United States 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

o		Transition Report under Section 13 or 15(d) of the Exchange Act

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 Cedex 16, Paris, France		75784
(Addresses of principal executive offices)		(Zip Codes)

(713) 354-6100 (Houston)
33 156 26 7171 (Paris)

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 the definitions 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 April 21, 2011, was 76,849,033.

 

 

DRESSER-RAND GROUP INC.
TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Statement of Income for the three months ended March 31, 2011 and 2010			3
Consolidated Balance Sheet at March 31, 2011 and December 31, 2010			4
Consolidated Statement of Cash Flows for the three months ended March 31, 2011 and 2010			5
Notes to Unaudited Consolidated Financial Statements at March 31, 2011			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosure about Market Risk			28
Item 4. Controls and Procedures			28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			29
Item 6. Exhibits			31
Signatures			32
Exhibits
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 10.4
Exhibit 10.5
Exhibit 10.7
Exhibit 10.8
Exhibit 10.9
Exhibit 10.10
Exhibit 10.11
Exhibit 10.12
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

PART I. — FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

DRESSER-RAND GROUP INC.

CONSOLIDATED STATEMENT OF INCOME

		Three months ended March 31,
		2011				2010
		(Unaudited; $ in millions, except per
		share amounts)
Net sales of products		$	253.4			$	398.5
Net sales of services			100.8				103.6
Total revenues			354.2				502.1
Cost of products sold			178.2				287.1
Cost of services sold			75.4				72.9
Total cost of sales			253.6				360.0
Gross profit			100.6				142.1
Selling and administrative expenses			77.0				71.4
Research and development expenses			4.4				6.3
Income from operations			19.2				64.4
Interest expense, net			(15.0	)			(8.2	)
Early redemption premium on debt			(8.2	)			—
Other income (expense), net			3.6				(16.2	)
(Loss) income before income taxes			(0.4	)			40.0
Provision for income taxes			1.2				17.7
Net (loss) income			(1.6	)			22.3
Net loss attributable to noncontrolling interest			2.0				—
Net income attributable to Dresser-Rand		$	0.4			$	22.3
Net income per share
Basic		$	0.01			$	0.27
Diluted		$	0.00			$	0.27
Weighted average shares outstanding — (in thousands)
Basic			79,451				81,865
Diluted			80,249				82,243

See accompanying notes to unaudited consolidated financial statements.

DRESSER-RAND GROUP INC.

CONSOLIDATED BALANCE SHEET

		March 31,				December 31,
		2011				2010
		(Unaudited; $ in millions, except
		share amounts)
Assets
Current assets
Cash and cash equivalents		$	294.9			$	420.8
Accounts receivable, less allowance for losses of $11.1 at 2011 and $11.4 at 2010			278.6				303.5
Inventories, net			309.5				291.6
Prepaid expenses and other			66.8				36.5
Deferred income taxes, net			31.8				31.8
Total current assets			981.6				1,084.2
Property, plant and equipment, net			277.8				278.1
Goodwill			504.7				487.1
Intangible assets, net			423.1				426.0
Other assets			41.5				29.3
Total assets		$	2,228.7			$	2,304.7
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable and accruals		$	371.2			$	401.4
Customer advance payments			302.5				253.6
Accrued income taxes payable			21.8				14.1
Current portion of long-term debt			78.7				—
Total current liabilities			774.2				669.1
Deferred income taxes, net			23.1				25.9
Postemployment and other employee benefit liabilities			89.7				109.0
Long-term debt			535.0				370.0
Other noncurrent liabilities			44.3				43.4
Total liabilities			1,466.3				1,217.4
Commitments and contingencies (Notes 8 through 12)
Stockholders’ equity
Common stock, $0.01 par value, 250,000,000 shares authorized; and 75,755,191 and 80,436,896 shares issued and outstanding, respectively			0.8				0.8
Additional paid-in capital			—				341.9
Retained earnings			777.6				784.8
Accumulated other comprehensive loss			(14.0	)			(40.2	)
Total Dresser-Rand stockholders’ equity			764.4				1,087.3
Noncontrolling interest			(2.0	)			—
Total stockholders’ equity			762.4				1,087.3
Total liabilities and stockholders’ equity		$	2,228.7			$	2,304.7

See accompanying notes to unaudited consolidated financial statements.

