The Daily Magic Formula Stock for 10/30/2008 is Dresser-Rand Group Inc. According to the Magic Formula Investing Web Site, the ebit yield is 13% and the EBIT ROIC is >100 %.
Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.
Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.
Dresser-Rand Group Inc. is a Delaware corporation formed in October 2004. Dresser-Rand Company, an affiliate of Dresser-Rand Group Inc. was initially formed on December 31, 1986, when Dresser Industries, Inc. and Ingersoll Rand entered into a partnership agreement for the formation of Dresser-Rand Company, a New York general partnership owned 50% by Dresser Industries, Inc. and 50% by Ingersoll Rand. On October 1, 1992, Dresser Industries, Inc. purchased a 1% equity interest from Dresser-Rand Company. In September 1999, Dresser Industries, Inc. merged with Halliburton Industries, and Dresser Industries, Inc.â€™s ownership interest in Dresser-Rand Company transferred to Halliburton Industries. On February 2, 2000, a wholly-owned subsidiary of Ingersoll Rand purchased Halliburton Industriesâ€™ 51% interest in Dresser-Rand Company. On August 25, 2004, Dresser-Rand Holdings, LLC, an affiliate of First Reserve Corporation (â€śFirst Reserveâ€ť), a private equity firm, entered into an equity purchase agreement with Ingersoll Rand to purchase all of the equity interests in the Dresser-Rand Entities for approximately $1.13 billion. The acquisition closed on October 29, 2004. In this Form 10-K, we refer to this acquisition as the â€śAcquisitionâ€ť and the term â€śTransactionsâ€ť means, collectively, the Acquisition and the related financings to fund the Acquisition.
Unless the context otherwise indicates, as used in this Form 10-K, (i) the terms â€śwe,â€ť â€śour,â€ť â€śus,â€ť the â€śCompanyâ€ť, the â€śSuccessorâ€ť and similar terms refer to Dresser-Rand Group Inc. and its consolidated subsidiaries after giving effect to the consummation of the Transaction, (ii) the term â€śDresser-Rand Entitiesâ€ť and the term â€śPredecessorâ€ť refers to Dresser-Rand Company and its direct and indirect subsidiaries, Dresser-Rand Canada, Inc. and Dresser-Rand GmbH and (iii) the term â€śIngersoll Randâ€ť refers to Ingersoll Rand Company Limited, a Bermuda corporation, and its predecessors, which sold its interest in the Dresser-Rand Entities in the Acquisition.
We are among the largest global suppliers of rotating equipment solutions to the worldwide oil, gas, petrochemical and process industries. Our services and products are used for a wide range of applications, including oil and gas production, high-pressure injection and enhanced oil recovery, gas transmission, refinery processes, natural gas processing, and petrochemical production. We believe we have the largest installed base in the world of the classes of equipment we manufacture, with approximately 40% of the total installed base of equipment in operation. Our installed base of equipment includes such well-recognized brand names as Dresser-Rand, Dresser-Clark, Ingersoll Rand, Worthington, Turbodyne, Terry, Coppus, Murray and Nadrowski. We provide a full range of aftermarket parts and services to this installed base through our global network of 27 service and support centers covering more than 140 countries. We operate globally with manufacturing facilities in the United States, France, Germany, Norway, and India. Our client base consists of most major independent oil and gas producers and distributors worldwide, national oil and gas companies, and chemical and industrial companies. Our clients include Royal Dutch Shell, ExxonMobil, BP, Statoil, Chevron, Petrobras, Pemex, PDVSA, ConocoPhillips, Lukoil, Marathon Oil Corporation, Repsol, and Dow Chemical Company.
Our solutions-based service offering combines our industry-leading technology, proprietary worldwide service center network and deep product expertise. This approach drives our growth as we offer integrated service solutions that help our clients maximize returns on their production and processing equipment. We believe our business model and alliance-based approach align us with our clients who are shifting from purchasing isolated units and services on a transactional basis to choosing service providers that can help optimize performance over the entire life cycle of their equipment. Our alliance program encompasses both the provision of new units and/or parts and services. We offer our clients a dedicated team, a streamlined engineering and procurement process, and a life cycle approach to manufacturing, operating, and maintaining their equipment, whether originally manufactured by us or by a third party. In our alliances, we are either the exclusive or preferred supplier of equipment and aftermarket parts and services to a client. Our alliances enable us to:
â€˘ lower clientsâ€™ total cost of ownership and improve equipment performance;
â€˘ lower both our transaction costs and our clientsâ€™ ;
â€˘ better forecast our future revenues; and
â€˘ develop a broad, continuing business-to-business relationship with our clients that often results in a substantial increase in the level of activity with those clients.
The markets in which we operate are large and fragmented. We estimate that the worldwide aggregate annual value of new unit sales of the classes of equipment we manufacture is approximately $4 billion and the aftermarket parts and services needs of the installed base of such equipment (both in-house and outsourced) is approximately $10 billion. We believe that we are well positioned to benefit from a variety of long-term trends driving demand in our industry, including:
â€˘ the increased worldwide demand for oil products resulting from economic growth;
â€˘ the maturation of producing fields worldwide, which requires increasing use of compression equipment to maintain production levels;
â€˘ the substantial increase in demand for natural gas, which is driving growth in gas production, storage and transmission infrastructure;
â€˘ regulatory and environmental initiatives, including clean fuel legislation and stricter emissions controls worldwide;
â€˘ the aging installed base of equipment, which is increasing demand for aftermarket parts and services, revamps and upgrades; and
â€˘ the increased outsourcing of equipment maintenance and operations.
In 2007, approximately 92% of our revenues were generated from energy infrastructure and oilfield spending. Additionally, 48.9% of our total combined revenues were generated by our new units segment and 51.1% by our aftermarket parts and services segment. We intend to continue to focus on the upstream, midstream, and downstream segments of the oil and gas market. Thus, expect to capitalize on the expected long-term growth in equipment and services investment in these segments. Specifically, we intend to:
Increase Sales of Aftermarket Parts and Services to Existing Installed Base. The substantial portion of the aftermarkets parts and services needs of the existing installed base of equipment that we currently do not, or only partially, service, represents a significant opportunity for growth. We believe the market has a general preference for aftermarket original equipment manufacturersâ€™ parts and services. We are implementing a proactive approach to aftermarket parts and services sales that capitalizes on our knowledge of the installed base of our own and our competitorsâ€™ equipment. Through the D-R Avenue project, we have assembled a significant amount of data on both Dresser-Randâ€™s and competitorsâ€™ installed equipment base. We have developed predictive models that help us identify and be proactive in securing aftermarket parts and services opportunities. We are upgrading our service response by integrating the expertise of our factory-based product engineers with the client-oriented service personnel in the field through our Client Interface and Response System (CIRS). CIRS significantly enhances our ability to rapidly and accurately respond to any technical support or service request from our clients. We believe our premium service level will result in continued growth of sales of aftermarket parts and services.
Expand Aftermarket Parts and Services Business to Non-Dresser-Rand Original Equipment Manufacturersâ€™ Equipment. We believe the aftermarket parts and services market for non-Dresser-Rand equipment represents a significant growth opportunity that we are continuing to pursue on a systematic basis. As a result of the knowledge and expertise derived from our long history and experience servicing the largest installed base in the industry, combined with our extensive investment in technology, we have a proven process of applying our technology and processes to improve the operating efficiency and performance of our competitorsâ€™ products. Additionally, with the largest global network of full-capability service centers and field service support for our class of equipment, we are often in a position to provide quick response to clients and to offer local service. We believe these are important service differentiators for our clients. By using D-R Avenue, we intend to capitalize on our knowledge, our broad network of service centers, flexible technology and existing relationships with most major industry participants to grow our aftermarket parts and services solutions for non-Dresser-Rand equipment. We are able to identify technology upgrades that improve the performance of our clientsâ€™ assets and to proactively suggest upgrade and revamp projects that clients may not have considered.
