Dresser-Rand 10Q 2006 Q1 Quarterly report

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q


[X]		Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the Quarterly Period Ended March 31, 2006
[ ]		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.

(Exact name of registrant as specified in its charter)


Delaware		20-1780492

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


1200 West Sam Houston Parkway, No. Houston, TX		77043

(Address of principal executive offices)		(Zip Code)

(713) 467-2221

(Registrant’s telephone number, including area code)

Paul Clark Drive, Olean, NY 14760

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]

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

The number of shares of common stock, $.01 par value, outstanding as of May 1, 2006, was 85,479,959.

Page 1 of 35

DRESSER-RAND GROUP INC.
TABLE OF CONTENTS


	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Statement of Operations for the three months ended March 31, 2006 and 2005		3
Consolidated Balance Sheet at March 31, 2006, and December 31, 2005		4
Consolidated Statement of Cash Flows for the three months ended March 31, 2006 and 2005		5
Notes to Unaudited Consolidated Financial Statements at March 31, 2006		6-17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18-23
Item 3. Quantitative and Qualitative Disclosure about Market Risk		24
Item 4. Controls and Procedures		25-27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		28
Item 4. Submission of Matters to a Vote of Security Holders		29
Item 6. Exhibits		30
Signatures		31
Exhibits		32-35
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

Page 2 of 35

DRESSER-RAND GROUP INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited; dollars in thousands, except per share amounts)

PART I. — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


	Three months ended March 31,
	2006			2005
Net sales of products	$	229,668		$	178,448
Net sales of services		61,887			55,552

Total revenues		291,555			234,000

Cost of products sold		180,283			143,815
Cost of services sold		44,249			42,476

Total cost of products and services sold		224,532			186,291

Gross Profit		67,023			47,709
Selling and administrative expenses		46,496			37,361
Research and development expenses		2,083			1,632
Curtailment gain		(11,796)			—

Income from operations		30,240			8,716

Interest expense, net		(13,673	)		(15,233	)
Other income (expense), net		1,900			(180	)

Income (loss) before income taxes		18,467			(6,697	)
Provision (benefit) for income taxes		6,151			(2,679	)

Net income (loss)	$	12,316		$	(4,018	)

Net income (loss) per common share — basic and diluted	$	0.14		$	(0.07	)

See accompanying notes to unaudited consolidated financial statements.

Page 3 of 35

DRESSER-RAND GROUP INC.

CONSOLIDATED BALANCE SHEET

(dollars in thousands, except per share amounts)


	March 31,			December 31,
	2006			2005
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	58,719		$	98,036
Accounts receivable, less allowance for doubtful accounts of $9,981 and $8,649 at 2006 and 2005		223,660			268,831
Inventories, net		184,297			145,762
Prepaid expenses		28,154			25,887
Deferred income taxes, net		11,058			10,899

Total current assets		505,888			549,415
Property, plant and equipment, net		224,810			228,671
Goodwill		401,170			393,300
Intangible assets, net		457,380			460,919
Other assets		23,650			25,566

Total assets	$	1,612,898		$	1,657,871

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable and accruals	$	300,205		$	303,430
Customer advance payments		78,781			84,695
Accrued income taxes payable		6,210			4,988
Loans payable		68			67

Total current liabilities		385,264			393,180
Deferred income taxes		25,649			22,586
Postemployment and other employee benefit liabilities		101,675			113,861
Long-term debt		549,780			598,137
Other noncurrent liabilities		14,955			15,447

Total liabilities		1,077,323			1,143,211

Commitments and contingencies (Notes 7 through 11)
Stockholders’ Equity
Common stock, $0.01 par value, 250,000,000 and 101,200,000 shares authorized; and, 85,479,959 and 85,476,283 shares issued and outstanding, respectively		855			855
Additional paid-in capital		493,603			493,163
Retained earnings		56,640			44,324
Accumulated other comprehensive loss		(15,523	)		(23,682	)

Total stockholders’ equity		535,575			514,660

Total liabilities and stockholders’ equity	$	1,612,898		$	1,657,871

See accompanying notes to unaudited consolidated financial statements.

Page 4 of 35

DRESSER-RAND GROUP INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited; dollars in thousands)


	Three Months Ended March 31,
	2006			2005
Cash flows from operating activities
Net income (loss)	$	12,316		$	(4,018	)
Adjustments to arrive at net cash provided by operating activities:
Depreciation and amortization		13,054			16,951
Curtailment gain		(11,796	)		—
Deferred income taxes		2,447			(5,766	)
Amortization of debt financing costs		2,007			2,827
Employee stock compensation		440			168
(Net adjustment) provision for losses on inventory		(121	)		1,403
Minority interest, net of dividends		(234	)		(326	)
Equity in undistributed losses		—			411
Loss on sale of property, plant and equipment		85			87
Working capital and other
Accounts receivable		49,006			81,060
Inventories		(36,365	)		(1,178	)
Accounts payable		(2,606	)		5,112
Customer advances		(7,455	)		40,947
Other		(8,307	)		(19,786	)

Net cash provided by operating activities		12,471			117,892

Cash flows from investing activities
Capital expenditures		(3,198	)		(1,643	)
Proceeds from equity investment disposition		—			10,000

Net cash (used in) provided by investing activities		(3,198	)		8,357

Cash flows from financing activities
Payments of long-term debt		(50,000	)		(85,685	)

Net cash used in financing activities		(50,000	)		(85,685	)

Effect of exchange rate changes on cash and cash equivalents		1,410			(747	)

Net (decrease) increase in cash and cash equivalents		(39,317	)		39,817
Cash and cash equivalents, beginning of the period		98,036			111,500

Cash and cash equivalents, end of period	$	58,719		$	151,317

See accompanying notes to unaudited consolidated financial statements.

Page 5 of 35

DRESSER-RAND GROUP INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Basis of presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and notes required by such principles applicable to annual financial statements. These financial statements are unaudited but, in the opinion of management, contain all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of our financial position and results of operations. These financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2005, and other filings with the Securities and Exchange Commission. Operating results for the 2006 period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

Recently issued accounting standards

In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, Inventory Costs, an Amendment of Accounting Research Bulletin No. 43, and Chapter 4. SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight handling costs and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance in this statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of this statement did not have a material impact on our financial reporting.

In December 2004, the FASB issued SFAS No. 123R,Share-Based Payments, that is a revision of SFAS No. 123,Accounting for Stock-Based Compensation. SFAS No. 123R supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in exchange for equity. We have elected to early adopt the provisions of SFAS 123R as of October 30, 2004. As a result, we recognized compensation cost in relation to share-based compensation arrangements of $440,000 and $168,000 for the three months ended March 31, 2006 and 2005, respectively.

In December 2004, the FASB issued SFAS No. 153,Exchanges of Non-monetary Assets, an Amendment of APB Opinion No. 29,Accounting for Non-monetary Transactions. SFAS No. 153 eliminates the exception from fair value measurement for non-monetary exchanges of similar productive assets in paragraph 21 (b) of APB Opinion No. 29 and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for exchanges occurring in fiscal years beginning after June 15, 2005. The adoption of this statement did not have a material effect on our financial reporting.