DRESSER-RAND GROUP INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

		Three months ended March 31,
		2011				2010
		(Unaudited; $ in millions)
Cash flows from operating activities
Net income attributable to Dresser-Rand		$	0.4			$	22.3
Adjustments to reconcile net income attributable to Dresser-Rand to net cash (used in) provided by operating activities
Depreciation and amortization			13.8				13.2
Deferred income taxes			0.3				0.5
Stock-based compensation			(0.1	)			1.6
Excess tax benefits from share-based compensation			(3.4	)			(0.6	)
Amortization of debt financing costs			7.8				0.8
Provision for losses on inventory			0.4				1.2
Loss on sale of property, plant and equipment			0.1				0.2
Net income from equity investment			—				(0.1	)
Working capital and other, net of acquisitions
Accounts receivable			29.4				31.1
Inventories			(14.8	)			26.8
Accounts payable and accruals			(37.9	)			(42.3	)
Customer advances			44.4				(30.2	)
Other			(44.9	)			(0.5	)
Net cash (used in) provided by operating activities			(4.5	)			24.0
Cash flows from investing activities
Capital expenditures			(5.1	)			(5.0	)
Proceeds from sales of property, plant and equipment			—				0.1
Acquisitions, net of cash			—				(58.3	)
Other investments			(6.3	)			—
Net cash used in investing activities			(11.4	)			(63.2	)
Cash flows from financing activities
Proceeds from exercise of stock options			2.1				0.1
Proceeds from long-term debt			535.0				—
Excess tax benefits from share-based compensation			3.4				0.6
Repurchase of common stock			(355.0	)			—
Payments for debt financing costs			(13.2	)			—
Payments of long-term debt			(291.3	)			(0.1	)
Net cash (used in) provided by financing activities			(119.0	)			0.6
Effect of exchange rate changes on cash and cash equivalents			9.0				(5.7	)
Net decrease in cash and cash equivalents			(125.9	)			(44.3	)
Cash and cash equivalents, beginning of the period			420.8				223.2
Cash and cash equivalents, end of period		$	294.9			$	178.9

See accompanying notes to unaudited consolidated financial statements.

DRESSER-RAND GROUP INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

($ in millions, except per share amounts)

1. Basis of presentation

Unless the context otherwise indicates, the terms “we”, “our”, “us”, the “Company”, “Dresser-Rand” 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. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2010, and our other filings with the Securities and Exchange Commission. Operating results for the 2011 period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

Revenue Recognition

On January 1, 2011, we adopted Accounting Standards Update (“ASU”) 2009-13 Multiple-Deliverable Revenue Arrangements. We recognize revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned when we have persuasive evidence of an arrangement, delivery of the product or service has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. Delivery does not occur until products have been shipped or services have been provided to the client, risk of loss has transferred to the client and any required client acceptance has been obtained (or such provisions have lapsed), or we have objective evidence that the criteria specified in the client acceptance provisions have been satisfied. The amount of revenue related to any contingency is not recognized until the contingency is resolved.

We enter into multiple-element revenue arrangements or contracts, which may include any combination of designing, developing, manufacturing, modifying, erecting and commissioning complex products to customer specifications and providing services related to the performance of such products. These contracts normally take up to fifteen months to complete. Provided that the separate deliverables have value to the client on a stand-alone basis, we use the selling price hierarchy described below to determine how to separate multiple element revenue arrangements into separate units of accounting and how to allocate the arrangement consideration among those separate units of accounting:

•

Vendor-specific objective evidence.

•

Third-party evidence if vendor-specific objective evidence is not available.

•

Estimated selling price determined in the same manner as that used to determine the price at which we sell the deliverables on a standalone basis if neither vendor-specific objective evidence nor third party evidence is available.

Upon adoption of ASU 2009-13, we did not experience a material change in the timing of revenue recognition or the allocation of our units of accounting.

Our sales arrangements do not include a general right of return of the delivered unit(s). If it is determined that the separate deliverables do not have value on a stand-alone basis, the arrangement is accounted for as one unit of accounting, which results in revenue being recognized when the last undelivered unit is delivered.

We are required to estimate the future costs that will be incurred related to sales arrangements to determine whether any arrangement will result in a loss. These costs include material, labor and overhead. Factors influencing these future costs include the availability of materials and skilled laborers.

DRESSER-RAND GROUP INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

($ in millions, except per share amounts)

2. New accounting standards

On January 1, 2011, the Company adopted ASU 2010-28, Intangibles — Goodwill and Other. ASU 2010-28 modifies step one of the goodwill impairment test for reporting units with zero or negative carrying amounts and offers guidance on when to perform step two of the testing. For those reporting units, an entity is required to perform step two of the goodwill impairment test if it is more likely than not that a goodwill impairment exists based upon factors such as unanticipated competition, the loss of key personnel and adverse regulatory changes. The adoption of ASU 2010-28 did not have a material effect on the Company’s consolidated financial statements.

On January 1, 2011, the Company adopted ASU 2010-29, which updates the guidance in Accounting Standards Codification(“ASC”) 805, Business Combinations. ASU 2010-29 clarifies that pro forma disclosures should be presented as if a business combination occurred at the beginning of the prior annual period for purposes of preparing both the current reporting period and the prior reporting period pro forma financial information. These disclosures should be accompanied by a narrative description about the nature and amount of material, nonrecurring pro forma adjustments. The adoption of ASU 2010-29 did not have a material effect on the Company’s consolidated financial statements.

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 $34.3. LETT is a provider of turbine technologies applicable to industrial gas turbines, steam turbines and compressor repair. The acquisition allows the Company to expand its service offering in its current market and provides the Company with access to adjacent markets. 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.

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 acquisition provides the Company the ability to expand its service offering in South Africa and the rest of the sub-Saharan market. 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 estimated fair values of the additional consideration for the LETT and TMFS acquisitions of $2.6 and $2.6, respectively, at March 31, 2011 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 acquisition is deductible over 15 years. The amortization of goodwill related to the TMFS acquisition is not tax deductible.

