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Gardner Denver 10-Q 2006

Documents found in this filing:

  1. 10-Q
  2. Ex-12
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2
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Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13215
GARDNER DENVER, INC.
(Exact name of registrant as specified in its charter)
     
Delaware
(State or other jurisdiction of
incorporation or organization)
  76-0419383
(I.R.S. Employer
Identification No.)
1800 Gardner Expressway
Quincy, Illinois 62305

(Address of principal executive offices and Zip Code)
(217) 222-5400
(Registrant’s telephone number, including area code)
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. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ      Accelerated filer o      Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 52,506,354 shares of Common Stock, par value $0.01 per share, as of October 29, 2006.
 
 

 


 

GARDNER DENVER, INC.
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 Statement Re: Computation of Ratio of Earnings to Fixed Charges
 302 Certification of Chief Executive Officer
 302 Certification of Chief Financial Officer
 906 Certification of Chief Executive Officer
 906 Certification of Chief Financial Officer

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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
GARDNER DENVER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2006     2005     2006     2005  
Revenues
  $ 414,028     $ 356,095     $ 1,229,634     $ 845,265  
 
                               
Costs and expenses:
                               
Cost of sales (excluding depreciation and amortization)
    271,549       240,535       800,438       569,449  
Depreciation and amortization
    13,000       11,335       39,527       25,816  
Selling and administrative expenses
    73,783       71,082       220,531       175,245  
Interest expense
    8,762       10,358       28,574       19,642  
Other income, net
    (1,015 )     (1,016 )     (2,155 )     (4,338 )
 
                       
Total costs and expenses
    366,079       332,294       1,086,915       785,814  
 
                       
 
                               
Income before income taxes
    47,949       23,801       142,719       59,451  
Provision for income taxes
    15,832       7,140       47,106       17,835  
 
                       
 
                               
Net income
  $ 32,117     $ 16,661     $ 95,613     $ 41,616  
 
                       
 
Basic earnings per share
  $ 0.61     $ 0.32     $ 1.83     $ 0.90  
 
                       
 
                               
Diluted earnings per share
  $ 0.60     $ 0.32     $ 1.79     $ 0.88  
 
                       
The accompanying notes are an integral part of these consolidated financial statements.

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GARDNER DENVER, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
                 
    September 30,     December 31,  
    2006     2005  
    (unaudited)          
Assets
               
Current assets:
               
Cash and equivalents
  $ 86,024     $ 110,906  
Accounts receivable (net of allowances of $10,333 at September 30, 2006 and $9,605 at December 31, 2005)
    271,677       229,467  
Inventories, net
    228,555       207,326  
Deferred income taxes
    27,270       25,754  
Other current assets
    16,544       12,814  
 
           
Total current assets
    630,070       586,267  
 
           
 
               
Property, plant and equipment, net
    266,533       282,591  
Goodwill
    679,042       620,244  
Other intangibles, net
    197,511       203,516  
Other assets
    21,775       22,442  
 
           
Total assets
  $ 1,794,931     $ 1,715,060  
 
           
 
               
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Short-term borrowings and current maturities of long-term debt
  $ 32,034     $ 26,081  
Accounts payable
    102,733       103,028  
Accrued liabilities
    198,252       184,735  
 
           
Total current liabilities
    333,019       313,844  
 
           
 
               
Long-term debt, less current maturities
    459,197       542,641  
Postretirement benefits other than pensions
    31,863       31,387  
Deferred income taxes
    83,551       86,171  
Other liabilities
    89,648       82,728  
 
           
Total liabilities
    997,278       1,056,771  
 
           
 
               
Stockholders’ equity:
               
Common stock, $0.01 par value; 100,000,000 shares authorized; 52,501,169 and 51,998,704 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively
    562       278  
Capital in excess of par value
    487,131       472,825  
Retained earnings
    301,994       206,381  
Accumulated other comprehensive income
    39,608       8,124  
Treasury stock at cost, 3,733,095 and 3,618,052 shares at September 30, 2006 and December 31, 2005, respectively
    (31,642 )     (29,319 )
 
           
Total stockholders’ equity
    797,653       658,289  
 
           
Total liabilities and stockholders’ equity
  $ 1,794,931     $ 1,715,060  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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GARDNER DENVER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
                 
    Nine Months Ended  
    September 30,  
    2006     2005  
Cash Flows From Operating Activities
               
Net income
  $ 95,613     $ 41,616  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    39,527       25,816  
Unrealized foreign currency transaction loss (gain), net
    354       (108 )
Net loss on asset dispositions
    51       146  
Stock issued for employee benefit plans
    2,767       2,496  
Excess tax benefits from stock-based compensation
    (2,925 )      
Deferred income taxes
    (4,787 )     (1,874 )
Changes in assets and liabilities:
               
Receivables
    (32,639 )     (7,638 )
Inventories
    (16,581 )     (4,316 )
Accounts payable and accrued liabilities
    (2,212 )     (8,609 )
Other assets and liabilities, net
    7,572       5,298  
 
           
Net cash provided by operating activities
    86,740       52,827  
 
           
 
               
Cash Flows From Investing Activities
               
Net cash paid in business combinations
    (20,057 )     (480,421 )
Capital expenditures
    (26,277 )     (22,650 )
Disposals of property, plant and equipment
    11,436       536  
Other, net
          (2,148 )
 
           
Net cash used in investing activities
    (34,898 )     (504,683 )
 
           
 
               
Cash Flows From Financing Activities
               
Principal payments on short-term borrowings
    (7,997 )     (23,380 )
Proceeds from short-term borrowings
    8,293       16,663  
Principal payments on long-term debt
    (210,376 )     (467,328 )
Proceeds from long-term debt
    120,922       786,150  
Proceeds from issuance of common stock
          199,318  
Proceeds from stock options
    4,593       5,498  
Excess tax benefits from stock-based compensation
    2,925        
Purchase of treasury stock
    (1,222 )     (2,810 )
Debt issuance costs
    (540 )     (7,789 )
Other
    (158 )      
 