In May 2005, the FASB issued SFAS No.154,Accounting Changes and Error Corrections. SFAS No.154 provides guidance on the accounting for and reporting of changes and error corrections. This statement is effective for fiscal years beginning after December 31, 2005. The adoption of this statement did not have a material effect on our financial reporting.

Curtailment gain

On January 23, 2006, a new labor agreement was ratified by the represented employees at our Wellsville, New York, facility which became effective on February 1, 2006. That new agreement reduced certain previously recorded retiree health benefits for the represented employees covered by the agreement. As a result, we recorded a curtailment gain of $11,796,000 ($7,868,000 after tax; $.09 per share — basic and diluted) in the first quarter of 2006 for the actuarial net present value of the estimated reduction in the future cash costs of the retiree health care benefits.

Earnings per share

Earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Weighted average common shares of 85,445,000 and 54,319,000 were used to calculate basic and diluted earnings per share for the three months ended March 31, 2006 and 2005, respectively.

Page 6 of 35

DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Intangible assets and goodwill

The cost and related accumulated amortization of intangible assets were:


	March 31, 2006				Weighted	December 31, 2005
			Accumulated		Average			Accumulated
(In thousands of dollars)	Cost		Amortization		Useful Lives	Cost		Amortization
Trade names	$	87,600	$	2,995	40 years	$	87,600	$	2,448
Customer relationships		233,993		8,325	40 years		232,219		6,806
Software		30,553		4,336	10 years		30,553		3,571
Existing technology		126,577		7,128	25 years		126,577		5,800
Order backlog		26,325		26,166	15 months		26,325		25,561
Non-compete agreement		4,382		3,100	2 years		4,382		2,551

Total amortizable intangible assets	$	509,430	$	52,050		$	507,656	$	46,737

Amortization of intangible assets for the three months ended March 31, 2006 and 2005, was $5.3 million and $11.1 million, respectively.

The changes in goodwill for the three months ended March 31, 2006, were:


	March 31,
(In thousands of dollars)	2006
Beginning balance	$	393,300
TES acquisition		1,186
Translation adjustments		6,684

Ending balance	$	401,170

On September 8, 2005, we acquired from Tuthill Corporation certain assets of its Tuthill Energy Systems Division (“TES”). TES is an international manufacturer of single and multi-stage steam turbines and portable ventilators under the Coppus, Murray and Nadrowski brands which complement our steam turbine business. The cost of TES was approximately $54.6 million, net of $4.0 million cash acquired. We preliminarily allocated the cost based on current estimates of the fair value of assets acquired and liabilities assumed as of December 31, 2005, pending finalization of the restructuring plan.

On February 22, 2006, we announced a restructuring of certain operations to obtain appropriate synergies in the combined steam turbine business. Such plan includes ceasing manufacturing operations at our Millbury, Massachusetts facility and shifting production to our other facilities around the world, maintaining a commercial and technology center in Millbury, implementing a new competitive labor agreement at our Wellsville, New York facility and rationalizing product offerings, distribution and sales channels. The preliminary amounts allocated to the assets and liabilities acquired were revised when the restructuring plan was finalized during the first quarter of 2006 as follows:

Page 7 of 35

DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


	Final
(In thousands of dollars)
Accounts receivable	$	12,454
Inventory		7,309
Prepaid expenses and other current assets		515

Total current assets		20,278

Property, plant and equipment, net		19,029
Amortizable intangible assets		19,600
Goodwill		7,119

Total assets acquired		66,026

Accounts payable and accruals		9,435
Other liabilities		2,016

Total liabilities assumed		11,451

Cash paid — net	$	54,575

Pro forma financial information, assuming that TES had been acquired at January 1, 2005, has not been presented because the effect on our results for the three months ended March 31, 2005, was not considered material. TES results have been included in our consolidated financial results since September 8, 2005, and were not material to the results of operations for the three months ended March 31, 2006.

Inventories

Inventories were as follows:


	March 31,			December 31,
(In thousands of dollars)	2006			2005
Raw materials and supplies	$	99,633		$	83,355
Work-in-process and finished goods		280,941			257,488

		380,574			340,843
Less:
Progress payments		(196,277	)		(195,081	)

Total	$	184,297		$	145,762

The progress payments represent payments from customers based on milestone completion schedules. Any payments received in excess of the related inventory investment are classified as “Customer Advance Payments” in the current liabilities section of the balance sheet.

Income taxes

Our estimated income tax provision for the three months ended March 31, 2006 results in an effective rate of approximately 33% that differs from U.S. Federal statutory rate of 35% principally because of lower tax rates in certain foreign jurisdictions, state and local taxes, and a deduction related to certain exports from the United States. For the three months ended March 31, 2005, the Company’s effective income tax rate was approximately 40% because of foreign tax rate differences, valuation allowances, state and local income taxes, and various credits and nondeductible expenditures.

We began operations as a new entity on October 29, 2004, having been acquired by Dresser-Rand Holdings LLC, an affiliate of First Reserve Corporation (the Acquisition). We operate in numerous countries around the world and file tax returns as appropriate. The Acquisition was an asset purchase in the United States and a stock purchase outside the United States. The purchase price was allocated among the entities acquired based on estimated fair values. Deferred taxes were

Page 8 of 35

DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

recorded to reflect the difference between the purchase price allocated to foreign entities and their underlying tax basis. We believe that we have provided adequate estimated liabilities for taxes based on the allocation of the purchase price and our understanding of the tax laws and regulations in those countries. Since few tax returns have been filed since beginning operations and none have been audited by the appropriate taxing authorities, we could be exposed to additional income and other taxes.

Pension plans

The components of net periodic pension cost for defined benefit pension plans are as follows:


	Three months ended March 31,
(In thousands of dollars)	2006			2005
Service cost	$	1,437		$	1,361
Interest cost		4,321			4,322
Expected return on plan assets		(4,976	)		(4,737	)
Net amortization of unrecognized
Plan net losses		28			—

Net pension expense	$	810		$	946

9. Postretirement benefits other than pensions

The components of net periodic postretirement benefits cost for such plans are as follows:


	Three months ended March 31,
(In thousands of dollars)	2006			2005
Service cost	$	478		$	452
Interest cost		654			673
Curtailment gain		(11,796	)		—

Net periodic postretirement benefits (gain) cost	$	(10,664	)	$	1,125

10.