DRESSER-RAND GROUP INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

($ in millions, except per share amounts)

The acquisition prices were allocated to the fair values of assets acquired and liabilities assumed as follows:

		2010
Accounts receivable, net		$	4.1
Inventory, net			2.5
Total current assets			6.6
Property, plant and equipment			12.9
Amortizable intangible assets			16.8
Goodwill			15.9
Total assets acquired			52.2
Accounts payable and accruals			1.3
Total liabilities assumed			1.3
Purchase price			50.9
Fair value of contingent consideration (non-cash)			(6.1	)
Cash paid		$	44.8

Pro forma financial information, assuming the 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 for 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 months ended March 31, 2011 and 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 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 optional investments in November 2009 of $5.0 and November 2010 of $5.0 which resulted in an aggregate non-controlling interest of 29.2%. The agreement allows the Company to make an additional optional investment of $4.0 by October 2011. 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.

In February 2011, the Company entered into an agreement to acquire a non-controlling interest in Echogen Power Systems, LLC (“Echogen”), a privately held technology development company that is developing and commercializing power generation systems that harness waste heat for power and cooling applications. The Company also acquired certain broad license rights in certain of the Company’s key industries and will pay Echogen a royalty based on future equipment sales in these markets. Commercialization is anticipated to begin in 2012. Pursuant to the agreement, the Company made an initial investment of $5.0 in February 2011 and a $1.3 license fee payment, and is required to make an additional investment of $5.0 and an additional $0.7 license fee payment in July 2011. The $10.0 investment will result in an ownership interest in Echogen of approximately 20%.

DRESSER-RAND GROUP INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

($ in millions, except per share amounts)

4. Intangible assets and goodwill

The cost and related accumulated amortization of intangible assets were:

		March 31, 2011								Weighted		December 31, 2010
						Accumulated				Average						Accumulated
		Cost				Amortization				Useful Lives		Cost				Amortization
Trade names		$	94.5			$	14.9			39 years		$	94.4			$	14.2
Customer relationships			267.2				45.0			37 years			264.5				42.5
Software			30.6				19.6			10 years			30.6				18.8
Existing technology			145.1				35.8			24 years			145.0				34.2
Non-compete agreements			2.4				1.4			4 years			2.4				1.2
Total amortizable intangible assets		$	539.8			$	116.7					$	536.9			$	110.9

Intangible asset amortization expense was $5.2 and $5.1 for the three months ended March 31, 2011 and 2010, respectively.

The following table represents the changes in goodwill:

						Aftermarket
		New units				parts and services				Total
Balance, December 31, 2010		$	151.3			$	335.8			$	487.1
Foreign currency adjustments			6.5				11.1				17.6
Balance, March 31, 2011		$	157.8			$	346.9			$	504.7

5. Inventories

Inventories were as follows:

		March 31,				December 31,
		2011				2010
Raw materials		$	47.9			$	47.2
Finished parts			152.2				125.9
Work-in-process			408.1				327.6
			608.2				500.7
Less: Progress payments			(298.7	)			(209.1	)
Total inventories		$	309.5			$	291.6

Finished parts may be used in production or sold to customers. 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.

DRESSER-RAND GROUP INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

($ in millions, except per share amounts)

6. Property, plant and equipment

Property, plant and equipment were comprised of the following:

		March 31,				December 31,
		2011				2010
Cost:
Land		$	17.1			$	16.7
Buildings and improvements			125.5				120.6
Machinery and equipment			318.7				314.2
			461.3				451.5
Less: Accumulated depreciation			(183.5	)			(173.4	)
Property, plant and equipment, net		$	277.8			$	278.1

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 or other 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).

The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis:

		March 31,				December 31,
		2011				2010
Foreign currency exchange contracts assets		$	6.8			$	3.7
Foreign currency exchange contracts liabilities		$	2.6			$	5.7

The net foreign currency gains (losses) recognized for forward currency contracts were $3.6, for the three months ended March 31, 2011, compared to ($16.1) for the three months ended March 31, 2010, and were included in other expense, net.

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 $25.5) and effectively converts substantially the entire interest component of the lease from a variable rate of interest to a fixed rate of interest of approximately 3.87%. 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 gain was $0.3 at March 31, 2011.

The carrying values of cash, accounts receivable, short-term borrowings and accounts payable are reasonable estimates of their fair value due to the short-term nature of these instruments. The fair value of debt obligations as determined by quoted market prices as of March 31, 2011, was approximately $630.6.

DRESSER-RAND GROUP INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

($ in millions, except per share amounts)

ASC 820, Fair Value Measurements and Disclosures, defines fair value 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). ASC 820 classifies the inputs used to measure fair value into 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		Disclosure		Input Level		Level 2 Inputs		Level 3 Inputs
Acquired assets and liabilities		Note 3		Level 3		Not applicable		Income approach using projected results and weighted average cost of capital
Long-term debt (note disclosure only)		Note 7		Level 1		Not applicable		Not applicable
Financial derivatives		Note 7		Level 2		Quoted market prices of similar assets or liabilities in active markets		Not applicable

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.