Grow Alliances. As a result of the need to improve efficiency in a competitive global economy, oil and gas companies are frequently consolidating their supplier relationships and seeking alliances with suppliers, shifting from purchasing units and services on an individual transactional basis to choosing long-term service providers that can help them optimize performance over the entire life cycle of their equipment. We continue to see a high level of interest among our clients in seeking alliances with us, and we have entered into agreements with more than 49 of our clients. We plan to leverage our market leadership, global presence, and comprehensive range of products and services to continue to take advantage of this trend by pursuing new client alliances as well as strengthening our existing alliances. We currently are the only alliance partner for rotating equipment with Marathon Oil Corporation and Royal Dutch
Shell. In addition, we are a preferred, non-exclusive supplier to other alliance partners, including BP, Statoil, ConocoPhillips, ExxonMobil, Chevron, Petrobras, Pemex, Valero, Praxair, Targa, PDVSA, Repsol and DCP Midstream.
Expand our Performance-Based Long-Term Service Contracts. We are growing the outsourced services market with our performance-based operations and maintenance solutions (known as our Availability+ program), which are designed to offer clients significant value (improved equipment performance, decreased life cycle cost and higher availability levels) versus the traditional services and products approach. These contracts generally represent multiyear, recurring revenue opportunities for us that typically include a performance-based element to the service provided. We offer these contracts for most of the markets that we serve.
Introduce New and Innovative Products and Technologies. We believe we are an industry leader in introducing new, value-added technology. Product innovation has historically provided, and we believe will continue to provide, significant opportunities to increase revenues from both new product sales and upgrades to our, and other original equipment manufacturersâ€™, installed base of equipment. Many of our products utilize innovative technology that lowers operating costs, improves convenience and increases reliability and performance. Examples of recent new offerings include adapting the DATUM compressor platform for the revamping of other original equipment manufacturersâ€™ equipment, a new design of dry-gas seals and bearings, a new generation of rotating separators and an integrated compression system (ICS). We recently have introduced a complete line of remote-monitoring and control instrumentation that offers significant performance benefits to clients and enhances our operations and maintenance services offering. We plan to continue developing innovative products, including new compressor platforms which would further open up new markets to us.
Continue to Improve Profitability. We continually seek to improve our financial and operating performance through cost reductions and productivity improvements. Process efficiencies, cycle time reductions and cost improvements are being driven by greater worldwide collaboration across Dresser-Rand locations. We have Process Innovation teams removing waste using advanced lean manufacturing methodologies such as valve stream mapping. A large portion of our finished products comes from purchased materials and we are extending our process innovation and lean methodologies to remove waste from our supply chain. We are focused on continuing to improve our cost position in every area of our business, and we believe there is substantial opportunity to further increase our productivity in the future.
Selectively Pursue Acquisitions. We intend to continue our disciplined pursuit of acquisition opportunities that fit our business strategy. We expect to make acquisitions within the energy sector that add new products or technologies to our portfolio, provide us with access to new markets or enhance our current market positions. Given our size and the large number of small companies in our industry and related industries, we believe we are well positioned to be an industry consolidator over time.
Services and Products
We design, manufacture and market highly engineered rotating equipment and services sold primarily to the worldwide oil, gas, petrochemical and industrial process industries. Our segments are new units and aftermarket parts and services.
Segment and geographic revenues and related financial information for 2007, 2006, and 2005 can be found in Note 21, Segment Information, in the Notes to Consolidated Financial Statements in Item 15 of this Form 10-K.
We are a leading manufacturer of highly-engineered turbo and reciprocating compression equipment and steam turbines. We also manufacture special-purpose gas turbines. Our new unit products are built to client specifications for long-life, critical applications.
Turbo Products. We are a leading supplier of turbomachinery for the oil and gas industries worldwide. In 2007, in North America new unit turbomachinery bookings, we were the leader, and we continued to rank in the top three in worldwide market share. Turbo products sales represented 60.9%, 62.3%, and 56.5% of our total new unit revenues for the fiscal years ended 2007, 2006, and 2005, respectively. Centrifugal compressors utilize turbomachinery machinery technology that employs a series of graduated impellers to increase pressure. Generally, these centrifugal compressors are used to re-inject natural gases into petroleum fields to increase field pressures for added petroleum recovery. In addition, centrifugal compression is used to separate the composition of various gases in process applications to extract specific gases. These compressors are also used to provide the compression needed to increase pressures required to transport gases between gas sources through pipelines. Applications for our turbo products include gas lift and injection, gas gathering, storage and transmission, synthetic fuels, ethylene, fertilizer, refineries and chemical production.
In 1995, we introduced the DATUM product line, which incorporates enhanced engineering features that provide significant operating and maintenance benefits for our clients. The DATUM is a comprehensive line of radial and axial split, modular and scalable construction, for flows to 500,000 cubic feet per minute (CFM), and discharge pressures to over 10,000 pounds per square inch gauge (psig). In some applications, a single DATUM compressor can compress greater flows per frame size than a comparable existing product offering, resulting in the capability to handle the same pressure ratio with less frames. The DATUM product line also offers improved rotor stability characteristics. DATUM compressors are available in 14 frame sizes. In addition to the DATUM centrifugal compressor line, we manufacture a line of axial flow compressors, legacy centrifugal compressors, hot-gas expanders, gas and power turbines and control systems.
In addition, we offer a variety of gas turbines ranging in power capacity from approximately 1.5 to 60 megawatts (MW), which support driver needs for various centrifugal compressor product lines, as well as for power generation applications.
Reciprocating Compressors. We are a leading supplier of reciprocating compressors, offering products ranging from medium to high speed separable units driven by engines to large slow speed motor driven process reciprocating compressors. In 2007, in new unit reciprocating compressor sales, we were the clear leader in North America, and we continued to rank in the top three in worldwide market share. Reciprocating compressor product sales represented 17.3%, 20.7%, and 25.3% of our total new unit revenues for the fiscal years ended 2007, 2006, and 2005, respectively. Reciprocating compressors use a traditional piston and cylinder engine design to increase pressure within a chamber. Typically, reciprocating compressors are used in lower volume/higher compression ratio applications and are better able to handle changes in pressure and flow compared to centrifugal compressors. We offer 11 models of process reciprocating compressors, with power capacity ranging from 5 to 45,000 horsepower, and pressures ranging from vacuum to 60,000 psig. We offer seven models of separable reciprocating compressors, with power ratings to 11,000
horsepower. Applications for our reciprocating compressors include upstream production (gas lift, Liquefied Natural Gas, export, gathering, processing, Liquefied Petroleum Gas, and Natural Gas Liquids), midstream transportation (gas transport, storage and fuel gas) and downstream processing (G-T-C, H 2 Production, refining, cool gas, methanol and ethylene, NH 3 , Nitric Acid, and Urea).
