##### 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 September 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 W. Sam 
Houston Parkway, N. 
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 nine months ended
September 30, 2006 and 2005
    
    
    3Consolidated Balance Sheet at September 30, 2006, and December 31, 2005
    
    
    4Consolidated Statement of Cash Flows for the nine months ended September 30, 2006 and 2005
    
    
    5Notes to Unaudited Consolidated Financial Statements at September 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
    
    30-33PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    34Item 6.
    
    Exhibits
    
    
    35Signatures
    
    
    36-40Exhibits
    
    
    41EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION
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PART I.  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales of products
    
    $
    244,217
    
    
    $
    258,065
    
    
    $
    823,460
    
    
    $
    683,656Net sales of services
    
    
    66,076
    
    
    
    51,694
    
    
    
    202,369
    
    
    
    162,581Total revenues
    
    
    310,293
    
    
    
    309,759
    
    
    
    1,025,829
    
    
    
    846,237Cost of products sold
    
    
    165,703
    
    
    
    192,804
    
    
    
    621,549
    
    
    
    533,685Cost of services sold
    
    
    45,254
    
    
    
    40,050
    
    
    
    141,530
    
    
    
    124,160Total cost of products and services sold
    
    
    210,957
    
    
    
    232,854
    
    
    
    763,079
    
    
    
    657,845Gross profit
    
    
    99,336
    
    
    
    76,905
    
    
    
    262,750
    
    
    
    188,392Selling and administrative expenses (Nine months ended September 30, 2006
amount includes $16,812 of stock based compensation  exit units)
    
    
    48,412
    
    
    
    39,814
    
    
    
    160,897
    
    
    
    118,331Research and development expenses
    
    
    2,534
    
    
    
    1,249
    
    
    
    7,812
    
    
    
    4,745Curtailment (gain)
    
    
    
    
    
    
    
    
    
    
    (11,796
    )
    
    
    Income from operations
    
    
    48,390
    
    
    
    35,842
    
    
    
    105,837
    
    
    
    65,316Interest expense, net
    
    
    (10,999
    )
    
    
    (14,966
    )
    
    
    (37,014
    )
    
    
    (44,619
    )Early redemption premium on debt
    
    
    
    
    
    
    (3,688
    )
    
    
    
    
    
    
    (3,688
    )Other income (expense), net
    
    
    983
    
    
    
    (978
    )
    
    
    6,947
    
    
    
    (1,558
    )Income before income taxes
    
    
    38,374
    
    
    
    16,210
    
    
    
    75,770
    
    
    
    15,451Provision for income taxes
    
    
    15,447
    
    
    
    5,776
    
    
    
    29,833
    
    
    
    10,560Net income
    
    $
    22,927
    
    
    $
    10,434
    
    
    $
    45,937
    
    
    $
    4,891Net income per common share-basic and diluted
    
    $
    0.27
    
    
    $
    0.15
    
    
    $
    0.54
    
    
    $
    0.08Weighted average shares outstanding-basic and diluted
    
    
    85,457
    
    
    
    71,904
    
    
    
    85,450
    
    
    
    60,179
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September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    129,536
    
    
    $
    98,036Accounts receivable, less allowance for doubtful
accounts of $9,297 and $8,649 at 2006 and 2005
    
    
    231,169
    
    
    
    268,831Inventories, net
    
    
    190,537
    
    
    
    145,762Prepaid expenses
    
    
    33,222
    
    
    
    25,887Deferred income taxes, net
    
    
    11,723
    
    
    
    10,899Total current assets
    
    
    596,187
    
    
    
    549,415Property, plant and equipment, net
    
    
    220,502
    
    
    
    228,671Goodwill
    
    
    409,914
    
    
    
    393,300Intangible assets, net
    
    
    449,168
    
    
    
    460,919Other assets
    
    
    24,309
    
    
    
    25,566Total assets
    
    $
    1,700,080
    
    
    $
    1,657,871Liabilities and Stockholders EquityCurrent liabilitiesAccounts payable and accruals
    
    $
    276,582
    
    
    $
    303,430Customer advance payments
    
    
    99,685
    
    
    
    84,695Accrued income taxes payable
    
    
    21,408
    
    
    
    4,988Loans payable
    
    
    71
    
    
    
    67Total current liabilities
    
    
    397,746
    
    
    
    393,180Deferred income taxes
    
    
    37,619
    
    
    
    22,586Postemployment and other employee benefit liabilities
    
    
    105,085
    
    
    
    113,861Long-term debt
    
    
    552,700
    
    
    
    598,137Other noncurrent liabilities
    
    
    18,699
    
    
    
    15,447Total liabilities
    
    
    1,111,849
    
    
    
    1,143,211Commitments and contingencies (Notes 8 through 12)Stockholders equityCommon stock, $0.01 par value, 250,000,000 and 101,200,000 shares
authorized; and, 85,479,053 and 85,476,283 shares issued and
outstanding, respectively
    
    
    855
    
    
    
    855Additional paid-in capital
    
    
    511,440
    
    
    
    493,163Retained earnings
    
    
    90,261
    
    
    
    44,324Accumulated other comprehensive loss
    
    
    (14,325
    )
    
    
    (23,682
    )Total stockholders equity
    
    
    588,231
    
    
    
    514,660Total liabilities and stockholders equity
    
    $
    1,700,080
    
    
    $
    1,657,871
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Nine months ended September 30,2006
    
    
    2005Cash flows from operating activitiesNet income
    
    $
    45,937
    
    
    $
    4,891Adjustments to arrive at net cash provided by operating activities:Depreciation and amortization
    
    
    38,584
    
    
    
    48,045Stock based compensation
    
    
    18,277
    
    
    
    3,237Curtailment gain
    
    
    (11,796
    )
    
    
    Deferred income taxes
    
    
    13,009
    
    
    
    (2,459
    )Amortization of debt financing costs
    
    
    3,873
    
    
    
    8,627Provision for losses on inventory
    
    
    973
    
    
    
    2,743Other
    
    
    (218
    )
    
    
    (79
    )Working capital and otherAccounts receivable
    
    
    43,962
    
    
    