Our estimated income tax provision for the three months ended March 31, 2011 and 2010 differs from the U.S. federal statutory rate of 35% because of different tax rates in foreign tax jurisdictions and certain deductions and credits allowable for income tax purposes, partially offset by state and local income taxes and valuation allowances on net operating loss carryforwards that more likely than not will not be realized. 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. Tax expense for the three months ended March 31, 2011 includes approximately $1.0 associated with an uncertain tax position in one of our foreign subsidiaries as it is more likely than not that the Company’s position will not be sustained upon examination. As a result of the devaluation of the Venezuelan bolivar on January 8, 2010, the Company recorded a non-deductible foreign exchange loss in its Consolidated Income Statement of approximately $13.6 which adversely affected the effective tax rate for the three months ended March 31, 2010. The effective tax rate for the three months ended March 31, 2011, was also impacted by the relatively low amount of pre-tax income which exaggerates the impact of normally insignificant items.

9. Long-Term Debt

Senior Secured Credit Facility

On March 15, 2011, the Company and certain of its foreign subsidiaries entered into a credit agreement with a syndicate of lenders (the “Senior Secured Credit Facility”), and terminated its existing credit facility. The obligations of the Company under the Senior Secured Credit Facility are secured by mortgages on certain real and other property and are guaranteed by certain material domestic subsidiaries of the Company (the “Domestic Guarantors”). The obligations of the French subsidiary borrower under the Senior Secured Credit Facility are guaranteed by the Company, the Domestic Guarantors and the direct French subsidiary of such French borrower. Interest expense for the three months ended March 31, 2011 includes $2.1 of accelerated amortization of deferred financing fees as a result of terminating our previous Senior Secured Credit Facility. In connection with entering into the Senior Secured Credit Facility, the Company incurred fees of $9.5 which are being amortized on the interest method over the term of the Senior Secured Credit Facility.

DRESSER-RAND GROUP INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

($ in millions, except per share amounts)

The Senior Secured Credit Facility consists of a $600.0 revolving credit facility and a $400.0 term loan facility. The term loan facility provides for an initial draw in the amount of $160.0 and one additional delayed draw of up to the remaining $240.0 commitment that may be initiated by the Company any time on or prior to July 13, 2011 (the delayed draw availability period). At the end of each quarter commencing June 30, 2012, the term loan facility requires the Company to make principal payments equal to one and one-quarter percent (1.25%) of the term loan balance outstanding immediately following the end of the delayed draw availability period. Any principal amount outstanding under the revolving credit facility and term loan facility is due and payable in full at maturity on March 15, 2016. At March 31, 2011, term loan borrowings totaled $160.0 and there were no borrowings outstanding under the revolving credit facility. The Company had issued $180.0 of letters of credit under the revolving credit facility at March 31, 2011. In addition to these letters of credit, $125.9 of letters of credit and bank guarantees were outstanding at March 31, 2011, which were issued by banks offering uncommitted lines of credit.

Revolving and term loan borrowings under the Senior Secured Credit Facility bear interest, at the Company’s election, at either (a) a rate equal to an applicable margin ranging from 2.00% to 2.75%, depending on the Company’s leverage ratio, plus a LIBOR rate determined by reference to the costs of funds for the offering of deposits in U.S. dollars (or with respect to Euro-denominated borrowings only, the costs of funds for the offering of deposits in Euros) for the interest period relevant to such borrowing adjusted for certain additional costs or (b) a rate equal to an applicable margin ranging from 1.00% to 1.75%, depending on the Company’s leverage ratio plus a base rate determined by reference to the highest of (1) the rate that the administrative agent announces from time to time as its base commercial lending rate, (2) the federal funds effective rate plus ¹/2 of 1% and (3) the adjusted LIBOR rate for a one month period plus 1%.

In addition to paying interest on outstanding principal under the Senior Secured Credit Facility, the Company is required to pay a commitment fee to the lenders under the revolving credit facility in respect of the unutilized commitments at a rate ranging from 0.375% to 0.50% per annum depending on the Company’s leverage ratio. The Company will also pay letter of credit fees equal to an applicable margin then in effect with respect to LIBOR loans under the revolving credit facility on the face amount of each financial letter of credit, and a rate ranging from 1.20% to 1.65% on the face amount of each performance letter of credit.

The Senior Secured Credit Facility requires that certain net proceeds related to asset sales, to the extent not reinvested in assets used or useful in the Company’s business within one year, be used to pay down the outstanding balance. The Company may voluntarily prepay outstanding loans under the Senior Secured Credit Facility at any time without premium or penalty, other than customary brokerage costs. The Senior Secured Credit Facility contains normal and customary covenants including the provision of periodic financial information, financial covenants (including a maximum leverage ratio and a minimum interest coverage ratio), and certain other limitations governing, among others, such matters as the Company’s ability to incur additional debt, grant liens on assets, make investments, acquisitions or mergers, dispose of assets, make capital expenditures, engage in transactions with affiliates, make amendments to documentation for the Company’s Senior Subordinated Notes that would be materially adverse to lenders, and pay dividends and distributions or repurchase capital stock. The Senior Secured Credit Facility also provides for customary events of default.