Steam Turbines. We are a leading supplier of standard and engineered mechanical drive steam turbines and turbine generator sets. Steam turbine product sales represented 21.9%, 17.0%, and 18.2% of our total new unit revenues for the fiscal years ended 2007, 2006, and 2005, respectively. Steam turbines use steam from power plant or process applications and expand it through nozzles and fixed and rotating vanes, converting the steam energy into mechanical energy of rotation. We are one of the few remaining North American manufacturers of standard and engineered multi-stage steam turbines. Our steam turbine models have power capacity ranging from 2 to 75MW and are used primarily to drive pumps, fans, blowers, generators and compressors. Our steam turbines are used in a variety of industries, including oil and gas, refining, petrochemical, chemical, pulp and paper, metals, industrial power production and utilities, sugar and palm oil. We are the sole supplier to the United States Navy of steam turbines for aircraft carrier propulsion.
New Product Development
New product development is an important part of our business. We believe we are an industry leader in introducing new, value-added technology. Our investment in research and development has resulted in numerous technology upgrades focused on aftermarket parts and services growth. Our recent new product development includes adapting the DATUM compressor platform for revamping of other original equipment manufacturersâ€™ equipment, a new design of dry-gas seals and bearings, an in-line rotary separator (IRIS) and a new Integrated Compression System (ICS). ICS uses as a platform high-efficiency DATUM centrifugal compressor technology driven by a high-speed, close-coupled motor, with an integrated gas-liquid separation unit, packaged with process coolers in a single module. It provides a complete compression system that can be applied to all markets â€” upstream, midstream and downstream. We believe that the ICS is uniquely suited for developing sub-sea applications because the compressor, motor, separation system and gas coolers are contained in the same process module. We have recently introduced a complete suite package of remote monitoring and control instrumentation that offers significant performance benefits to clients and enhances our operations and maintenance services offering. We plan to continue developing innovative products.
We believe clients are increasingly choosing their suppliers based upon capability to custom engineer, manufacture and deliver reliable high-performance products, with the lowest total cost of ownership, in the shortest cycle time, and to provide timely, locally based service and support. Our client alliance sales have increased substantially as a result of our ability to meet these client requirements. For example, our combined core centrifugal and process reciprocating new unit revenues from client alliances have increased from approximately $17 million in 2000 to approximately $495 million in 2007.
William E. Macaulay has been the Chairman of our Board of Directors since October 2004. Mr. Macaulay is the Chairman, Chief Executive Officer, and a Managing Director of First Reserve Corporation (â€śFirst Reserveâ€ť), a private equity firm focusing on the energy industry, which he joined in 1983. First Reserve was an affiliate of our former indirect parent, Dresser-Rand Holdings LLC. Prior to joining First Reserve, Mr. Macaulay was a co-founder of Meridien Capital Company, a private equity buyout firm. From 1972 to 1982, Mr. Macaulay was with Oppenheimer & Co., Inc., where he served as Director of Corporate Finance, with responsibility for investing Oppenheimerâ€™s capital in private equity transactions, as a General Partner and member of the Management Committee of Oppenheimer & Co., as well as President of Oppenheimer Energy Corporation. Mr. Macaulay serves as a director of Weatherford International, Inc., an oilfield service company. Mr. Macaulay holds a B.B.A. degree, Magna Cum Laude in Economics from City College of New York and an M.B.A. from the Wharton School of the University of Pennsylvania.
Vincent R. Volpe Jr. is our President and Chief Executive Officer and has served as a member of our Board of Directors since October 2004. Mr. Volpe has been with Dresser-Rand Group Inc., its affiliates and predecessor companies to the business since 1981. He has held positions in Engineering, Marketing and Operations residing and working in various countries, including: Applications Engineer in Caracas, Venezuela; Vice President Dresser-Rand Japan in Tokyo, Japan; Vice President Marketing and Engineering Steam and Turbo Products in Olean, New York; Executive Vice President European Operations in Le Havre, France; and President Dresser-Rand Europe in London, U.K. In January 1997, Mr. Volpe became President of Dresser-Rand Companyâ€™s Turbo Product Division, a position he held until September 2000. In April 1999, he assumed the additional role of Chief Operating Officer for Dresser-Rand Company, responsible for worldwide manufacturing, technology and supply chain management, serving in that position until September 2000. Mr. Volpe became President and Chief Executive Officer of Dresser-Rand Company in September 2000. He is proficient in five languages. Mr. Volpe earned a B.S. in Mechanical Engineering and a B.A. in German literature, both from Lehigh University.
Rita V. Foley has been a member of our Board of Directors since May 2007. Ms. Foley retired in June 2006 as Senior Vice President of MeadWestvaco Corporation, a leading global provider of packaging to the entertainment, healthcare, cosmetics, and consumer products industries, and President of its Consumer Packaging Group. Prior to that, from 2001 to 2002, she was the Chief Operating Officer of MeadWestvacoâ€™s Consumer Packaging Group. Ms. Foley held various senior positions from 1999 to 2001 within Westvaco, the predecessor to MeadWestvaco, including Senior Vice President and Chief Information Officer. Ms. Foley has also held various executive global sales, marketing, and general management positions at Harris Lanier, Digital Equipment Corporation, and QAD Inc. Ms. Foley serves on the boards of PetSmart Inc. and Pro Mujer International, and she is a former director of the Council of the Americas. Ms. Foley earned a B.S. degree from Smith College and she is a graduate of Stanford Universityâ€™s Executive Program.
Louis A. Raspino has been a member of our Board of Directors since December 2005. He has over 30 years of experience in the oil and gas exploration, production and service industry. Mr. Raspino has been the President and Chief Executive Officer of Pride International Inc., an international provider of contract drilling and related services to oil and natural gas companies, since June 2005 and has been on its Board of Directors since July 2005. He was an Executive Vice President and Chief Financial Officer of Pride International Inc. from December 2003 until June 2005. Before joining Pride International in December 2003, he was Senior Vice President and Chief Financial Officer of Grant Prideco, Inc., a manufacturer of drilling and completion products supplying the energy industry, from July 2001 until December 2003. Previously, he was Vice President of Finance for Halliburton Company, Senior Vice President and Chief Financial Officer of The Louisiana Land & Exploration Company and began his career with Ernst & Young. Mr. Raspino is a CPA and earned a B.S. from Louisiana State University in New Orleans and an M.B.A. from Loyola University.
Philip R. Roth has been a member of our Board of Directors since December 2005. He has over 30 years of accounting and finance experience. Mr. Roth formerly was Vice President, Finance and Chief Financial Officer of Gardner Denver, Inc., which designs, manufacturers and markets compressor and vacuum products and fluid transfer products, from May 1996 until August 2004. Prior to joining Gardner Denver, Mr. Roth was with Emerson Electric Co. from 1980 until 1996 where he held positions in accounting, treasury and investor relations at the corporate office, and in strategic planning and acquisitions, and as a Chief Financial Officer at the division level. Mr. Roth is a CPA and began his career with Price Waterhouse. He earned a B.S. in Accounting and Business Administration from the University of Missouri and an M.B.A. from the Olin School of Business at Washington University.
Michael L. Underwood has been a member of our Board of Directors since August 2005. Prior to his retirement, from June 2002 to June 2003, Mr. Underwood was employed by Deloitte & Touche LLP as a Director. Prior to that, he had over 35 years of public accounting experience including 25 of those years as an audit partner with Arthur Andersen LLP. Mr. Underwood currently serves on the board of directors of Chicago Bridge & Iron Company N.V. He holds a B.A. in Philosophy and Economics and a Masters Degree in Accounting from the University of Illinois.
