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Dresser-Rand Group 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
Form 10-Q
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, 2010
     
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.
(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.)
     
West8 Tower, Suite 1000
10205 Westheimer Road
   
Houston, TX, U.S.A   77042
     
112 Avenue Kleber
Paris, France
  75784
     
(Addresses of principal executive offices)   (Zip Codes)
(713) 354-6100 (Houston)
33 156 26 71 71 (Paris)
(Registrant’s telephone numbers, including area code)
(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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
    (Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
The number of shares of common stock, $.01 par value, outstanding as of October 22, 2010, was 80,543,987.
 
 

 

 


 

DRESSER-RAND GROUP INC.
TABLE OF CONTENTS
                 
            Page  
PART I. FINANCIAL INFORMATION        
 
               
       
 
               
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    19  
 
               
    27  
 
               
    27  
 
               
PART II. OTHER INFORMATION        
 
               
    28  
 
               
    28  
 
               
    30  
 
               
        31  
 
               
Exhibits
           
 
               
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT

 

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PART I. – FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
DRESSER-RAND GROUP INC.
CONSOLIDATED STATEMENT OF INCOME
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2010     2009     2010     2009  
    (Unaudited; $ in millions, except per share amounts)  
 
                               
Net sales of products
  $ 378.5     $ 494.8     $ 1,085.3     $ 1,400.3  
Net sales of services
    104.6       117.3       331.1       326.8  
 
                       
Total revenues
    483.1       612.1       1,416.4       1,727.1  
 
                       
Cost of products sold
    261.9       350.3       748.6       1,015.7  
Cost of services sold
    76.0       79.6       236.9       222.2  
 
                       
Total cost of sales
    337.9       429.9       985.5       1,237.9  
 
                       
Gross profit
    145.2       182.2       430.9       489.2  
Selling and administrative expenses
    73.5       70.9       219.0       207.4  
Research and development expenses
    6.4       5.7       19.3       14.6  
Plan settlement
                      1.3  
 
                       
Income from operations
    65.3       105.6       192.6       265.9  
 
                       
Interest expense, net
    (8.2 )     (8.3 )     (24.8 )     (23.6 )
Other income (expense) , net
    2.5       3.2       (14.2 )     4.0  
 
                       
Income before income taxes
    59.6       100.5       153.6       246.3  
Provision for income taxes
    22.1       25.9       58.8       76.9  
 
                       
Net income
  $ 37.5     $ 74.6     $ 94.8     $ 169.4  
 
                       
Net income per share
                               
Basic
  $ 0.47     $ 0.91     $ 1.17     $ 2.07  
 
                       
Diluted
  $ 0.46     $ 0.91     $ 1.16     $ 2.07  
 
                       
Weighted average shares outstanding — (in thousands)
                               
Basic
    80,370       81,705       81,340       81,644  
 
                       
Diluted
    80,948       82,013       81,804       81,794  
 
                       
See accompanying notes to unaudited consolidated financial statements.

 

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DRESSER-RAND GROUP INC.
CONSOLIDATED BALANCE SHEET
                 
    September 30,     December 31,  
    2010     2009  
    (Unaudited; $ in millions, except  
    share amounts)  
Assets
               
Current assets
               
Cash and cash equivalents
  $ 333.0     $ 223.2  
Accounts receivable, less allowance for losses of $13.5 at 2010 and $14.4 at 2009
    285.8       289.8  
Inventories, net
    297.4       353.0  
Prepaid expenses and other
    39.1       24.9  
Deferred income taxes, net
    43.0       45.4  
 
           
Total current assets
    998.3       936.3  
Property, plant and equipment, net
    269.2       268.9  
Goodwill
    489.5       486.0  
Intangible assets, net
    431.2       430.9  
Other assets
    25.5       28.1  
 
           
Total assets
  $ 2,213.7     $ 2,150.2  
 
           
 
               
Liabilities and Stockholders’ Equity
               
Current liabilities
               
Accounts payable and accruals
  $ 356.8     $ 412.0  
Customer advance payments
    221.0       165.2  
Accrued income taxes payable
    27.0       8.1  
Loans payable
          0.1  
 
           
Total current liabilities
    604.8       585.4  
Deferred income taxes, net
    44.0       38.5  
Postemployment and other employee benefit liabilities
    107.6       109.9  
Long-term debt
    370.0       370.0  
Other noncurrent liabilities
    44.7       33.8  
 
           
Total liabilities
    1,171.1       1,137.6  
 
           
Commitments and contingencies (Notes 8 through 12)
               
Stockholders’ equity
               
Common stock, $0.01 par value, 250,000,000 shares authorized; and 80,606,075 and 82,513,744 shares issued and outstanding, respectively
    0.8       0.8  
Additional paid-in capital
    344.2       396.6  
Retained earnings
    732.9       638.1  
Accumulated other comprehensive loss
    (35.3 )     (22.9 )
 
           
Total stockholders’ equity
    1,042.6       1,012.6  
 
           
Total liabilities and stockholders’ equity
  $ 2,213.7     $ 2,150.2  
 
           
See accompanying notes to unaudited consolidated financial statements.

 

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DRESSER-RAND GROUP INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
                 
    Nine months ended September 30,  
    2010     2009  
    (Unaudited; $ in millions)  
Cash flows from operating activities
               
Net income
  $ 94.8     $ 169.4  
Adjustments to arrive at net cash provided by operating activities
               
Depreciation and amortization
    38.5       37.9  
Deferred income taxes
    9.0       (1.3 )
Stock-based compensation
    10.0       8.0  
Excess tax benefits from share-based compensation
    (0.8 )      
Amortization of debt financing costs
    2.4       2.4  
Provision for losses on inventory
    3.9       4.2  
Plan settlement
          (0.2 )
Loss on sale of property, plant and equipment
    0.6       0.1  
Net loss from equity investment
          0.8  
Working capital and other, net of acquisitions
               
Accounts receivable
    10.9       61.8  
Inventories
    48.4       (38.2 )
Accounts payable and accruals
    (25.4 )     (49.8 )
Customer advances
    59.5       (77.5 )
Other
    6.3       (38.0 )
 
           
Net cash provided by operating activities
    258.1       79.6  
 
           
Cash flows from investing activities
               
Capital expenditures
    (13.5 )     (21.1 )
Proceeds from sales of property, plant and equipment
    0.2       1.0  
Other investments
          (5.0 )
Acquisitions, net of cash
    (68.8 )     (12.7 )
 
           
Net cash used in investing activities
    (82.1 )     (37.8 )
 
           
Cash flows from financing activities
               
Proceeds from exercise of stock options
    0.9       2.1  
Excess tax benefits from share-based compensation
    0.8        
Purchase of treasury stock
    (63.3 )      
Payments of long-term debt
    (0.1 )     (0.1 )
 
           
Net cash (used in) provided by financing activities
    (61.7 )     2.0  
 
           
Effect of exchange rate changes on cash and cash equivalents
    (4.5 )     7.3  
 
           
Net increase in cash and cash equivalents
    109.8       51.1  
Cash and cash equivalents, beginning of the period
    223.2       147.1  
 
           
Cash and cash equivalents, end of period
  $ 333.0     $ 198.2  
 
           
See accompanying notes to unaudited consolidated financial statements.

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DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share amounts)
1. Basis of presentation
Unless the context otherwise indicates, the terms “we”, “our”, “us”, the “Company” and similar terms, refer to Dresser-Rand Group Inc. and its consolidated subsidiaries.
The accompanying 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 (including 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, 2009, and our other filings with the Securities and Exchange Commission. Operating results for the 2010 periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.
2. New accounting standards
In October 2009, Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition, was issued. ASU 2009-13 replaces the concept of fair market value with selling price when determining how to allocate the total contract sales price in a multiple-deliverable revenue arrangement. This amendment establishes a hierarchy process for determining the selling price of a given deliverable to be used in the allocation. The order of the selling price determination hierarchy is (a) vendor specific objective evidence; (b) third party evidence, if vendor specific objective evidence is not available; or (c) estimated selling price, if neither vendor specific objective evidence nor third party evidence is available. ASU 2009-13 will be effective for the Company’s fiscal year beginning January 1, 2011. The Company does not expect the adoption of ASU 2009-13 to have a material impact on its consolidated financial statements.
On January 1, 2010, the Company adopted ASU 2009-16, Accounting for Transfers of Financial Assets. ASU 2009-16 requires more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 also eliminates the concept of “qualified special-purpose entity”, changes the requirements for derecognizing financial assets, and requires additional disclosures. The adoption of ASU 2009-16 did not have a material impact on our consolidated financial statements.
On January 1, 2010, the Company adopted ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which requires a qualitative approach to identifying a controlling financial interest in a variable interest entity (“VIE”), and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. The adoption of ASU 2009-17 did not have a material impact on our consolidated financial statements.
On January 1, 2010, the Company adopted ASU 2010-6, Improving Disclosures About Fair Value Measurements, which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements, including significant transfers into and out of the standard’s Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis for Level 3 fair-value measurements. ASU 2010-6 is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. The adoption of ASU 2010-6 did not have a material impact on our consolidated financial statements.
On January 1, 2010, the Company adopted ASU 2010-09, Subsequent Events — Amendments to Certain Recognition and Disclosure Requirements, which amends Accounting Standards Codification (“ASC”) Topic 855, Subsequent Events, so that SEC filers no longer are required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. The adoption of ASU 2010-09 did not have a material impact on our consolidated financial statements.