Commitments and contingencies

As a result of the enhanced compliance processes implemented by us shortly prior to and following the Acquisition, we have discovered that our Brazilian subsidiary engaged in a number of transactions that resulted in steam turbine parts and services being provided to Moa Nickel S.A., a Cuban mining company jointly owned by the Government of Cuba and Sherritt International Corp., a Canadian company. Our revenues from these transactions were approximately $4 million in the aggregate since December, 1999, when we acquired a controlling interest in the Brazilian subsidiary. This amount represents approximately 0.06% of our consolidated revenues from 2000 through March 31, 2006. Of the $4 million, approximately $2.5 million in revenues was in connection with the sale of a spare part ordered in October, 2003, which was delivered and installed in Cuba, with the assistance of non-U.S. employees of our Brazilian subsidiary, in May, 2005. When these transactions came to our attention, we instructed our Brazilian subsidiary in July, 2005, to cease dealings with Cuba. These transactions were apparently in violation of the U.S. Treasury Department’s Office of Foreign Assets Control’s regulations with respect to Cuba. We have informed the U.S. Treasury Department of these matters and are currently engaged in preliminary discussions with the Department. Our inquiry into these transactions is continuing and

Page 9 of 35

DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

the Department’s review of this matter is in a very preliminary stage. Cuba is subject to economic sanctions administered by the U.S. Treasury Department’s Office of Foreign Assets Control, and is identified by the U.S. State Department as a terrorist-sponsoring state. To the extent we violated any regulations with respect to Cuba or the Department determines that other violations have occurred, we will be subject to fines or other sanctions, including possible criminal penalties, with related business consequences. We do not expect these matters to have a material adverse effect on our financial results, cash flow or liquidity. In addition, the Department’s investigation into our activities with respect to Cuba may result in additional scrutiny of our activities with respect to other countries that are the subject of sanctions.

We are involved in litigation in the United Kingdom with a customer over performance of certain equipment sold to them. The customer is seeking damages of about 8 million pounds sterling (approximately $14 million). We had previously offered to settle and recorded a litigation liability for 900,000 pounds sterling (approximately $1,575,000). Based on a recent report from an expert damages witness hired by the Company, we have increased our offer to settle to 1,500,000 pounds sterling (approximately $2,625,000) resulting in a charge recorded as expense in the first quarter of 2006 of $1,050,000 included in cost of sales. The trial started on May 2, 2006. While we believe that we have made adequate provision for the ultimate loss in this litigation and intend to vigorously defend this suit, it is reasonably possible that the loss could be up to the 3,133,000 pounds sterling (approximately $5,483,000), not including interest or costs, limit of liability stated in the agreement with the customer or 1,633,000 pounds sterling (approximately $2,858,000) in excess of amounts recognized as of March 31, 2006.

We are involved in various litigation, claims and administrative proceedings, including environmental matters, arising in the normal course of business. Amounts recorded for identified contingent liabilities are estimates, which are regularly reviewed and adjusted to reflect additional information when it becomes available. Subject to the uncertainties inherent in estimating future costs for contingent liabilities, management believes that any future adjustments to recorded amounts, with respect to these currently known contingencies, would not have a material effect on the financial condition, results of operations, liquidity or cash flows of the Company for any year.

In connection with the Acquisition, the purchase agreement provides that, with the exception of non-Superfund off-site liabilities and non-asbestos environmental tort claims which have a three year limit for a claim to be filed, Ingersoll-Rand (I-R), our previous owner, will remain responsible without time limitations for known environmental conditions as of the date of acquisition that meet certain requirements set forth in the purchase agreement. The most important of these requirements is that with regard to environmental contamination, regulatory authorities would be expected to require investigation or remediation if they knew about the contamination. The Company and I-R have agreed on many, but not all, of the matters for which I-R will remain responsible. The remaining issues to be resolved are not expected to be material.

11.

Warranty accruals

We maintain a product warranty liability that represents estimated future claims for equipment, parts and services covered during a warranty period. A warranty liability is provided at the time of revenue recognition based on historical experience and adjusted as required.

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


	Three months ended March 31,
(In thousands of dollars)	2006			2005
Beginning balance	$	21,511		$	21,078
Provision for warranties issued during period		3,282			1,899
Adjustments to warranties issued in prior periods		655			744
Payments during period		(2,116	)		(3,297	)
Translation adjustments		349			(571	)

Ending balance	$	23,681		$	19,853

Page 10 of 35

DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

12. Segment information

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

1)		New Units are 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.

Unallocable amounts represent expenses and assets that cannot be assigned directly to either reportable segment because of their nature. Unallocable expenses include certain corporate expenses, research and development expenses, and the curtailment gain. Assets that are directly assigned to the two reportable segments include trade accounts receivable, net inventories, and goodwill. Unallocable assets include cash, prepaid expenses, deferred taxes, property, plant and equipment, and intangibles.


	Three months ended March 31,
(In thousands of dollars)	2006			2005
Revenues
New units	$	139,079		$	88,265
Aftermarket parts and services		152,476			145,735

Total Revenues	$	291,555		$	234,000

Operating Income
New units	$	(1,284	)	$	(6,058	)
Aftermarket parts and services		34,357			23,844
Unallocable		(2,833	)		(9,070	)

Total Operating Income	$	30,240		$	8,716

Depreciation and Amortization
New units	$	6,479		$	6,451
Aftermarket parts and services		6,575			10,500

Total Depreciation and Amortization	$	13,054		$	16,951

Total Assets (including Goodwill)
New units	$	249,165		$	231,899
Aftermarket parts and services		546,955			540,265
Unallocable		816,778			897,150

Total Assets	$	1,612,898		$	1,669,314

Page 11 of 35

DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

13. Stockholders’ equity

Changes in stockholders’ equity for three months ended March 31, 2006, were:


							Accumulated
							Other
	Common		Additional		Retained		Comprehensive
(In thousands of dollars)	Stock		Paid-in Capital		Earnings		Income (Loss)			Total
At December 31, 2005	$	855	$	493,163	$	44,324	$	(23,682	)	$	514,660

Stock based employee compensation		—		440		—		—			440
Net income		—		—		12,316		—			12,316
Other comprehensive income (loss)
Currency translation								8,159			8,159


At March 31, 2006	$	855	$	493,603	$	56,640	$	(15,523	)	$	535,575

The components of other comprehensive income (loss) are as follows:


	Three months ended March 31,
(In thousands of dollars)	2006		2005

Net income (loss)	$	12,316	$	(4,018	)
Other comprehensive income (loss):
Foreign currency translation adjustment		8,159		(13,743	)

Comprehensive income (loss)	$	20,475	$	(17,761	)

The components of accumulated other comprehensive loss are as follows:


	March 31,			December 31,
(In thousands of dollars)	2006			2005

Minimum pension liability, net of tax	$	(6,002	)	$	(6,002	)
Foreign currency translation adjustment		(9,521	)		(17,680	)

Accumulated other comprehensive loss	$	(15,523	)	$	(23,682	)

The amended and restated limited liability company agreement of Dresser-Rand Holdings, LLC (Holdings) permits the grant of the right to purchase common units to management members of the Company and the grant of service units and exit units (collectively referred to as “profit units”), consisting of one initial tranche of service units and five initial tranches of exit units to certain management members who own common units. On November 22, 2004, and in connection with the closing of the Acquisition, several of the Company’s executives, including the Chief Executive Officer and four other of the most highly compensated executive officers, purchased common units in Holdings for $4.33 per unit, the same amount paid for such common units by funds affiliated with First Reserve in connection with the Acquisition. Executives who purchased common units were also issued a total of 2,392,500 service units and five tranches of exit units totaling 5,582,500 exit units in Holdings, which permit them to share in appreciation in the value of the Company’s shares. In May 2005, three new executives purchased 303,735 common units in Dresser-Rand Holdings, LLC at a price of $4.33 per share and were granted 300,000 service units and 700,000 exit units. The price per unit was below the market price resulting in a “cheap stock” charge to expense at that time of $2.4 million for the sale of the units. The Company accounts for the transactions between

Page 12 of 35

DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Holdings and the Company’s executives in accordance with Staff Accounting Bulletin Topic 5T, which requires the Company to record expense for services paid by the stockholder for the benefit of the Company.