    46,989Inventories
    
    
    (42,947
    )
    
    
    13,003Accounts payable
    
    
    (28,828
    )
    
    
    8,372Customer advance payments
    
    
    11,954
    
    
    
    75,838Other
    
    
    (723
    )
    
    
    13,177Net cash provided by operating activities
    
    
    92,057
    
    
    
    222,384Cash flows from investing activitiesCapital expenditures
    
    
    (13,060
    )
    
    
    (10,747
    )Acquisitions
    
    
    
    
    
    
    (57,218
    )Proceeds from equity investment disposition
    
    
    
    
    
    
    10,000Proceeds from sales of property, plant and equipment
    
    
    
    
    
    
    244Net cash (used in) investing activities
    
    
    (13,060
    )
    
    
    (57,721
    )Cash flows from financing activitiesPayments of long-term debt
    
    
    (50,056
    )
    
    
    (211,162
    )Payments of short-term borrowings
    
    
    
    
    
    
    (2,638
    )Proceeds from initial public offering  net
    
    
    
    
    
    
    608,925Cash dividends paid
    
    
    
    
    
    
    (557,686
    )Proceeds from sale of stock to employees
    
    
    
    
    
    
    1,420Net cash (used in) financing activities
    
    
    (50,056
    )
    
    
    (161,141
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    2,559
    
    
    
    (5,518
    )Net increase (decrease) in cash and cash equivalents
    
    
    31,500
    
    
    
    (1,996
    )Cash and cash equivalents, beginning of the period
    
    
    98,036
    
    
    
    111,500Cash and cash equivalents, end of period
    
    $
    129,536
    
    
    $
    109,504
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1. Basis of presentation
  2. Recently issued accounting standards
 Share-Based Payments Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 Accounting Changes and Error Corrections
 Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109
 Fair Value Measurements
 Employers Accounting for Defined
Benefit Pension and Other Post Retirement Plans an amendment of FASB Statements No. 87, 88, 106
and 132(R).
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3. Stock-based compensation expense  exit units
    4. Curtailment gain
  Page 7 of 40




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5. Intangible assets and goodwill
  
 September 30, 2006
    
    
    Weighted
    
    
    December 31, 2005Accumulated
    
    
    Average
    
    
    
    
    
    
    Accumulated(In thousands)
    
    Cost
    
    
    Amortization
    
    
    Useful Lives
    
    
    Cost
    
    
    AmortizationTrade names
    
    $
    87,600
    
    
    $
    4,095
    
    
    40 years
    
    $
    87,600
    
    
    $
    2,448Customer relationships
    
    
    235,408
    
    
    
    11,422
    
    
    40 years
    
    
    232,219
    
    
    
    6,806Software
    
    
    30,553
    
    
    
    5,867
    
    
    10 years
    
    
    30,553
    
    
    
    3,571Existing technology
    
    
    126,577
    
    
    
    9,784
    
    
    25 years
    
    
    126,577
    
    
    
    5,800Order backlog
    
    
    26,325
    
    
    
    26,325
    
    
    15 months
    
    
    26,325
    
    
    
    25,561Non-compete agreement
    
    
    4,382
    
    
    
    4,184
    
    
    2 years
    
    
    4,382
    
    
    
    2,551Total amortizable intangible assets
    
    $
    510,845
    
    
    $
    61,677
    
    
    
    
    
    
    $
    507,656
    
    
    $
    46,737
   September 30,(In thousands)
    
    2006Beginning balance
    
    $
    393,300TES acquisition
    
    
    1,186Translation adjustments
    
    
    15,428Ending balance
    
    $
    409,914
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Accounts receivable
    
    $
    14,897Inventory  net
    
    
    7,309Prepaid expenses and other current assets
    
    
    515Total current assets
    
    
    22,721Property, plat and equipment, net
    
    
    19,029Intangible assets
    
    
    19,600Goodwill
    
    
    7,119Total assets acquired
    
    
    68,469Accounts payable and accruals
    
    
    9,435Other liabilities
    
    
    2,016Total liabilities assumed
    
    
    11,451Cash paid  net
    
    $
    57,018
   6. Inventories
  September 30,
    
    
    December 31,(In thousands)
    
    2006
    
    
    2005Raw materials and supplies
    
    $
    105,484
    
    
    $
    83,355Work-in-process and finished goods
    
    
    250,496
    
    
    
    257,488355,980
    
    
    
    340,843Less progress payments
    
    
    (165,443
    )
    
    
    (195,081
    )Total inventories
    
    $
    190,537
    
    
    $
    145,762
  7. Property, plant and equipment
  September 30,
    
    
    December 31,(In thousands)
    
    2006
    
    
    2005Property, plant and equipment, at cost
    
    $
    270,561
    
    
    $
    254,643Less accumulated depreciation
    
    
    (50,059
    )
    
    
    (25,972
    )Property, plant and equipment, net
    
    $
    220,502
    
    
    $
    228,671
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8. Income taxes
    9. Pension plans
  Three months ended September 30,
    
    
    Nine months ended September 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    1,488
    
    
    $
    1,269
    
    
    $
    4,398
    
    
    $
    3,862Interest cost
    
    
    4,417
    
    
    
    4,254
    
    
    
    13,116
    
    
    
    12,891Expected return on plan assets
    
    
    (5,070
    )
    
    
    (4,822
    )
    
    
    (15,076
    )
    
    
    (14,575
    )Net amortization of unrecognized Plan net losses
    
    
    30
    
    
    
    
    
    
    
    87
    
    
    
    Net pension expense
    
    $
    865
    
    
    $
    701
    
    
    $
    2,525
    
    
    $
    2,178
 10. Postretirement benefits other than pensions
  Three months ended September 30,
    
    
    Nine months ended September 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    420
    
    
    $
    499
    
    
    $
    1,318
    
    
    $
    1,498Interest cost
    
    
    588
    
    
    
    684
    
    
    
    1,829
    
    
    
    2,052Curtailment gain
    
    
    
    
    
    
    
    
    
    
    (11,796
    )
    