 

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DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
($ in millions, except per share amounts)
3. Acquisitions and other investments
On January 18, 2010, the Company acquired certain assets of Leading Edge Turbine Technologies, Inc. (such business being referred to as “LETT”), located in Houston, Texas for $34.2. LETT is a provider of turbine technologies applicable to industrial gas turbines, steam turbines and compressor repair. The purchase agreement includes the potential for additional cash consideration based on achieving certain revenue and earnings before interest, tax, depreciation, and amortization (“EBITDA”) targets over a three-year period ending on December 31, 2012. The additional consideration is up to a maximum of $5.5 depending upon the achievement of such targets. The acquisition allows the Company to expand its service offering in its current market and provides the Company with access to adjacent markets.
On May 3, 2010, the Company acquired certain assets of Turbo Machines Field Services (Pty) Ltd. (such business being referred to as “TMFS”), for $10.5. TMFS operates a repair facility near Johannesburg, South Africa. TMFS manufactures turbine blades, compressor impellers, bearings and seals for steam turbine and centrifugal compressor products. Additionally, TMFS provides engineered solutions for equipment upgrades and field services for critical rotating equipment applications. TMFS clients are in the oil, gas, petrochemical, and industrial sectors. The purchase agreement includes the potential for additional cash consideration based on achieving certain annual and cumulative earnings before interest, tax, depreciation, and amortization (“EBITDA”) targets over a three-year period ending on June 30, 2013. The additional consideration is up to a maximum of $4.0 depending upon the achievement of such targets. The acquisition provides the Company the ability to expand its service offering in South Africa and the rest of the sub-Saharan market.
On September 1, 2009, the Company acquired the assets of Compressor Renewal Services Ltd. (“CRS”) located in Odessa, Texas for $12.7. CRS services separable, process and integral-engine reciprocating compressors primarily in the North American natural gas transmission market. The purchase agreement includes the potential for additional cash consideration based on achieving certain earnings targets over a five-year period beginning on October 1, 2009. The additional consideration is up to a maximum of $3.7 depending upon the achievement of such goals.
The estimated fair values of the additional consideration for the LETT, TMFS and CRS acquisitions of $2.6, $2.5 and $1.3, respectively, at September 30, 2010, are included as liabilities in the consolidated financial statements. Changes in the fair values since the date of acquisition are recognized immediately in the applicable consolidated statements of income until the contingencies are resolved.
Goodwill is comprised primarily of expected synergies from combining operations of the acquired businesses and the Company. Substantially all of the goodwill from the acquisitions is attributable to the Aftermarket Parts and Services segment.
For tax purposes the amortization of goodwill related to the LETT and CRS acquisitions is deductible over 15 years. The amortization of goodwill related to the TMFS acquisition is not tax deductible.
The acquisition prices were allocated to the fair values of assets acquired and liabilities assumed as follows:
                 
    2010     2009  
 
               
Accounts receivable, net
  $ 4.1     $ 0.8  
Inventory, net
    2.5       0.5  
 
           
Total current assets
    6.6       1.3  
 
           
Property, plant and equipment
    12.9       6.6  
Amortizable intangible assets
    16.8       2.4  
Goodwill
    15.8       4.0  
 
           
Total assets acquired
    52.1       14.3  
 
           
Accounts payable and accruals
    1.3       0.4  
 
           
Total liabilities assumed
    1.3       0.4  
 
           
Purchase price
    50.8       13.9  
Fair value of contingent consideration (non-cash)
    (6.1 )     (1.2 )
 
           
Cash paid
  $ 44.7     $ 12.7  
 
           

 

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DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
($ in millions, except per share amounts)
Pro forma financial information, assuming these acquisitions occurred at the beginning of each income statement period, has not been presented because the effect on our results for each of those periods is not considered material. The results of the acquisitions have been included in our consolidated financial results since the date of each acquisition, and were not material to the results of operations for the three and nine months ended September 30, 2010.
In addition to the cash paid for acquisitions discussed above, on January 22, 2010, the Company paid $24.1 of additional cash consideration in connection with its 2008 acquisition of certain assets of Peter Brotherhood Ltd.
Other Investments
In 2008, the Company entered into an agreement by which it acquired a non-controlling interest in Ramgen Power Systems, LLC (“Ramgen”), a privately held development stage company that is developing compressor technology that applies proven supersonic aircraft technology to ground-based air and gas compressors. In addition to receiving a non-controlling interest, the Company received an option to acquire the business of Ramgen at a price of $25.0 and a royalty commitment. The option is exercisable at any time through October 28, 2012. Pursuant to the agreement, an initial investment of $5.0 was made in November 2008, and our final contractually obligated investment of $5.0 was made in May 2009. The Company also made an optional investment in November 2009 of $5.0 which resulted in an aggregate non-controlling interest of 23.7%. The agreement allows the Company to make additional optional investments of $9.0 through October 2012. The Company’s maximum exposure to loss on its investment in Ramgen is limited to the amounts invested. In determining whether the Company should consolidate Ramgen, the Company considered that its Board participation, ownership interest and the option would not give the Company the ability to direct the activities of Ramgen, and consequently, would not result in the Company being the primary beneficiary. The investment in Ramgen is being accounted for under the equity method of accounting.
In April 2009, the Company and Al Rushaid Petroleum Investment Company (“ARPIC”) executed and delivered a Business Venture Agreement to form a joint venture, Dresser-Rand Arabia LLC (“D-R Arabia”). D-R Arabia will be a center of excellence in the Kingdom of Saudi Arabia for manufacturing, repairs, service, technical expertise and training. The Company owns approximately 50% of D-R Arabia. The Company made a cash contribution of approximately $0.3 and will license D-R Arabia to use certain intellectual property. ARPIC owns approximately 50% of the “Joint Venture” and made a cash contribution of approximately $0.3. In determining whether the Company should consolidate D-R Arabia, the Company considered that its ownership and Board participation would give the Company the ability to direct the activities of D-R Arabia which would result in the Company being the primary beneficiary. Consequently, D-R Arabia is consolidated in the financial results of the Company. The assets and liabilities of D-R Arabia are not material to the Company’s consolidated financial statements.
4. Intangible assets and goodwill
The cost and related accumulated amortization of intangible assets were:
                                         
    September 30, 2010     Weighted     December 31, 2009  
            Accumulated     Average             Accumulated  
    Cost     Amortization     Useful Lives     Cost     Amortization  
Trade names
  $ 94.4     $ 13.5     39 years   $ 93.1     $ 11.6  
Customer relationships
    264.9       40.5     37 years     258.6       34.5  
Software
    30.6       18.1     10 years     30.6       15.8  
Existing technology
    144.7       32.6     24 years     137.1       27.9  
Non-compete agreements
    2.6       1.3     4 years     2.1       0.8  
 
                               
Total amortizable intangible assets
  $ 537.2     $ 106.0             $ 521.5     $ 90.6  
 
                               
Intangible asset amortization expense was $5.2 and $15.6 for the three and nine months ended September 30, 2010, and $4.9 and $14.5 for the three and nine months ended September 30, 2009, respectively.

 

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DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
($ in millions, except per share amounts)
The following table represents the changes in goodwill:
                         
            Aftermarket        
    New units     parts and services     Total  
Balance, December 31, 2009
  $ 157.0     $ 329.0     $ 486.0  
Acquisitions
          15.8       15.8  
Foreign currency adjustments
    (4.7 )     (7.6 )     (12.3 )
 
                 
Balance, September 30, 2010
  $ 152.3     $ 337.2     $ 489.5  
 
                 
5. Inventories
Inventories were as follows:
                 
    September 30,     December 31,  
    2010     2009  
 
               
Raw materials and supplies
  $ 120.3     $ 132.6  
Work-in-process and finished goods
    389.4       485.0  
 
           
 
    509.7       617.6  
Less: Progress payments
    (212.3 )     (264.6 )
 
           
Total inventories
  $ 297.4     $ 353.0  
 
           
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.
6. Property, plant and equipment
Property, plant and equipment were comprised of the following:
                 
    September 30,     December 31,  
    2010     2009  
Cost:
               
Land
  $ 16.8     $ 15.3  
Buildings and improvements
    118.6       113.9  
Machinery and equipment
    300.7       285.3  
 
           
 
    436.1       414.5  
Less: Accumulated depreciation
    (166.9 )     (145.6 )
 
           
Property, plant and equipment, net
  $ 269.2     $ 268.9  
 
           
7. Financial Instruments (€ in millions)
The Company manages exposure to changes in foreign currency exchange rates through its normal operating and financing activities as well as through the use of financial instruments, principally forward exchange contracts.
The purpose of the Company’s foreign currency hedging activities is to mitigate the economic impact of changes in foreign currency exchange rates. The Company attempts to hedge transaction exposures through natural offsets. To the extent that this is not practicable, the Company may enter into forward exchange contracts. Major exposure areas considered for hedging include foreign currency denominated receivables and payables, firm committed transactions and forecast sales and purchases.
The Company’s foreign currency derivative financial instruments are not designated as hedges for accounting purposes. The Company recognizes all derivatives in prepaid expenses and other or accounts payable and accruals, as appropriate, on the balance sheet and measures them at fair value. Changes in the fair values of derivatives are immediately recognized in the consolidated statement of income as foreign currency income or loss in other income (expense).

 

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DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
($ in millions, except per share amounts)
The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis:
                 
    September 30,     December 31,  
    2010     2009  
 
               
Foreign currency exchange contracts assets
  $ 6.9     $ 5.9  
 
           
 
               
Foreign currency exchange contracts liabilities
  $ 5.5     $ 7.2  
 
           
The net foreign currency gains (losses) recognized for currency transactions, forward currency contracts and re-measuring monetary assets and liabilities was $2.7 and ($15.4) for the three and nine months ended September 30, 2010, compared to gains of $3.7 and $4.9 for the three and nine months ended September 30, 2009. The Venezuelan government has devalued the bolivar a number of times, including a devaluation on January 8, 2010. During the nine months ended September 30, 2010, the Company recorded a loss of approximately $13.6 as a result of this devaluation. The devaluation of the Venezuelan bolivar had no impact on our consolidated financial statements for the three months ended September 30, 2010.
The Company has entered into an interest rate swap agreement to minimize the economic impact of unexpected fluctuations in interest rates on the lease of its compressor testing facility in France. The interest rate swap has a notional amount of €18.0 (approximately $24.5) and effectively converts substantially the entire interest component of the lease from a variable rate of interest to a fixed rate of interest. The interest rate swap has been designated as a cash flow hedge for accounting purposes, and unrealized gains and losses are recognized in other comprehensive income. The fair value of the interest rate swap and the related unrealized loss was $0.7 at September 30, 2010.
The carrying values of cash, accounts receivable, short-term borrowings and accounts payable are reasonable estimates of their fair values due to the short-term nature of these instruments. The fair value of debt obligations as of September 30, 2010, was approximately $378.3.
Under accounting principles generally accepted in the United States of America, fair value for all financial instruments is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are based on the following hierarchy:
     
Level 1
  Unadjusted quoted prices in active markets for identical assets or liabilities
 
   
Level 2
  Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability
 
   
Level 3
  Unobservable inputs for the asset or liability
Input levels used for our fair value measurements are as follows:
             
Description   Input Level     Inputs
Long-term debt (note disclosure only)
  Level 1   Quoted market prices
Financial derivatives
  Level 2   Quoted market prices of similar instruments
8. Income taxes
We operate in numerous countries and tax jurisdictions around the world and many of the tax returns we have filed have not been audited. Accordingly, we could be exposed to additional income and other taxes.