           
Net cash (used in) provided by financing activities
    (83,560 )     506,322  
 
           
 
               
Effect of exchange rate changes on cash and equivalents
    6,836       (4,511 )
 
           
 
               
(Decrease) increase in cash and equivalents
    (24,882 )     49,955  
Cash and equivalents, beginning of year
    110,906       64,601  
 
           
Cash and equivalents, end of period
  $ 86,024     $ 114,556  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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GARDNER DENVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts or amounts described in millions)
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
     The accompanying consolidated financial statements include the accounts of Gardner Denver, Inc. and those subsidiaries that are majority-owned or over which Gardner Denver, Inc. exercises control (referred to herein as “Gardner Denver” or the “Company”). In consolidation, all significant intercompany transactions and accounts have been eliminated. Current and prior year per share amounts in this report on Form 10-Q reflect the effect of a two-for-one stock split (in the form of a 100% stock dividend) that was completed on June 1, 2006 (see Note 3).
     The financial information presented as of any date other than December 31, 2005 has been prepared from the books and records of the Company without audit. The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of such financial statements, have been included.
     The unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Gardner Denver’s Annual Report on Form 10-K for the year ended December 31, 2005.
     The results of operations for the nine-month period ended September 30, 2006 are not necessarily indicative of the results to be expected for the full year. The balance sheet at December 31, 2005 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements.
     Other than as specifically indicated in the “Notes to Consolidated Financial Statements” included in this Quarterly Report on Form 10-Q, the Company has not materially changed its significant accounting policies from those disclosed in its Form 10-K for the year ended December 31, 2005.
     In the first quarter of 2006, the Company made certain organizational changes that resulted in a realignment of its reportable segments. The operations of the Company’s line of specialty bronze and high alloy pumps for the general industrial and marine markets (acquired in July 2005 as part of Thomas Industries Inc. (“Thomas”)) (see Note 2) and the operations of its line of self-sealing couplings (acquired in January 2004 as part of Syltone plc (“Syltone”)) were transferred from the Compressor and Vacuum Products segment to the Fluid Transfer Products segment. Accordingly, reportable segment information for these two operations has been included in the Fluid Transfer Products segment results. Results for the three and nine-month periods ended September 30, 2005 have been restated to reflect this realignment. In addition, operating results of the Todo Group (“Todo”), a manufacturer of self-sealing couplings that was acquired in January 2006 (see Note 2) have been included in the Fluid Transfer Products segment from the date of acquisition.

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Changes in Accounting Principles and Effects of New Accounting Pronouncements
     In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). SFAS No. 123(R) supersedes Accounting Principals Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and amends SFAS No. 95, “Statement of Cash Flows.” The Company adopted the provisions of SFAS No. 123(R) effective January 1, 2006. Disclosures related to the Company’s stock-based compensation plans are included in Note 9.
     In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 in the first quarter of 2007. The cumulative effects, if any, of applying FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. Management has commenced the process of evaluating the expected effect of FIN 48 on the Company’s consolidated financial statements and related disclosure requirements.
     In June 2006, the Emerging Issues Task Force reached a consensus on the income statement presentation of various types of taxes. The new guidance, Emerging Issues Task Force Issue 06-3 “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF 06-3”) applies to any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes. The presentation of taxes within the scope of this issue on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy decision that should be disclosed pursuant to APB Opinion No. 22, “Disclosure of Accounting Policies.” The EITF’s decision on gross versus net presentation requires that any such taxes reported on a gross basis be disclosed on an aggregate basis in interim and annual financial statements, for each period for which an income statement is presented, if those amounts are significant. EITF 06-3 is effective for fiscal years beginning after December 15, 2006. Management has commenced the process of evaluating the expected effect of EITF 06-3 on the Company’s disclosure requirements.
     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. SFAS No. 157 applies whenever other statements require or permit assets or liabilities to be measured at fair value. This statement is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact the adoption of SFAS No. 157 will have on the Company’s consolidated financial statements and related disclosure requirements.

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     In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”), which requires companies to recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income to report the funded status of defined benefit pension and other postretirement benefit plans. SFAS No.158 requires prospective application, and the recognition and disclosure requirements are effective for fiscal years ending after December 15, 2006. Additionally, this statement requires companies to measure plan assets and obligations at their year-end balance sheet date. This requirement is effective for fiscal years ending after December 15, 2008. Management has commenced the process of evaluating the expected effect of SFAS No. 158 on the Company’s consolidated financial statements and related disclosure requirements.
     In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”), which addresses the diversity in practice in quantifying financial statement misstatements and provides interpretive guidance regarding the consideration given to prior year misstatements when determining materiality in current year financial statements. SAB No. 108 is effective for fiscal years ending after November 15, 2006. Management is currently evaluating the impact the adoption of SAB No. 108 will have on the Company’s consolidated financial statements and related disclosure requirements.
Note 2. Business Combinations
     Service marks, trademarks and/or tradenames and related designs or logotypes owned by Gardner Denver, Inc. or its subsidiaries are shown in italics.
     The following table presents summary information with respect to acquisitions completed by Gardner Denver during 2005:
         
Date of Acquisition   Acquired Entity   Net Transaction Value
June 1, 2005
  Bottarini S.p.A.   8.0 million (approximately $10.0 million)
July 1, 2005
  Thomas Industries Inc.   $483.5 million
     During the nine-month period ended September 30, 2006, the Company also made cash acquisition payments of approximately $4.0 million, primarily consisting of payments to former stockholders and transaction-related costs in connection with Thomas, and reflected in the above transaction value.
     On January 9, 2006, the Company completed the acquisition of the Todo Group (“Todo”) for a purchase price of 126.2 million Swedish kronor (approximately $16.1 million), net of debt and cash acquired. Todo, with assembly operations in Sweden and the United Kingdom, and a central European sales and distribution operation in the Netherlands, has an extensive offering of dry-break couplers. Todo-Matic self-sealing couplings are used by oil, chemical and gas companies to transfer their products. The Todo acquisition extends the Company’s product line of Emco Wheaton couplers, added as part of the Syltone plc (“Syltone”) acquisition in 2004.
     All acquisitions have been accounted for by the purchase method and, accordingly, their results are included in the Company’s consolidated financial statements from the respective dates of acquisition. Under the purchase method, the purchase price is allocated based on the fair value of assets received and liabilities assumed as of the acquisition date.