Jean-Paul Vettier has been a member of our Board of Directors since July 2006. From 1993 until his retirement in March 2006, he was Chairman and Chief Executive Officer of Total Refining & Marketing, a multinational energy company. Between 1992 and 1996, he was non-executive Chairman of Total Petroleum North America. During two terms from 1998 to 2004, he chaired Europia, the European oil industry association. Prior to joining Total in 1990 as Executive Vice President of Refining and Marketing, Mr. Vettier was employed by Rhone-Poulec for 16 years where he held positions of increasing responsibility in the legal and strategic planning functions. In 1987, he joined Orkem as General Manager of the Petrochemical Division and a member of the Executive Committee. Mr. Vettier is currently a director of SNC-Lavalin Group, Inc., Overseas Shipholding Group Inc., and DomoChemicals NV. He received his degree in Public Law and Economic Sciences from the University of Paris. He is Knight of the French National Order of Merit and of the French Legion of Honour.
Joseph C. Winkler III has been a member of our Board of Directors since May 2007. Mr. Winkler has served as the Chairman and Chief Executive Officer of Complete Production Services, Inc., a provider of specialized oil and gas services and equipment in North America, since March 2007. Between June 2005 and March 2007, Mr. Winkler served as its President and Chief Executive Officer. Prior to that, from March 2005 until June 2005, Mr. Winkler served as the Executive Vice President and Chief Operating Officer of National Oilwell Varco, Inc., an oilfield capital equipment and services company and from May 2003 until March 2005 as the President and Chief Operating Officer of the companyâ€™s predecessor, Varco International, Inc. From April 1996 until May 2003, Mr. Winkler served in various other capacities with Varco and its predecessor, including Executive Vice President and Chief Financial Officer. From 1993 to April 1996, Mr. Winkler served as the Chief Financial Officer of D.O.S., Ltd., a privately held provider of solids control equipment and services and coil tubing equipment to the oil and gas industry, which was acquired by Varco in April 1996. Prior to joining D.O.S., Ltd., he was Chief Financial Officer of Baker Hughes INTEQ, and served in a similar role for various companies owned by Baker Hughes Incorporated including Eastman/Telco and Milpark Drilling Fluids. Mr. Winkler received a B.S. degree from Louisiana State University.
MANAGEMENT DISCUSSION FROM LATEST 10K
We are among the largest global suppliers of rotating equipment solutions to the worldwide oil, gas, petrochemical and industrial process industries. Our services and products are used for a wide range of applications, including oil and gas production, refinery processes, natural gas processing, pipelines, petrochemical production, high-pressure field injection and enhanced oil recovery. We also serve general industrial markets including paper, steel, sugar, distributed power and government markets. In addition, see Item 1, Business in this Form 10-K for a description of the strong economic conditions of the markets we serve.
We operate globally with manufacturing facilities in the United States, France, Germany, Norway and India. We provide a wide array of products and services to our worldwide client base in over 140 countries from our 67 global locations in 11 U.S. states and 24 countries. For the year ended December 31, 2007, our revenue by geographic region consisted of North America 42%, Europe 18%, Asia Pacific 12%, Middle East and Africa 15% and Latin America 13%. Our total combined revenues by geographic region for the year ended December 31, 2006, consisted of North America 36%, Europe 24%, Latin America 14%, Asia Pacific 14% and the Middle East and Africa 12%.
On December 31, 1986, Dresser Industries, Inc. and Ingersoll Rand (collectively, the partners) entered into a partnership agreement for the formation of Dresser-Rand Company, a New York general partnership owned 50% by Dresser Industries, Inc. and 50% by Ingersoll Rand. The partners contributed substantially all of the operating assets and certain related liabilities, which comprised their worldwide reciprocating compressor, steam turbine and turbo-machinery businesses. The net assets contributed by the partners were recorded by Dresser-Rand Company at amounts approximating their historical values. Dresser-Rand Company commenced operations on January 1, 1987. On October 1, 1992, Dresser Industries, Inc. acquired a 1% equity interest from Dresser-Rand Company to increase its ownership to 51% of Dresser-Rand Company.
In September 1999, Dresser Industries, Inc. merged with Halliburton Industries. Accordingly, Dresser Industries, Inc.â€™s ownership interest in Dresser-Rand Company transferred to Halliburton Industries on that date. On February 2, 2000, a wholly-owned subsidiary of Ingersoll Rand purchased Halliburton Industriesâ€™ 51% interest in Dresser-Rand Company for a net purchase price of approximately $543.
On August 25, 2004, Dresser-Rand Holdings, LLC, an affiliate of First Reserve, entered into an equity purchase agreement with Ingersoll Rand (the â€śAcquisitionâ€ť) to purchase all of the equity interests in the Dresser-Rand Entities for $1,130. The Acquisition closed on October 29, 2004. In connection with the Acquisition, funds affiliated with First Reserve contributed $430 in cash as equity to Dresser-Rand Holdings, LLC, which used this cash to fund a portion of the purchase price for the Dresser-Rand Entities. The remainder of the cash needed to finance the acquisition, including related fees and expenses, was provided by borrowings of $420 in senior subordinated notes due 2014 and under a $695 senior secured credit facility which consisted of a $395 term loan portion and a $300 revolving portion. During 2007, we entered into an amended and restated senior credit facility increasing the revolving credit amount to $500.
Basis of Presentation
The information presented in Item 6. Selected Financial Data is labeled as â€śPredecessorâ€ť for the periods prior to the Acquisition and is labeled as â€śSuccessorâ€ť for the periods subsequent to the Acquisition and was developed from audited financial statements.
The Successor consolidated financial statements include the accounts of all controlled subsidiaries and include fair value adjustments as required by purchase accounting to assets and liabilities, including inventory, goodwill, other intangible assets and property, plant and equipment. Also included is the corresponding effect these fair value adjustments had to cost of sales, depreciation and amortization expenses.
The Predecessor combined financial statements include the accounts of all wholly-owned and majority-owned subsidiaries of Dresser-Rand Company, as well as the operations of Dresser-Rand Canada, Inc. and Dresser-Rand GmbH, which were owned by Ingersoll Rand, but were managed and operated by the Predecessor along with the investments in Multiphase Power and Processing Technologies, LLC (USA) and Dresser-Rand & Enserv Services Sdn. Bhd. (Malaysia). Allocation of costs for facilities, functions and certain services performed by Ingersoll Rand on behalf of the Predecessor, including environmental and other risk management, internal audit, transportation service, administration of benefit and insurance programs and certain tax, legal, accounting and treasury functions have been made. All of the allocations and estimates in the combined financial statements are based on assumptions that the management of the Company and Ingersoll Rand believe are reasonable.
Effects of Currency Fluctuations
We conduct operations in over 140 countries. Therefore, our results of operations are subject to both currency transaction risk and currency translation risk. We incur currency transaction risk whenever we or our subsidiaries enter into a large purchase or a large sales transaction using a currency other than the local currency of the transacting entity. With respect to currency translation risk, our financial condition and results of operations are measured and recorded in the relevant local currency and then translated into U.S. dollars for inclusion in our consolidated financial statements. Exchange rates between these currencies and U.S. dollars in recent years have fluctuated significantly and may continue to do so in the future. The majority of our revenues and costs are denominated in U.S. dollars. Euro-related revenues and costs are also significant. Historically, we have engaged in hedging strategies from time to time to reduce the effect of currency fluctuations on specific transactions. However, we have not sought to hedge currency translation risk. We expect to continue to engage in hedging strategies going forward, but have not attempted to qualify for hedge accounting treatment during 2007, 2006 or 2005. Significant declines in the value of the euro relative to the U.S. dollar could have a material adverse effect on our financial condition and results of operations.