 

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DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
($ in millions, except per share amounts)
Our estimated income tax provision for the three months ended September 30, 2010 and 2009 differs from the U.S. federal statutory rate of 35% because of state and local income taxes and valuation allowances on net operating loss carryforwards that more likely than not will not be realized, partially offset by different tax rates in foreign tax jurisdictions and certain deductions and credits allowable for income tax purposes. We will adjust valuation allowances in the future when it becomes more likely than not that the benefits of deferred tax assets will be realized. In addition to these impacts to the effective tax rate, the devaluation of the Venezuelan bolivar discussed above resulted in an additional 3.7 percentage point increase in our effective tax rate for the nine months ended September 30, 2010. During the three months ended September 30, 2009, we executed a corporate restructuring to facilitate our global cash management. In connection with the restructuring, we experienced a non-recurring tax benefit associated with the application of foreign tax credits against non-recurring foreign source income, which reduced our effective tax rate in the three and nine months ended September 30, 2009.
9. Pension plans
The components of net pension expense were as follows:
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2010     2009     2010     2009  
 
                               
Service cost
  $ 1.8     $ 1.7     $ 5.6     $ 4.8  
Interest cost
    5.1       5.1       15.3       15.0  
Expected return on plan assets
    (5.2 )     (4.7 )     (15.6 )     (13.7 )
Amortization of prior service cost
    0.3       0.2       1.0       0.6  
Amortization of net actuarial loss
    0.8       1.0       2.2       2.9  
Plan settlement
                      1.3  
 
                       
Net pension expense
  $ 2.8     $ 3.3     $ 8.5     $ 10.9  
 
                       
In 2008, the Company amended its Canadian defined benefit pension plan to discontinue the benefits. During the nine months ended September 30, 2009, the Company converted the plan to a defined contribution plan, which was considered a plan settlement. The plan settlement required the Company to recognize a $1.3 settlement charge in the consolidated statement of income for the nine months ended September 30, 2009. The settlement charge included approximately $0.4 of net actuarial losses previously recorded in accumulated other comprehensive income. The cash payment required to effect the plan conversion was $1.5.
10. Postretirement benefits other than pensions
The components of net periodic postretirement benefits income for such plans were as follows:
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2010     2009     2010     2009  
Interest cost
  $ 0.3     $ 0.3     $ 0.7     $ 0.8  
Amortization of prior service credit
    (2.4 )     (2.0 )   $ (7.0 )     (6.0 )
Amortization of net actuarial loss
    0.3       0.2     $ 1.1       0.7  
 
                       
Net post-retirement benefits income
  $ (1.8 )   $ (1.5 )   $ (5.2 )   $ (4.5 )
 
                       
11. Commitments and contingencies (£ in millions)
We are involved in various litigation, claims and administrative proceedings 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. We are indemnified by our former owner, Ingersoll Rand Company Limited, for certain matters as part of Ingersoll Rand’s sale of the Company. While adverse decisions in certain of these litigation matters, claims and administrative proceedings could have a material effect on a particular quarter’s or year’s results of operations, subject to the uncertainties inherent in estimating future costs for contingent liabilities and the benefit of the indemnity from Ingersoll Rand, management believes that any future accruals, with respect to these currently known contingencies, would not have a material effect on the financial condition, liquidity or cash flows of the Company.

 

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DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
($ in millions, except per share amounts)
In November 2007, Local 313 of IUE-CWA, the union that represents certain employees at the Company’s Painted Post facility (the “IUE”) made an offer to have its striking members return to work under the terms of the previously expired union agreement. The Company rejected that offer and a lockout of the represented employees commenced. Approximately one week later, after reaching an impasse in negotiations, the Company exercised its right to implement the terms of its last contract offer, ended the lockout, and the employees represented by the IUE agreed to return to work under the implemented terms. Subsequently, the IUE filed several unfair labor practice (“ULP”) charges against the Company with Region 3 of the National Labor Relations Board (“NLRB”), asserting multiple allegations arising from the protracted labor dispute, its termination, contract negotiations and related matters.
Region 3 of the NLRB decided to proceed to complaint on only one-third of the ULP allegations asserted by the IUE, while the remaining claims were dismissed. Notably, the NLRB found that many of the critical aspects of the Company’s negotiations with the IUE were handled appropriately, that the union’s strike was not an unfair labor practice strike and the Company’s declaration of impasse and its unilateral implementation of its last offer were lawful.
The claims that proceeded to complaint before the NLRB included the Company’s handling of the one week lockout, the negotiation of the recall process used to return employees to the facility after reaching impasse and lifting the lockout, and the termination of two employees who engaged in misconduct on the picket line during the strike. The trial of this matter took place before a NLRB Administrative Law Judge (the “ALJ”) in Elmira and Painted Post, N.Y. during the summer of 2009. On January 29, 2010, the ALJ issued his decision in which he found in favor of the union on some issues and upheld the Company’s position on others. The Company continues to believe it complied with the law with respect to the allegations that led to the adverse ALJ ruling, and it has appealed these rulings to the NLRB in Washington, D.C. While the Company believes it should ultimately prevail with respect to these ULP allegations, several levels of appeal may be necessary. The Company anticipates that any impact arising from the ULP allegations will not have a material adverse effect on the Company’s financial condition. The appellate process could reasonably take 3 to 5 years and potentially even longer to resolve with finality.
During the three months ended September 30, 2009, the Company received notification from the current plan trustees of one of its subsidiaries’ pension plans in the United Kingdom that the plan may not have been properly amended to achieve sex equalization. The third-party trustee at the time action was taken believes that it had taken the appropriate steps to properly amend the plan. If it is determined that sex equalization was not achieved, certain benefits would be recalculated by reference to a normal retirement date of 60 for both men and women, which we believe could result in a potential liability of up to approximately £4.0 ($6.3).
12. 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:
                 
    Nine months ended September 30,  
    2010     2009  
 
               
Beginning balance
  $ 39.2     $ 37.0  
Provisions for warranties issued during the period
    15.5       17.0  
Changes related to preexisting warranty liabilities
    (7.0 )      
Payments during period
    (15.3 )     (13.5 )
Foreign currency adjustments
    (1.5 )     1.3  
 
           
Ending balance
  $ 30.9     $ 41.8  
 
           
13. 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 requests from clients. The segment includes engineering, manufacturing, sales and administrative support.
 
2)   Aftermarket parts and services consist of support solutions for the existing population of installed equipment. The segment includes engineering, manufacturing, sales and administrative support.

 

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DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
($ in millions, except per share amounts)
Unallocated amounts represent expenses and assets that cannot be assigned directly to either reportable segment because of their nature. Unallocated net expenses include certain corporate expenses, research and development expenses and the plan settlement (see Note 9). Assets that are directly assigned to the two reportable segments are trade accounts receivable, net inventories, and goodwill. Unallocated assets include cash, prepaid expenses and other, deferred taxes, property, plant and equipment, and intangible assets.
Segment results for the three and nine months ended September 30, 2010, and 2009 were as follows:
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2010     2009     2010     2009  
Revenues
                               
New units
  $ 251.3     $ 347.2     $ 704.1     $ 973.9  
Aftermarket parts and services
    231.8       264.9       712.3       753.2  
 
                       
Total revenues
  $ 483.1     $ 612.1     $ 1,416.4     $ 1,727.1  
 
                       
Operating Income
                               
New units
  $ 32.6     $ 55.9     $ 101.7     $ 129.2  
Aftermarket parts and services
    55.2       70.2       159.2       196.7  
Unallocated
    (22.5 )     (20.5 )     (68.3 )     (60.0 )
 
                       
Total operating income
  $ 65.3     $ 105.6     $ 192.6     $ 265.9  
 
                       
Depreciation and Amortization
                               
New units
  $ 6.2     $ 6.5     $ 18.8     $ 21.0  
Aftermarket parts and services
    6.4       5.8       19.7       16.9  
 
                       
Total depreciation and amortization
  $ 12.6     $ 12.3     $ 38.5     $ 37.9  
 
                       
Assets (including Goodwill)
                               
New units
  $ 299.0     $ 367.2     $ 299.0     $ 367.2  
Aftermarket parts and services
    775.4       773.8       775.4       773.8  
Unallocated
    1,139.3       991.1       1,139.3       991.1  
 
                       
Total assets
  $ 2,213.7     $ 2,132.1     $ 2,213.7     $ 2,132.1  
 
                       
14. Stockholders’ equity
Changes in stockholders’ equity for nine months ended September 30, 2010, were:
                                         
                            Accumulated        
                            Other        
    Common     Additional     Retained     Comprehensive        
    Stock     Paid-in Capital     Earnings     (Loss) Income     Total  
At December 31, 2009
  $ 0.8     $ 396.6     $ 638.1     $ (22.9 )   $ 1,012.6  
Stock-based employee compensation
          11.4                   11.4  
Stock repurchase
          (63.8 )                 (63.8 )
Net income
                94.8             94.8  
Other comprehensive loss
                                       
Foreign currency adjustments
                      (10.2 )     (10.2 )
Unrealized loss on derivatives, net of $0.2 tax
                      (0.5 )     (0.5 )
Pension and other postretirement benefit plans — net of $1.1 tax:
                                       
Benefit plans amortization
                      (1.7 )     (1.7 )
 
                             
At September 30, 2010
  $ 0.8     $ 344.2     $ 732.9     $ (35.3 )   $ 1,042.6  
 
                             

 

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DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
($ in millions, except per share amounts)
The components of total comprehensive income were as follows:
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2010     2009     2010     2009  
 
                               
Net income
  $ 37.5     $ 74.6     $ 94.8     $ 169.4  
Other comprehensive income (loss)
                               
Foreign currency adjustments
    49.2       22.2       (10.2 )     35.6  
Unrealized loss on derivatives, net of $0.2 tax
                (0.5 )      
Pension and other postretirement benefit plans — net of $1.1 tax
                               
Benefit plans amortization
    (0.6 )     (0.4 )     (1.7 )     (1.2 )
Plan settlement
                      0.3  
 