The service units were granted without any remuneration. The service units vest over a period of 5 years and have 10 year contractual terms. The service units provide for accelerated vesting if there is a change in control, as defined in the Holdings Agreement. Vested service units convert to common units of Holdings upon termination for any reason, death or disability. In certain circumstances, unvested service units will also convert into common units of Holdings.

The exit units were granted in a series of five tranches. Exit units are eligible for vesting upon the occurrence of certain exit events, as defined in the Holdings LLC Agreement, including (i) funds affiliated with First Reserve receiving an amount of cash in respect of their ownership interest in Holdings that exceeds specified multiples of the equity those funds have invested in the Company, or (ii) there is both (a) a change in control, certain terminations of employment, death or disability, and (b) the fair value of the common units at the time of such an event is such that were the common units converted to cash, funds affiliated with First Reserve would receive an amount of cash that exceeds specified multiples of the equity those funds have invested in the Company. Vested exit units convert to common units of Holdings. The Company will recognize a non-cash compensation expense and a credit to additional paid-in-capital for the fair value of the exit units at the grant date when the exit units vest.

On May 3, 2006, Holdings sold 27,600,000 shares of Dresser-Rand Group Inc. common stock that it owned through its subsidiary, D-R Interholdings LLC, for net proceeds to Holdings of $652.5 million. As a result, the first tranche of exit units vested on that day and the Company will record, in the second quarter of 2006, a non-cash compensation pre-tax and after tax charge equal to the total estimated fair value of the first tranche of exit units of approximately $9.1 million and credit to paid in capital.

During the first quarter of 2006, under the Dresser-Rand Group Inc. 2005 Stock Incentive Plan, our Board of Directors granted options and stock appreciation rights involving 266,900 shares and 3,676 shares of restricted stock to employees.

Page 13 of 35

DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

14. Supplemental guarantor financial information

In connection with the Acquisition, the Company issued $420 million of senior subordinated notes. The following subsidiaries, all of which are wholly owned, guaranteed the notes on a full, unconditional and joint and several basis: Dresser-Rand LLC, Dresser-Rand Power LLC, Dresser-Rand Company and Dresser-Rand Global Services, LLC.

The following condensed consolidated financial information of the Issuer, Subsidiary Guarantors and Subsidiary Non-Guarantors, presents balance sheets as of March 31, 2006 and December 31, 2005, and statements of operations and cash flows for the three months ended March 31, 2006 and 2005.

CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the three months ended March 31, 2006


							Subsidiary
				Subsidiary			Non-			Consolidating
	Issuer			Guarantors			Guarantors			Adjustments			Total
	(In thousands of dollars)
Net sales	$	—		$	167,848		$	154,806		$	(31,099	)	$	291,555
Cost of goods sold		—			127,716			128,200			(29,301	)		226,615


Gross profit		—			40,132			26,606			(1,798	)		64,940

Selling and administrative expenses		350			29,869			16,607			(330	)		46,496
Curtailment gain		—			(11,796	)		—			—			(11,796	)


(Loss) income from operations		(350	)		22,059			9,999			(1,468	)		30,240

Equity earnings (losses) in affiliates (net of tax)		18,058			1,597			—			(19,655	)		—
Interest (expense) income, net		(12,521	)		79			(1,231	)		—			(13,673	)
Intercompany interest and fees		1,434			3,686			(5,120	)		—			—
Other income, net		1,221			282			397			—			1,900


Income (loss) before income taxes		7,842			27,703			4,045			(21,123	)		18,467
(Benefit) provision for income taxes		(4,474	)		9,204			1,421			—			6,151


Net income (loss)	$	12,316		$	18,499		$	2,624		$	(21,123	)	$	12,316

CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the three months ended March 31, 2005


							Subsidiary
				Subsidiary			Non-			Consolidating
	Issuer			Guarantors			Guarantors			Adjustments			Total
	(In thousands of dollars)
Net sales	$	—		$	169,267		$	84,844		$	(20,111	)	$	234,000
Cost of goods sold		46			143,568			64,420			(20,111	)		187,923


Gross profit (loss)		(46	)		25,699			20,424			—			46,077

Selling and administrative expenses		336			23,255			13,770			—			37,361


(Loss) income from operations		(382	)		2,444			6,654			—			8,716

Equity earnings (losses) in affiliates (net of tax)		6,251			1,506			—			(7,757	)		—
Interest expense, net		(13,607	)		(109	)		(1,517	)		—			(15,233	)
Intercompany interest and fees		(1,299	)		(1,647	)		2,946			—			—
Other income (expense), net		—			1,844			(2,024	)		—			(180	)


(Loss) income before income taxes		(9,037	)		4,038			6,059			(7,757	)		(6,697	)
Provision (benefit) for income taxes		(5,019	)		—			2,340			—			(2,679	)

Net (loss) income	$	(4,018	)	$	4,038		$	3,719		$	(7,757	)	$	(4,018	)

Page 14 of 35

DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2006


						Subsidiary
			Subsidiary			Non-		Consolidating
	Issuer		Guarantors			Guarantors		Adjustments			Total
	(In thousands of dollars)
ASSETS
Cash and cash equivalents	$	—	$	7,782		$	50,937	$	—		$	58,719
Accounts and notes receivables net		100		87,285			136,275		—			223,660
Inventories, net (excluding advance payments)		—		120,742			70,928		(7,373	)		184,297
Prepaid expenses and deferred income taxes		5,323		6,538			27,351		—			39,212


Total current assets		5,423		222,347			285,491		(7,373	)		505,888

Investment in affiliates		1,068,306		53,094			—		(1,121,400	)		—
Property, plant, and equipment, net		—		163,853			60,957		—			224,810
Intangible assets, net		—		519,604			338,946		—			858,550
Other assets		15,580		5,017			3,053		—			23,650


Total assets	$	1,089,309	$	963,915		$	688,447	$	(1,128,773	)	$	1,612,898


LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accruals	$	28,467	$	136,590		$	220,086	$	53		$	385,196
Loans payable		—		—			68		—			68


Total current liabilities		28,467		136,590			220,154		53			385,264

Long-term debt		482,160		(1	)		67,621		—			549,780
Intercompany accounts		32,488		(150,625	)		118,137		—			—
Other noncurrent liabilities		10,619		90,292			41,421		(53	)		142,279


Total liabilities		553,734		76,256			447,333		—			1,077,323


Common stock		855		—			—		—			855
Other stockholders’ equity		534,720		887,659			241,114		(1,128,773	)		534,720

Total stockholders’ equity		535,575		887,659			241,114		(1,128,773	)		535,575


Total liabilities and stockholders’ equity	$	1,089,309	$	963,915		$	688,447	$	(1,128,773	)	$	1,612,898