Our revenues are primarily generated through the sale of new units and aftermarket parts and services. Revenues are recognized as described in Note 2, Summary of Significant Accounting Policies, in our Notes to Consolidated Financial Statements.
Cost of Sales
Cost of sales includes raw materials, facility related employee and overhead costs, freight and warehousing, and product engineering.
Selling and Administrative Expenses
Selling expenses consist of costs associated with marketing and sales. Administrative expenses are primarily management, accounting, corporate expenses and legal costs.
Research and Development Expenses
Research and development expenses include payroll, employee benefits, and other labor related costs, facilities, workstations and software costs associated with product development. These costs are expensed as incurred. Expenses for major projects are carefully evaluated to manage return on investment requirements. We expect that our research and development spending will continue in line with historical levels.
Other Income (Expense)
Other income (expense) includes those items that are non-operating in nature. Examples of items reported as other income (expense) are equity in earnings of certain 50% or less owned affiliates, casualty losses, certain government grants and the impact of currency exchange fluctuations.
Depreciation and Amortization
Property, plant and equipment is reported at cost less accumulated depreciation, which is generally provided using the straight-line method over the estimated useful lives of the assets. Expenditures for improvements that extend the life of the asset are generally capitalized. Intangible assets primarily consist of amounts allocated to customer relationships, software and technology, trade names and other intangibles. All of the intangible assets are amortized over their estimated useful lives.
For the Predecessor periods presented, certain of the Dresser-Rand Entities were accounted for as a partnership and were not required to provide for income taxes, since all partnership income and losses were allocated to the partners for inclusion in their respective financial statements. In connection with the Transactions, the assets of the former partnership are now subject to corporate income taxes. For income tax purposes, the former partnership assets have been recorded at, and will be depreciated based upon their fair value at the time of the Transaction instead of their historical amount. On October 29, 2004, our business became subject to income tax, which has impacted our results of operations for the years ended December 31, 2007, 2006 and 2005 and for the period from October 30, 2004 through December 31, 2004 and will affect our results in the future.
For the Predecessor periods presented and prior to the Transactions, certain of our operations were subject to U.S. or foreign income taxes. After the Transactions, all of our operations are subject to U.S. or foreign income taxes. In preparing our financial statements, we have determined the tax provision of those operations on a separate company basis.
Bookings and Backlog
Bookings represent firm orders placed for specific scope of supply during the period, whether or not filled. The elapsed time from booking to completion of performance is currently averaging 15 months (longer for less frequent major projects). The backlog of unfilled orders includes amounts based on signed contracts as well as agreed letters of authorization which management has determined are likely to be performed. Although backlog represents only business that is considered firm, cancellations or scope adjustments may occur. In certain cases, cancellation of a contract provides us with the opportunity to bill for certain incurred costs and penalties.
Aftermarket Parts and Services
Bookings represent firm orders placed for specific scope of supply during the period, whether or not filled. Backlog primarily consists of unfilled parts orders and open repair and field service orders. The elapsed time from order entry to completion can be one day to 12 months depending on the complexity of the order. The cancellation of an order for parts can generally be made without penalty. Backlog is adjusted to reflect currency fluctuations. Bookings are adjusted to reflect cancellations and revised scope.
Letters of Credit, Bank Guarantees and Surety Bonds
In the ordinary course of our business, we make use of letters of credit, bank guarantees and surety bonds. We use both performance bonds, ensuring the performance of our obligations under various contracts to which we are a party, and advance payment bonds, which ensure that clients that place purchase orders with us and make advance payments under such contracts are reimbursed to the extent we fail to deliver under the contract. Under the revolving portion of our amended and restated senior secured credit facility, we are entitled to have up to $500 of letters of credit outstanding at any time, subject to certain conditions.
Results of Operations
Year ended December 31, 2007, compared to the year ended December 31, 2006
Total revenues. The energy market is very robust as the worldwide demand for and price of oil and gas continues to be strong, which in turn has caused very strong market conditions for our products and services. Total revenues were $1,665.0 for the year ended December 31, 2007, compared to $1,501.5 for the year ended December 31, 2006. This is a $163.5, or 10.9% increase. The highly engineered nature of our worldwide products and services does not lend itself to measuring the impact of price, volume and mix on changes in our total revenues from year to year. Nevertheless, based on factors such as measures of labor hours and purchases from suppliers, volume was up significantly during 2007. The aftermarket parts and services segment increased as a percentage of revenues while the New Unit segment decreased.
Cost of sales. Cost of sales was $1,216.1 for the year ended December 31, 2007, compared to $1,097.8 for the year ended December 31, 2006. As a percentage of revenues, cost of sales was approximately 73% for both years principally because our increased price realization in excess of market cost increases was offset by the effects of the work stoppage at our Painted Post facility in 2007 as discussed below.
Gross profit. Gross profit was $448.9, or 27.0% of revenues for the year ended December 31, 2007, compared to $403.7, or 26.9% of revenues for the year ended December 31, 2006. In addition to the factors mentioned above, the represented employees at our Painted Post facility imposed a work stoppage on August 3, 2007 at the conclusion of the existing collective bargaining agreement as we were unsuccessful in reaching a new agreement. The work stoppage continued through November 29, 2007, when we declared impasse. At that time, we implemented our last contract offer and the employees agreed to return to work. We estimate the work stoppage and related preparation costs reduced our gross profit for the year ended December 31, 2007, by approximately $34.
Selling and administrative expenses. Selling and administrative expenses were $239.0 for the year ended December 31, 2007, compared to $228.8 for the year ended December 31, 2006. However, 2006 included stock based compensation - exit unit expense of $23.6, as discussed below. The net increase of $10.2 is attributable to higher expense to support the increased volume of business partially offset by the absence of any stock based compensation â€” exit units in 2007. Selling and administrative expenses were 14.4% as a percentage of revenues for the year ended December 31, 2007, compared to 15.2% for 2006. 2006 included 1.6% applicable to stock based compensation â€” exit units.
Stock based compensation â€” exit units. On October 29, 2004, Dresser-Rand Holdings, LLC (Holdings), an affiliate of First Reserve Corporation, acquired the Company (the Acquisition). The financial statements of Holdings and First Reserve Corporation are not included in these consolidated financial statements. The amended and restated limited liability company agreement (Agreement) of Holdings permitted the grant of the right to purchase common units to management members of the Company and the grant of service units and exit units (collectively referred to as â€śprofit
unitsâ€ť), consisting of one initial tranche of service units and five initial tranches of exit units to certain management members who own common units. On November 22, 2004, and in connection with the closing of the Acquisition of the Company by Holdings, several of the Companyâ€™s executives, including the Chief Executive Officer and four other of the most highly compensated executive officers, purchased common units in Holdings for $4.33 per unit, the same amount paid for such common units by funds affiliated with First Reserve Corporation in connection with the Acquisition. Executives who purchased common units were also issued a total of 2,392,500 service units and five tranches of exit units totaling 5,582,500 exit units in Holdings, which permitted them to share in appreciation in the value of the Companyâ€™s shares. In May 2005, three new executives purchased 303,735 common units in Holdings at a price of $4.33 per unit and were granted 300,000 service units and 700,000 exit units. The price per unit was below their fair value at that time resulting in a â€ścheap stockâ€ť charge to expense in the second quarter of 2005 of $2.4. The Company accounted for the transactions between Holdings and the Companyâ€™s executives in accordance with FASB Statement 123(R), which required the Company to record expense for services paid by the stockholder for the benefit of the Company.