                       
Total comprehensive income
  $ 86.1     $ 96.4     $ 82.4     $ 204.1  
 
                       
During the nine months ended September 30, 2010, the Compensation Committee of the Board of Directors approved grants of options and appreciation rights involving 237,603 shares of common stock and grants of 366,687 shares of time-vested restricted stock units to employees under the Dresser-Rand Group Inc. Stock Incentive Plan. Additionally, the Compensation Committee approved the issuance of performance based restricted stock units with a target grant amount of 82,236 restricted shares. These stock compensation arrangements vest over three year periods. Additionally, Directors were granted 17,940 shares of restricted stock that will vest in one year.
In February 2010, the Company’s Board of Directors authorized the repurchase of up to $200.0 of its common stock, which is approximately 7 percent of the Company’s outstanding shares. Stock repurchases under the program may be made through open market or privately negotiated transactions in accordance with all applicable laws, rules, and regulations. The transactions may be made from time to time and in such amounts, as management deems appropriate and will be funded from operating cash flows or borrowings under the Company’s revolving credit facility. During the nine months ended September 30, 2010, the Company purchased 1,925,164 shares at an average price of $33.14 per share for a total amount purchased of $63.8, pursuant to a plan adopted in accordance with Rule 10b(5-1), a safe harbor rule, under the Securities Exchange Act of 1934, as amended.
The number of shares to be repurchased and the timing of repurchases will be based on several factors. These factors include the price of the Company’s common stock, general business and market conditions, other investment opportunities, including acquisitions, and covenant limitations. The most restrictive covenant allows shares to be repurchased up to an annual amount of half the prior year’s net income. Presently, without seeking a covenant waiver, this limits the Company to approximately $100.0 in 2010. The stock repurchase program does not have an expiration date and may be limited or terminated at any time without prior notice.
15. Supplemental guarantor financial information
The following wholly owned subsidiaries have guaranteed the Company’s senior subordinated notes on a full, unconditional and joint and several basis: Dresser-Rand LLC, Dresser-Rand Power LLC, Dresser-Rand Company, D-R Steam LLC and Dresser-Rand Global Services, Inc. (“Subsidiary Guarantors”). The statements of cash flows for the nine months ended September 30, 2010 and 2009 include certain corrections related to the three months ended March 31, 2010, and the three months ended September 30, 2009, as follows: (a) a reclassification of $34.2 in the nine months ended September 30, 2010 from the Subsidiary Non-Guarantors to the Subsidiary Guarantors to correctly classify cash flows from operations (b) reclassifications of $34.2 and $12.7 in the nine months ended September 2010 and 2009, respectively, from the Issuer to the Subsidiary Guarantors to correctly classify cash used in acquisitions, and (c) reclassifications to reflect (a) and (b) above as having been financed through intercompany account activity.
The Company’s U.S income tax liabilities are accounted for by the Issuer (Dresser-Rand Group Inc.). Each quarter, the Company recognizes an income tax expense and related income tax liability for the Subsidiary Guarantors’ and Subsidiary Non-Guarantors’ portion of U.S. pre-tax earnings. Periodically, the income tax liability balances are transferred to an intercompany account. The amounts transferred for the nine months ended September 30, 2010 and 2009 were $119.0 and $107.1, respectively. No amounts were transferred for the three months ended September 30, 2010 and 2009.
The following condensed consolidated financial information of the Issuer, Subsidiary Guarantors and Subsidiary Non-Guarantors, presents statements of income for the three and nine months ended September 30, 2010, and 2009, balance sheets at September 30, 2010, and December 31, 2009, and statements of cash flows for the nine months ended September 30, 2010, and 2009.

 

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DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
($ in millions, except per share amounts)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the three months ended September 30, 2010
                                         
            Subsidiary     Subsidiary Non-     Consolidating        
    Issuer     Guarantors     Guarantors     Adjustments     Total  
Net sales
  $     $ 236.9     $ 286.8     $ (40.6 )   $ 483.1  
Cost of sales
          167.2       205.5       (34.8 )     337.9  
 
                             
Gross profit
          69.7       81.3       (5.8 )     145.2  
Selling and administrative expenses
    33.8       16.0       30.4       (6.7 )     73.5  
Research and development expenses
          5.5       0.9             6.4  
 
                             
(Loss) income from operations
    (33.8 )     48.2       50.0       0.9       65.3  
Equity earnings in affiliates
    62.3       3.1             (65.4 )      
Interest expense, net
    (8.1 )           (0.1 )           (8.2 )
Intercompany interest and fees
    6.5       (1.5 )     (5.0 )            
Other (expense) income, net
    (0.6 )     0.3       2.8             2.5  
 
                             
Income before income taxes
    26.3       50.1       47.7       (64.5 )     59.6  
(Benefit) provision for income taxes
    (11.2 )     17.4       15.9             22.1  
 
                             
Net income
  $ 37.5     $ 32.7     $ 31.8     $ (64.5 )   $ 37.5  
 
                             
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the three months ended September 30, 2009
                                         
            Subsidiary     Subsidiary Non-     Consolidating        
    Issuer     Guarantors     Guarantors     Adjustments     Total  
Net sales
  $     $ 353.6     $ 296.1     $ (37.6 )   $ 612.1  
Cost of sales
          253.4       211.7       (35.2 )     429.9  
 
                             
Gross profit
          100.2       84.4       (2.4 )     182.2  
Selling and administrative expenses
    30.7       15.0       31.3       (6.1 )     70.9  
Research and development expenses
          5.0       0.7             5.7  
 
                             
(Loss) income from operations
    (30.7 )     80.2       52.4       3.7       105.6  
Equity earnings in affiliates
    82.1       6.8             (88.9 )      
Interest expense, net
    (7.8 )           (0.5 )           (8.3 )
Intercompany interest and fees
    9.5       (7.5 )     (2.0 )            
Other income, net
    0.4       0.3       2.5             3.2  
 
                             
Income before income taxes
    53.5       79.8       52.4       (85.2 )     100.5  
(Benefit) provision for income taxes
    (21.1 )     33.2       13.8             25.9  
 
                             
Net income
  $ 74.6     $ 46.6     $ 38.6     $ (85.2 )   $ 74.6  
 
                             

 

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DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
($ in millions, except per share amounts)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the nine months ended September 30, 2010
                                         
            Subsidiary     Subsidiary Non-     Consolidating        
    Issuer     Guarantors     Guarantors     Adjustments     Total  
Net sales
  $     $ 702.2     $ 830.6     $ (116.4 )   $ 1,416.4  
Cost of sales
          500.1       584.4       (99.0 )     985.5  
 
                             
Gross profit
          202.1       246.2       (17.4 )     430.9  
Selling and administrative expenses
    103.2       42.2       92.4       (18.8 )     219.0  
Research and development expenses
          16.4       2.9             19.3  
 
                             
(Loss) income from operations
    (103.2 )     143.5       150.9       1.4       192.6  
Equity earnings in affiliates
    162.9       16.2             (179.1 )      
Interest expense, net
    (23.7 )           (1.1 )           (24.8 )
Intercompany interest and fees
    19.9       (2.5 )     (17.4 )            
Other income (expense), net
    2.5       1.2       (17.9 )           (14.2 )
 
                             
Income before income taxes
    58.4       158.4       114.5       (177.7 )     153.6  
(Benefit) provision for income taxes
    (36.4 )     52.5       42.7             58.8  
 
                             
Net income
  $ 94.8     $ 105.9     $ 71.8     $ (177.7 )   $ 94.8  
 
                             
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the nine months ended September 30, 2009
                                         
            Subsidiary     Subsidiary Non-     Consolidating        
    Issuer     Guarantors     Guarantors     Adjustments     Total  
Net sales
  $     $ 1,026.6     $ 831.4     $ (130.9 )   $ 1,727.1  
Cost of sales
          728.2       612.0       (102.3 )     1,237.9  
 
                             
Gross profit
          298.4       219.4       (28.6 )     489.2  
Selling and administrative expenses
    101.7       45.5       87.4       (27.2 )     207.4  
Research and development expenses
          13.1       1.5             14.6  
Plan settlement
                1.3             1.3  
 
                             
(Loss) income from operations
    (101.7 )     239.8       129.2       (1.4 )     265.9  
Equity earnings in affiliates
    224.2       13.3             (237.5 )      
Interest expense, net
    (23.3 )           (0.3 )           (23.6 )
Intercompany interest and fees
    20.5       (9.8 )     (10.7 )            
Other income, net
    1.0             3.0             4.0  
 
                             
Income before income taxes
    120.7       243.3       121.2       (238.9 )     246.3  
(Benefit) provision for income taxes
    (48.7 )     91.5       34.1             76.9  
 
                             
Net income
  $ 169.4     $ 151.8     $ 87.1     $ (238.9 )   $ 169.4  
 
                             

 

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DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
($ in millions, except per share amounts)
CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2010
                                         
            Subsidiary     Subsidiary Non-     Consolidating        
    Issuer     Guarantors     Guarantors     Adjustments     Total  
ASSETS
                                       
Cash and cash equivalents
  $ 125.1     $     $ 207.9     $     $ 333.0  
Accounts receivable, net
          109.6       176.9       (0.7 )     285.8  
Inventories, net
          198.9       106.2       (7.7 )     297.4  
Prepaid and other expenses and deferred income taxes
    29.1       1.8       50.5       0.7       82.1  
 
                             
Total current assets
    154.2       310.3       541.5       (7.7 )     998.3  
Investment in affiliates
    2,074.6       81.2             (2,155.8 )      
Property, plant and equipment, net
          175.9       93.3             269.2  
Intangible assets, net
          447.0       473.7             920.7  
Other assets
    23.6       0.4       1.5             25.5  
 
                             
Total assets
  $ 2,252.4     $ 1,014.8     $ 1,110.0     $ (2,163.5 )   $ 2,213.7  
 
                             
 
                                       
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                       
Accounts payable and accruals
  $ (12.7 )   $ 317.5     $ 300.0     $     $ 604.8  
 
                             
Total current liabilities
    (12.7 )     317.5       300.0             604.8  
Long-term debt
    370.0                         370.0  
Intercompany accounts
    825.5       (888.0 )     62.5              
Other noncurrent liabilities
    27.0       92.2       77.1             196.3  
 
                             
Total liabilities
    1,209.8       (478.3 )     439.6             1,171.1  
 
                             
Common stock
    0.8                         0.8  
Other stockholders’ equity
    1,041.8       1,493.1       670.4       (2,163.5 )     1,041.8  
 
                             
Total stockholders’ equity
    1,042.6       1,493.1       670.4       (2,163.5 )     1,042.6  
 
                             
Total liabilities and stockholders’ equity
  $ 2,252.4     $ 1,014.8     $ 1,110.0     $ (2,163.5 )   $ 2,213.7  
 
                             
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2009
                                         
            Subsidiary     Subsidiary Non-     Consolidating        
    Issuer     Guarantors     Guarantors     Adjustments     Total  
ASSETS
                                       
Cash and cash equivalents
  $ 57.6     $     $ 165.6     $     $ 223.2  
Accounts receivables, net
          126.4       163.4             289.8  
Inventories, net
          215.0       147.0       (9.0 )     353.0  
Prepaid expenses and other and deferred income taxes
    33.4       2.2       34.7             70.3  
 
                             
Total current assets
    91.0       343.6       510.7       (9.0 )     936.3  
Investment in affiliates
    1,911.9       64.6             (1,976.5 )      
Property, plant and equipment, net
          171.2       97.7             268.9  
Intangible assets, net
          436.5       480.4             916.9  
Other assets
    26.1       0.7       1.3             28.1  
 
                             
Total assets
  $ 2,029.0     $ 1,016.6     $ 1,090.1     $ (1,985.5 )   $ 2,150.2  
 
                             
 
                                       
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                       
Accounts payable and accruals
  $ (90.9 )   $ 306.3     $ 369.9     $     $ 585.3  
Loans payable
          0.1                   0.1  
 
                             
Total current liabilities
    (90.9 )     306.4       369.9             585.4  
Long-term debt
    370.0                         370.0  
Intercompany accounts
    717.0       (756.7 )     39.7              
Other noncurrent liabilities
    20.3       86.5       75.4             182.2  
 
                             
Total liabilities
    1,016.4       (363.8 )     485.0             1,137.6  
 
                             
Common stock
    0.8                         0.8  
Other stockholders’ equity
    1,011.8       1,380.4       605.1       (1,985.5 )     1,011.8  
 
                             
Total stockholders’ equity
    1,012.6       1,380.4       605.1       (1,985.5 )     1,012.6  
 