    
    Net periodic postretirement benefits (gain) cost
    
    $
    1,008
    
    
    $
    1,183
    
    
    $
    (8,649
    )
    
    $
    3,550
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11. Commitments and contingencies
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12. Warranty accruals
  
  Nine months ended September 30,(In thousands)
    
    2006
    
    
    2005Beginning balance
    
    $
    21,511
    
    
    $
    21,078Provisions for warranties issued during the period
    
    
    11,543
    
    
    
    9,350Adjustments to warranties issued in prior periods
    
    
    183
    
    
    
    1,436Payments during period
    
    
    (11,150
    )
    
    
    (9,379
    )Translation adjustments
    
    
    874
    
    
    
    (1,266
    )Ending balance
    
    $
    22,961
    
    
    $
    21,219
 13. Segment information
  1)
    
    New Units are highly engineered solutions to new requests from customer. 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.
  Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)RevenuesNew units
    
    $
    113,690
    
    
    $
    162,587
    
    
    $
    501,037
    
    
    $
    399,044Aftermarket parts and services
    
    
    196,603
    
    
    
    147,172
    
    
    
    524,792
    
    
    
    447,193Total revenues
    
    $
    310,293
    
    
    $
    309,759
    
    
    $
    1,025,829
    
    
    $
    846,237Operating incomeNew units
    
    $
    11,433
    
    
    $
    8,342
    
    
    $
    24,732
    
    
    $
    4,713Aftermarket parts and services
    
    
    51,945
    
    
    
    38,417
    
    
    
    131,789
    
    
    
    93,197Unallocable
    
    
    (14,988
    )
    
    
    (10,917
    )
    
    
    (50,684
    )
    
    
    (32,594
    )Total operating income
    
    $
    48,390
    
    
    $
    35,842
    
    
    $
    105,837
    
    
    $
    65,316Depreciation and amortizationNew units
    
    $
    5,580
    
    
    $
    7,799
    
    
    $
    20,419
    
    
    $
    22,499Aftermarket parts and services
    
    
    7,201
    
    
    
    6,636
    
    
    
    18,165
    
    
    
    25,546Total depreciation and amortization
    
    $
    12,781
    
    
    $
    14,435
    
    
    $
    38,584
    
    
    $
    48,045Total assets (including goodwill)New units
    
    $
    239,853
    
    
    
    
    
    
    $
    239,853Aftermarket parts and services
    
    
    577,935
    
    
    
    
    
    
    
    577,935Unallocable
    
    
    882,292
    
    
    
    
    
    
    
    882,292Total assets
    
    $
    1,700,080
    
    
    
    
    
    
    $
    1,700,080
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14. Stockholders equity
  AccumulatedOtherCommon
    
    
    Additional
    
    
    Retained
    
    
    Comprehensive(In thousands)
    
    Stock
    
    
    Paid-in Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    TotalAt December 31, 2005
    
    $
    855
    
    
    $
    493,163
    
    
    $
    44,324
    
    
    $
    (23,682
    )
    
    $
    514,660Stock based employee compensation
    
    
    
    
    
    
    18,277
    
    
    
    
    
    
    
    
    
    
    
    18,277Net income
    
    
    
    
    
    
    
    
    
    
    45,937
    
    
    
    
    
    
    
    45,937Other comprehensive income (loss)Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72
    )
    
    
    (72
    )Currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,429
    
    
    
    9,429At September 30, 2006
    
    $
    855
    
    
    $
    511,440
    
    
    $
    90,261
    
    
    $
    (14,325
    )
    
    $
    588,231
  Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Net income (loss)
    
    $
    22,927
    
    
    $
    10,434
    
    
    $
    45,937
    
    
    $
    4,891Other comprehensive income (loss):Minimum pension liability  tax effect
    
    
    
    
    
    
    
    
    
    
    (72
    )
    
    
    Foreign currency translation adjustment
    
    
    (3,972
    )
    
    
    (2,560
    )
    
    
    9,429
    
    
    
    (27,155
    )Comprehensive income (loss)
    
    $
    18,955
    
    
    $
    7,874
    
    
    $
    55,924
    
    
    $
    (22,264
    )
  September 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Minimum pension liability, net of tax
    
    $
    (6,074
    )
    
    $
    (6,002
    )Foreign currency translation adjustment
    
    
    (8,251
    )
    
    
    (17,680
    )Accumulated other comprehensive loss
    
    $
    (14,325
    )
    
    $
    (23,682
    )
  15. Supplemental guarantor financial information
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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the three months ended September 30, 2006
 SubsidiarySubsidiary
    
    
    Non-
    
    
    Consolidating(In thousands)
    
    Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    TotalNet sales
    
    $
    
    
    
    $
    210,428
    
    
    $
    122,926
    
    
    $
    (23,061
    )
    
    $
    310,293Cost of goods sold
    
    
    
    
    
    
    154,247
    
    
    
    82,266
    
    
    
    (25,556
    )
    
    
    210,957Gross profit
    
    
    
    
    
    
    56,181
    
    
    
    40,660
    
    
    
    2,495
    
    
    
    99,336Selling and administrative expenses
    
    
    958
    
    
    
    31,323
    
    
    
    16,516
    
    
    
    (385
    )
    
    
    48,412Research and development expenses
    
    
    
    
    
    
    2,453
    
    
    
    81
    
    
    
    
    
    
    
    2,534(Loss) income from operations
    
    
    (958
    )
    
    
    22,405
    
    
    
    24,063
    
    
    
    2,880
    
    
    
    48,390Equity earnings in affiliates
    
    
    31,794
    
    
    
    1,097
    
    
    
    
    
    
    
    (32,891
    )
    
    
    Interest (expense) income, net
    
    
    (10,704
    )
    
    
    148
    
    
    
    (443
    )
    
    
    
    
    
    
    (10,999
    )Intercompany interest and fees
    
    
    (6,801
    )
    
    
    12,331
    
    
    
    (5,530
    )
    
    
    
    
    
    
    Other income (expense), net
    
    
    (289
    )
    
    
    (227
    )
    
    
    1,499
    
    
    
    
    
    
    