The exit units were granted in a series of five tranches. Exit units were eligible for vesting upon the occurrence of certain exit events, as defined in the Agreement, including (i) funds affiliated with First Reserve Corporation receiving an amount of cash in respect of their ownership interest in Holdings that exceeds specified multiples of the equity those funds have vested in the Company, or (ii) there is both (a) a change in control, certain terminations of employment, death or disability, and (b) the fair value of the common units at the time of such an event is such that were the common units converted to cash, funds affiliated with First Reserve would receive an amount of cash that exceeds specified multiples of the equity those funds have invested in the Company. Vested exit units convert to common units of Holdings. When the exit units vest, the Company recognizes a non-cash compensation expense and a credit to additional paid-in capital for the fair value of the exit units determined at the grant date.
During 2006, Holdings sold shares of the Company common stock that it owned for net proceeds to Holdings of approximately $1,000. As a result, all five tranches of exit units vested and the Company recorded a non-cash compensation expense equal to the total fair value at the grant date of the exit units of $23.6 during 2006. This expense did not require the use of any Company cash or the issuance of any Company stock.
Research and development expenses. Total research and development expenses for the year ended December 31, 2007 were $12.8, compared to $10.4 for the year ended December 31, 2006. The $2.4 increase was from additional engineering staff hired to support the desired growth in research and development spending.
Curtailment amendment. On January 23, 2006, a new labor agreement was ratified by the represented employees at our Wellsville, New York facility. That new agreement eliminated future retiree health benefits for active represented employees covered by the agreement who did not meet certain criteria on January 1, 2006. The resulting $11.8 net curtailment amendment reduction in accumulated benefit obligation was recorded in 2006 as the period to full eligibility for those remaining plan participants who were not fully eligible on that date was less than one year.
Operating income. Operating income was $197.1 for the year ended December 31, 2007, compared to $176.3 for the year ended December 31, 2006. The $20.8 increase was attributed to higher gross profit partially offset by increased Selling and Administration expense and the absence of a curtailment amendment as discussed above. As a percentage of revenues, operating income was 11.8% for 2007 compared to 11.7% for 2006.
Interest expense, net. Interest expense, net was $36.8 for the year ended December 31, 2007, compared to $47.9 for the year ended December 31, 2006. This reduction results from our reducing long-term debt since December 31, 2006. Interest expense, net for 2007 included $6.9 in amortization of deferred financing costs, of which $3.7 was accelerated amortization due to an early payment of $137.2 in long-term debt in the period and amending and restating our senior secured credit facility. Interest related to the Maersk litigation totaling $2.2 as described in Note 15 to the Notes to Consolidated Financial Statements are also included in the amounts for 2007. Amortization of deferred financing costs for 2006 was $5.7, including $2.0 from accelerated amortization for early payment of debt.
Other income (expense), net. Other income, net was $7.3 for the year ended December 31, 2007, compared to other income, net of $8.9 for the year ended December 31, 2006. Net currency gains were $5.5 in 2007 and $8.9 in 2006. The 2007 results also included a $2.3 gain recorded on the sale of a minority investment in a small electricity generating facility.
Provision for income taxes. Provision for income taxes was $60.9 for the year ended December 31, 2007 and $58.5 for the year ended December 31, 2006. The effective tax rate for 2007 was 36.3% compared to 42.6% for 2006. The 2007 rate is slightly higher than the 35% U.S. statutory rate principally because of certain expenses which are not a tax deduction and state and local income taxes partially offset by lower tax rates in certain foreign tax jurisdictions and the United States manufacturing tax deduction. The higher rate in 2006 was due principally to the stock based
compensation â€” exit units, which are not deductible for income tax purposes. Also, during 2006, we provided a valuation allowance of $1.8 for deferred tax assets at our subsidiary in Brazil because its accumulated losses and related net operating loss carry forward caused us to conclude that it was more likely than not, as defined by generally accepted accounting principles, that its deferred tax assets would 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.
Bookings and Backlog. Bookings for the year ended December 31, 2007 increased to $2,194.7 from $1,838.9 for the year ended December 31, 2006. The backlog increased to $1,859.3 at December 31, 2007 from $1,267.4 at December 31, 2006. These increases were principally in the New Units segment. This increase reflects the strength of the markets that we serve.
We have two reportable segments based on the engineering and production processes, and the products and services provided by each segment as follows:
1) New Units are highly engineered solutions to new customer requests. The segment includes engineering, manufacturing, sales and administrative support.
2) Aftermarket parts and services consist of aftermarket support solutions for the existing population of installed equipment. The segment includes engineering, manufacturing, sales and administrative support.
Unallocable amounts represent expenses and assets that cannot be assigned directly to either reportable segment because of their nature. Unallocable expenses included corporate expenses, research and development expenses, the curtailment amendment and stock-based compensation â€” exit units.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Results of Operations
Three months ended June 30, 2008, compared to the three months ended June 30, 2007
Total revenues. Total revenues were $541.2 for the three months ended June 30, 2008, compared to $441.2 for the three months ended June 30, 2007. The increase of $100.0 or 22.7% was from increases in new unit sales of $67.0 and aftermarket parts and services sales of $33.0. The highly engineered nature of our worldwide products and services does not 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, total volume was up during the second quarter of 2008. Also, we have implemented price increases for most of our products and services. However, realization of implemented price increases depends on the cycle times from order entry to completion. Currently, cycle times from order entry to completion for new unit bookings are averaging 15 months and cycle times for aftermarket parts and services typically ranges from one day to 12 months depending on the nature of the product or service.
Cost of sales. Cost of sales was $391.2 for the three months ended June 30, 2008, compared to $322.3 for the three months ended June 30, 2007. As a percentage of revenues, cost of sales remained at about 73% for both periods. Cost of sales for the three months ended June 30, 2007, also includes a provision for loss on litigation with Maersk Oil UK Limited of $3.0.
Gross profit. Gross profit was $150.0 for the three months ended June 30, 2008, compared to $118.9 for the three months ended June 30, 2007, and remained at about 27% of revenue for both periods even though lower margin new units was 55.3% of total revenues in 2008 versus 52.6% in 2007.
Selling and administrative expenses. Selling and administrative expenses were $68.9 for the three months ended June 30, 2008, compared to $66.2 for the three months ended June 30, 2007, an increase of $2.7. The increase was generally attributable to higher expenses to support the increased business volume, including higher third party commissions.
Research and development expenses. Research and development expenses for the three months ended June 30, 2008 were $3.8 compared to $2.6 for the three months ended June 30, 2007. The $1.2 increase was planned and we expect total research and development for the year 2008 to exceed that incurred in 2007.
Partial settlement. In connection with a new collective bargaining agreement ratified by our represented employees at our Olean, NY, facility on March 31, 2008, certain changes were made to retiree medical benefits for employees covered by the agreement. Employees who did not meet certain age and service criteria on April 1, 2008, were paid a lump sum totaling $6.4 in May 2008 calculated based on years of service in lieu of receiving future retiree medical benefits, resulting in a curtailment amendment. Under the accounting principles generally accepted in the United States of America, the payment of the $6.4 lump sum in May 2008 was considered a partial settlement that required the Company to recognize approximately $1.8 of net actuarial losses included in accumulated other comprehensive income in the second quarter 2008 statement of income.