                             
Total liabilities and stockholders’ equity
  $ 2,029.0     $ 1,016.6     $ 1,090.1     $ (1,985.5 )   $ 2,150.2  
 
                             

 

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DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
($ in millions, except per share amounts)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2010
                                         
            Subsidiary     Subsidiary Non-     Consolidating        
    Issuer     Guarantors     Guarantors     Adjustments     Total  
Cash flows from operating activities
                                       
Net cash provided by operating activities
  $ 33.5     $ 165.2     $ 59.4     $     $ 258.1  
 
                             
 
                                       
Cash flows from investing activities
                                       
Capital expenditures
          (9.2 )     (4.3 )           (13.5 )
Proceeds from sale of property, plant and equipment
          0.2                   0.2  
Acquisitions, net of cash
          (34.2 )     (34.6 )           (68.8 )
 
                             
Net cash used in investing activities
          (43.2 )     (38.9 )           (82.1 )
 
                             
 
                                       
Cash flows from financing activities
                                       
Proceeds from exercise of stock options
    0.9                         0.9  
Excess tax benefits from share-based compensation
          0.8                   0.8  
Purchase of treasury stock
    (63.3 )                       (63.3 )
Payment of long-term debt
          (0.1 )                 (0.1 )
Change in intercompany accounts
    96.4       (122.7 )     26.3              
 
                             
Net cash provided (used in) by financing activities
    34.0       (122.0 )     26.3             (61.7 )
 
                             
 
                                       
Effect of exchange rate changes
                (4.5 )           (4.5 )
Net increase in cash and equivalents
    67.5             42.3             109.8  
Cash and cash equivalents, beginning of period
    57.6             165.6             223.2  
 
                             
Cash and cash equivalents, end of period
  $ 125.1     $     $ 207.9     $     $ 333.0  
 
                             
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2009
                                         
            Subsidiary     Subsidiary Non-     Consolidating        
    Issuer     Guarantors     Guarantors     Adjustments     Total  
Cash flows from operating activities
                                       
Net cash (used in) provided by operating activities
  $ (44.2 )   $ 79.1     $ 44.7     $     $ 79.6  
 
                             
 
                                       
Cash flows from investing activities
                                       
Capital expenditures
          (16.7 )     (4.4 )           (21.1 )
Proceeds from sale of property, plant and equipment
          1.0                   1.0  
Acquisitions
          (12.7 )                     (12.7 )
Other investments
    (5.0 )                       (5.0 )
 
                             
Net cash used in investing activities
    (5.0 )     (28.4 )     (4.4 )           (37.8 )
 
                             
 
                                       
Cash flows from financing activities
                                       
Proceeds from exercise of stock options
    2.1                         2.1  
Payment of long-term debt
          (0.1 )                 (0.1 )
Change in intercompany accounts
    60.9       (50.6 )     (10.3 )            
 
                             
Net cash provided by (used in) financing activities
    63.0       (50.7 )     (10.3 )           2.0  
 
                             
 
                                       
Effect of exchange rate changes
                7.3             7.3  
Net increase in cash and equivalents
    13.8             37.3             51.1  
Cash and cash equivalents, beginning of period
    26.5             120.6             147.1  
 
                             
Cash and cash equivalents, end of period
  $ 40.3     $     $ 157.9     $     $ 198.2  
 
                             

 

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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ($ in millions)
Overview
We are among the largest global suppliers of custom-engineered rotating equipment solutions for long-life, critical applications in the oil, gas, petrochemical and process industries. Our products are used for applications that include oil and gas production and gas lift; high-pressure gas injection and other applications for enhanced oil recovery; natural gas production and processing; gas liquefaction; gas gathering, transmission and storage; hydrogen, wet and coker gas, synthesis gas, carbon dioxide and many other applications for the refining, fertilizer and petrochemical markets; several applications for the armed forces; as well as varied applications for general industrial markets such as paper, steel, sugar, and distributed power generation. We service our installed base, and that of other suppliers, around the world through the provision of parts, repairs, overhauls, operation and maintenance, upgrades, revamps, applied technology solutions, coatings, field services, technical support and other extended services.
We operate globally with manufacturing facilities in the United States, France, United Kingdom, Germany, Norway, China and India. We provide a wide array of products and services to our worldwide client base in over 140 countries from our global locations (over 60 sales offices, 39 service centers and 12 manufacturing locations) in 18 U.S. states and 29 countries.
The energy markets continue to be driven by worldwide supply and demand, production and processing capacity, and geopolitical risks. Despite the financial market turmoil and global economic slow down that commenced at the end of 2008, we continue to believe that the longer-term fundamentals affecting the energy industry will support significant additional investment in energy infrastructure worldwide as well as the maintenance and upgrade of the existing installed base of rotating equipment.
From a long-term perspective, we believe that the fundamentals driving trends in our industry remain in place. These include population and economic growth; maturing producing oil and gas fields worldwide that require greater use of compression equipment to maintain production levels; the increase in demand for electricity requiring greater use of power generation equipment; the increase in demand for natural gas that is driving growth in gas production, storage and transmission infrastructure; international regulatory and environmental initiatives, including clean fuel legislation and stricter emission controls; the aging installed base that is increasing demand for aftermarket parts and services, overhauls and upgrades; and the increased outsourcing of equipment maintenance and operation.
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 requests from clients. The segment includes engineering, manufacturing, sales and administrative support.
2)   Aftermarket parts and services consist of support solutions for the existing population of installed equipment. The segment includes engineering, manufacturing, sales and administrative support.
Unallocated amounts represent expenses and assets that cannot be assigned directly to either reportable segment because of their nature. Unallocated net expenses include certain corporate expenses, research and development expenses and the plan settlement (see Note 9 of the unaudited consolidated financial statements). Assets that are directly assigned to the two reportable segments are trade accounts receivable, net inventories, and goodwill. Unallocated assets include cash, prepaid expenses and other, deferred taxes, property, plant and equipment, and intangible assets.

 

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Results of Operations
Three months ended September 30, 2010, compared to the three months ended September 30, 2009:
                                                 
                                    Period to Period Change  
    Three months ended September 30, 2010     Three months ended September 30, 2009     2009 to 2010     % Change  
Statement of Operations Data:
                                               
 
                                               
Total revenues
  $ 483.1       100.0 %   $ 612.1       100.0 %   $ (129.0 )     (21.1 )%
Cost of sales
    337.9       69.9       429.9       70.2       (92.0 )     (21.4 )%
 
                                     
Gross profit
    145.2       30.1       182.2       29.8       (37.0 )     (20.3 )%
Selling and administrative expenses
    73.5       15.2       70.9       11.6       2.6       3.7 %
Research and development expenses
    6.4       1.3       5.7       0.9       0.7       12.3 %
 
                                     
Operating income
    65.3       13.6       105.6       17.3       (40.3 )     (38.2 )%
Interest expense, net
    (8.2 )     (1.7 )     (8.3 )     (1.4 )     0.1       (1.2 )%
Other income, net
    2.5       0.5       3.2       0.5       (0.7 )     (21.9 )%
 
                                     
Income before income taxes
    59.6       12.4       100.5       16.4       (40.9 )     (40.7 )%
Provision for income taxes
    22.1       4.6       25.9       4.2       (3.8 )     (14.7 )%
 
                                     
Net income
  $ 37.5       7.8 %   $ 74.6       12.2 %   $ (37.1 )     (49.7 )%
 
                                     
 
                                               
Bookings
  $ 360.5             $ 290.8             $ 69.7       24.0 %
 
                                         
 
                                               
Backlog — ending
  $ 1,738.0             $ 1,644.9             $ 93.1       5.7 %
 
                                         
Total revenues.  Total revenues were $483.1 for the three months ended September 30, 2010, compared to $612.1 for the three months ended September 30, 2009, a decrease of $129.0 or 21.1%. The highly engineered nature of our worldwide products and services does not easily lend itself to reasonably measure the impact of price, volume and mix on changes in our total revenues from period to period. Nevertheless, based on factors such as measures of labor hours and purchases from suppliers, volume was lower during the three months ended September 30, 2010, than the three months ended September 30, 2009, driven by lower bookings in 2009 as a result of the economic downturn that commenced at the end of 2008.
Cost of sales.  Cost of sales was $337.9 for the three months ended September 30, 2010, compared to $429.9 for the three months ended September 30, 2009. As a percentage of revenues, cost of sales was 69.9% for the three months ended September 30, 2010, compared to 70.2% for the three months ended September 30, 2009. Overall, cost of sales as a percentage of revenue decreased because of an overall favorable shift in segment mix from the lower margin new units segment to the higher margin aftermarket parts and services segment, partially offset by a less favorable mix of revenues within the new units segment, during the three months ended September 30, 2010.
Gross profit.  Gross profit was $145.2 for the three months ended September 30, 2010, compared to $182.2 for the three months ended September 30, 2009. As a percentage of revenues, gross profit was 30.1% for the three months ended September 30, 2010, compared to 29.8% for the three months ended September 30, 2009. The increase in the gross profit percentage resulted from the factors discussed above.
Selling and administrative expenses.  Selling and administrative expenses were $73.5 for the three months ended September 30, 2010, compared to $70.9 for the three months ended September 30, 2009. The increase in selling and administrative expenses for the three months ended September 30, 2010, is mostly attributable to cost inflation. As a percentage of sales, selling and administrative expenses increased to 15.2% from 11.6% as a result of lower revenues discussed above.
Research and development expenses.  Research and development expenses for the three months ended September 30, 2010, were $6.4 compared to $5.7 for the three months ended September 30, 2009. Research and development expenses increased in the three months ended September 30, 2010, as a result of executing our strategy to introduce new and innovative products and technologies with a focus on key new product development initiatives for Integrated Compression Systems (ICS), Liquid Natural Gas (LNG) and gas turbines, as well as expanding the portfolio of projects focused on product enhancements.
Operating income.  Operating income was $65.3 for the three months ended September 30, 2010, compared to $105.6 for the three months ended September 30, 2009, a decrease of $40.3. As a percentage of revenues, operating income for the three months ended September 30, 2010 was 13.6%, compared to 17.3% for the three months ended September 30, 2009. The decrease was primarily attributable to the factors discussed above.
Interest expense, net.  Interest expense, net was $8.2 for the three months ended September 30, 2010, compared to $8.3 for the three months ended September 30, 2009, including approximately $0.8 of amortization of deferred financing costs for both periods.