Page 15 of 35

DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2005


						Subsidiary
			Subsidiary			Non-		Consolidating
	Issuer		Guarantors			Guarantors		Adjustments			Total
	(In thousands of dollars)
ASSETS
Cash and cash equivalents	$	—	$	41,587		$	56,449	$	—		$	98,036
Accounts and notes receivables net		100		129,285			139,446		—			268,831
Inventories, net (excluding advance payments)		—		99,697			51,970		(5,905	)		145,762
Prepaid expenses and deferred income taxes		4,868		5,767			26,151		—			36,786


Total current assets		4,968		276,336			274,016		(5,905	)		549,415

Investment in affiliates		1,042,089		50,658			—		(1,092,747	)		—
Property, plant, and equipment, net		—		168,434			60,237		—			228,671
Intangible assets, net		—		523,020			331,199		—			854,219
Other assets		17,146		5,360			3,060		—			25,566


Total assets	$	1,064,203	$	1,023,808		$	668,512	$	(1,098,652	)	$	1,657,871


LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accruals	$	7,652	$	155,322		$	230,139	$	—		$	393,113
Loans payable		—		—			67		—			67


Total current liabilities		7,652		155,322			230,206		—			393,180

Long-term debt		532,160		—			65,977		—			598,137
Intercompany accounts		5,750		(104,901	)		99,151		—			—
Other noncurrent liabilities		3,981		105,066			42,847		—			151,894


Total liabilities		549,543		155,487			438,181		—			1,143,211


Common stock		855		—			—		—			855
Other stockholders’ equity		513,805		868,321			230,331		(1,098,652	)		513,805

Total stockholders’ equity		514,660		868,321			230,331		(1,098,652	)		514,660


Total liabilities and stockholders’ equity	$	1,064,203	$	1,023,808		$	668,512	$	(1,098,652	)	$	1,657,871

Page 16 of 35

DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the three months ended March 31, 2006


							Subsidiary
				Subsidiary			Non-
				Guarantors			Guarantors			Consolidating
	Issuer			Entities			Entities			Adjustments			Total
	(In thousands of dollars)
Cash flows from operating activities:
Net cash provided by (used in) operating activities	$	21,794		$	14,337		$	(25,128	)	$	1,468		$	12,471


Cash flows from investing activities:
Capital expenditures		—			(2,418	)		(780	)		—			(3,198	)


Net cash (used in) investing activities		—			(2,418	)		(780	)		—			(3,198	)


Cash flows from financing activities:
Payments of long-term debt		(50,000	)		—			—			—			(50,000	)
Change in intercompany accounts		28,206			(45,724	)		18,986			(1,468	)		—

Net cash (used in) provided by financing activities		(21,794	)		(45,724	)		18,986			(1,468	)		(50,000	)


Effect of exchange rate changes		—			—			1,410			—			1,410
Net decrease in cash and cash equivalents		—			(33,805	)		(5,512	)		—			(39,317	)
Cash and cash equivalents, beginning of period		—			41,587			56,449			—			98,036

Cash and cash equivalents, end of period	$	—		$	7,782		$	50,937		$	—		$	58,719

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the three months ended March 31, 2005


							Subsidiary
				Subsidiary			Non-			Consolidating
	Issuer			Guarantors			Guarantors			Adjustments			Total
	(in thousands of dollars)
Cash flows from operating activities:
Net cash provided by operating activities	$	24,493		$	48,974		$	41,638		$	2,787		$	117,892


Cash flows from investing activities:
Capital expenditures		—			(939	)		(704	)		—			(1,643	)
Proceeds from sale of equity investment		—			10,000			—			—			10,000

Net cash provided by (used in) investing activities		—			9,061			(704	)		—			8,357


Cash flows from financing activities:
Payments of long-term debt		(67,141	)		—			(18,544	)		—			(85,685	)
Change in intercompany accounts		42,648			(53,357	)		13,496			(2,787	)		—

Net cash (used in) provided by financing activities		(24,493	)		(53,357	)		(5,048	)		(2,787	)		(85,685	)


Effect of exchange rate changes		—			—			(747	)		—			(747	)
Net increase in cash and cash equivalents		—			4,678			35,139			—			39,817
Cash and cash equivalents — beginning of year		—			63,341			48,159			—			111,500

Cash and cash equivalents — end of year	$	—		$	68,019		$	83,298		$	—		$	151,317

Page 17 of 35

DRESSER-RAND GROUP INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)


ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are among the largest global suppliers of rotating equipment solutions to the worldwide oil, gas, petrochemical and industrial process industries. Our segments are new units and aftermarket parts and services. Our services and products are used for a range of applications, including oil and gas production, refinery processes, natural gas processing, pipelines, petrochemical production, high-pressure field injection and enhanced oil recovery. We also serve general industrial markets including paper, steel, sugar, distributed power and government markets.

We operate globally with manufacturing facilities in the United States, France, Germany, Norway, India and Brazil. We provide a wide array of products and services to our worldwide client base in over 140 countries from our 57 global locations in 11 U.S. states and 24 countries.

New Units. We manufacture highly-engineered turbo and reciprocating compression equipment and steam turbines. Our products are custom-designed to client specifications for long-life, critical applications.

Aftermarket Parts and Services. We offer a range of aftermarket parts and services, including installation, maintenance, monitoring, operation, repairs, overhauls and upgrades. With a typical operating life of 30 years or more, rotating equipment requires substantial aftermarket parts and services over its operating life. The cumulative revenues from these aftermarket activities often significantly exceed the initial purchase price of a new unit.

Results of Operations

Three months ended March 31, 2006 compared to three months ended March 31, 2005


											Period to Period Change
	Three months ended March					Three months ended March
	31, 2006					31, 2005					2005 to 2006			% Change
Statement of Operations Data:	(Dollars in millions)

Total revenues	$	291.6		100.0	%	$	234.0		100.0	%	$	57.6			24.6	%
Cost of goods sold		224.6		77.0			186.3		79.6			38.3			20.5	%

Gross profit		67.0		23.0			47.7		20.4			19.3			40.5	%
Selling and administrative expenses		46.5		15.9			37.4		16.0			9.1			24.5	%
Research and development expenses		2.1		0.7			1.6		0.7			0.5			27.6	%
Curtailment gain		(11.8	)	(4.0	)		0.0		0.0			(11.8	)	NM

Operating income		30.2		10.4			8.7		3.7			21.5			246.9	%
Interest income (expense), net		(13.6	)	(4.8	)		(15.2	)	(6.5	)		1.6			(10.2	)%
Other income (expense), net		1.9		0.7			(0.2	)	(0.1	)		2.1		NM

Income before income taxes		18.5		6.3			(6.7	)	(2.9	)		25.2		NM
Provision for income taxes		6.2		2.1			(2.7	)	(1.2	)		8.9		NM

Net income	$	12.3		4.2	%	$	(4.0	)	(1.7	)%	$	16.3		NM


Bookings	$	365.3				$	450.3				$	(85.0	)		(18.9	)%


Backlog — ending	$	993.8				$	851.6				$	142.2			16.7	%

Total revenues.The worldwide market demand for oil and gas products continued to increase in 2006, which in turn increased the demand for our products and services. Total revenues were $291.6 million for the three months ended March 31, 2006 compared to $234.0 million for the three months ended March 31, 2005. The $57.6 million, 24.6% increase was primarily in the new units segment.