Senior Subordinated Notes

On March 8, 2011, the Company announced a cash tender offer to purchase any and all of its $370.0 outstanding 7 ³/₈% Senior Subordinated Notes, which mature on November 1, 2014. The tender offer provided total consideration to those tendering on or before March 21, 2011 equal to the principal amount of the notes plus 2.80%, and accrued interest. As of March 31, 2011, $291.3 of notes were tendered in the tender offer and were subsequently repurchased by the Company. In connection with the tender offer, the Company recorded non-operating expense of approximately $8.2 for early redemption premiums. Interest expense for the three months ended March 31, 2011 includes $5.1 of accelerated amortization of deferred financing fees as a result of executing the cash tender offer to purchase our outstanding 7 ³/₈% Senior Subordinated Notes. Also, on March 21, 2011, the Company announced the redemption of all of the remaining 7 ³/₈% notes at the call price of 102.458% of the face amount of notes. This redemption was completed on April 22, 2011 and resulted in a call premium of approximately $1.9 and the acceleration of deferred financing fees of approximately $1.3, which will be recorded in the three months ended June 30, 2011. Following the redemption, the 7 ³/₈% Senior Subordinated Notes are no longer outstanding.

On March 22, 2011, the Company issued $375.0 of new Senior Subordinated Notes, which bear interest at a rate of 6 ¹/2%. The new notes will mature on May 1, 2021. The Company may redeem any of the notes beginning on May 1, 2016 at a redemption price of 103.250% of their principal amount, plus accrued interest. The redemption price will decline each year after 2016 and will be 100% of their principal amount, plus accrued interest, beginning on May 1, 2019. Prior to May 1, 2016, the Company may redeem the notes at a redemption price of 100% of the principal amount of the notes plus a “make-whole” premium and accrued interest. Prior to May 1, 2014, the Company may redeem up to 35% of the notes with the net cash proceeds from certain equity offerings at a redemption price of 106.5% of the principal amount of the notes plus accrued interest. In connection with issuing the 6 ¹/2 % Senior Subordinated Notes, the Company incurred fees of $3.7, which are being amortized on the interest method over the term of the notes.

DRESSER-RAND GROUP INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

($ in millions, except per share amounts)

All of the Senior Subordinated Notes are general unsecured obligations and are guaranteed on a senior subordinated basis by certain of the Company’s material domestic subsidiaries and rank secondary to the Company’s Senior Secured Credit Facility. The Senior Subordinated Notes contain customary covenants including certain limitations and restrictions on the Company’s ability to incur additional indebtedness, create liens, pay dividends and make distributions in respect of capital stock, redeem capital stock, make investments or certain other restricted payments, sell assets, issue or sell stock of restricted subsidiaries, enter into transactions with affiliates and effect consolidations or mergers.

The most restrictive covenant under the Company’s Senior Secured Credit Facility and the indenture governing the Senior Subordinated Notes allows dividends to be paid or its shares to be repurchased and redeemed in an aggregate amount not to exceed the sum of $200.0 plus 50% of the Company’s net income for the period commencing January 1, 2010 and ending on the day of the most recently ended fiscal quarter. The limitation on shares to be repurchased under this covenant excludes the accelerated share acquisition programs that were executed on March 15 and March 22, 2011 (Note 15).

10. Pension plans

The components of net pension expense were as follows:

		Three months ended March 31,
		2011				2010
Service cost		$	2.0			$	1.9
Interest cost			5.0				5.2
Expected return on plan assets			(5.4	)			(5.2	)
Amortization of prior service cost			0.3				0.3
Amortization of net actuarial loss			0.6				0.7
Net pension expense		$	2.5			$	2.9

During the three months ended March 31, 2011 and 2010 the Company made pension contributions of $22.2 and $4.7, respectively.

11. Postretirement benefits other than pensions

The components of net periodic postretirement benefits income for such plans were as follows:

		Three months ended March 31,
		2011				2010
Interest cost		$	0.2			$	0.2
Amortization of prior service credit			(0.4	)			(2.3	)
Amortization of net actuarial loss			0.2				0.4
Net post-retirement benefits income		$	—			$	(1.7	)

12. 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 of these 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 period’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.

DRESSER-RAND GROUP INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

($ in millions, except per share amounts)

In November of 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 locked out these represented employees. 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, including the NLRB’s findings 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 Company, therefore, continued to operate under a more contemporary and competitive implemented contract offer while contract negotiations with the IUE continued in 2008 and 2009. In November 2009, a collective bargaining agreement between the IUE and the Company was ratified, which agreement expires in March 2013. As a result, the Company was not required to make available the retiree medical benefits which the Company eliminated in its implemented last contract offer. The Company recognized a non-cash curtailment amendment gain of $18.6 in other comprehensive income in December 2007, that was amortized over 36 months beginning January 2008, as a result of the elimination of those benefits.

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 these allegations. While management 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 ULPs will not have a material adverse effect on the Company’s financial condition. The litigation process, including appeals if elected by either party, could reasonably take 3 to 5 years and potentially even longer to resolve with finality.

During July 2009, the Company received notification from the current plan trustees of one of its subsidiaries’ pension plans in the United Kingdom that sex equalization under the plan may have been achieved later than originally expected. The third-party trustee at the time action was taken believes that it had taken the appropriate steps to properly amend the plan as originally expected. The Company has accrued $4.9 to address contingent exposure regarding this dispute over potential unequal treatment of men and women under the pension plan related to a period in the 1990s and is exploring its rights against others.