 

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Other income, net.  Other income, net was $2.5 for the three months ended September 30, 2010, compared to other income, net of $3.2 for the three months ended September 30, 2009. Other income, net consists primarily of net currency gains and losses.
Provision for income taxes.  Provision for income taxes was $22.1 for the three months ended September 30, 2010, and $25.9 for the three months ended September 30, 2009. Our estimated income tax provision for the three months ended September 30, 2010 and 2009 differs from the U.S. federal statutory rate of 35% because of state and local income taxes and valuation allowances on net operating loss carryforwards that more likely than not will not be realized, partially offset by different tax rates in foreign tax jurisdictions and certain deductions and credits allowable for income tax purposes. We will adjust valuation allowances in the future when it becomes more likely than not that the benefits of deferred tax assets will be realized. During the three months ended September 30, 2009, we executed a corporate restructuring to facilitate our global cash management. In connection with the restructuring, we experienced a non-recurring tax benefit associated with the application of foreign tax credits against non-recurring foreign source income, which reduced our effective tax rate for the three months ended September 30, 2009.
Bookings and backlog.  Bookings for the three months ended September 30, 2010, were $360.5 compared to $290.8 for the three months ended September 30, 2009, an increase of $69.7 or 24.0%. The increase in bookings reflects an improvement in market conditions from the economic downturn that commenced at the end of 2008. Backlog was $1,738.0 at September 30, 2010, compared to $1,644.9 at September 30, 2009. Our bookings were overstated for the years ended December 31, 2007, 2008 and 2009, by 0.3%, 0.2%, and 0.4%, respectively, of total bookings. Accordingly, we have recorded a reduction in total backlog at September 30, 2010.
Segment Analysis – three months ended September 30, 2010, compared to three months ended September 30, 2009:
                                                 
    Three months ended September 30,             Period to Period Change  
    2010             2009             2009 to 2010     % Change  
Revenues
                                               
New units
  $ 251.3       52.0 %   $ 347.2       56.7 %   $ (95.9 )     (27.6 )%
Aftermarket parts and services
    231.8       48.0 %     264.9       43.3 %     (33.1 )     (12.5 )%
 
                                     
Total revenues
  $ 483.1       100.0 %   $ 612.1       100.0 %   $ (129.0 )     (21.1 )%
 
                                     
Gross profit
                                               
New units
  $ 54.7             $ 80.2             $ (25.5 )     (31.8 )%
Aftermarket parts and services
    90.5               102.0               (11.5 )     (11.3 )%
 
                                         
Total gross profit
  $ 145.2             $ 182.2             $ (37.0 )     (20.3 )%
 
                                         
Operating income
                                               
New units
  $ 32.6             $ 55.9             $ (23.3 )     (41.7 )%
Aftermarket parts and services
    55.2               70.2               (15.0 )     (21.4 )%
Unallocated
    (22.5 )             (20.5 )             (2.0 )     9.8 %
 
                                         
Total operating income
  $ 65.3             $ 105.6             $ (40.3 )     (38.2 )%
 
                                         
Bookings
                                               
New units
  $ 125.1             $ 79.0             $ 46.1       58.4 %
Aftermarket parts and services
    235.4               211.8               23.6       11.1 %
 
                                         
Total bookings
  $ 360.5             $ 290.8             $ 69.7       24.0 %
 
                                         
Backlog — ending
                                               
New units
  $ 1,384.4             $ 1,289.2             $ 95.2       7.4 %
Aftermarket parts and services
    353.6               355.7               (2.1 )     (0.6 )%
 
                                         
Total backlog
  $ 1,738.0             $ 1,644.9             $ 93.1       5.7 %
 
                                         
New Units
Revenues.  New units revenues were $251.3 for the three months ended September 30, 2010, compared to $347.2 for the three months ended September 30, 2009, a decrease of $95.9 or 27.6%. The highly engineered nature of new units products does not easily lend itself to reasonably measure the impact of price, volume and mix on changes in our new units revenues from period to period. Nevertheless, based on factors such as measures of labor hours and purchases from suppliers, new units volume was lower during the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, driven by lower bookings in 2009 as a result of the economic downturn that commenced at the end of 2008. Cycle times from order entry to completion for products in this segment are currently averaging 12 to 15 months.
Gross profit.  Gross profit was $54.7 for the three months ended September 30, 2010, compared to $80.2 for the three months ended September 30, 2009. Gross profit, as a percentage of segment revenues, was 21.8% for the three months ended September 30, 2010 compared to 23.1% for the three months ended September 30, 2009. Gross profit as a percentage of revenues decreased because of a less favorable mix of new units revenues.

 

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Operating income.  Operating income was $32.6 for the three months ended September 30, 2010, compared to $55.9 for the three months ended September 30, 2009. As a percentage of segment revenues, operating income was 13.0% for the three months ended September 30, 2010, compared to 16.1% for the three months ended September 30, 2009. The decrease in operating income as a percentage of segment revenues resulted primarily from the factors discussed above.
Bookings and Backlog.  New units bookings for the three months ended September 30, 2010, were $125.1 compared to $79.0 for the three months ended September 30, 2009. The increase in new units bookings reflects an improvement in market conditions from the economic downturn that commenced at the end of 2008. The backlog was $1,384.4 at September 30, 2010, compared to $1,289.2 at September 30, 2009.
Aftermarket Parts and Services
Revenues.  Aftermarket parts and services revenues were $231.8 for the three months ended September 30, 2010, compared to $264.9 for the three months ended September 30, 2009, a decrease of $33.1 or 12.5%. The decrease in aftermarket parts and services segment revenues was the result of lower bookings, primarily in our downstream markets, driven by the economic downturn that commenced at the end of 2008. Elapsed time from order entry to completion in this segment typically ranges from one day to 12 months depending on the nature of the product or service.
Gross profit.  Gross profit was $90.5 for the three months ended September 30, 2010, compared to $102.0 for the three months ended September 30, 2009. Gross profit as a percentage of segment revenues for the three months ended September 30, 2010 of 39.0% was comparable to gross margin of 38.5% for the three months ended September 30, 2009.
Operating income.  Operating income was $55.2 for the three months ended September 30, 2010, compared to $70.2 for the three months ended September 30, 2009. As a percentage of segment revenues, operating income decreased to 23.8% for the three months ended September 30, 2010, from 26.5% for the three months ended September 30, 2009. The decline in operating income and operating income as a percentage of segment revenues was the result of the decline in revenues discussed above.
Bookings and Backlog.  Bookings for the three months ended September 30, 2010 were $235.4, compared to $211.8 for the three months ended September 30, 2009. We believe the increase in bookings reflects an improvement in market conditions, primarily in our midstream and upstream markets. Backlog was $353.6 as of September 30, 2010, compared to $355.7 at September 30, 2009. Our Aftermarket Parts and Services bookings were overstated for the years ended December 31, 2007, 2008 and 2009, by 0.8%, 0.5%, and 0.8%, respectively, of total Aftermarket Parts and Services bookings. Accordingly, we have recorded a reduction in Aftermarket Parts and Services backlog at September 30, 2010.
Results of Operations
Nine months ended September 30, 2010, compared to the nine months ended September 30, 2009:
                                                 
                                    Period to Period Change  
    Nine months ended September 30, 2010     Nine months ended September 30, 2009     2009 to 2010     % Change  
Statement of Operations Data:
                                               
 
                                               
Total revenues
  $ 1,416.4       100.0 %   $ 1,727.1       100.0 %   $ (310.7 )     (18.0 )%
Cost of sales
    985.5       69.6       1,237.9       71.7       (252.4 )     (20.4 )%
 
                                     
Gross profit
    430.9       30.4       489.2       28.3       (58.3 )     (11.9 )%
Selling and administrative expenses
    219.0       15.5       207.4       12.0       11.6       5.6 %
Research and development expenses
    19.3       1.4       14.6       0.8       4.7       32.2 %
Plan settlement
                1.3       0.1       (1.3 )     (100.0 )%
 
                                     
Operating income
    192.6       13.5       265.9       15.4       (73.3 )     (27.6 )%
Interest expense, net
    (24.8 )     (1.7 )     (23.6 )     (1.3 )     (1.2 )     5.1 %
Other (expense) income, net
    (14.2 )     (1.0 )     4.0       0.2       (18.2 )     (455.0 )%
 
                                     
Income before income taxes
    153.6       10.8       246.3       14.3       (92.7 )     (37.6 )%
Provision for income taxes
    58.8       4.1       76.9       4.5       (18.1 )     (23.5 )%
 
                                     
Net income
  $ 94.8       6.7 %   $ 169.4       9.8 %   $ (74.6 )     (44.0 )%
 
                                     
 
                                               
Bookings
  $ 1,483.0             $ 1,051.3             $ 431.7       41.1 %
 
                                         
 
                                               
Backlog — ending
  $ 1,738.0             $ 1,644.9             $ 93.1       5.7 %
 
                                         

 

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Total revenues.  Total revenues were $1,416.4 for the nine months ended September 30, 2010, compared to $1,727.1 for the nine months ended September 30, 2009, a decrease of $310.7 or 18.0%. The highly engineered nature of our worldwide products and services does not easily lend itself to reasonably measure the impact of price, volume and mix on changes in our total revenues from period to period. Nevertheless, based on factors such as measures of labor hours and purchases from suppliers, volume was lower during the nine months ended September 30, 2010, than the nine months ended September 30, 2009, primarily driven by lower bookings in 2009 as a result of the economic downturn that commenced at the end of 2008.
Cost of sales.  Cost of sales was $985.5 for the nine months ended September 30, 2010, compared to $1,237.9 for the nine months ended September 30, 2009. As a percentage of revenues, cost of sales was 69.6% for the nine months ended September 30, 2010, compared to 71.7% for the nine months ended September 30, 2009. Overall, cost of sales as a percentage of revenues declined because of cost and productivity improvements and a favorable shift in overall segment mix from the lower margin new units segment to the higher margin aftermarket parts and services segment.
Gross profit.  Gross profit was $430.9 for the nine months ended September 30, 2010, compared to $489.2 for the nine months ended September 30, 2009. As a percentage of revenues, gross profit was 30.4% for the nine months ended September 30, 2010, compared to 28.3% for the nine months ended September 30, 2009. The increase in the gross profit percentage resulted from the factors discussed above.
Selling and administrative expenses.  Selling and administrative expenses were $219.0 for the nine months ended September 30, 2010, compared to $207.4 for the nine months ended September 30, 2009. The increase in selling and administrative resulted mostly from higher selling costs associated with higher bookings and cost inflation. As a percentage of sales, selling and administrative expenses increased to 15.5% from 12.0% as a result of lower revenues discussed above.
Research and development expenses.  Research and development expenses for the nine months ended September 30, 2010, were $19.3 compared to $14.6 for the nine months ended September 30, 2009. Research and development expenses increased in the nine months ended September 30, 2010, as a result of executing our strategy to introduce new and innovative products and technologies with a focus on key new product development initiatives for Integrated Compression Systems (ICS), Liquid Natural Gas (LNG) and gas turbines, as well as expanding the portfolio of projects focused on product enhancements.
Plan Settlement. In 2008, the Company amended its Canadian defined benefit pension plan to discontinue the benefits. During the nine months ended September 30, 2009, the Company converted the plan to a defined contribution plan which was considered a plan settlement. The plan settlement required the Company to recognize a $1.3 settlement charge in the consolidated statement of income for the nine months ended September 30, 2009.
Operating income.  Operating income was $192.6 for the nine months ended September 30, 2010, compared to $265.9 for the nine months ended September 30, 2009, a decrease of $73.3. As a percentage of revenues, operating income for the nine months ended September 30, 2010 was 13.5%, compared to 15.4% for the nine months ended September 30, 2009. The decrease was primarily attributable to the factors discussed above.
Interest expense, net.  Interest expense, net was $24.8 for the nine months ended September 30, 2010, compared to $23.6 for the nine months ended September 30, 2009, including approximately $2.4 of amortization of deferred financing costs for both periods. We experienced lower interest income in the nine months ended September 30, 2010, resulting from lower average interest bearing cash balances.
Other (expense) income net.  Other expense, net was $14.2 for the nine months ended September 30, 2010, compared to other income, net of $4.0 for the nine months ended September 30, 2009. Other (expense) income, net consists primarily of net currency gains and losses. The change from income to expense is the result of the devaluation of the Venezuelan bolivar on January 8, 2010. As a result of this devaluation, the Company recorded a non-deductible foreign exchange loss in its Consolidated Income Statement of approximately $13.6 in the nine months ended September 30, 2010. The change from income to expense also reflects the impact of an average weaker Euro on our forward exchange contracts over the nine months ended September 30, 2010.

