
    
    
    30.2
    %Total bookings
    
    $
    434.1
    
    
    
    
    
    
    $
    296.7
    
    
    
    
    
    
    $
    137.4
    
    
    
    46.3
    %Backlog  endingNew units
    
    $
    739.5
    
    
    
    
    
    
    $
    682.0
    
    
    
    
    
    
    $
    57.5
    
    
    
    8.4
    %Aftermarket parts and services
    
    
    273.6
    
    
    
    
    
    
    
    160.3
    
    
    
    
    
    
    
    113.3
    
    
    
    70.6
    %Total backlog
    
    $
    1,013.1
    
    
    
    
    
    
    $
    842.3
    
    
    
    
    
    
    $
    170.8
    
    
    
    20.3
    %
 New Units
 Revenues.
 Gross profit.
 Operating income.
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Bookings and backlog.
 Aftermarket Parts and Services
 Revenues
 Gross profit.
 Operating income.
 Bookings and backlog.
 Results of Operations
 Six months ended June 30, 2006, compared to six months ended June 30, 2005
 Six months ended
    
    
    Six months ended
    
    
    Period to Period ChangeJune 30, 2006
    
    
    June 30, 2005
    
    
    2005 to 2006
    
    
    % Change(Dollars in millions)Statement of Operations Data:Total revenues
    
    $
    715.5
    
    
    
    100.0
    %
    
    $
    536.5
    
    
    
    100.0
    %
    
    $
    179.0
    
    
    
    33.4
    %Cost of goods sold
    
    
    552.1
    
    
    
    77.2
    
    
    
    425.0
    
    
    
    79.2
    
    
    
    127.1
    
    
    
    29.9
    %Gross profit
    
    
    163.4
    
    
    
    22.8
    
    
    
    111.5
    
    
    
    20.8
    
    
    
    51.9
    
    
    
    46.6
    %Selling and administrative expenses
    
    
    112.5
    
    
    
    15.7
    
    
    
    78.5
    
    
    
    14.6
    
    
    
    34.0
    
    
    
    43.3
    %Research and development expenses
    
    
    5.3
    
    
    
    0.7
    
    
    
    3.5
    
    
    
    0.7
    
    
    
    1.8
    
    
    
    51.0
    %Curtailment gain
    
    
    (11.8
    )
    
    
    (1.6
    )
    
    
    
    
    
    
    
    
    
    
    (11.8
    )
    
    NMOperating income
    
    
    57.4
    
    
    
    8.0
    
    
    
    29.5
    
    
    
    5.5
    
    
    
    27.9
    
    
    
    94.9
    %Interest (expense), net
    
    
    (26.0
    )
    
    
    (3.6
    )
    
    
    (29.7
    )
    
    
    (5.5
    )
    
    
    3.7
    
    
    
    (12.3
    )%Other income (expense), net
    
    
    6.0
    
    
    
    0.8
    
    
    
    (0.6
    )
    
    
    (0.1
    )
    
    
    6.6
    
    
    NMIncome (loss) before income taxes
    
    
    37.4
    
    
    
    5.2
    
    
    
    (0.8
    )
    
    
    (0.1
    )
    
    
    38.2
    
    
    NMProvision for income taxes
    
    
    14.4
    
    
    
    2.0
    
    
    
    4.7
    
    
    
    0.9
    
    
    
    9.7
    
    
    NMNet income (loss)
    
    $
    23.0
    
    
    
    3.2
    %
    
    $
    (5.5
    )
    
    
    (1.0
    )%
    
    $
    28.5
    
    
    NMBookings
    
    $
    799.4
    
    
    
    
    
    
    $
    747.1
    
    
    
    
    
    
    $
    52.3
    
    
    
    7.0
    %Backlog  ending
    
    $
    1,013.1
    
    
    
    
    
    
    $
    842.3
    
    
    
    
    
    
    $
    170.8
    
    
    
    20.3
    %
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Total revenues.
 Cost of goods sold.
 Gross profit.
 Selling and administrative expenses.
 Stock based compensation  exit units.
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Research and development expenses.
 Curtailment gain.
 Operating income.
 Interest expense, net.
 Other income (expense), net.
 Provision for income taxes.
 Bookings.
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Segment Analysis  Six months ended June 30, 2006, compared to six months ended June 30, 2005
 Six months ended
    
    
    Six months ended 30,
    
    
    Period to Period ChangeJune 30, 2006
    
    
    June 30, 2005
    
    
    2005 to 2006
    
    
    % Change(Dollars in millions)Statement of Segment Data:RevenuesNew units
    
    $
    387.3
    
    
    
    54.1
    %
    
    $
    236.5
    
    
    
    44.1
    %
    
    $
    150.8
    
    
    
    63.8
    %Aftermarket parts and services
    
    
    328.2
    
    
    
    45.9
    %
    
    
    300.0
    
    
    
    55.9
    %
    
    
    28.2
    
    
    
    9.4
    %Total revenues
    
    $
    715.5
    
    
    
    100.0
    %
    
    $
    536.5
    
    
    
    100.0
    %
    
    $
    179.0
    
    
    