On March 3, 2011, the Company signed a Share Purchase Agreement (“SPA”) to acquire Grupo Guascor S.L. (“GG”) for an enterprise value of €500.0 ($690.0) in a cash and stock transaction. GG is a privately held company headquartered in Vitoria-Gasteiz, Spain with operations in Spain, Italy and Brazil. GG’s Spanish GAAP revenues for 2010 were approximately €312.0 ($413.5), and as of December 31, 2010, it held Spanish GAAP total assets of approximately €417.9 ($553.8). GG is a supplier of diesel and gas engines providing customized energy solutions across worldwide energy infrastructure markets based upon reciprocating engine power systems technologies. GG also has substantial experience in bio-energy and distributed generation applications. The enterprise value includes the assumption of approximately €125.0 ($172.0) of net debt. Closing of the transaction is currently planned to occur in the second quarter of 2011 but is subject to various closing conditions, including receipt of a variety of regulatory approvals, licenses and clearances, which may not be satisfactorily obtained. Under the terms of the SPA, Dresser-Rand will pay the sellers cash of approximately $283.0 and will issue approximately 5.0 million shares of Dresser-Rand common stock. In accordance with the SPA, the number of shares to be issued was determined based on a volume weighted closing price of $46.75 per share for the 20 trading days prior to March 1, 2011.

13. Warranty accruals

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

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

		Three months ended March 31,
		2011				2010
Beginning balance		$	28.2			$	39.2
Provisions for warranties issued during the period			2.3				3.8
Adjustments to warranties issued in prior periods			(2.3	)			0.3
Payments during period			(3.8	)			(5.1	)
Foreign currency adjustments			0.6				(0.9	)
Ending balance		$	25.0			$	37.3

DRESSER-RAND GROUP INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

($ in millions, except per share amounts)

14. 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 and research and development expenses. 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 months ended March 31, 2011, and 2010 were as follows:

		Three months ended March 31,
		2011				2010
Revenues
New units		$	144.9			$	285.1
Aftermarket parts and services			209.3				217.0
Total revenues		$	354.2			$	502.1
Operating Income
New units		$	13.5			$	40.3
Aftermarket parts and services			28.9				45.9
Unallocated			(23.2	)			(21.8	)
Total operating income		$	19.2			$	64.4
Depreciation and Amortization
New units		$	5.5			$	7.4
Aftermarket parts and services			8.3				5.8
Total depreciation and amortization		$	13.8			$	13.2
Assets (including Goodwill)
New units		$	333.9			$	320.5
Aftermarket parts and services			751.7				743.8
Unallocated			1,143.1				985.7
Total assets		$	2,228.7			$	2,050.0

DRESSER-RAND GROUP INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

($ in millions, except per share amounts)

15. Stockholders’ equity

Changes in stockholders’ equity for three months ended March 31, 2011 and 2010, were:

														Accumulated
														Other
		Common				Additional				Retained				Comprehensive				Noncontrolling
		Stock				Paid-in Capital				Earnings				(Loss) Income				Interest				Total
At December 31, 2010		$	0.8			$	341.9			$	784.8			$	(40.2	)		$	—			$	1,087.3
Stock-based employee compensation			—				5.5				—				—				—				5.5
Stock repurchase			—				(347.4	)			(7.6	)			—				—				(355.0	)
Net income (loss)			—				—				0.4				—				(2.0	)			(1.6	)
Other comprehensive income
Foreign currency adjustments			—				—				—				25.4				—				25.4
Unrealized gain on derivatives, net of $0.2 tax			—				—				—				0.4				—				0.4
Pension and other postretirement benefit plans amortization — net of $0.3 tax			—				—				—				0.4				—				0.4
At March 31, 2011		$	0.8			$	—			$	777.6			$	(14.0	)		$	(2.0	)		$	762.4

														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			—				2.2				—				—				2.2
Net income			—				—				22.3				—				22.3
Other comprehensive income (loss)
Foreign currency adjustments			—				—				—				(19.2	)			(19.2	)
Unrealized loss on derivatives, net of $0.1 tax			—				—				—				(0.2	)			(0.2	)
Pension and other postretirement benefit plans amortization — net of $0.3 tax			—				—				—				(0.6	)			(0.6	)
At March 31, 2010		$	0.8			$	398.8			$	660.4			$	(42.9	)		$	1,017.1

The components of total comprehensive income were as follows:

		Three months ended March 31,
		2011				2010
Net income attributable to Dresser-Rand		$	0.4			$	22.3
Other comprehensive income (loss)
Foreign currency adjustments			25.4				(19.2	)
Unrealized gain on derivatives, net of $0.2 tax			0.4				(0.2	)
Pension and other postretirement benefit plans amortization — net of $0.3 tax			0.4				(0.6	)
Other comprehensive income attributable to Dresser-Rand			26.6				2.3
Other comprehensive income attributable to noncontrolling interest			(2.0	)			—
Total comprehensive income		$	24.6			$	2.3

During the three months ended March 31, 2011, the Compensation Committee of the Board of Directors approved grants of options and appreciation rights involving 167,703 shares of common stock and grants of 281,348 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 restricted stock units (“PRSUs”) with a target grant amount of 55,770 restricted shares. PRSUs vest ratably between 16.67% and 50.00% annually over a three-year period to the extent that the percentile rank of the shareholder return of the Company’s stock is between the 25^th percentile and the 75^th percentile of a selected peer group. Additionally, Directors were granted 17,437 shares of restricted stock that will vest in one year.

On February 10, 2011, the Company’s Board of Directors authorized the repurchase of up to $450.0 of its common stock. The repurchases may be made from time to time and in such amounts, as management deems appropriate and have been funded from operating cash flows and borrowings under the Company’s Senior Secured Credit Facility.