 

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Provision for income taxes.  Provision for income taxes was $58.8 for the nine months ended September 30, 2010, and $76.9 for the nine months ended September 30, 2009. Our estimated income tax provision for the three months ended September 30, 2010 and 2009 differs from the U.S. federal statutory rate of 35% because of state and local income taxes and valuation allowances on net operating loss carryforwards that more likely than not will not be realized, partially offset by different tax rates in foreign tax jurisdictions and certain deductions and credits allowable for income tax purposes. We will adjust valuation allowances in the future when it becomes more likely than not that the benefits of deferred tax assets will be realized. In addition to these impacts to the effective tax rate, the devaluation of the Venezuelan bolivar discussed above resulted in an additional 3.7 percentage point increase in our effective tax rate for the nine months ended September 30, 2010. During the nine months ended September 30, 2009, we executed a corporate restructuring to facilitate our global cash management. In connection with the restructuring, we experienced a non-recurring tax benefit associated with the application of foreign tax credits against non-recurring foreign source income, which reduced our effective tax rate in the nine months ended September 30, 2009.
Bookings and backlog.  Bookings for the nine months ended September 30, 2010, were $1,483.0 compared to $1,051.3 for the nine months ended September 30, 2009, an increase of $431.7 or 41.1%. The increase in bookings reflects an improvement in market conditions from the economic downturn that commenced at the end of 2008. Backlog was $1,738.0 at September 30, 2010, compared to $1,644.9 at September 30, 2009. Our bookings were overstated for the years ended December 31, 2007, 2008 and 2009, by 0.3%, 0.2%, and 0.4%, respectively, of total bookings. Accordingly, we have recorded a reduction in total backlog at September 30, 2010.
Segment Analysis nine months ended September 30, 2010, compared to nine months ended September 30, 2009:
                                                 
    Nine months ended September 30,             Period to Period Change  
    2010             2009             2009 to 2010     % Change  
Revenues
                                               
New units
  $ 704.1       49.7 %   $ 973.9       56.4 %   $ (269.8 )     (27.7 )%
Aftermarket parts and services
    712.3       50.3 %     753.2       43.6 %     (40.9 )     (5.4 )%
 
                                     
Total revenues
  $ 1,416.4       100.0 %   $ 1,727.1       100.0 %   $ (310.7 )     (18.0 )%
 
                                     
Gross profit
                                               
New units
  $ 164.7             $ 198.7             $ (34.0 )     (17.1 )%
Aftermarket parts and services
    266.2               290.5               (24.3 )     (8.4 )%
 
                                         
Total gross profit
  $ 430.9             $ 489.2             $ (58.3 )     (11.9 )%
 
                                         
Operating income
                                               
New units
  $ 101.7             $ 129.2             $ (27.5 )     (21.3 )%
Aftermarket parts and services
    159.2               196.7               (37.5 )     (19.1 )%
Unallocated
    (68.3 )             (60.0 )             (8.3 )     13.8 %
 
                                         
Total operating income
  $ 192.6             $ 265.9             $ (73.3 )     (27.6 )%
 
                                         
Bookings
                                               
New units
  $ 730.1             $ 357.5             $ 372.6       104.2 %
Aftermarket parts and services
    752.9               693.8               59.1       8.5 %
 
                                         
Total bookings
  $ 1,483.0             $ 1,051.3             $ 431.7       41.1 %
 
                                         
Backlog — ending
                                               
New units
  $ 1,384.4             $ 1,289.2             $ 95.2       7.4 %
Aftermarket parts and services
    353.6               355.7               (2.1 )     (0.6 )%
 
                                         
Total backlog
  $ 1,738.0             $ 1,644.9             $ 93.1       5.7 %
 
                                         
New Units
Revenues.  New units revenues were $704.1 for the nine months ended September 30, 2010, compared to $973.9 for the nine months ended September 30, 2009, a decrease of $269.8 or 27.7%. The highly engineered nature of new units products does not easily lend itself to reasonably measure the impact of price, volume and mix on changes in our new units revenues from period to period. Nevertheless, based on factors such as measures of labor hours and purchases from suppliers, new units volume was lower during the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009 driven by a lower level of bookings in 2009 as a result of the economic downturn that commenced at the end of 2008. Cycle times from order entry to completion for products in this segment are currently averaging 12 to 15 months.
Gross profit.  Gross profit was $164.7 for the nine months ended September 30, 2010, compared to $198.7 for the nine months ended September 30, 2009. Gross profit, as a percentage of segment revenues, was 23.4% for the nine months ended September 30, 2010 compared to 20.4% for the nine months ended September 30, 2009. Gross profit as a percentage of revenues increased as a result of cost and productivity improvements in the nine months ended September 30, 2010.
Operating income.  Operating income was $101.7 for the nine months ended September 30, 2010, compared to $129.2 for the nine months ended September 30, 2009. As a percentage of segment revenues, operating income was 14.4% for the nine months ended September 30, 2010, compared to 13.3% for the nine months ended September 30, 2009. The increase in operating income as a percentage of segment revenues is primarily the result of the factors discussed above.

 

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Bookings and Backlog.  New units bookings for the nine months ended September 30, 2010, were $730.1 compared to $357.5 for the nine months ended September 30, 2009. The increase in new units bookings reflects an improvement in market conditions from the economic downturn that commenced at the end of 2008. The backlog was $1,384.4 at September 30, 2010, compared to $1,289.2 at September 30, 2009.
Aftermarket Parts and Services
Revenues.  Aftermarket parts and services revenues were $712.3 for the nine months ended September 30, 2010, compared to $753.2 for the nine months ended September 30, 2009, a decrease of $40.9 or 5.4%. The decline in aftermarket parts and services segment revenues was the result of lower volumes driven by lower bookings, primarily in our downstream markets, as a result of the economic downturn that commenced at the end of 2008. Elapsed time from order entry to completion in this segment typically ranges from one day to 12 months depending on the nature of the product or service.
Gross profit.  Gross profit was $266.2 for the nine months ended September 30, 2010, compared to $290.5 for the nine months ended September 30, 2009. Gross profit as a percentage of segment revenues was 37.4% for the nine months ended September 30, 2010 compared to 38.6% for the nine months ended September 30, 2009. Gross profit as a percentage of revenues decreased due to a less favorable mix within the segment.
Operating income.  Operating income was $159.2 for the nine months ended September 30, 2010, compared to $196.7 for the nine months ended September 30, 2009. As a percentage of segment revenues, operating income decreased to 22.4% for the nine months ended September 30, 2010, from 26.1% for the nine months ended September 30, 2009. The decrease is primarily the result of the factors discussed above.
Bookings and Backlog.  Bookings for the nine months ended September 30, 2010 were $752.9, compared to $693.8 for the nine months ended September 30, 2009. We believe the increase in bookings reflects an improvement in market conditions, particularly in our midstream and upstream markets. Backlog was $353.6 as of September 30, 2010, compared to $355.7 at September 30, 2009. We have reduced our September 30, 2010 Aftermarket Parts and Services backlog for overbookings in 2007, 2008 and 2009, representing 0.8%, 0.5%, and 0.8%, respectively, of the total Aftermarket Parts and Services bookings for those years.
Liquidity and Capital Resources
Net cash provided by operating activities increased for the nine months ended September 30, 2010, to $258.1 from $79.6 for the nine months ended September 30, 2009 despite a decrease in net income to $94.8 from $169.4. From December 31, 2009, to September 30, 2010, working capital balances, including accounts receivable, inventories, and accounts payable and accruals declined as a result of decreased business activity driven by the economic downturn that commenced at the end of 2008, as well as a focused effort to improve working capital. At September 30, 2010, total customer advances and progress payments were comparable to the total customer advances and progress payments at December 31, 2009. The net working capital decline resulted in additional cash from operations of approximately $93.4. This is favorable to the nine months ended September 30, 2009, when we made an incremental working capital investment of approximately $103.7 associated with a higher level of business activity. For the nine months ended September 30, 2009, we made pension contributions of $32.3 in accordance with our funding policy, which was significantly higher than our pension contributions for the nine months ended September 30, 2010 of $5.9.
Net cash used in investing activities was $82.1 for the nine months ended September 30, 2010, compared to $37.8 for the nine months ended September 30, 2009. Cash used in investing activities for the nine months ended September 30, 2010, includes $44.7 related to the recent acquisitions of Leading Edge Turbine Technologies, Inc. and Turbo Machines Field Services (Pty) Ltd. as well as the payment of $24.1 of contingent consideration associated with the 2008 acquisition of Peter Brotherhood Ltd. Capital expenditures were $13.5 for the nine months ended September 30, 2010, compared to $21.1 for the nine months ended September 30, 2009.
Net cash used in financing activities was $61.7 for the nine months ended September 30, 2010 compared to net cash provided of $2.0 in the same period for 2009. During the nine months ended September 30, 2010, we repurchased $63.3 million of common stock in connection with a stock repurchase plan approved by our Board of Directors on February 12, 2010.
As of September 30, 2010, we had cash and cash equivalents of $333.0 and the ability to borrow $342.2 under our $500.0 restated senior secured revolving credit facility, as $157.8 was used for outstanding letters of credit. In addition to these letters of credit, a total of $126.5 of letters of credit and bank guarantees were outstanding at September 30, 2010, which were issued by banks offering uncommitted lines of credit. 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 restated senior secured revolving credit facility will be adequate to meet our working capital, capital expenditures, interest payments and other funding requirements for the business within the next 12 months and our long-term future contractual obligations.