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Acquisition of Thomas Industries Inc.
     Under the purchase method of accounting, the assets and liabilities of Thomas were recorded at their estimated respective fair values as of July 1, 2005. The initial allocation of the purchase price was subsequently adjusted when preliminary valuation estimates were finalized. The following table summarizes the nature and amount of such adjustments recorded in 2006:
Thomas Industries Inc.
Purchase Price Allocation and Adjustments
September 30, 2006
         
Total intangible assets recorded as of December 31, 2005
  $ 360,373  
Purchase accounting adjustments recorded in 2006:
       
Fair value of current assets and liabilities, net
    9,090  
Fair value of property, plant and equipment, net
    2,893  
Termination benefits and other related liabilities
    (2,872 )
Income taxes, net
    4,865  
Other, net
    1,951  
 
     
Total intangible assets recorded as of September 30, 2006
  $ 376,300  
 
     
Goodwill
  $ 276,955  
Identifiable intangible assets
    99,345  
 
     
Total
  $ 376,300  
 
     
     Finalization of the fair value of the Thomas tangible and amortizable intangible assets resulted in a cumulative $5.5 million pre-tax charge to depreciation expense and a cumulative $3.2 million pre-tax credit to amortization expense in the second quarter of 2006.
     In connection with the acquisition of Thomas, the Company initiated plans to close and consolidate certain former Thomas facilities, primarily in the U.S. and Europe. These plans include various voluntary and involuntary employee termination and relocation programs affecting both salaried and hourly employees and exit costs associated with the sale, lease termination or sublease of certain manufacturing and administrative facilities. The terminations, relocations and facility exits are expected to be substantively completed during the next nine months. A liability of $17,500 was included in the allocation of the Thomas purchase price for the estimated cost of these actions at July 1, 2005 in accordance with EITF No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” Based on finalization of these plans, an estimated total cost of $16,862 has been included in the allocation of the Thomas purchase price. The cost of these plans is comprised of the following:
         
Voluntary and involuntary employee termination and relocation
  $ 14,718  
Lease termination and related costs
    1,007  
Other
    1,137  
 
     
Total
  $ 16,862  
 
     

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     The following table summarizes the activity in the associated accrual account. All additional amounts accrued, net, were recorded as adjustments to the cost of acquiring Thomas.
                         
    Termination              
    Benefits     Other     Total  
Established at July 1, 2005
  $ 16,814     $ 686     $ 17,500  
Amounts paid
    (8,157 )           (8,157 )
 
                 
Balance at December 31, 2005
    8,657       686       9,343  
Additional amounts accrued (reversed), net
    (2,096 )     1,458       (638 )
Amounts paid
    (3,096 )     (527 )     (3,623 )
 
                 
Balance at September 30, 2006
  $ 3,465     $ 1,617     $ 5,082  
 
                 
Note 3. Stockholders’ Equity and Stock Split
     On May 2, 2006, the Company’s stockholders approved an increase in the number of authorized shares of common stock from 50 million to 100 million. This increase in shares allowed the Company to complete the previously announced two-for-one stock split (in the form of a 100% stock dividend). Stockholders of record at the close of business on May 11, 2006 received a stock dividend of one share of the Company’s common stock for each share owned. The stock dividend was paid after the close of business on June 1, 2006. All shares reserved for issuance pursuant to the Company’s stock option, retirement savings and stock purchase plans were automatically increased by the same proportion pursuant to the Company’s Long-Term Incentive Plan and retirement savings plan. In addition, shares subject to outstanding options or other rights to acquire the Company’s stock and the exercise price for such shares were adjusted proportionately. The Company transferred $0.3 million to common stock from additional paid-in capital, representing the aggregate par value of the shares issued under the stock split. Current and prior year share and per share amounts in this report on Form 10-Q reflect the effect of the two-for-one stock split (in the form of a 100% stock dividend) that was completed on June 1, 2006.

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Note 4. Inventories
                 
    September 30,     December 31,  
    2006     2005  
Raw materials, including parts and subassemblies
  $ 104,212     $ 95,855  
Work-in-process
    39,653       37,230  
Finished goods
    95,493       80,494  
 
           
 
    239,358       213,579  
Excess of FIFO costs over LIFO costs
    (10,803 )     (6,253 )
 
           
Inventories, net
  $ 228,555     $ 207,326  
 
           
Note 5. Goodwill and Other Intangible Assets
     The changes in the carrying amount of goodwill attributable to each business segment for the nine-month period ended September 30, 2006, and the year ended December 31, 2005, are presented in the table below. The adjustments to goodwill recorded in 2006 reflect the finalization of the purchase price allocations for the Thomas and Bottarini S.p.A. (“Bottarini”) acquisitions.
                         