    983Income before income taxes
    
    
    13,042
    
    
    
    35,754
    
    
    
    19,589
    
    
    
    (30,011
    )
    
    
    38,374Provision for income taxes
    
    
    (9,885
    )
    
    
    13,608
    
    
    
    11,724
    
    
    
    
    
    
    
    15,447Net income
    
    $
    22,927
    
    
    $
    22,146
    
    
    $
    7,865
    
    
    $
    (30,011
    )
    
    $
    22,927
 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the three months ended September 30, 2005
 SubsidiarySubsidiary
    
    
    Non-
    
    
    Consolidating(In thousands)
    
    Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    TotalNet sales
    
    $
    
    
    
    $
    196,774
    
    
    $
    141,089
    
    
    $
    (28,104
    )
    
    $
    309,759Cost of goods sold
    
    
    
    
    
    
    154,142
    
    
    
    105,649
    
    
    
    (26,937
    )
    
    
    232,854Gross profit
    
    
    
    
    
    
    42,632
    
    
    
    35,440
    
    
    
    (1,167
    )
    
    
    76,905Selling and administrative expenses
    
    
    689
    
    
    
    25,651
    
    
    
    14,641
    
    
    
    (1,167
    )
    
    
    39,814Research and development expenses
    
    
    
    
    
    
    1,161
    
    
    
    88
    
    
    
    
    
    
    
    1,249(Loss) income from operations
    
    
    (689
    )
    
    
    15,820
    
    
    
    20,711
    
    
    
    
    
    
    
    35,842Equity earnings in affiliates
    
    
    23,733
    
    
    
    1,244
    
    
    
    
    
    
    
    (24,977
    )
    
    
    Interest (expense) income, net
    
    
    (14,446
    )
    
    
    382
    
    
    
    (902
    )
    
    
    
    
    
    
    (14,966
    )Intercompany interest and fees
    
    
    4,174
    
    
    
    (2,960
    )
    
    
    (1,214
    )
    
    
    
    
    
    
    Other (expense), net
    
    
    (2,338
    )
    
    
    (557
    )
    
    
    (1,771
    )
    
    
    
    
    
    
    (4,666
    )Income before income taxes
    
    
    10,434
    
    
    
    13,929
    
    
    
    16,824
    
    
    
    (24,977
    )
    
    
    16,210Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    5,776
    
    
    
    
    
    
    
    5,776Net income
    
    $
    10,434
    
    
    $
    13,929
    
    
    $
    11,048
    
    
    $
    (24,977
    )
    
    $
    10,434
 Page 14 of 40




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the nine months ended September 30, 2006
 SubsidiarySubsidiary
    
    
    Non-
    
    
    Consolidating(In thousands)
    
    Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    TotalNet sales
    
    $
    
    
    
    $
    599,834
    
    
    $
    515,768
    
    
    $
    (89,773
    )
    
    $
    1,025,829Cost of goods sold
    
    
    
    
    
    
    451,799
    
    
    
    401,064
    
    
    
    (89,784
    )
    
    
    763,079Gross profit
    
    
    
    
    
    
    148,035
    
    
    
    114,704
    
    
    
    11
    
    
    
    262,750Selling and administrative expenses
    
    
    18,614
    
    
    
    92,913
    
    
    
    50,471
    
    
    
    (1,101
    )
    
    
    160,897Research and development expenses
    
    
    
    
    
    
    7,687
    
    
    
    125
    
    
    
    
    
    
    
    7,812Curtailment gain
    
    
    
    
    
    
    (11,796
    )
    
    
    
    
    
    
    
    
    
    
    (11,796
    )(Loss) income from operations
    
    
    (18,614
    )
    
    
    59,231
    
    
    
    64,108
    
    
    
    1,112
    
    
    
    105,837Equity earnings in affiliates
    
    
    84,372
    
    
    
    6,714
    
    
    
    
    
    
    
    (91,086
    )
    
    
    Interest (expense), net
    
    
    (33,877
    )
    
    
    (169
    )
    
    
    (2,968
    )
    
    
    
    
    
    
    (37,014
    )Intercompany interest and fees
    
    
    (20,152
    )
    
    
    38,139
    
    
    
    (17,987
    )
    
    
    
    
    
    
    Other income (expense), net
    
    
    4,135
    
    
    
    (297
    )
    
    
    3,109
    
    
    
    
    
    
    
    6,947Income before income taxes
    
    
    15,864
    
    
    
    103,618
    
    
    
    46,262
    
    
    
    (89,974
    )
    
    
    75,770Provision for income taxes
    
    
    (30,073
    )
    
    
    39,383
    
    
    
    20,523
    
    
    
    
    
    
    
    29,833Net income
    
    $
    45,937
    
    
    $
    64,235
    
    
    $
    25,739
    
    
    $
    (89,974
    )
    
    $
    45,937
 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the nine months ended September 30, 2005
 SubsidiarySubsidiary
    
    
    Non-
    
    
    Consolidating(In thousands)
    
    Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    TotalNet sales
    
    $
    
    
    
    $
    561,105
    
    
    $
    359,288
    
    
    $
    (74,156
    )
    
    $
    846,237Cost of goods sold
    
    
    
    
    
    
    452,448
    
    
    
    277,268
    
    
    
    (71,871
    )
    
    
    657,845Gross profit
    
    
    
    
    
    
    108,657
    
    
    
    82,020
    
    
    
    (2,285
    )
    
    
    188,392Selling and administrative expenses
    
    
    3,320
    
    
    
    74,887
    
    
    
    42,409
    
    
    
    (2,285
    )
    
    
    118,331Research and development expenses
    
    
    
    
    
    
    4,517
    
    
    
    228
    
    
    
    
    
    
    
    4,745(Loss) income from operations
    
    
    (3,320
    )
    
    
    29,253
    
    
    
    39,383
    
    
    
    
    
    
    
    65,316Equity earnings in affiliates
    
    
    47,068
    
    
    
    5,645
    
    
    
    
    
    
    
    (52,713
    )
    
    
    Interest (expense), net
    
    
    (40,884
    )
    
    
    376
    
    
    