Page 18 of 35

DRESSER-RAND GROUP INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)

Cost of goods sold.Cost of goods sold was $224.6 million for the three months ended March 31, 2006 compared to $186.3 million for the three months ended March 31, 2005. The $38.3 million, 20.5% increase was primarily attributed to the combination of higher 2006 revenues and adverse revenue mix change (higher cost New Units segment was 48% of total revenues in 2006 versus 38% in 2005), partially offset by lower intangible asset amortization from the backlog and royalty and the absence of the inventory fair value cost of sales in 2005 from purchase accounting. As a percentage of revenues, cost of goods sold decreased to 77.0% for 2006 from 79.6% for 2005 for the factors cited above.

Gross profit.Gross profit was $67.0 million, or 23.0% of revenues for the three months ended March 31, 2006 compared to $47.7 million, or 20.4% of revenues for the three months ended March 31, 2005. The dollar increase was primarily attributable to higher revenues. The percent of revenue increase was primarily attributable to lower amortization and inventory purchase accounting costs mentioned above and to the operating leverage benefit of higher revenues on fixed manufacturing costs.

Selling and administrative expenses.Selling and administrative expenses were $46.5 million for the three months ended March 31, 2006 compared to $37.4 million for the three months ended March 31, 2005. The $9.1 million, 24.5% increase was principally attributed to three factors: (1) support the increased bookings rate and due to greater revenues, (2) from the acquisition of Tuthill Energy Systems, and (3) establishing corporate functions for the stand-alone company. Selling and administrative expenses decreased slightly as a percentage of revenues to 15.9% for 2006 compared to 16.0% for 2005.

Research and development expenses.Total research and development expenses for the three months ended March 31, 2006 were $2.1 million compared to $1.6 million for the three months ended March 31, 2005. The $0.7 million increase was from an unusually low 2005 amount due to the increased booking rate that caused reassignment of some research and development resources to customer order engineering tasks.

Curtailment gain.On January 23, 2006, a new labor agreement was ratified by the represented employees at our Wellsville, New York facility which became effective on February 1, 2006. That new agreement reduced certain previously recorded retiree health benefits for the represented employees covered by the agreement. As a result, we recorded a curtailment gain of $11.8 million ($7.9 million after tax; $.09 per share — basic and diluted) in the first quarter of 2006 for the actuarial net present value of the estimated reduction in future cash costs of the retiree health care benefits.

Operating income.Operating income was $30.2 million for the three months ended March 31, 2006 compared to $8.7 million for the three months ended March 31, 2005. The $21.5 million increase was attributed primarily to increased revenues and the operating leverage effect of higher revenues on fixed costs, as well as the $11.8 million curtailment gain cited above. As a percentage of revenues, operating income for 2006 was 10.4% compared to 3.7% for 2005.

Interest expense, net.Net interest expense was $13.6 million for the three months ended March 31, 2006 compared to $15.2 million for the three months ended March 31, 2005. Interest expense for 2006 included $2.0 million in amortization of deferred financing fees, of which $1.1 million was accelerated amortization due to a reduction of $50 million in long-term debt in the period. Amortization of deferred financing fees for 2005 was $2.8 million of which $1.9 million was accelerated amortization due to a reduction of $85.7 million in long-term debt in the period.

Other income (expense), net.Net other income was $1.9 million for the three months ended March 31, 2006 compared to $(0.2) million for the three months ended March 31, 2005. The increase is primarily the result of greater currency transaction gains in 2006 compared to in 2005.

Provision for income taxes.Provision (benefit) for income taxes for the three months ended March 31, 2006 was $6.2 million and $(2.7) million for the three months ended March 31, 2005. Our estimated income tax provision for the three months ended March 31, 2006, results in an effective rate of approximately 33% that differs from U.S. Federal statutory rate of 35% principally because of lower tax rates in certain foreign jurisdictions, state and local taxes and a deduction related to certain exports from the United States. For the three months ended March 31, 2005, the Company’s effective income tax rate was approximately 40% because of foreign tax rate differences, valuation allowances, state and local income taxes, and various credits and nondeductible expenditures.

Bookings and backlog.Bookings for the three months ended March 31, 2006 were $365.3 million compared to $450.3 million for the three months ended March 31, 2005. The $85.0 million decrease is primarily due to an $89 million order booked in 2005. Backlog at March 31, 2006, was $993.8 million compared to $851.6 million at March 31, 2005. The $142.2 million increase includes both the new units and aftermarket parts and services segments. The increases from prior year reflect the strength of the oil and gas market.

Page 19 of 35

DRESSER-RAND GROUP INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)

Segment information

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

1)		New Units are highly engineered solutions to new customer requests.

2)		Aftermarket Parts and Services consist of aftermarket support solutions for the existing population of installed equipment.

Unallocable amounts represent expenses and assets that cannot be assigned directly to either reportable segment because of their nature. Unallocable expenses included corporate expenses, research and development expenses, and the curtailment gain. The only assets that are directly allocable to either of the two reportable segments are trade accounts receivable, net inventories, and goodwill. All other assets such as cash, prepaid expenses, deferred taxes, and long term assets are not directly allocable to either of the two reportable segments.

Segment Analysis — Three Months ended March 31, 2006 compared to three months ended March 31, 2005


											Period to Period Change
	Three months ended March					Three months ended March
	31, 2006					31, 2005					2005 to 2006			% Change
						(Dollars in millions)
Statement of Segment Data:

Revenues
New units	$	139.1		47.7	%	$	88.3		37.7	%	$	50.8			57.6	%
Aftermarket parts and services		152.5		52.3	%		145.7		62.3	%		6.8			4.6	%

Total revenues	$	291.6		100.0	%	$	234.0		100.0	%	$	57.6			24.6	%


Gross profit
New units	$	11.2				$	3.9				$	7.3			190.8	%
Aftermarket parts and services		55.8					43.8					12.0			27.3	%

Total gross profit	$	67.0				$	47.7				$	19.3			40.5	%


Operating income
New units	$	(1.3	)			$	(6.1	)			$	4.8			(78.8	)%
Aftermarket parts and services		34.4					23.8					10.6			44.1	%
Unallocated corporate expense		(2.9	)				(9.0	)				6.1			(68.8	)%

Total operating income	$	30.2				$	8.7				$	21.5			246.9	%


Bookings
New units	$	165.5				$	295.5				$	(130.0	)		(44.0	)%
Aftermarket parts and services		199.8					154.8					45.0			29.0	%

Total bookings	$	365.3				$	450.3				$	(85.0	)		(18.9	)%


Backlog — ending
New units	$	749.8				$	692.7				$	57.1			8.2	%
Aftermarket parts and services		244.0					158.9					85.1			53.6	%

Total backlog	$	993.8				$	851.6				$	142.2			16.7	%

New Units

Revenues.New units revenues were $139.1 million for the three months ended March 31, 2006 compared to $88.3 million for the three months ended March 31, 2005. The $50.8 million, 57.6% increase is primarily attributable to a higher backlog at the beginning of the year ($668.1 million at December 31, 2005 versus $489.3 million at December 31, 2004). Customer orders typically have lead times from as little as three months to over twelve months depending on the engineering and manufacturing complexity of the configuration, and the lead-time for critical components.