Operating income. Operating income was $75.5 for the three months ended June 30, 2008, compared to $50.1 for the three months ended June 30, 2007, an increase of $25.4. As a percentage of revenues, operating income for 2008 was 14.0% compared to 11.4% for 2007. These increases were due to the factors mentioned above.
Interest expense, net. Interest expense, net was $7.1, including $0.8 of amortization of deferred financing costs, for the three months ended June 30, 2008, compared to $10.0 for the three months ended June 30, 2007. Interest expense, net for 2007 included $1.2 of accrued interest recorded in connection with the Maersk Oil UK Limited litigation and $1.9 in amortization of deferred financing costs, of which $1.1 was accelerated amortization due to early payments of $60.1 on long-term debt in the period.
Other income, net. Other income, net was $1.2 for the three months ended June 30, 2008, compared to other income, net of $1.3 for the three months ended June 30, 2007. Net currency gains during 2008 were $1.2 compared to net currency gains of $1.4 during the 2007 period.
Provision for income taxes. Provision for income taxes was $22.9 for the three months ended June 30, 2008, and $15.2 for the three months ended June 30, 2007. Our estimated income tax provision for the three months ended June 30, 2008 and 2007, results in an effective rate that differs form the U.S. Federal statutory rate of 35% principally because of certain expenses that are not tax deductible, state and local income taxes, different tax rates in foreign tax jurisdictions and certain deductions and credits allowable for income tax purposes only. In addition, the provision for the income taxes for the three months ended June 30, 2008, includes discrete amounts recognized in the period for adjustments to certain foreign subsidiariesâ€™ prior year income tax returns.
Bookings and backlog. Bookings for the three months ended June 30, 2008, was $503.6 compared to $659.2 for the three months ended June 30, 2007. This decline was attributed principally to the $154.0 British Petroleum Skarv FPSO order booked in 2007. Aftermarket parts and services segment bookings increased $65.1, while the new units segment bookings declined $220.7. We expect bookings for the year 2008 to exceed 2007â€™s. Backlog was $2,085.8 at June 30, 2008, compared to $1,612.5 at June 30, 2007. The backlog increases reflect the continued strength of the markets we serve.
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 customers. The segment includes engineering, manufacturing, sales and administrative support.
2) Aftermarket parts and services consist of aftermarket support solutions for the existing population of installed equipment. The segment includes engineering, manufacturing, sales and administrative support.
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 curtailment amendment / partial settlement. Assets that are directly assigned to the two reportable segments are trade accounts receivable, net inventories, and goodwill. Unallocated assets include cash, prepaid expenses, deferred taxes, property, plant and equipment, and intangible assets.
Segment Analysis â€” three months ended June 30, 2008, compared to three months ended June 30, 2007
Revenues. New units revenues were $299.2 for the three months ended June 30, 2008, compared to $232.2 for the three months ended June 30, 2007, an increase of $67.0 or 28.9%, reflecting the continued strength of the markets we serve. Cycle times from order entry to completion for products in this segment are currently averaging approximately 15 months. The market for our products continues strong as reflected in the growth of our backlog.
Gross profit. Gross profit was $47.1 for the three months ended June 30, 2008, compared to $39.6 for the three months ended June 30, 2007. Gross profit, as a percentage of segment revenues, was 15.7% for 2008 compared to 17.1% for 2007. These decreases resulted principally from the mix of orders shipped in the periods. Also in 2007, there were a higher proportion of orders shipped with higher margins on which third party commissions were paid that are included in selling expense. Margins net of third party commissions were higher in 2008 than 2007.
Operating income. Operating income was $25.7 for the three months ended June 30, 2008, compared to $17.4 for the three months ended June 30, 2007. The increase was principally from improved pricing and higher sales volume. As a percentage of segment revenues, operating income was 8.6% for 2008 compared to 7.5% for 2007. The increase was principally from higher sales and lower period costs and expenses.
Bookings and Backlog. New units bookings for the three months ended June 30, 2008 was $232.2, compared to $452.9 for the three months ended June 30, 2007. This decline was attributed principally to the $154.0 British Petroleum Skarv FPSO order booked in 2007. The backlog increased to $1, 707.8 at June 30, 2008, from $1,335.2 at June 30, 2007, as several large orders were booked during the nine months ended March 31, 2008.
Aftermarket Parts and Services
Revenues. Aftermarket parts and services revenues were $242.0 for the three months ended June 30, 2008, compared to $209.0 for the three months ended June 30, 2007, an increase of $33.0 or 15.8%. We believe the increase reflects the continued strength of the markets we serve and indicates the procurement process approval cycle and budget appropriations for certain of our national oil company clients in 2007 has returned to more normal processes. 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 $102.9 for the three months ended June 30, 2008, compared to $79.3 for the three months ended June 30, 2007. Gross profit, as a percentage of segment revenues, increased to 42.5% in 2008 compared to 37.9% in 2007, principally from improved pricing and higher volume.
Operating income. Operating income was $70.8 for the three months ended June 30, 2008, compared to $52.0 for the three months ended June 30, 2007. As a percentage of segment revenues, operating income increased to 29.3% for 2008 from 24.9% for 2007, principally from improved pricing and higher volume.
Bookings and Backlog. Bookings for the three months ended June 30, 2008 were $271.4 compared to $206.3 for the three months ended June 30, 2007. Backlog was $378.0 as of June 30, 2008 compared to $277.3 at June 30, 2007. We believe these increases reflect the continued strength of the markets we serve and indicate the procurement process approval cycle and budget appropriations for certain of our national oil company customers in 2007 has returned to more normal processes.
Blaise Derrico - Director, Investor Relations
Theresa, thank you. Good morning, everyone. This call is open to the public, being webcast simultaneously at www.dresser-rand.com and will be temporarily archived for replay. A copy of the news release we issued yesterday is available on our website, as are the slides we will use today during our presentation. We will let you know when to advance the slides as we deliver our prepared remarks.
Please turn to slide number two. Statements made during this conference call that are not historical facts may be forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements.
In addition, this conference call contains time-sensitive information that reflects management's best judgment only as of the date of the live call. Dresser-Rand does not undertake any ongoing obligation other than that imposed by law, publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after this call. Further information concerning issues that can materially affect the financial performance related to forward-looking statements can be found in Dresser-Rand's periodic filings with the SEC.
Now, I'll turn the call over to Vince Volpe, President and Chief Executive Officer.
Vincent R. Volpe, Jr. - President and Chief Executive Officer
Thank you for joining us today, and welcome to Dresser-Rand's earnings call. With me are Mark Baldwin, Dresser-Rand's Chief Financial Officer; and Blaise Derrico, our Director of Investor Relations. I will start with a review of recent highlights and Mark will follow me with a detailed discussion of our second quarter results.
Please turn to slide three. We are very pleased with our second quarter performance. Our operating results were well above the top end of our guidance range. Net income was about $47 million, an increase of 78% from the corresponding period last year. EPS was $0.55 per share. Mark will cover our second quarter financial results in detail in a moment, but first a few recent highlights.
Bookings overall were lower than last year's second quarter, primarily due to timing and the lumpy nature of new unit orders, but bookings in the higher margin after-market segment were up about 32%. Sales increased 23%. Backlog grew 29% from June 30th, 2007 to approximately $2.1 billion. Operating income was $75.5 million or 51% increase compared to the corresponding period last year. As of the close of business yesterday, we have completed approximately three-quarters of the previously announced $150 million share repurchase program.
We announced the approval of two strategic investments. One investment is to construct additional test capability associated with our newly developed compressor-separator technologies, and the second is for a new technology center to house about 500 engineers and technologists.