    (4,111
    )
    
    
    
    
    
    
    (44,619
    )Intercompany interest and fees
    
    
    4,365
    
    
    
    (7,364
    )
    
    
    2,999
    
    
    
    
    
    
    
    Other income (expense), net
    
    
    (2,338
    )
    
    
    786
    
    
    
    (3,694
    )
    
    
    
    
    
    
    (5,246
    )Income before income taxes
    
    
    4,891
    
    
    
    28,696
    
    
    
    34,577
    
    
    
    (52,713
    )
    
    
    15,451Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    10,560
    
    
    
    
    
    
    
    10,560Net income
    
    $
    4,891
    
    
    $
    28,696
    
    
    $
    24,017
    
    
    $
    (52,713
    )
    
    $
    4,891
 Page 15 of 40




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2006
 Subsidiary
    
    
    Subsidiary Non-
    
    
    Consolidating(In thousands)
    
    Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    TotalASSETSCash and cash equivalents
    
    $
    55,605
    
    
    $
    
    
    
    $
    73,931
    
    
    $
    
    
    
    $
    129,536Accounts and notes receivables net
    
    
    100
    
    
    
    98,687
    
    
    
    132,382
    
    
    
    
    
    
    
    231,169Inventories, net (excluding advance payments)
    
    
    
    
    
    
    138,472
    
    
    
    56,858
    
    
    
    (4,793
    )
    
    
    190,537Prepaids expenses and deferred income taxes
    
    
    4,373
    
    
    
    11,197
    
    
    
    29,375
    
    
    
    
    
    
    
    44,945Total current assets
    
    
    60,078
    
    
    
    248,356
    
    
    
    292,546
    
    
    
    (4,793
    )
    
    
    596,187Investment in affiliates
    
    
    1,135,817
    
    
    
    57,924
    
    
    
    
    
    
    
    (1,193,741
    )
    
    
    Property, plant, and equipment, net
    
    
    
    
    
    
    158,886
    
    
    
    61,616
    
    
    
    
    
    
    
    220,502Intangible assets, net
    
    
    
    
    
    
    511,053
    
    
    
    348,029
    
    
    
    
    
    
    
    859,082Other assets
    
    
    16,338
    
    
    
    4,690
    
    
    
    3,281
    
    
    
    
    
    
    
    24,309Total assets
    
    $
    1,212,233
    
    
    $
    980,909
    
    
    $
    705,472
    
    
    $
    (1,198,534
    )
    
    $
    1,700,080LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable and accruals
    
    $
    13,540
    
    
    $
    164,538
    
    
    $
    219,597
    
    
    $
    
    
    
    $
    397,675Loans payable
    
    
    
    
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    71Total current liabilities
    
    
    13,540
    
    
    
    164,538
    
    
    
    219,668
    
    
    
    
    
    
    
    397,746Long-term debt
    
    
    482,159
    
    
    
    
    
    
    
    70,541
    
    
    
    
    
    
    
    552,700Intercompany accounts
    
    
    154,336
    
    
    
    (256,401
    )
    
    
    102,065
    
    
    
    
    
    
    
    Other noncurrent liabilities
    
    
    (26,033
    )
    
    
    139,904
    
    
    
    47,532
    
    
    
    
    
    
    
    161,403Total liabilities
    
    
    624,002
    
    
    
    48,041
    
    
    
    439,806
    
    
    
    
    
    
    
    1,111,849Common stock
    
    
    855
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    855Other stockholders equity
    
    
    587,376
    
    
    
    932,868
    
    
    
    265,666
    
    
    
    (1,198,534
    )
    
    
    587,376Total stockholders equity
    
    
    588,231
    
    
    
    932,868
    
    
    
    265,666
    
    
    
    (1,198,534
    )
    
    
    588,231Total liabilities and stockholders equity
    
    $
    1,212,233
    
    
    $
    980,909
    
    
    $
    705,472
    
    
    $
    (1,198,534
    )
    
    $
    1,700,080
 Page 16 of 40




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2005
 SubsidiarySubsidiary
    
    
    Non-
    
    
    Consolidating(In thousands)
    
    Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    TotalASSETSCash 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 40




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2006
 SubsidiarySubsidiary
    
    
    Non-
    
    
    Consolidating(In thousands)
    
    Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    TotalCash flows from operating activities:Net cash (used in) provided by operating activities
    
    $
    (41,870
    )
    
    $
    120,098
    
    
    $
    14,941
    
    
    $
    (1,112
    )
    
    $
    92,057Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (9,976
    )
    
    
    (3,084
    )
    
    
    
    
    
    
    (13,060
    )Net cash used in investing activities
    
    
    
    
    
    
    (9,976
    )
    
    
    (3,084
    )
    
    
    
    
    
    
    (13,060
    )Cash flows from financing activities:Net change in debt
    
    
    (50,000
    )
    
    
    
    
    
    
    (56
    )
    
    
    
    
    
    
    (50,056
    )Change in intercompany accounts
    
    
    147,475
    
    
    
    (151,709
    )
    
    
    3,122
    
    
    
    1,112
    
    
    
    Net cash provided by (used in) financing activities
    
    
    97,475
    
    
    
    (151,709
    )
    
    
    3,066
    
    
    
    1,112
    
    
    
    (50,056
    )Effect of exchange rate changes
    
    
    
    
    
    
    
    
    
    
    2,559
    
    
    
    
    
    
    
    2,559Net increase (decrease) in cash and equivalents
    
    
    55,605
    
    
    
    (41,587
    )
    
    
    17,482
    
    
    
    
    
    
    
    31,500Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    41,587
    
    
    
    56,449
    
    
    
    
    
    
    
    98,036Cash and cash equivalents, end of period
    
    $
    55,605
    
    
    $
    
    
    
    $
    73,931
    
    
    $
    
    
    
    $
    129,536
 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2005
 SubsidiarySubsidiary
    
    
    Non-Guarantors
    
    
    Guarantors
    
    
    Consolidating(In thousands)
    
    Issuer
    
    
    Entities
    
    
    Entities
    
    
    Adjustments
    
    
    TotalCash flows from operating activities:Net cash (used in) provided by operating activities
    