On March 15, 2011, the Company entered into a collared accelerated share acquisition program under which it paid $275.0 to repurchase shares of its common stock in a share forward transaction. The total number of shares purchased (subject to a minimum and maximum number of shares) will be determined by dividing the $275.0 purchase price by the volume-weighted average trading prices of shares of common stock during a valuation period, minus a fixed discount and subject to a minimum and maximum price set during a hedging period. The program is expected to be completed in the fourth quarter of 2011.

DRESSER-RAND GROUP INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

($ in millions, except per share amounts)

On March 22, 2011, the Company entered into an un-collared accelerated share acquisition program under which it paid $80.0 to repurchase shares of common stock in a share forward transaction. The total number of shares purchased will be determined by dividing the $80.0 purchase price by the volume-weighted average trading prices of shares of common stock during a valuation period, minus a fixed discount. The program is expected to be completed in the fourth quarter of 2011.

Outstanding shares used to calculate earnings per share are reduced by the number of shares repurchased when they are delivered, and the total $355.0 purchase price of the programs was recorded as a reduction in shareholders’ equity upon its prepayment. The Company received 4,870,186 shares in March 2011 and an additional 1,013,691 shares in April 2011 at the end of the hedging period. The Company will receive additional repurchased shares above the minimum , if any, at the end of the valuation periods, which will continue until the programs are completed.

16. 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 LLC (“Subsidiary Guarantors”). The statements of cash flows for the three months ended March 31, 2010 include certain corrections as follows: (a) a reclassification of $34.2 from the Subsidiary Non-Guarantors to the Subsidiary Guarantors to correctly classify cash flows from operations (b) a reclassification of $34.2 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. These reclassifications reflect the acquisitions as having been executed by the subsidiaries with cash transferred from the issuer rather than being executed by the issuer with the acquired assets subsequently transferred to the subsidiaries.

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 three months ended March 31, 2011 and 2010 were $76.1 and $119.0, respectively.

The following condensed consolidated financial information of the Issuer, Subsidiary Guarantors and Subsidiary Non-Guarantors, presents statements of income for the three months ended March 31, 2011, and 2010, balance sheets at March 31, 2011, and December 31, 2010, and statements of cash flows for the three months ended March 31, 2011, and 2010.

CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the quarter ended March 31, 2011

										Subsidiary
						Subsidiary				Non-				Consolidating
		Issuer				Guarantors				Guarantors				Adjustments				Total
Net sales		$	—			$	206.4			$	191.2			$	(43.4	)		$	354.2
Cost of sales			—				144.6				139.4				(30.4	)			253.6
Gross profit			—				61.8				51.8				(13.0	)			100.6
Selling and administrative expenses			40.2				16.6				29.3				(9.1	)			77.0
Research and development expenses			—				3.5				0.9				—				4.4
(Loss) income from operations			(40.2	)			41.7				21.6				(3.9	)			19.2
Equity earnings in affiliates			34.9				4.9				—				(39.8	)			—
Interest (expense) income, net			(15.2	)			—				0.2				—				(15.0	)
Intercompany interest and fees			4.4				(0.6	)			(3.8	)			—				—
Early redemption premium on debt			(8.2	)			—				—				—				(8.2	)
Other income, net			4.7				0.4				(1.5	)			—				3.6
(Loss) income before income taxes			(19.6	)			46.4				16.5				(43.7	)			(0.4	)
(Benefit) provision for income taxes			(20.0	)			15.3				5.9				—				1.2
Net income (loss)			0.4				31.1				10.6				(43.7	)			(1.6	)
Net loss attributable to noncontrolling interest			—				—				2.0				—				2.0
Net income attributable to Dresser-Rand		$	0.4			$	31.1			$	12.6			$	(43.7	)		$	0.4

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 March 31, 2010

										Subsidiary
						Subsidiary				Non-				Consolidating
		Issuer				Guarantors				Guarantors				Adjustments				Total
Net sales		$	—			$	247.2			$	301.6			$	(46.7	)		$	502.1
Cost of sales			—				180.7				217.0				(37.7	)			360.0
Gross profit			—				66.5				84.6				(9.0	)			142.1
Selling and administrative expenses			35.2				12.7				31.3				(7.8	)			71.4
Research and development expenses			—				5.2				1.1				—				6.3
(Loss) income from operations			(35.2	)			48.6				52.2				(1.2	)			64.4
Equity earnings in affiliates			39.9				3.7				—				(43.6	)			—
Interest expense, net			(7.8	)			—				(0.4	)			—				(8.2	)
Intercompany interest and fees			14.2				(1.9	)			(12.3	)			—				—
Other income (expense), net			2.0				—				(18.2	)			—				(16.2	)
Income before income taxes			13.1				50.4				21.3				(44.8	)			40.0
(Benefit) provision for income taxes			(9.2	)			17.2				9.7				—				17.7
Net income		$	22.3			$	33.2			$	11.6			$	(44.8	)		$	22.3

CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2011

										Subsidiary
						Subsidiary				Non-				Consolidating
		Issuer				Guarantors				Guarantors				Adjustments				Total
ASSETS
Cash and cash equivalents		$	44.8			$	—			$	250.1			$	—			$	294.9
Accounts receivables, net			—				118.0				160.6				—				278.6
Inventories, net			—				205.5				113.8				(9.8	)			309.5
Prepaid and other expenses and deferred income taxes			39.2				1.4				58.0				—				98.6
Total current assets			84.0				324.9				582.5				(9.8	)			981.6
Investment in affiliates			2,174.2				89.9				—				(2,264.1	)			—
Property, plant, and equipment, net			—				177.8				100.0				—				277.8
Goodwill and Intangible assets, net			—				439.1				488.7				—				927.8
Other assets			39.6				0.2				1.7				—				41.5
Total assets		$	2,297.8			$	1,031.9			$	1,172.9			$	(2,273.9	)		$	2,228.7
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accruals		$	9.9			$	336.7			$	348.9			$	—			$	695.5
Current portion of long-term debt			78.7				—				—				—				78.7
Total current liabilities			88.6				336.7				348.9				—				774.2
Long-term debt			535.0				—				—				—				535.0
Intercompany accounts			886.0				(947.8	)			61.8				—				—
Other noncurrent liabilities			23.8				77.7				55.6				—				157.1
Total liabilities			1,533.4				(533.4	)			466.3				—				1,466.3
Common stock			0.8				—				—				—				0.8
Other stockholders’ equity			763.6				1,565.3				708.6				(2,273.9	)			763.6
Total Dresser-Rand stockholders’ equity			764.4				1,565.3				708.6				(2,273.9	)			764.4
Noncontrolling interest			—				—				(2.0	)			—				(2.0	)
Total stockholders’ equity			764.4				1,565.3				706.6				(2,273.9	)			762.4
Total liabilities and stockholders’ equity		$	2,297.8			$	1,031.9			$	1,172.9			$	(2,273.9	)		$	2,228.7

DRESSER-RAND GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
($ in millions, except per share amounts)

CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2010

										Subsidiary
						Subsidiary				Non-				Consolidating
		Issuer				Guarantors				Guarantors				Adjustments				Total
ASSETS
Cash and cash equivalents		$	182.9			$	—			$	237.9			$	—			$	420.8
Accounts receivables, net			—				138.9				164.6				—				303.5
Inventories, net			—				185.5				114.7				(8.6	)			291.6
Prepaid and other expenses and deferred income taxes			19.7				4.2				44.4				—				68.3
Total current assets			202.6				328.6				561.6				(8.6	)			1,084.2
Investment in affiliates			2,110.7				83.7				—				(2,194.4	)			—
Property, plant and equipment, net			—				181.3				96.8				—				278.1
Goodwill and intangible assets, net			—				443.2				469.9				—				913.1
Other assets			27.7				0.3				1.3				—				29.3
Total assets		$	2,341.0			$	1,037.1			$	1,129.6			$	(2,203.0	)		$	2,304.7
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accruals		$	(39.2	)		$	387.1			$	321.2			$	—			$	669.1
Total current liabilities			(39.2	)			387.1				321.2				—				669.1
Long-term debt			370.0				—				—				—				370.0
Intercompany accounts			902.3				(978.3	)			76.0				—				—
Other noncurrent liabilities			20.6				95.1				62.6				—				178.3
Total liabilities			1,253.7				(496.1	)			459.8				—				1,217.4
Common stock			0.8				—				—				—				0.8
Other stockholders’ equity			1,086.5				1,533.2				669.8				(2,203.0	)			1,086.5
Total stockholders’ equity			1,087.3				1,533.2				669.8				(2,203.0	)			1,087.3
Total liabilities and stockholders’ equity		$	2,341.0			$	1,037.1			$	1,129.6			$	(2,203.0	)		$	2,304.7

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the quarter ended March 31, 2011

										Subsidiary
						Subsidiary				Non-				Consolidating
		Issuer				Guarantors				Guarantors				Adjustments				Total
Cash flows from operating activities:
Net cash (used in) provided by operating activities		$	7.0			$	(32.0	)		$	20.5			$	—			$	(4.5	)
Cash flows from investing activities:
Capital expenditures			—				(1.9	)			(3.2	)			—				(5.1	)
Other investments			(6.3	)			—				—				—				(6.3	)
Net cash used in investing activities			(6.3	)			(1.9	)			(3.2	)			—				(11.4	)
Cash flows from financing activities:
Proceeds from exercise of stock options			2.1				—				—				—				2.1
Proceeds from long-term debt			535.0																535.0
Excess tax benefits from share-based compensation			—				3.4				—				—				3.4
Purchase of treasury stock			(355.0	)			—				—				—				(355.0	)
Payments for debt financing costs			(13.2	)			—				—				—				(13.2	)
Payments of long-term debt			(291.3	)			—				—				—				(291.3	)
Change in intercompany accounts			(16.4	)			30.5				(14.1	)			—				—
Net cash (used in) provided by financing activities			(138.8	)			33.9				(14.1	)			—				(119.0	)
Effect of exchange rate changes on cash and cash equivalents			—				—				9.0				—				9.0
Net (decrease) increase in cash and equivalents			(138.1	)			—				12.2				—				(125.9	)
Cash and cash equivalents, beginning of period			182.9				—				237.9				—				420.8
Cash and cash equivalents, end of period		$	44.8			$	—			$	250.1			$	—			$	294.9