    33.4
    %Gross profitNew units
    
    $
    41.9
    
    
    
    
    
    
    $
    18.9
    
    
    
    
    
    
    $
    23.0
    
    
    
    122.1
    %Aftermarket parts and services
    
    
    121.5
    
    
    
    
    
    
    
    92.6
    
    
    
    
    
    
    
    28.9
    
    
    
    31.2
    %Total gross profit
    
    $
    163.4
    
    
    
    
    
    
    $
    111.5
    
    
    
    
    
    
    $
    51.9
    
    
    
    46.6
    %Operating incomeNew units
    
    $
    13.3
    
    
    
    
    
    
    $
    (3.6
    )
    
    
    
    
    
    $
    16.9
    
    
    
    (466.5
    )%Aftermarket parts and services
    
    
    79.8
    
    
    
    
    
    
    
    54.8
    
    
    
    
    
    
    
    25.0
    
    
    
    45.8
    %Unallocated corporate expense
    
    
    (35.7
    )
    
    
    
    
    
    
    (21.7
    )
    
    
    
    
    
    
    (14.0
    )
    
    
    64.7
    %Total operating income
    
    $
    57.4
    
    
    
    
    
    
    $
    29.5
    
    
    
    
    
    
    $
    27.9
    
    
    
    94.9
    %BookingsNew units
    
    $
    397.6
    
    
    
    
    
    
    $
    437.1
    
    
    
    
    
    
    $
    (39.5
    )
    
    
    (9.0
    )%Aftermarket parts and services
    
    
    401.8
    
    
    
    
    
    
    
    310.0
    
    
    
    
    
    
    
    91.8
    
    
    
    29.6
    %Total bookings
    
    $
    799.4
    
    
    
    
    
    
    $
    747.1
    
    
    
    
    
    
    $
    52.3
    
    
    
    7.0
    %Backlog  endingNew units
    
    $
    739.5
    
    
    
    
    
    
    $
    682.0
    
    
    
    
    
    
    $
    57.5
    
    
    
    8.4
    %Aftermarket parts and services
    
    
    273.6
    
    
    
    
    
    
    
    160.3
    
    
    
    
    
    
    
    113.3
    
    
    
    70.6
    %Total backlog
    
    $
    1,013.1
    
    
    
    
    
    
    $
    842.3
    
    
    
    
    
    
    $
    170.8
    
    
    
    20.3
    %
 New Units
 Revenues.
 Gross profit.
 Operating income (loss).
 Bookings.
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Aftermarket Parts and Services
 Revenues
 Gross profit.
 Operating income.
 Bookings.
 Liquidity and Capital Resources
     Page 27 of 41




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Recently issued accounting standards
 ,
Inventory Costs, an Amendment of Accounting Research Bulletin No. 43, and Chapter 4
 Share-Based Payments Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 Exchanges of Non-monetary Assets Accounting for Non-monetary Transactions
 Accounting Changes and Error Corrections
 Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 Risk Factors
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
    
    material weaknesses in our internal control over financial reporting;
    
    economic or industry downturns;
    
    our inability to implement our business strategy to increase our aftermarket parts and services revenue;
    
    competition in our markets;
    
    failure to complete or achieve the expected benefits from any future acquisitions;
    
    economic, political, currency and other risks associated with our international sales and operations;
    
    loss of our senior management;
    
    our brand name may be confused with others;
    
    environment compliance costs and liabilities;
    
    failure to maintain safety performance acceptable to our clients;
    
    failure to negotiate new collective bargaining agreements;
    
    our ability to operate as a standalone company;
    
    unexpected product claims or regulations;
    
    infringement on our intellectual property or our infringement on others intellectual property; and
    
    other factors described in this report.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
   
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ITEM 4. CONTROLS AND PROCEDURES
    Material Weaknesses in Internal Control over Financial Reporting
   1)
    
    We did not have an effective control environment because of the following material weaknesses:
 a)
    
    We did not have a sufficient complement of personnel to have an appropriate accounting
and financial reporting organizational structure to support the activities of the Company.
Specifically, we did not have personnel with an appropriate level of accounting knowledge,
experience and training in the selection, application and implementation of GAAP
commensurate with our financial reporting requirements.
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b)
    
    We did not have an appropriate level of control consciousness as it relates to the
establishment and maintenance of policies and procedures with respect to the primary
components of information technology general controls. This resulted in either not having
appropriate controls designed and in place or not achieving operating effectiveness over
systems development, software change management, computer operations and security, which
are referred to as information technology general controls. Additionally, we lacked a
sufficient complement of personnel with a level of knowledge and experience to have an
appropriate information technology organizational structure.
 The control environment sets the tone of an organization, influences the control consciousness
of its people, and is the foundation of all other components of internal control over financial
reporting. These control environment material weaknesses contributed to the material weaknesses
discussed in 2 and 3 below.
 2)
    
    We did not have effective controls over certain of our accounts and disclosures because of
the following material weaknesses.
 a)
    