    $
    (4,771
    )
    
    $
    142,991
    
    
    $
    86,809
    
    
    $
    (2,645
    )
    
    $
    222,384Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (7,938
    )
    
    
    (2,809
    )
    
    
    
    
    
    
    (10,747
    )Proceeds from sale of equity investment
    
    
    
    
    
    
    66
    
    
    
    178
    
    
    
    
    
    
    
    244Proceeds from sale of investment
    
    
    
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    10,000Acquisitions, net of cash
    
    
    (57,018
    )
    
    
    (200
    )
    
    
    
    
    
    
    
    
    
    
    (57,218
    )Net cash (used in) provided by investing activities
    
    
    (57,018
    )
    
    
    1,928
    
    
    
    (2,631
    )
    
    
    
    
    
    
    (57,721
    )Cash flows from financing activities:Net change in debt
    
    
    (167,141
    )
    
    
    
    
    
    
    (46,659
    )
    
    
    
    
    
    
    (213,800
    )Change in intercompany accounts
    
    
    176,271
    
    
    
    (165,683
    )
    
    
    (13,233
    )
    
    
    2,645
    
    
    
    Issuance of common units
    
    
    1,420
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,420Proceeds from initial public offering
    
    
    608,925
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    608,925Dividends paid
    
    
    (557,686
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (557,686
    )Net cash provided by (used in) financing activities
    
    
    61,789
    
    
    
    (165,683
    )
    
    
    (59,892
    )
    
    
    2,645
    
    
    
    (161,141
    )Effect of exchange rate changes
    
    
    
    
    
    
    
    
    
    
    (5,518
    )
    
    
    
    
    
    
    (5,518
    )Net (decrease) increase in cash and cash equivalents
    
    
    
    
    
    
    (20,764
    )
    
    
    18,768
    
    
    
    
    
    
    
    (1,996
    )Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    63,341
    
    
    
    48,159
    
    
    
    
    
    
    
    111,500Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    42,577
    
    
    $
    66,927
    
    
    $
    
    
    
    $
    109,504
 Page 18 of 40




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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.
  Results of Operations
 Three months ended September 30, 2006 compared to three months ended September 30, 2005
 Three months ended
    
    
    Three months ended
    
    
    Period to Period Change(In millions)
    
    September 30, 2006
    
    
    September 30, 2005
    
    
    2005 to 2006
    
    
    % ChangeStatement of Operations Data:Total revenues
    
    $
    310.3
    
    
    
    100.0
    %
    
    $
    309.8
    
    
    
    100.0
    %
    
    $
    0.5
    
    
    
    0.2
    %Cost of goods sold
    
    
    211.0
    
    
    
    68.0
    
    
    
    232.9
    
    
    
    75.2
    
    
    
    (21.9
    )
    
    
    (9.4
    )%Gross profit
    
    
    99.3
    
    
    
    32.0
    
    
    
    76.9
    
    
    
    24.8
    
    
    
    22.4
    
    
    
    29.1
    %Selling and administrative expenses
    
    
    48.4
    
    
    
    15.6
    
    
    
    39.9
    
    
    
    12.8
    
    
    
    8.5
    
    
    
    21.3
    %Research and development expenses
    
    
    2.5
    
    
    
    0.8
    
    
    
    1.2
    
    
    
    0.4
    
    
    
    1.3
    
    
    
    108.3
    %Operating income
    
    
    48.4
    
    
    
    15.6
    
    
    
    35.8
    
    
    
    11.6
    
    
    
    12.6
    
    
    
    35.2
    %Interest (expense), net
    
    
    (11.0
    )
    
    
    (3.5
    )
    
    
    (14.9
    )
    
    
    (4.9
    )
    
    
    3.9
    
    
    
    (26.2
    )%Early redemption premium on debt
    
    
    0.0
    
    
    
    0.0
    
    
    
    (3.7
    )
    
    
    (1.2
    )
    
    
    3.7
    
    
    
    NMOther income (expense), net
    
    
    1.0
    
    
    
    0.3
    
    
    
    (1.0
    )
    
    
    (0.3
    )
    
    
    2.0
    
    
    
    NMIncome before income taxes
    
    
    38.4
    
    
    
    12.4
    
    
    
    16.2
    
    
    
    5.2
    
    
    
    22.2
    
    
    
    137.0
    %Provision for income taxes
    
    
    15.5
    
    
    
    5.0
    
    
    
    5.8
    
    
    
    1.8
    
    
    
    9.7
    
    
    
    167.2
    %Net income
    
    $
    22.9
    
    
    
    7.4
    %
    
    $
    10.4
    
    
    
    3.4
    %
    
    $
    12.5
    
    
    
    120.2
    %Bookings
    
    $
    483.3
    
    
    
    
    
    
    $
    288.9
    
    
    
    
    
    
    $
    194.4
    
    
    
    67.3
    %Backlog  ending
    
    $
    1,183.0
    
    
    
    
    
    
    $
    872.8
    
    
    
    
    
    
    $
    310.2
    
    
    
    35.5
    %
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Total revenues.
 Cost of goods sold.
 Gross profit.
 Selling and administrative expenses.
 Research and development expenses.
 Operating income.
 Interest expense, net.
 Early
redemption premium on debt.
 Other income (expense), net.
 Provision
for income taxes.
 Bookings and backlog.
 Page 20 of 40




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Segment Analysis  three months ended September 30, 2006, compared to three months ended September
30, 2005
 Three months ended
    
    
    Three months ended
    
    
    Period to Period Change(In millions)
    
    September 30, 2006
    
    
    September 30, 2005
    
    
    2005 to 2006
    
    
    % ChangeStatement of Segment Data:RevenuesNew units
    
    $
    113.7
    
    
    
    36.6
    %
    
    $
    162.6
    
    
    
    52.5
    %
    
    $
    (48.9
    )
    
    
    (30.1
    )%Aftermarket parts and services
    
    
    196.6
    
    
    
    63.4
    %
    
    
    147.2
    
    
    
    47.5
    %
    
    
    49.4
    
    
    