    Compressor &     Fluid        
    Vacuum     Transfer        
    Products     Products     Total  
Balance as of December 31, 2004
  $ 336,075     $ 38,084     $ 374,159  
Acquisitions
    256,942             256,942  
Adjustments to goodwill
    4,332             4,332  
Foreign currency translation
    (13,908 )     (1,281 )     (15,189 )
 
                 
Balance as of December 31, 2005
    583,441       36,803       620,244  
Acquisitions
          12,409       12,409  
Adjustments to goodwill
    24,724             24,724  
Foreign currency translation
    20,093       1,572       21,665  
 
                 
Balance as of September 30, 2006
  $ 628,258     $ 50,784     $ 679,042  
 
                 
     The following table presents the gross carrying amount and accumulated amortization of identifiable intangible assets, other than goodwill, at the dates presented:
                                 
    September 30, 2006     December 31, 2005  
    Gross             Gross        
    Carrying     Accumulated     Carrying     Accumulated  
    Amount     Amortization     Amount     Amortization  
Amortized intangible assets:
                               
Customer lists and relationships
  $ 63,290     $ (7,793 )   $ 105,896     $ (7,389 )
Acquired technology
    37,691       (18,652 )     30,802       (13,164 )
Other
    11,758       (4,376 )     13,453       (3,558 )
Unamortized intangible assets:
                               
Trademarks
    115,593             77,476        
 
                       
Total other intangible assets
  $ 228,332     $ (30,821 )   $ 227,627     $ (24,111 )
 
                       
     Amortization of intangible assets for the three and nine-month periods ended September 30, 2006, was $2.6 million and $5.8 million, respectively. Finalization of the fair value of the Thomas amortizable intangible assets resulted in a cumulative $3.2 million pre-tax credit to amortization expense in the second quarter of 2006. Amortization of intangible assets for the three and nine-month periods

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ended September 30, 2005, was $2.9 million and $6.6 million, respectively. Amortization of intangible assets is anticipated to be approximately $8.0 to $9.0 million annually in 2006 through 2010, based upon existing intangible assets with finite useful lives as of September 30, 2006.
Note 6. Accrued Product Warranty
     The following table summarizes the activity in the Company’s product warranty accrual for the three and nine-month periods ended September 30, 2006 and 2005, respectively:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2006     2005     2006     2005  
Balance at beginning of period
  $ 17,048     $ 10,861     $ 15,254     $ 10,671  
Product warranty accruals
    3,101       3,464       10,985       7,374  
Settlements
    (3,961 )     (3,235 )     (10,709 )     (6,700 )
Other (acquisitions and foreign currency translation)
    747       5,872       1,405       5,617  
 
                       
Balance at end of period
  $ 16,935     $ 16,962     $ 16,935     $ 16,962  
 
                       
Note 7. Pension and Other Postretirement Benefits
     The following table summarizes the components of net periodic benefit cost for the Company’s defined benefit pension plans and other postretirement benefit plans recognized for the three and nine–month periods ended September 30, 2006 and 2005, respectively:
                                                 
    Three Months Ended September 30,  
    Pension Benefits     Other  
    U.S. Plans     Non-U.S. Plans     Postretirement Benefits  
    2006     2005     2006     2005     2006     2005  
Service cost
  $ 857     $ 1,346     $ 1,342     $ 1,342     $ 33     $ 28  
Interest cost
    993       1,025       2,120       2,008       390       409  
Expected return on plan assets
    (1,087 )     (1,150 )     (2,367 )     (1,901 )            
Amortization of prior-service cost
    (18 )     (2 )                 (27 )     11  
Amortization of net loss (gain)
    124       136       122       56       (56 )     (139 )
 
                                     
Net periodic benefit expense
  $ 869     $ 1,355     $ 1,217     $ 1,505     $ 340     $ 309  
 
                                   
                                                 
    Nine Months Ended September 30,  
    Pension Benefits     Other  
    U.S. Plans     Non-U.S. Plans     Postretirement Benefits  
    2006     2005     2006     2005     2006     2005  
Service cost
  $ 2,571     $ 2,552     $ 4,026     $ 3,815     $ 99     $ 28  
Interest cost
    2,979       2,801       6,360       5,948       1,170       1,169  
Expected return on plan assets
    (3,261 )     (3,100 )     (7,101 )     (5,935 )            
Amortization of prior-service cost
    (54 )     (52 )                 (81 )     (39 )
Amortization of net loss (gain)
    372       356       366       135       (168 )     (439 )
 
                                   
Net periodic benefit expense
  $ 2,607     $ 2,557     $ 3,651     $ 3,963     $ 1,020     $ 719  
 
                                   

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     During the third quarter of 2006, the Company announced changes to certain of its defined pension benefit plans, effective November 1, 2006. See Note 16, “Subsequent Event.”
Note 8. Debt
     The Company’s debt is summarized as follows:
                 
    September 30,     December 31,  
    2006     2005  
Short-term debt
  $ 201     $ 1,860  
 
           
 
               
Long-term debt:
               
Credit Line, due 2010 (1)
  $ 140,261     $ 158,900  
Term Loan, due 2010 (2)
    194,000       255,000  
Senior Subordinated Notes at 8%, due 2013
    125,000       125,000  
Secured Mortgages (3)
    9,543       8,892  
Variable Rate Industrial Revenue Bonds, due 2018 (4)
    8,000       8,000  
Capitalized leases and other long-term debt
    14,226       11,070  
 
           
Total long-term debt, including current maturities
    491,030       566,862  
Current maturities of long-term-debt
    31,833       24,221  
 
           
Total long-term debt, less current maturities
  $ 459,197     $ 542,641  
 
           
 
(1)   The loans under this facility may be denominated in U.S. dollars or several foreign currencies. At September 30, 2006, the outstanding balance consisted of U.S. dollar borrowings of $45,500, Euro borrowings of 60,000 and British pound borrowings of £10,000. The interest rates under the facility are based on prime and/or LIBOR for the applicable currency. The weighted-average interest rates were 6.2%, 4.0% and 5.8% as of September 30, 2006 for the U.S. dollar, Euro and British pound loans, respectively. The interest rates averaged 6.2%, 4.1% and 6.1% during the first nine months of 2006 for the U.S. dollar, Euro and British pound loans, respectively.
 
(2)   The interest rate varies with prime and/or LIBOR. At September 30, 2006, this rate was 6.4% and averaged 6.4% during the first nine months of 2006.
 
(3)   This amount consists of two fixed-rate commercial loans assumed in the 2004 acquisition of nash_elmo Holdings, LLC (“Nash Elmo”) with an outstanding balance of 7,530 at September 30, 2006. The loans are secured by the Company’s facility in Bad Neustadt, Germany.
 