Page 20 of 35

DRESSER-RAND GROUP INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)

Gross profit.Gross profit was of $11.2 million for the three months ended March 31, 2006 compared to $3.9 million for the three months ended March 31, 2005. The $7.3 million increase is due to increased revenues. Gross profit as a percentage of segment revenues was 8.1% for 2006 compared to 4.4% for 2005. The increase was primarily attributable to lower amortization, purchase accounting inventory costs, and the operating leverage benefit of higher revenues on fixed manufacturing costs.

Operating income.Operating income (loss) was $(1.3) million for the three months ended March 31, 2006 compared to $(6.1) million for the three months ended March 31, 2005. As a percentage of segment revenues, operating income at (0.9)% for 2006 increased from (6.9)% for 2005. Both increases are due to the factors cited above.

Bookings and backlog.New unit bookings for the three months ended March 31, 2006 were $165.5 million compared to $295.5 million for the three months ended March 31, 2005. The $130.0 million decrease is primarily due to an $89 million order booked in 2005 for equipment being supplied to a large floating production storage and offloading unit. New unit backlog at March 31, 2006 was $749.8 million compared to $692.7 million at March 31, 2005.

Aftermarket Parts and Services

Revenues. Aftermarket parts and services revenues were $152.5 million for the three months ended March 31, 2006 compared to $145.7 million for the three months ended March 31, 2005. The $6.8 million or, 4.6% increase is partially attributable to the higher bookings in the quarter. Customer orders typically have lead times from as little as one day to over nine months depending on the nature of product or service required. The higher backlog at the beginning of the year ($196.6 million at December 31, 2005 versus $148.3 million at December 31, 2004) also contributed to higher revenues in 2006.

Gross profit.Gross profit was $55.8 million for the three months ended March 31, 2006 compared to $43.8 million for the three months ended March 31, 2005. The $12.0 million increase was due to increased volume and prices. Gross profit as a percentage of segment revenues was 36.6% for 2006 compared to 30.1% for 2005. The increase was attributed to the factors cited above and to lower allocations of certain costs due to revenue mix (aftermarket parts and services segment was 52% of total revenues in 2006 versus 62% in 2005).

Operating income.Operating income was $34.4 million for the three months ended March 31, 2006 compared to $23.8 million for the three months ended March 31, 2005. As a percentage of segment revenues, operating income at 22.5% for 2006 compares to 16.4% for 2005. Both increases are due to the factors cited above.

Bookings and backlog.Aftermarket parts and services bookings for the three months ended March 31, 2006 of $199.8 million compared to $154.8 million for the three months ended March 31, 2005. Aftermarket parts and services backlog at March 31, 2006 of $244.0 million compared to $158.9 million at March 31, 2005. The increases from prior year reflect the strength of the oil and gas market.

Liquidity and Capital Resources

Net cash provided by operating activities for the three months ended March 31, 2006 was $12.5 million, compared to $117.9 million for the same period in 2005. The decrease of $105.4 million in net cash provided by operating activities was principally from changes in accounts receivable, inventories and customer advance payments. Accounts receivable declined to $49.0 million in the first quarter of 2006 compared to the $81.1 million in the first quarter of 2005. Sales in the first quarters of 2006 and 2005 were lower than the fourth quarters of 2005 and 2004, respectively, resulting in a reduction of receivables during the first quarter of each year. In 2005, we also collected $30.5 million from Ingersoll-Rand that was part of the settlement of the working capital and other adjustments from the Acquisition. Inventories-net increased $36.4 million and customer advance payments decreased $7.5 million during the first quarter of 2006, as a result of our increased backlog. Inventories decreased $1.2 million and customer advances increased $40.9 million during the first quarter of 2005 as a result of our increased efforts to collect customer payments in line with or ahead of the costs of inventory work-in-process.

Net cash used in investing activities for the three months ended March 31, 2006, was $3.2 million, compared to net cash provided of $8.4 million for the same period in 2005 as we sold our investment in a partially owned entity in the first quarter of 2005 for $10 million.

Page 21 of 35

DRESSER-RAND GROUP INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)

Net cash used in financing activities was $50.0 million for the three months ended March 31, 2006, compared to $85.7 million for the three months ended March 31, 2005, related to accelerated payments on long-term debt from available cash flow.

As of March 31, 2006, we had a cash balance of $58.7 million and the ability to borrow $150.6 million under our $350 million senior secured revolving credit facility, as $199.4 million was used for outstanding letters of credit, bank guarantees, etc. Although there can be no assurances, based on our current and anticipated levels of operations and conditions in our markets and industry, we believe that our cash flow from operations, available cash and available borrowings under the senior secured revolving credit facility will be adequate to meet our working capital, capital expenditures, debt service and other funding requirements for the next twelve months and our long-term future contractual obligations.

Recently issued accounting standards

In December 2004, the FASB issued SFAS No. 153,Exchanges of Non-monetary Assets, an Amendment of APB Opinion No. 29,Accounting for Non-monetary Transactions. SFAS No. 153 eliminates the exception from fair value measurement for non-monetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29 and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for exchanges occurring in fiscal years beginning after June 15, 2005. The adoption of this statement did not have a material effect on our financial reporting.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Risk Factors

Statements included or incorporated by reference in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The statements may relate to our future prospects, developments and business strategies. These forward-looking statements relate to analyses and other information that are based upon forecasts of future results and estimates of amounts not determinable which involve a number of risks, uncertainties, and other factors described below and elsewhere in this Form 10-Q and in other documents we file with the SEC from time-to-time, that could cause actual results to differ materially from those stated. We undertake no obligation to update or revise forward-looking statements which may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. These risks, uncertainties and factors include, without limitation:

•

material weaknesses in our internal control over financial reporting;

Page 22 of 35

DRESSER-RAND GROUP INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)

•		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 23 of 35

DRESSER-RAND GROUP INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our results of operations are affected by fluctuations in the value of local currencies in which we transact business. We record the effect of translating our non-U.S. subsidiaries’ financial statements into U.S. dollars using exchange rates as they exist at the end of each month. The effect on our results of operations of fluctuations in currency exchange rates depends on various currency exchange rates and the magnitude of the transactions completed in currencies other than the U.S. dollar. The net foreign currency gain was $1.5 million for the three months ended March 31, 2006, compared to a net foreign currency gain $0.2 million for the three months ended March 31, 2005.

We enter into financial instruments to mitigate the impact of changes in currency exchange rates that may result from long-term customer contracts where we deem appropriate.

We have interest rate risk related to the term loan portion of senior secured credit facility as the interest rate on the principal outstanding on the loans is variable. A 1% increase in the interest rate would have the effect of increasing interest expense by $2.3 million annually, based on the outstanding principal balance at March 31, 2006.