    33.6
    %Total revenues
    
    $
    310.3
    
    
    
    100.0
    %
    
    $
    309.8
    
    
    
    100.0
    %
    
    $
    0.5
    
    
    
    0.2
    %Gross profitNew units
    
    $
    24.0
    
    
    
    
    
    
    $
    21.5
    
    
    
    
    
    
    $
    2.5
    
    
    
    11.6
    %Aftermarket parts and services
    
    
    75.3
    
    
    
    
    
    
    
    55.4
    
    
    
    
    
    
    
    19.9
    
    
    
    35.9
    %Total gross profit
    
    $
    99.3
    
    
    
    
    
    
    $
    76.9
    
    
    
    
    
    
    $
    22.4
    
    
    
    29.1
    %Operating incomeNew units
    
    $
    11.4
    
    
    
    
    
    
    $
    8.3
    
    
    
    
    
    
    $
    3.1
    
    
    
    37.3
    %Aftermarket parts and services
    
    
    51.9
    
    
    
    
    
    
    
    38.4
    
    
    
    
    
    
    
    13.5
    
    
    
    35.2
    %Unallocated corporate expense
    
    
    (14.9
    )
    
    
    
    
    
    
    (10.9
    )
    
    
    
    
    
    
    (4.0
    )
    
    
    36.7
    %Total operating income
    
    $
    48.4
    
    
    
    
    
    
    $
    35.8
    
    
    
    
    
    
    $
    12.6
    
    
    
    35.2
    %BookingsNew units
    
    $
    277.3
    
    
    
    
    
    
    $
    121.3
    
    
    
    
    
    
    $
    156.0
    
    
    
    128.6
    %Aftermarket parts and services
    
    
    206.0
    
    
    
    
    
    
    
    167.6
    
    
    
    
    
    
    
    38.4
    
    
    
    22.9
    %Total bookings
    
    $
    483.3
    
    
    
    
    
    
    $
    288.9
    
    
    
    
    
    
    $
    194.4
    
    
    
    67.3
    %Backlog  endingNew units
    
    $
    900.3
    
    
    
    
    
    
    $
    687.3
    
    
    
    
    
    
    $
    213.0
    
    
    
    31.0
    %Aftermarket parts and services
    
    
    282.7
    
    
    
    
    
    
    
    185.5
    
    
    
    
    
    
    
    97.2
    
    
    
    52.4
    %Total backlog
    
    $
    1,183.0
    
    
    
    
    
    
    $
    872.8
    
    
    
    
    
    
    $
    310.2
    
    
    
    35.5
    %
 New Units
 Revenues.
 Gross profit.
 Operating income.
 Bookings and backlog.
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Aftermarket Parts and Services
 Revenues
 Gross profit.
 Operating income.
 Bookings and backlog.
 Results of Operations
 Nine months ended September 30, 2006, compared to nine months ended September 30, 2005
 Nine months ended
    
    
    Nine months ended
    
    
    Period to Period Change(In millions)
    
    September 30, 2006
    
    
    September 30, 2005
    
    
    2005 to 2006
    
    
    % ChangeStatement of Operations Data:Total revenues
    
    $
    1,025.8
    
    
    
    100.0
    %
    
    $
    846.2
    
    
    
    100.0
    %
    
    $
    179.6
    
    
    
    21.2
    %Cost of goods sold
    
    
    763.0
    
    
    
    74.4
    
    
    
    657.8
    
    
    
    77.7
    
    
    
    105.2
    
    
    
    16.0
    %Gross profit
    
    
    262.8
    
    
    
    25.6
    
    
    
    188.4
    
    
    
    22.3
    
    
    
    74.4
    
    
    
    39.5
    %Selling and administrative expenses
    
    
    161.0
    
    
    
    15.7
    
    
    
    118.4
    
    
    
    14.0
    
    
    
    42.6
    
    
    
    36.0
    %Research and development expenses
    
    
    7.8
    
    
    
    0.8
    
    
    
    4.7
    
    
    
    0.6
    
    
    
    3.1
    
    
    
    66.0
    %Curtailment gain
    
    
    (11.8
    )
    
    
    (1.2
    )
    
    
    0.0
    
    
    
    0.0
    
    
    
    (11.8
    )
    
    
    NMOperating income
    
    
    105.8
    
    
    
    10.3
    
    
    
    65.3
    
    
    
    7.7
    
    
    
    40.5
    
    
    
    62.0
    %Interest (expense), net
    
    
    (37.0
    )
    
    
    (3.6
    )
    
    
    (44.6
    )
    
    
    (5.3
    )
    
    
    7.6
    
    
    
    (17.0
    )%Early redemption premium on debt
    
    
    0.0
    
    
    
    0.0
    
    
    
    (3.7
    )
    
    
    (0.4
    )
    
    
    3.7
    
    
    
    NMOther income (expense), net
    
    
    7.0
    
    
    
    0.7
    
    
    
    (1.5
    )
    
    
    (0.2
    )
    
    
    8.5
    
    
    
    NMIncome before income taxes
    
    
    75.8
    
    
    
    7.4
    
    
    
    15.5
    
    
    
    1.8
    
    
    
    60.3
    
    
    
    389.0
    %Provision for income taxes
    
    
    29.9
    
    
    
    2.9
    
    
    
    10.6
    
    
    
    1.2
    
    
    
    19.3
    
    
    
    182.1
    %Net income
    
    $
    45.9
    
    
    
    4.5
    %
    
    $
    4.9
    
    
    
    0.6
    %
    
    $
    41.0
    
    
    
    836.7
    %Bookings
    
    $
    1,282.7
    
    
    
    
    
    
    $
    1,036.0
    
    
    
    
    
    
    $
    246.7
    
    
    
    23.8
    %Backlog  ending
    
    $
    1,183.0
    
    
    
    
    
    
    $
    872.8
    
    
    
    
    
    
    $
    310.2
    
    
    
    35.5
    %
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Total revenues.
 Cost of goods sold.
 Gross profit.
 Selling and administrative expenses.
 Stock-based compensation expense  exit units.
   Research and development expenses.
 Page 23 of 40