(4)   The interest rate varies with market rates for tax-exempt industrial revenue bonds. At September 30, 2006, this rate was 3.8% and averaged 3.5% during the first nine months of 2006. These industrial revenue bonds are secured by an $8,100 standby letter of credit. The proceeds from the bonds were used to construct the Company’s Peachtree City, Georgia facility.
Note 9. Stock-Based Compensation Plans
     On January 1, 2006, Gardner Denver adopted SFAS No. 123(R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. SFAS No. 123(R) supersedes the Company’s previous accounting under APB 25, for periods beginning in fiscal 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) to assist preparers with their implementation of SFAS No. 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

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     The Company adopted SFAS No. 123(R) using the modified prospective transition method. Under this method, the Company’s consolidated financial statements as of and for the nine-month period ended September 30, 2006, reflect the impact of SFAS No. 123(R), while the consolidated financial statements for periods prior to January 1, 2006 have not been restated to reflect, and do not include, the impact of SFAS No. 123(R). Stock-based compensation expense recognized under SFAS No. 123(R) was $1.0 million and $4.6 million, respectively, for the third quarter and first nine months of 2006, which consisted of: (1) compensation expense for all unvested share-based awards outstanding as of December 31, 2005, based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 123, and (2) compensation expense for share-based awards granted subsequent to adoption based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that are ultimately expected to vest. SFAS No. 123(R) amends SFAS No. 95 to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid, which is included within operating cash flows. The following table shows the impact of the adoption of SFAS No. 123(R) on the Consolidated Statements of Operations and the Consolidated Statements of Cash Flows.
                 
    Three Months Ended     Nine Months Ended  
    September 30, 2006     September 30, 2006  
Selling and administrative expenses
  $ 953     $ 4,559  
 
           
Total stock-based compensation expense included in operating expenses
    953       4,559  
 
               
Income before income taxes
    (953 )     (4,559 )
Provision for income taxes
    260       (1,311 )
 
           
Net income
  $ (693 )   $ (3,248 )
 
           
 
               
Basic and diluted earnings per share
  $ (0.01 )   $ (0.06 )
 
           
 
               
Net cash provided by operating activities
  $ (643 )   $ (2,925 )
Net cash used in financing activities
  $ 643     $ 2,925  
Plan Descriptions
     Under the Company’s Long-Term Incentive Plan (the “Incentive Plan”), designated employees are eligible to receive awards in the form of stock options, stock appreciation rights, restricted stock awards or performance shares, as determined by the Management Development and Compensation Committee of the Board of Directors. The Company’s Incentive Plan is intended to assist the Company in recruiting and retaining employees and directors, and to associate the interests of eligible participants with those of the Company and its shareholders. An aggregate of 8,500,000 shares of common stock has been authorized for issuance under the Incentive Plan. Under the Incentive Plan, the grant price of an option is determined by the Management Development and Compensation Committee, but must not be less than the average of the high price and low price of the Company’s common stock on the date of grant. The Incentive Plan provides that the term of any option granted may not exceed ten years. Under the

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terms of existing awards, one-third of employee options granted become vested and exercisable on each of the first three anniversaries of the date of grant (or upon retirement, death or cessation of service due to disability, if earlier). The options granted to employees in 2006, 2005 and 2004 expire seven years after the date of grant.
     Pursuant to the Incentive Plan, the Company also issues share-based awards to directors who are not employees of Gardner Denver or its affiliates. Since 2002, each nonemployee director has been granted options to purchase 9,000 shares of common stock on the day after the annual meeting of stockholders. These options are granted at the fair market value (the average of the high and low price) of the common stock on the date of grant, become exercisable on the first anniversary of the date of grant (or upon retirement, death or cessation of service due to disability, if earlier) and expire five years after the date of grant. The maximum allowable grant to a nonemployee director in any given year is an option to purchase 18,000 shares of common stock.
     The Company also has an employee stock purchase plan (the “Stock Purchase Plan”), a qualified plan under the requirements of Section 423 of the Internal Revenue Code, and has reserved 2,300,000 shares for issuance under this plan. The Stock Purchase Plan requires participants to have the purchase price of their options withheld from their pay over a one-year period. No options were offered to employees under the Stock Purchase Plan in 2006, 2005 or 2004.
Stock Option Awards
     The following summary presents information regarding outstanding stock options as of September 30, 2006 and changes during the nine-month period then ended (underlying shares in thousands):
                                 
            Outstanding           Weighted-
            Weighted-   Aggregate   Average
            Average   Intrinsic   Remaining
    Shares   Exercise Price   Value   Contractual Life
     
Outstanding at December 31, 2005
    2,665     $ 12.39                  
Granted
    362     $ 31.98                  
Exercised
    (483 )   $ 9.52                  
Forfeited or canceled
    (25 )   $ 24.45                  
 
                               
Outstanding at September 30, 2006
    2,519     $ 15.63     $ 44,300     4.5 years
 
Exercisable at September 30, 2006
    1,729     $ 11.60     $ 37,122     4.0 years
     The weighted-average estimated grant-date fair values of employee and director stock options granted during the nine-month period ended September 30, 2006 was $10.31. No options were granted during the third quarter of 2006.
      The total pre-tax intrinsic value of options exercised during the third quarter of 2006 and 2005, was $1.8 million and $5.5 million, respectively. The total pre-tax intrinsic value of options exercised during the first nine months of 2006 and 2005, was $11.7 million and $8.8 million, respectively. Pre-tax unrecognized compensation expense for stock options, net of estimated forfeitures, was $3.3 million as of September 30, 2006, and will be recognized as expense over a weighted-average period of 1.5 years.