Finally, we completed the acquisition of Peter Brotherhood, which is consistent with our bolt-on acquisition strategy and along with our share repurchase program a very good use of cash. Weâ€™ll have more to say about this transaction in a moment.
Next slide please. Bookings for the last 12 months were approximately $2.2 billion or 3% higher than the same period a year ago and 46% higher than two years ago. Breaking it down into the two segments, new unit bookings of $1.2 billion were 7% lower than a year ago. The decrease reflects the varying sizes and lumpy nature of new unit orders. For example, in the second quarter of last year, we booked a very large order for $154 million for the BP Skarv FPSO order. Please let me emphasize, we expect very strong bookings performance over the second half of the year in the new unit segment.
Turn to slide five please. One new unit order that was booked in the second quarter of 2008 involves one of the world's largest greenhouse gas storage projects. Part of our strategy is to increase our focus on environmental solutions. Under this order, we will supply DATUM compressors to inject carbon dioxide for enhanced oil recovery in EnCana's Weyburn field and Apache's Midale [ph] field located in Southeast Saskatchewan, Canada. These fields are host to the world leading storage projects studying CO2 Geological Storage. Scientists project that by using knowledge gained from the Weyburn project, the Weyburn oil field will remain viable for another 20 years, produce an additional 130 million barrels of oil and sequester as much as 30 million tons of CO2. We believe this type of environmental solution will provide a future platform for growth.
Turn to slide six please. After-market bookings of $985 million were up about 18%, reflecting the continued market strength as well as two national oil company clients, which in 2007 made certain process changes recovering to more normal bookings levels.
Turn to slide seven please. Backlog at the end of June was approximately $2.1 billion or 29% higher than a year earlier and 106% higher than two years ago. Breaking it down into the two segments, new unit backlog of $1.7 billion is up 28% versus a year ago and the after-market backlog is up about 36% to $378 million.
Turn to the next slide please. On the acquisition front, we're pleased to report that earlier this month we completed the acquisition of certain assets of Peter Brotherhood Limited for approximately $62 million net of cash acquired. The agreement includes a potential for additional consideration, based on an earn-out arrangement. Peter Brotherhood specializes in the design and manufacture of steam turbines, reciprocating gas compressors, gearboxes and environmentally-friendly gas engine package combined heat & power systems. With roughly half its sales in Europe, a third in Asia and about 15% in Africa, the acquisition strengthens our position in these regions of the world, especially in the FPSO and marine markets. With an installed base of approximately 750 units, the acquisition is consistent with our strategy to grow the high after-market segment. This acquisition, which is of significant geographic importance to us, is expected to be at least neutral to earnings in the first year and accretive thereafter.
I will now turn the call over to Mark Baldwin.
Mark E. Baldwin - Executive Vice President and Chief Financial Officer
Thank you, Vince, and good morning, everyone. Please turn to slide nine. As Vince mentioned, we reported net income for the second quarter of $46.7 million or $0.55 per diluted share. This includes a charge of $1.8 million pre-tax or $0.01 per share. We're showing on this slide the impact of several unusual items from both periods. After adjusting for these unusual items, adjusted non-GAAP net income was up approximately 58%. This improvement reflects very good operating leverage, as sales were up less than half of that percentage change.
At our first-quarter conference call, we mentioned that in connection with the Olean labor agreement we agreed to make a lump-sum payment to those employees affected by the elimination of retiree healthcare. At the time, we estimated that the charge to income in the second quarter would be approximately $2 million. A lump-sum payment totaling $6.4 million was paid to eligible employees in the second quarter of 2008. Under Generally Accepted Accounting Principles, the payment is considered a partial settlement that required us to recognize approximately $1.8 million of net actuarial losses in the second quarter of 2008 income statement.
Turn to slide ten please. Sales for the second quarter of 2008 of $541 million were about 23% higher than the second quarter of 2007. New unit sales of $299 million were 29% higher than the second quarter of 2007. Sales of after-market parts and services increased approximately 16% from the corresponding period a year ago to $242 million.
Turn to the next slide please. Total operating income for the second quarter of 2008 was $75.5 million, which includes the previously mentioned charge of $1.8 million before tax. Adjusting for the charge, second quarter non-GAAP operating income was $77.3 million. This compares to operating income of about $55.5 million for the second quarter of 2007, adjusted to exclude two unusual items, a litigation provision and workers' compensation expenses, which totaled about $5.4 million. Operating income margin was 14.3% compared to 12.6% for the corresponding period in 2007, after adjusting for these items I've mentioned previously.
Next slide please. After-market operating margin increased 320 basis points to 29.3% from the corresponding period last year of 26.1%, adjusted for the two unusual items mentioned previously. The increase in second quarter 2008 operating margins from the same period a year ago was principally due to improved prices, higher volumes and a better mix. We still believe after-market margins for the year will be roughly flat compared to 2007.
Next slide please. On an adjusted basis, new unit operating margins were relatively flat at 8.6% compared to the corresponding period a year ago. We continue to expect new unit operating margins to be in the low-double digits for the full year.
Turn to slide 14 please. At the end of the second quarter, liquidity was approximately $480 million and this consisted of about $273 million of cash and $207 million of available borrowings under our bank credit arrangements.
Next slide please. Net cash provided by operating activities for the first six months of this year was about $104 million, and this compares to $136 million in the first six months of 2007. The decrease of approximately $32 million was principally due to changes in working capital, which provided $43 million less cash flow than in the corresponding period a year ago. Working capital changes provided cash of approximately $40 million in the first six months of this year compared to $83 million in the first six months of 2007, principally due to the higher receivable balances in 2008 resulting from the significant increase in sales in the period.
Next slide please. In terms of investing activities, capital expenditures used cash of approximately $15 million in the first six months of 2008 compared to $9 million in the first six months of 2007. Investing activities in 2007 also includes the acquisition of the Gimpel Valve business for approximately $8 million.
In June, we announced the approval of two strategic investments at our Olean, New York location. One investment is to construct additional test capabilities associated with our newly developed compressor/separator technologies. The second is for a new technology center to house about 500 engineers and technologists. The capital expenditures for these two projects is expected to be approximately $25 million through the first half of next year. Consistent with the guidance provided on our previous call, capital expenditures for the year are expected to be about 2% of sales. The test facility is expected to be operational later this year, while the occupancy date for the tech center is scheduled for early 2009.
As to financing activities, during the second quarter we purchased Dresser-Rand stocks totaling approximately $28 million under our previously announced $150 million share repurchase program. As Vince mentioned earlier, as of last night we have now completed about three-quarters of the program. For more information about our results for the second quarter, please refer to our 10-Q, which we filed last night with the SEC.
With that, I'll turn the call back to Vince for closing comments and to moderate our Q&A session.
Vincent R. Volpe, Jr. - President and Chief Executive Officer
Thank you, Mark. As for our business outlook, demand for products and services continue to be strong across all markets; upstream, midstream and downstream. We expect very strong new unit bookings in the second half of the year. Backlog has extended well into next year with approximately $913 million or 44% of our June 30th, 2008 backlog scheduled to ship in 2009 and beyond. Our expectations for the 2008 operating income are unchanged. While we continue to believe that our 2008 operating income would be in the range of $285 million to $315 million, we now have a strong bias towards the upper half of the range. As for the third quarter, we currently expect operating income to be in the range of 25% to 27% of the total year.
At this point, we will open the line for questions. Operator, please begin the Q&A session. Thank you.