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Curtailment gain.
 Operating income.
 Interest expense, net.
 Early
redemption premium on debt.
 Other income (expense), net.
 Provision for income taxes.
  Bookings and backlog.
 Page 24 of 40




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Segment Analysis  Nine months ended September 30, 2006, compared to nine months ended September
30, 2005
 Nine months ended
    
    
    Nine months ended
    
    
    Period to Period Change(In millions)
    
    September 30, 2006
    
    
    September 30, 2005
    
    
    2005 to 2006
    
    
    % ChangeStatement of Segment Data:RevenuesNew units
    
    $
    501.0
    
    
    
    48.8
    %
    
    $
    399.0
    
    
    
    47.2
    %
    
    $
    102.0
    
    
    
    25.6
    %Aftermarket parts and services
    
    
    524.8
    
    
    
    51.2
    %
    
    
    447.2
    
    
    
    52.8
    %
    
    
    77.6
    
    
    
    17.4
    %Total revenues
    
    $
    1,025.8
    
    
    
    100.0
    %
    
    $
    846.2
    
    
    
    100.0
    %
    
    $
    179.6
    
    
    
    21.2
    %Gross profitNew units
    
    $
    65.9
    
    
    
    
    
    
    $
    40.4
    
    
    
    
    
    
    $
    25.5
    
    
    
    63.1
    %Aftermarket parts and services
    
    
    196.9
    
    
    
    
    
    
    
    148.0
    
    
    
    
    
    
    
    48.9
    
    
    
    33.0
    %Total gross profit
    
    $
    262.8
    
    
    
    
    
    
    $
    188.4
    
    
    
    
    
    
    $
    74.4
    
    
    
    39.5
    %Operating incomeNew units
    
    $
    24.7
    
    
    
    
    
    
    $
    4.7
    
    
    
    
    
    
    $
    20.0
    
    
    
    425.5
    %Aftermarket parts and services
    
    
    131.8
    
    
    
    
    
    
    
    93.2
    
    
    
    
    
    
    
    38.6
    
    
    
    41.4
    %Unallocated corporate expense
    
    
    (50.7
    )
    
    
    
    
    
    
    (32.6
    )
    
    
    
    
    
    
    (18.1
    )
    
    
    55.5
    %Total operating income
    
    $
    105.8
    
    
    
    
    
    
    $
    65.3
    
    
    
    
    
    
    $
    40.5
    
    
    
    62.0
    %BookingsNew units
    
    $
    674.9
    
    
    
    
    
    
    $
    558.3
    
    
    
    
    
    
    $
    116.6
    
    
    
    20.9
    %Aftermarket parts and services
    
    
    607.8
    
    
    
    
    
    
    
    477.7
    
    
    
    
    
    
    
    130.1
    
    
    
    27.2
    %Total bookings
    
    $
    1,282.7
    
    
    
    
    
    
    $
    1,036.0
    
    
    
    
    
    
    $
    246.7
    
    
    
    23.8
    %Backlog  endingNew units
    
    $
    900.3
    
    
    
    
    
    
    $
    687.3
    
    
    
    
    
    
    $
    213.0
    
    
    
    31.0
    %Aftermarket parts and services
    
    
    282.7
    
    
    
    
    
    
    
    185.5
    
    
    
    
    
    
    
    97.2
    
    
    
    52.4
    %Total backlog
    
    $
    1,183.0
    
    
    
    
    
    
    $
    872.8
    
    
    
    
    
    
    $
    310.2
    
    
    
    35.5
    %
 New Units
 Revenues.
 Gross profit.
 Operating income.
 Bookings.
 Aftermarket Parts and Services
 Revenues
 Page 25 of 40




---



##### Table of Contents



Gross profit.
 Operating income.
 Bookings.
 Liquidity and Capital Resources
    Page 26 of 40




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Accounts receivable
    
    $
    14,897Inventory  net
    
    
    7,309Prepaid expenses and other current assets
    
    
    515Total current assets
    
    
    22,721Property, plat and equipment, net
    
    
    19,029Intangible assets
    
    
    19,600Goodwill
    
    
    7,119Total assets acquired
    
    
    68,469Accounts payable and accruals
    
    
    9,435Other liabilities
    
    
    2,016Total liabilities assumed
    
    
    11,451Cash paid  net
    
    $
    57,018
      Page 27 of 40




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Recently
issued accounting standards
 Share-Based Payments Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 Accounting Changes and Error Corrections
 Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109
 Fair Value Measurements
 Employers Accounting for Defined
Benefit Pension and Other Post retirement Plans, an amendment of
FASB Statements No. 87, 88, 106 and 132(R).
 Page 28 of 40




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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 Risk Factors
  
    
    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;
 
    
    environmental 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.
 Page 29 of 40




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    
 ITEM 4. CONTROLS AND PROCEDURES
    Material Weaknesses in Internal Control over Financial Reporting
  Page 30 of 40




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##### Table of Contents



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.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.
 Page 31 of 40




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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.
 Plan for Remediation of Material Weaknesses
  a)
    
    We continued (1) to hire additional experienced information technology personnel; (2)
to hire additional experienced accounting personnel, (3) to improve our documentation of
worldwide accounting processes, policies and procedures; and (4) to implement a new
worldwide information technology system.b)
    
    We continued 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 continued to improve our procedures for developing required current consolidating
financial statements required by Rule 3-10 of Regulation S-X.d)
    
    We continued to improve our 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 continued to improve our detail reviews of 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 additional procedures for preparation, review and approval of certain
account analyses and reconciliations.g)
    
    We implemented additional procedures to analyze, reconcile and eliminate inter-company
accounts.h)
    
    We continued to review the documents supporting the revenue recognized on all
transactions over a selected dollar amount in the quarter by experienced accounting
personnel at Corporate Headquarters.
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Change in Internal Control over Financial Reporting
  Page 33 of 40




---



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PART II.  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
     Page 34 of 40




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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.November 6, 2006
    /s/ Lonnie A. ArnettLonnie A. ArnettVice President, Controller and
 Chief Accounting Officer Page 36 of 40