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Restricted Stock Awards
     The following summary presents information regarding outstanding restricted stock awards as of September 30, 2006 and changes during the nine-month period then ended (underlying shares in thousands):
                 
            Weighted-
    Shares   Average Price
Nonvested at December 31, 2005
    36     $ 8.85  
Granted
    50     $ 30.58  
Vested
    (36 )   $ 8.85  
Forfeited
        $  
 
               
Nonvested at September 30, 2006
    50     $ 30.58  
 
               
     The restricted stock awards granted during the first nine months of 2006 cliff vest three years after the date of grant. The restricted share award grants were valued at the average of the high and low price of the Company’s common stock on the date of grant. Pre-tax unrecognized compensation expense, net of estimated forfeitures, for nonvested restricted stock awards was $0.3 million as of September 30, 2006, which will be recognized as expense over a weighted-average period of 2.4 years. The total fair value of restricted stock awards that vested during the nine-month period ended September 30, 2006 was $1.1 million. No restricted stock awards vested during the nine-month period ended September 30, 2005.
Valuation Assumptions and Expense under SFAS No. 123(R)
     The fair value of each stock option grant under the Company’s Long-Term Incentive Plan was estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-average assumptions for the periods indicated are noted in the table below. No stock options were granted during the three-month periods ended September 30, 2006 and 2005. Expected volatility is based on historical volatility of the Company’s common stock calculated over the expected term of the option. The expected term for the majority of the options granted in the first nine months of 2006 was calculated in accordance with SAB 107 using the simplified method for “plain-vanilla” options. The expected terms for options granted to certain executives and non-employee directors that have similar historical exercise behavior were determined separately for valuation purposes. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the date of grant.
                                 
    For the Three   For the Nine
    Months Ended   Months Ended
    September 30,   September 30,
    2006   2005   2006   2005
Assumptions:
                               
Risk-free interest rate
    N/A       N/A       4.7 %     3.9 %
Dividend yield
    N/A       N/A              
Volatility factor
    N/A       N/A       27       33  
Expected life (in years)
    N/A       N/A       4.8       4.4  

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Pro Forma Net Earnings
     In accordance with the modified prospective transition method, the Company’s consolidated financial statements for prior periods have not been restated and do not include the impact of SFAS No. 123(R). Accordingly, no compensation expense related to stock option awards was recognized in the three and nine-month periods ending September 30, 2005, as all stock options granted had an exercise price equal to the fair market value of the underlying common stock on the date of grant. The following table provides pro forma net income and earnings per share as if the fair-value-based method of accounting had been applied to all outstanding and unvested stock option awards prior to the adoption of SFAS 123(R). For purposes of this pro forma disclosure, the estimated fair value of a stock option award is assumed to be expensed over the award’s vesting periods using the Black-Scholes model.
                 
    Three Months Ended     Nine Months Ended  
    September 30, 2005     September 30, 2005  
Net income, as reported
  $ 16,661     $ 41,616  
Less: Total stock-based employee compensation expense determined under fair value method, net of related tax effects
    (439 )     (1,218 )
 
           
Pro forma net income
  $ 16,222     $ 40,398  
 
           
Basic earnings per share, as reported
  $ 0.32     $ 0.90  
 
           
Basic earnings per share, pro forma
  $ 0.31     $ 0.87  
 
           
Diluted earnings per share, as reported
  $ 0.32     $ 0.88  
 
           
Diluted earnings per share, pro forma
  $ 0.31     $ 0.85  
 
           
     For stock option awards with accelerated vesting provisions that are granted to retirement-eligible employees and to employees that become eligible for retirement subsequent to the grant date, the Company previously followed the guidance of APB 25 and SFAS No. 123, which allowed compensation costs to be recognized ratably over the vesting period of the award. SFAS No. 123(R) requires compensation costs to be recognized over the requisite service period of the award instead of ratably over the vesting period stated in the grant. For awards granted prior to adoption, the Securities and Exchange Commission clarified that companies should continue to follow the vesting method they had previously been using. As a result, for awards granted prior to adoption, the Company will continue to recognize compensation costs ratably over the vesting period with accelerated recognition of the unvested portion upon actual retirement. The Company will follow the guidance of SFAS No. 123(R) for stock option awards granted subsequent to the adoption date. Therefore, the proforma information presented in the above table is not comparable to the amounts recognized by the Company over the same respective periods of 2006.
     The Company’s income taxes currently payable have been reduced by the tax benefits from employee stock option exercises and the vesting of restricted stock awards. These benefits totaled $0.6 million and $1.2 million for the three-month periods ended September 30, 2006 and 2005, respectively, and $2.9 million and $2.0 million for the nine-month periods of 2006 and 2005, respectively, and were recorded as an increase to additional paid-in capital.

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Note 10. Earnings Per Share
     The following table details the calculation of basic and diluted earnings per share (shares in thousands):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2006     2005     2006     2005  
Basic Earnings Per Share:
                               
Net income
  $ 32,117     $ 16,661     $ 95,613     $ 41,616  
 
                       
Shares:
                               
Weighted average number of common shares outstanding
    52,436       51,742       52,258       46,438  
 
                       
 
                               
Basic earnings per common share
  $ 0.61     $ 0.32     $ 1.83     $ 0.90  
 
                       
 
Diluted Earnings Per Share:
                               
Net income
  $ 32,117     $ 16,661     $ 95,613     $ 41,616  
 
                       
Shares:
                               
Weighted average number of common shares outstanding
    52,436       51,742       52,258       46,438  
Assuming conversion of dilutive stock options issued and outstanding
    1,112       1,000       1,147       1,082  
 
                       
Weighted average number of common shares outstanding, as adjusted
    53,548       52,742       53,405       47,520  
 
                       
 
                               
Diluted earnings per common share
  $ 0.60     $ 0.32     $ 1.79     $ 0.88  
 
                       
     For the quarters ended September 30, 2006 and 2005, respectively, antidilutive options to purchase 208 thousand and 580 thousand weighted-average shares of common stock were outstanding. For the nine months ended September 30, 2006 and 2005, respectively, antidilutive options to purchase 196 thousand and 460 thousand weighted-average shares of common stock were outstanding. Antidilutive options outstanding were not included in the computation of diluted earnings per share.
Note 11. Comprehensive Income
     For the three-month periods ended September 30, 2006 and 2005, comprehensive income was $37.7 million and $18.1 million, respectively. For the nine-month periods ended September 30, 2006 and 2005, comprehensive income was $127.1 million and $28.0 million, respectively. Items impacting the Company’s comprehensive income, but not included in net income, consist of foreign currency translation adjustments, including realized and unrealized gains and losses (net of income taxes) on foreign currency hedges of the Company’s investment in foreign subsidiaries, fair market value adjustments of interest rate swaps and additional minimum pension liability (net of income taxes).