    We did not have effective controls over the preparation and review of the interim and
annual consolidated financial statements and disclosures. Specifically, effective controls
were not designed and in place over the process related to identifying and accumulating all
required supporting information to ensure the completeness and accuracy of the consolidated
financial statements and disclosures including the required guarantor subsidiary financial
statement disclosures as required by Rule 3-10 of Regulation S-X.b)
    
    We did not have effective controls over the completeness and accuracy of foreign
currency translations related to our foreign affiliates. Specifically, our controls over
the translation of the step-up basis in property, plant and equipment recorded as a result
of the acquisition of certain foreign subsidiaries and the related cumulative translation
adjustment were not effectively designed to ensure that the translated amounts were
determined in accordance with generally accepted accounting principles.c)
    
    We did not have effective controls over the valuation of accounts receivable.
Specifically, effective controls were not in place to ensure the proper determination and
review of the allowance for doubtful accounts.d)
    
    We did not have effective controls over the valuation of inventory. Specifically,
effective controls were not designed and in place to ensure the proper determination and
review of the obsolete and slow-moving inventory reserve at period-end.e)
    
    We did not have effective controls over the timely preparation, review and approval of
certain account analyses and reconciliations. Specifically, we did not have effective
controls over the completeness and accuracy of supporting schedules and underlying data
supporting account reconciliations prepared for certain accounts related to accounts
receivable, payroll, inventory, property, plant and equipment and accruals.f)
    
    We did not have effective controls over intercompany accounts. Specifically, we did
not have effective controls to ensure that intercompany account balances were reconciled
timely and properly eliminated in consolidation in accordance with generally accepted
accounting principles.g)
    
    We did not have effective controls over revenue recognition. Specifically, our
controls were not adequate to ensure the completeness and accuracy of revenues recorded for
contracts with non-standard terms and conditions.
 3)
    
    We did not design or have effective controls over segregation of duties, including access to
financial applications and data. Specifically, certain financial accounting and information
technology personnel had unrestricted and unmonitored access to critical financial
applications and data, which are significant to the financial statements, and that could lead
to the creation, approval or processing of financial transactions, changes to financial data
or changes to application controls and processing, without appropriate review and
authorization.Additionally, these control deficiencies could result in a misstatement of substantially all
accounts and disclosures which would result in a material misstatement of annual or interim
financial statements that would not be prevented or detected.
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Plan for Remediation of Material Weaknesses
  a)
    
    We continued (1) to hire additional experienced information technology personnel; (2)
to hire additional experienced accounting personnel, including a Manager-International
Accounting, a Manager-Headquarters Accounting and a Manager-Corporate Headquarters Oracle
Implementation; (3) to improve our documentation of worldwide accounting processes,
policies and procedures and; (4) to implement a new worldwide information technology
system.b)
    
    We began developing and implementing information technology general controls and
specifically limiting certain financial and information technology personnels access to
critical financial applications and data.c)
    
    We established new procedures for developing required current consolidating financial
statements required by Rule 3-10 of Regulation S-X.d)
    
    We implemented a review process for foreign currency translated financial statements of
our foreign affiliates by experienced accounting personnel at Corporate Headquarters with
emphasis on the translation of property, plant and equipment, intangibles and goodwill, and
the related cumulative translation adjustment.e)
    
    We reemphasized compliance with existing policies on allowance for doubtful accounts
and allowance for obsolete and slow moving inventory and implemented a review by
experienced accounting personnel at Corporate Headquarters of such accounts.f)
    
    We implemented new procedures for preparation, review and approval of certain account
analyses and reconciliations.g)
    
    We implemented new procedures to analyze, reconcile and eliminate inter-company
accounts.h)
    
    We implemented a procedure requiring the documents supporting the revenue recognized on
all transactions over a selected dollar amount in the quarter to be reviewed by experienced
accounting personnel at Corporate Headquarters.
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Change in Internal Control over Financial Reporting
  Page 34 of 41




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PART II.  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
     Page 35 of 41




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ITEM 6. EXHIBITS
  Exhibit 3.1
    
    Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 4 to the
Registrants Registration Statement on Form S-1 (File No. 333-124963) filed with the SEC on August 2, 2005 (the
Form S-1)).Exhibit 3.2
    
    Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Registrants Form S-1).Exhibit 31.1
    
    Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.Exhibit 31.2
    
    Certification of the Executive Vice President and Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.Exhibit 32.1
    
    Certification of the President and Chief Executive Officer pursuant to Title 18, United States Code, Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). (This certification is
being furnished and shall not be deemed filed with the SEC for purposes of Section 18 of the Exchange Act, or
otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into
any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically
incorporates it by reference.)Exhibit 32.2
    
    Certification of the Executive Vice President and Chief Financial Officer pursuant to Title 18, United States
Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
(This certification is being furnished and shall not be deemed filed with the SEC for purposes of Section 18 of
the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be
incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that
the Registrant specifically incorporates it by reference.)
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SIGNATURES
  DRESSER-RAND GROUP INC.August 8, 2006
    
    /s/ Lonnie A. ArnettLonnie A. ArnettVice President, Controller and ChiefAccounting Officer
 Page 37 of 41