Page 24 of 35

DRESSER-RAND GROUP INC.
CONTROLS AND PROCEDURES

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of March 31, 2006. Disclosure controls and procedures are those controls and procedures designed to provide reasonable assurance that the information required to be disclosed in our Exchange Act filings is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms, and (2) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2006, our disclosure controls and procedures were not effective, at the reasonable assurance level, due to the identification of the material weaknesses in internal control over financial reporting described below. Notwithstanding the material weaknesses described below, we believe our consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present in all material respects our financial position, results of operations and cash flows for the periods presented in accordance with generally accepted accounting principles.

In preparing our Exchange Act filings, including this Quarterly Report on Form 10-Q, we implemented processes and procedures to provide reasonable assurance that the identified material weaknesses in our internal control over financial reporting were mitigated with respect to the information that we are required to disclose. As a result, we believe, and our Chief Executive Officer and Chief Financial Officer have certified to their knowledge that this Quarterly Report on Form 10-Q does not contain any untrue statements of material fact or omit to state any material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered in this Quarterly Report.

Material Weaknesses in Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”). Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the interim or annual consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. We have previously disclosed in our filings with the SEC that we have identified significant deficiencies which, when taken in the aggregate, amount to material weaknesses in internal control over financial reporting. We believe that many of these are attributable to our transition from a subsidiary of a multinational company to a standalone entity. In connection with the preparation of our 2005 consolidated financial statements and our assessment of the effectiveness of our disclosure controls and procedures as of December 31, 2005, to be included in our first Annual Report on Form 10-K to be filed under the Exchange Act, we identified the following specific control deficiencies, which represent material weaknesses in our internal control over financial reporting that continue as of March 31, 2006:

Page 25 of 35

DRESSER-RAND GROUP INC.
CONTROLS AND PROCEDURES — Continued

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.

	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.

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

Page 26 of 35

DRESSER-RAND GROUP INC.
CONTROLS AND PROCEDURES — Continued

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.

Remediation of Material Weaknesses

As discussed above, management has identified certain material weaknesses that exist in our internal control over financial reporting and management is taking steps to strengthen our internal control over financial reporting. During the first quarter of 2006, we hired additional accounting personnel, continued improving our documentation of worldwide accounting policies and procedures, and began implementation of a new worldwide information technology system.

While we have taken certain actions to address the material weaknesses identified, additional measures will be necessary and these measures, along with other measures we expect to take to improve our internal control over financial reporting, may not be sufficient to address the material weaknesses identified to provide reasonable assurance that our internal control over financial reporting is effective. In addition, we may in the future identify additional material weaknesses in our internal control over financial reporting.

Beginning with the year ending December 31, 2006, pursuant to Section 404 of the Sarbanes-Oxley Act, we will be required to deliver a report that assesses the effectiveness of our internal control over financial reporting, and our auditors will be required to audit and report on our assessment of and the effectiveness of our internal control over financial reporting. We have substantial effort ahead of us to complete the documentation and testing of our internal control over financial reporting and remediate any additional material weaknesses identified during that activity. Accordingly, we may not be able to complete the required management assessment by our reporting deadline. An inability to complete this assessment would result in receiving something other than an unqualified report from our auditors with respect to our internal control over financial reporting. In addition, if material weaknesses are not remediated, we would not be able to conclude that our internal control over financial reporting was effective, which would result in the inability of our external auditors to deliver an unqualified report on our internal control over financial reporting.

Change in Internal Control Over Financial Reporting

Except for the changes described above, there have been no changes in the our internal control over financial reporting that occurred during the quarter ended March 31, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Page 27 of 35

DRESSER-RAND GROUP INC.
OTHER INFORMATION — LEGAL PROCEEDINGS

PART II. — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As a result of the enhanced compliance processes implemented by us shortly prior to and following the Acquisition, we discovered that our Brazilian subsidiary engaged in a number of transactions that resulted in steam turbine parts and services being provided to Moa Nickel S.A., a Cuban mining company jointly owned by the Government of Cuba and Sherritt International Corp., a Canadian company. Our revenues from these transactions were approximately $4 million in the aggregate since December, 1999, when we acquired a controlling interest in the Brazilian subsidiary. This amount represents approximately 0.06% of our consolidated revenues from 2000 through March 31, 2006. Of the $4 million, approximately $2.5 million in revenues were in connection with the sale of a spare part ordered in October, 2003, which was delivered and installed in Cuba, with the assistance of non-U.S. employees of our Brazilian subsidiary, in May, 2005. When these transactions came to our attention, we instructed our Brazilian subsidiary in July, 2005, to cease dealings with Cuba. These transactions were apparently in violation of the U.S. Treasury Department’s Office of Foreign Assets Control’s regulations with respect to Cuba. We have informed the U.S. Treasury Department of these matters and are currently engaged in preliminary discussions with the Department. Our inquiry into these transactions is continuing and the Department’s review of this matter is in a very preliminary stage. Cuba is subject to economic sanctions administered by the U.S. Treasury Department’s Office of Foreign Assets Control, and is identified by the U.S. State Department as a terrorist-sponsoring state. To the extent we violated any regulations with respect to Cuba or the Department determines that other violations have occurred, we will be subject to fines or other sanctions, including possible criminal penalties, with related business consequences. We do not expect these matters to have a material adverse effect on our financial results, cash flow or liquidity. In addition, the Department’s investigation into our activities with respect to Cuba may result in additional scrutiny of our activities with respect to other countries that are the subject of sanctions.

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors described in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2005.

Page 28 of 35

DRESSER-RAND GROUP INC.
OTHER INFORMATION — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its annual meeting of stockholders on May 9, 2006. The stockholders approved the election of eight directors to serve until the annual meeting of stockholders in the year 2007.

The votes cast for each nominee were as follows:


	For	Withheld
William E. Macaulay	81,964,738	966,116
Mark A. McComiskey	81,847,205	1,083,649
Kenneth W. Moore	81,879,100	1,051,754
Louis A. Raspino	82,601,339	329,515
Philip R. Roth	82,602,189	328,665
Thomas J. Sikorski	81,819,585	1,111,269
Michael L. Underwood	82,601,389	329,465
Vincent R. Volpe, Jr.	71,375,977	11,554,877

There were no abstentions or broker non-votes.

The stockholders also ratified the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accountants. The votes cast on this proposal were as follows:


		For		Against
		82,882,858		41,560

There were 6,436 abstentions and no broker non votes.

Page 29 of 35

DRESSER-RAND GROUP INC.
OTHER INFORMATION — EXHIBITS

ITEM 6. EXHIBITS

The following exhibits are filed with this report:


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.)

Page 30 of 35

DRESSER-RAND GROUP INC.
OTHER INFORMATION — SIGNATURES

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	DRESSER-RAND GROUP INC.
May 15, 2006	/s/ Lonnie A. Arnett
	Lonnie A. Arnett
	Vice President, Controller and Chief Accounting Officer and Duly Authorized Officer

Page 31 of 35

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Good

Dresser-Rand (DRC) Inactive 10-Q2006 Q1 Quarterly report

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