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Note 12. Supplemental Cash Flow Information
     In the nine-month periods of 2006 and 2005, the Company paid $51.3 million and $11.7 million, respectively, to various taxing authorities for income taxes. Interest paid for the nine- month periods of 2006 and 2005, was $24.9 million and $14.1 million, respectively.
Note 13. Contingencies
     The Company is a party to various legal proceedings, lawsuits and administrative actions, which are of an ordinary or routine nature. In addition, due to the bankruptcies of several asbestos manufacturers and other primary defendants, among other things, the Company has been named as a defendant in an increasing number of asbestos personal injury lawsuits. The Company has also been named as a defendant in an increasing number of silicosis personal injury lawsuits. The plaintiffs in these suits allege exposure to asbestos or silica from multiple sources and typically the Company is one of approximately 25 or more named defendants. In the Company’s experience, the vast majority of the plaintiffs are not impaired with a disease for which the Company bears any responsibility.
     Predecessors to the Company sometimes manufactured, distributed and/or sold products allegedly at issue in the pending asbestos and silicosis litigation lawsuits (the “Products”). However, neither the Company nor its predecessors ever mined, manufactured, mixed, produced or distributed asbestos fiber or silica sand, the materials that allegedly caused the injury underlying the lawsuits. Moreover, the asbestos-containing components used in the Products were enclosed within the subject Products.
     The Company has entered into a series of cost-sharing agreements with multiple insurance companies to secure coverage for asbestos and silicosis lawsuits. The Company also believes some of the potential liabilities regarding these lawsuits are covered by indemnity agreements with other parties. The Company’s uninsured settlement payments for past asbestos and silicosis lawsuits have been immaterial.
     The Company believes that the pending and future asbestos and silicosis lawsuits will not, in the aggregate, have a material adverse effect on its consolidated financial position, results of operations or liquidity, based on: the Company’s anticipated insurance and indemnification rights to address the risks of such matters; the limited potential asbestos exposure from the components described above; the Company’s experience that the vast majority of plaintiffs are not impaired with a disease attributable to alleged exposure to asbestos or silica from or relating to the Products or for which the Company otherwise bears responsibility; various potential defenses available to the Company with respect to such matters; and the Company’s prior disposition of comparable matters. However, due to inherent uncertainties of litigation and because future developments, including, without limitation, potential insolvencies of insurance companies, could cause a different outcome, there can be no assurance that the resolution of pending or future lawsuits, whether by judgment, settlement or dismissal, will not have a material adverse effect on its consolidated financial position, results of operations or liquidity.
     The Company has also been identified as a potentially responsible party with respect to several sites designated for environmental cleanup under various state and federal laws. The Company does not believe that the future potential costs related to these sites will have a material adverse effect on its consolidated financial position, results of operations or liquidity.

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Note 14. Segment Results
     The Company’s organizational structure is based on the products and services it offers and consists of five operating divisions: Compressor, Blower, Liquid Ring Pump, Fluid Transfer and Thomas Products. These divisions comprise two reportable segments: Compressor and Vacuum Products and Fluid Transfer Products. The Compressor, Blower, Liquid Ring Pump and Thomas Products divisions are aggregated into the Compressor and Vacuum Products segment because the long-term financial performance of these businesses are affected by similar economic conditions and their products, manufacturing processes and other business characteristics are similar in nature.
     In the first quarter of 2006, the Company made certain organizational changes that resulted in a realignment of its reportable segments. The operations of the Company’s line of specialty bronze and high alloy pumps for the general industrial and marine markets (acquired in July 2005 as part of Thomas) and the operations of its line of self-sealing couplings (acquired in January 2004 as part of Syltone) were transferred from the Compressor and Vacuum Products segment to the Fluid Transfer Products segment. Accordingly, the results of these two operations have been included in the Fluid Transfer Products segment results. Results for the three and nine-month periods ended September 30, 2005 have been restated to reflect this realignment. In addition, operating results of Todo, a manufacturer of self-sealing couplings that was acquired in January 2006 (see Note 2) have been included in the Fluid Transfer Products segment from the date of acquisition.
     The following table provides financial information by business segment for the three and nine-month periods ended September 30, 2006 and 2005:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2006     2005     2006     2005  
Compressor and Vacuum Products
                               
Revenues
  $ 326,094     $ 295,185     $ 969,929     $ 681,683  
Operating earnings
    33,332       22,944       102,891       51,617  
Operating earnings as a percentage of revenues
    10.2 %     7.8 %     10.6 %     7.6 %
 
                               
Fluid Transfer Products
                               
Revenues
  $ 87,934     $ 60,910     $ 259,705     $ 163,582  
Operating earnings
    22,364       10,199       66,247       23,138  
Operating earnings as a percentage of revenues
    25.4 %     16.7 %     25.5 %     14.1 %
 
                               
Reconciliation of Segment Results to Consolidated Results
                               
Total segment operating earnings
  $ 55,696     $ 33,143     $ 169,138     $ 74,755  
Interest expense
    8,762       10,358       28,574       19,642  
Other income, net
    (1,015 )     (1,016 )     (2,155 )     (4,338 )
 
                       
Consolidated income before income taxes
  $ 47,949     $ 23,801     $ 142,719     $ 59,451  
 