 

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New accounting standards
In October 2009, Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition, was issued. ASU 2009-13 replaces the concept of fair market value with selling price when determining how to allocate the total contract sales price in a multiple-deliverable revenue arrangement. This amendment establishes a hierarchy process for determining the selling price of a given deliverable to be used in the allocation. The order of the selling price determination hierarchy is (a) vendor specific objective evidence; (b) third party evidence, if vendor specific objective evidence is not available; or (c) estimated selling price, if neither vendor specific objective evidence nor third party evidence is available. ASU 2009-13 will be effective for the Company’s fiscal year beginning January 1, 2011. The Company does not expect the adoption of ASU 2009-13 to have a material impact on its consolidated financial statements.
On January 1, 2010, the Company adopted ASU 2009-16, Accounting for Transfers of Financial Assets. ASU 2009-16 requires more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 also eliminates the concept of “qualified special-purpose entity”, changes the requirements for derecognizing financial assets, and requires additional disclosures. The adoption of ASU 2009-16 did not have a material impact on our consolidated financial statements.
On January 1, 2010, the Company adopted ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which requires a qualitative approach to identifying a controlling financial interest in a variable interest entity (“VIE”), and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. The adoption of ASU 2009-17 did not have a material impact on our consolidated financial statements.
On January 1, 2010, the Company adopted ASU 2010-6, Improving Disclosures About Fair Value Measurements, which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements, including significant transfers into and out of the standard’s Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis for Level 3 fair-value measurements. ASU 2010-6 is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. The adoption of ASU 2010-6 did not have a material impact on our consolidated financial statements.
On January 1, 2010, the Company adopted ASU 2010-09, Subsequent Events — Amendments to Certain Recognition and Disclosure Requirements, which amends Accounting Standards Codification (“ASC”) Topic 855, Subsequent Events, so that SEC filers no longer are required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements.  The adoption of ASU 2010-09 did not have a material impact on our consolidated financial statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information. When used in this Form 10-Q, the words “anticipates,” “believes,” “expects,” “intends”, “appears”, “outlook”, and similar expressions identify such forward-looking statements. Although we believe that such statements are based on reasonable assumptions, these forward-looking statements are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those projected. These factors, risks and uncertainties include, among others, the following:
    economic or industry downturns;
    volatility and disruption of the credit markets;
    our inability to implement our business strategy to increase our aftermarket parts and services revenue;
    our inability to generate cash and access capital on reasonable terms;
    competition in our markets;
    the variability of bookings due to volatile market conditions, client subjectivity in placing orders, and timing of large orders;

 

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    failure to integrate our acquisitions, or achieve the expected benefits from any future acquisitions;
    economic, political, currency and other risks associated with our international sales and operations;
    fluctuations in currency values and exchange rates;
    loss of our senior management or other key personnel;
    environmental compliance costs and liabilities;
    failure to maintain safety performance acceptable to our clients;
    failure to negotiate new collective bargaining agreements;
    unexpected product claims or regulations;
    infringement of our intellectual property rights or our infringement of others’ intellectual property rights;
    our pension expenses and funding requirements; and
    other factors described in this report and as set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ($ and in millions)
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. Generally, weakening of the U.S. dollar improves our reported results when the local currency financial statements are translated into U.S. dollars for inclusion in our consolidated financial statements and the strengthening of the U.S. dollar impacts our results negatively. We enter into financial instruments to mitigate the impact of changes in currency exchange rates on transactions when we deem appropriate. The net foreign currency gains (losses) recognized for currency transactions, forward currency contracts and re-measuring monetary assets and liabilities was $2.7 and ($15.4) for the three and nine months ended September 30, 2010, compared to gains of $3.7 and $4.9 for the three and nine months ended September 30, 2009. The Venezuelan government has devalued the bolivar a number of times, including a devaluation on January 8, 2010. Foreign currency losses for the nine months ended September 30, 2010, included approximately $13.6 as a result of this devaluation.
The Company has entered into an interest rate swap agreement to minimize the economic impact of unexpected fluctuations in interest rates on the lease of its compressor testing facility in France. The interest rate swap has a notional amount of 18.0 (approximately $24.5) and effectively converts substantially the entire interest component of the lease from a variable rate of interest to a fixed rate of interest. The interest rate swap has been designated as a cash flow hedge for accounting purposes, and unrealized gains and losses are recognized in other comprehensive income. The fair value of the interest rate swap and the related unrealized loss was $0.7 at September 30, 2010.
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) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2010. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2010, our disclosure controls and procedures were effective.
During the three months ended September 30, 2010, there were no changes in internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

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PART II. – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ($ and £ in millions)
We are involved in various litigation, claims and administrative proceedings 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. We are indemnified by our former owner, Ingersoll Rand Company Limited, for certain matters as part of Ingersoll Rand’s sale of the Company. While adverse decisions in certain of these litigation matters, claims and administrative proceedings could have a material effect on a particular quarter’s or year’s results of operations, subject to the uncertainties inherent in estimating future costs for contingent liabilities and the benefit of the indemnity from Ingersoll Rand, management believes that any future accruals, with respect to these currently known contingencies, would not have a material effect on the financial condition, liquidity or cash flows of the Company.
In November 2007, Local 313 of IUE-CWA, the union that represents certain employees at the Company’s Painted Post facility (the “IUE”) made an offer to have its striking members return to work under the terms of the previously expired union agreement. The Company rejected that offer and a lockout of the represented employees commenced. Approximately one week later, after reaching an impasse in negotiations, the Company exercised its right to implement the terms of its last contract offer, ended the lockout, and the employees represented by the IUE agreed to return to work under the implemented terms. Subsequently, the IUE filed several unfair labor practice (“ULP”) charges against the Company with Region 3 of the National Labor Relations Board (“NLRB”), asserting multiple allegations arising from the protracted labor dispute, its termination, contract negotiations and related matters.
Region 3 of the NLRB decided to proceed to complaint on only one-third of the ULP allegations asserted by the IUE, while the remaining claims were dismissed. Notably, the NLRB found that many of the critical aspects of the Company’s negotiations with the IUE were handled appropriately, that the union’s strike was not an unfair labor practice strike and the Company’s declaration of impasse and its unilateral implementation of its last offer were lawful.
The claims that proceeded to complaint before the NLRB included the Company’s handling of the one week lockout, the negotiation of the recall process used to return employees to the facility after reaching impasse and lifting the lockout, and the termination of two employees who engaged in misconduct on the picket line during the strike. The trial of this matter took place before a NLRB Administrative Law Judge (the “ALJ”) in Elmira and Painted Post, N.Y. during the summer of 2009. On January 29, 2010, the ALJ issued his decision in which he found in favor of the union on some issues and upheld the Company’s position on others. The Company continues to believe it complied with the law with respect to the allegations that led to the adverse ALJ ruling, and it has appealed these rulings to the NLRB in Washington, D.C. While the Company believes it should ultimately prevail with respect to these ULP allegations, several levels of appeal may be necessary. The Company anticipates that any impact arising from the ULP allegations will not have a material adverse effect on the Company’s financial condition. The appellate process could reasonably take 3 to 5 years and potentially even longer to resolve with finality.
During the three months ended September 30, 2009, the Company received notification from the current plan trustees of one of its subsidiaries’ pension plans in the United Kingdom that the plan may not have been properly amended to achieve sex equalization. The third-party trustee at the time action was taken believes that it had taken the appropriate steps to properly amend the plan. If it is determined that sex equalization was not achieved, certain benefits would be recalculated by reference to a normal retirement date of 60 for both men and women, which we believe could result in a potential liability of up to approximately £4.0 ($6.3).
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities ($ in millions except per share amounts)
In February 2010, the Company’s Board of Directors authorized the repurchase of up to $200.0 of its common stock, which is approximately 7 percent of the Company’s outstanding shares. Stock repurchases under the program may be made through open market or privately negotiated transactions in accordance with all applicable laws, rules, and regulations. The transactions may be made from time to time and in such amounts, as management deems appropriate and will be funded from operating cash flows or borrowings under the Company’s revolving credit facility. During the nine months ended September 30, 2010, the Company purchased 1,925,164 shares at an average price of $33.14 per share for a total amount purchased of $63.8, pursuant to a plan adopted in accordance with Rule 10b(5-1), a safe harbor rule, under the Securities Exchange Act of 1934, as amended.

 

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The number of shares to be repurchased and the timing of repurchases will be based on several factors. These factors include the price of the Company’s common stock, general business and market conditions, other investment opportunities, including acquisitions, and covenant limitations. The most restrictive covenant allows shares to be repurchased up to an annual amount of half the prior year’s net income. Presently, without seeking a covenant waiver, this limits the Company to approximately $100.0 in 2010. The stock repurchase program does not have an expiration date and may be limited or terminated at any time without prior notice. The following table contains information about repurchases of our common stock during the three months ended September 30, 2010:
                                 
                    Total Number     Approximate  
                    of Shares     Dollar Value  
                    Purchased as     of Shares That  
                    Part of     May Yet Be  
                    Publicly     Purchased  
    Total Number of     Average Price     Announced     Under the  
    Shares Purchased     Paid Per     Plans or     Plans or  
Period   (1)(2)     Share     Programs (2)     Programs  
 
July 2010
    723,708     $ 32.54       723,708       146,215,521  
August 2010
    188,275     $ 35.99       186,711       139,495,153  
September 2010
    89,500     $ 37.36       89,500       136,151,612  
 
                           
Total
    1,001,483               999,919       136,151,612  
 
                           
     
(1)   Includes 1,564 shares delivered to us in August 2010 as payment of withholding taxes due on the vesting of restricted stock issued under our Stock Incentive Plan.
 
(2)   As of September 30, 2010, the trade dates for the repurchase of 15,000 shares for a total purchase price of $0.5 had occurred but the repurchase had not yet settled.

 

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ITEM 6.   EXHIBITS
The following exhibits are filed with this report:
         
Exhibit No.   Description
       
 
  3.1    
Amended and Restated Certificate of Incorporation of Dresser-Rand Group Inc. (incorporated by reference to Exhibit 3.1 to Dresser-Rand Group Inc.’s Registration Statement on Form S-1/A, filed July 18, 2005, File No. 333-124963).
       
 
  3.2    
Amended and Restated By-Laws of Dresser-Rand Group Inc. (incorporated by reference to Exhibit 3.1 to Dresser-Rand Group Inc.’s Current Report on Form 8-K, filed November 16, 2007, File No. 001-32586).
       
 
  31.1    
Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  31.2    
Certification of the Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  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).
       
 
  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).
       
 
  101    
The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, formatted in XBRL: (i) Consolidated Statement of Income, (ii) Consolidated Balance Sheet, (iii) Consolidated Statement of Cash Flows, and (iv) Notes to Consolidated Financial Statements.(1)
 
     
(1)   The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

 

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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.
 
 
Date: October 28, 2010  /s/ Raymond L. Carney Jr.    
  Raymond L. Carney Jr.   
  Vice President, Controller and Chief Accounting Officer   

 

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