                       
     The following table provides financial information by business segment for the years ended December 31, 2005, 2004 and 2003 reflecting the organizational change described above. Segment disclosures in 2003, which are included in the table for comparative purposes, were not affected by the reorganization because the relevant operations were acquired by the Company in 2004 and 2005:

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    Year Ended December 31,  
    2005     2004     2003  
Compressor and Vacuum Products
                       
Revenues
  $ 982,476     $ 572,181     $ 369,023  
Operating earnings
    83,093       42,398       27,792  
Operating earnings as a percentage of revenues
    8.5 %     7.4 %     7.5 %
 
                       
Fluid Transfer Products
                       
Revenues
  $ 232,076     $ 167,358     $ 70,507  
Operating earnings
    37,542       19,352       4,093  
Operating earnings as a percentage of revenues
    16.2 %     11.6 %     5.8 %
 
                       
Reconciliation of Segment Results to Consolidated Results
                       
Total segment operating earnings
  $ 120,635     $ 61,750     $ 31,885  
Interest expense
    30,433       10,102       4,748  
Other income, net
    (5,442 )     (638 )     (3,221 )
 
                 
Consolidated income before income taxes
  $ 95,644     $ 52,286     $ 30,358  
 
                 
 
                       
LIFO Liquidation Income
                       
Compressor and Vacuum Products
  $     $ 132     $ 316  
Fluid Transfer Products
                50  
 
                 
Total
  $     $ 132     $ 366  
 
                 
 
                       
Depreciation and Amortization Expense
                       
Compressor and Vacuum Products
  $ 33,705     $ 17,414     $ 11,739  
Fluid Transfer Products
    4,617       4,487       2,827  
 
                 
Total
  $ 38,322     $ 21,901     $ 14,566  
 
                 
 
                       
Capital Expenditures
                       
Compressor and Vacuum Products
  $ 30,588     $ 15,221     $ 8,864  
Fluid Transfer Products
    4,930       4,329       3,086  
 
                 
Total
  $ 35,518     $ 19,550     $ 11,950  
 
                 
 
                       
Identifiable Assets as of December 31
                       
Compressor and Vacuum Products
  $ 1,422,119     $ 811,290     $ 375,376  
Fluid Transfer Products
    156,281       143,253       72,528  
General corporate (unallocated)
    136,660       74,066       141,829  
 
                 
Total assets
  $ 1,715,060     $ 1,028,609     $ 589,733  
 
                 
     Note 15. Guarantor Subsidiaries
     The Company’s obligations under its 8% Senior Subordinated Notes due 2013 are jointly and severally, fully and unconditionally guaranteed by certain wholly-owned domestic subsidiaries of the Company (the “Guarantor Subsidiaries”). The Company’s subsidiaries that do not guarantee the Senior Subordinated Notes are referred to as the “Non-Guarantor Subsidiaries”. The guarantor condensed consolidating financial data presented below presents the statements of operations, balance sheets and statements of cash flows data (i) for Gardner Denver, Inc. (the “Parent Company”), the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries on a consolidated basis (which is derived from

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Gardner Denver’s historical reported financial information); (ii) for the Parent Company, alone (accounting for its Guarantor Subsidiaries and Non-Guarantor Subsidiaries on a cost basis under which the investments are recorded by each entity owning a portion of another entity at historical cost); (iii) for the Guarantor Subsidiaries alone; and (iv) for the Non-Guarantor Subsidiaries alone.
The consolidating balance sheet at December 31, 2005 has been revised from what had been previously reported. The amount of the adjustments was not material to the consolidated financial statements and did not affect the Consolidated Statements of Operations, Consolidated Balance Sheets and Consolidated Statements of Cash Flows. These adjustments were made to properly reflect the amount of a certain intercompany investment of the Guarantor Subsidiaries and the reclassification of certain intercompany investments from long-term inter-company (receivable) payable to investments in affiliates and capital in excess of par value. This classification is consistent with the consolidating balance sheet presentation at September 30, 2006. The tables below present the balance sheet items affected by the changes as revised and as previously reported, and a reconciliation of the changes.
Selected Consolidating Balance Sheet Line Items
December 31, 2005
AS REVISED
                                         
    Parent     Guarantor     Non-
Guarantor
             
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Assets
                                       
Investments in affiliates
  $ 838,050     $ 215,061     $ 32     $ (1,053,111 )   $ 32  
Other assets
    21,287       (5,973 )     5,503       1,593       22,410  
Total assets
    1,083,204       589,617       1,099,051       (1,056,812 )     1,715,060  
 
Liabilities and Stockholders’ Equity
                                       
Long-term inter-company (receivable) payable
    (40,242 )     (136,952 )     191,276       (14,082 )      
Total liabilities
    537,447       (48,738 )     578,471       (10,409 )     1,056,771  
Stockholders’ equity:
                                       
Capital in excess of par value
    472,334       609,499       443,971       (1,052,979 )     472,825  
Total stockholders’ equity
    545,757       638,355       520,580       (1,046,403 )     658,289  
Total liabilities and stockholders’ equity
  $ 1,083,204     $ 589,617     $ 1,099,051     $ (1,056,812 )   $ 1,715,060  
 
Selected Consolidating Balance Sheet Line Items
December 31, 2005
AS PREVIOUSLY REPORTED
                                         
    Parent     Guarantor     Non-
Guarantor
             
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Assets
                                       
Investments in affiliates
  $ 671,182     $ 40,645     $ 32     $ (711,791 )   $ 68  
Other assets
    21,287       (5,973 )     5,503       1,557       22,374  
Total assets
    916,336       415,201       1,099,051       (715,528 )     1,715,060  
 
Liabilities and Stockholders’ Equity
                                       
Long-term inter-company (receivable) payable
    (207,110 )     (98,395 )     319,587       (14,082 )      
Total liabilities
    370,579       (10,181 )     706,782       (10,409 )     1,056,771  
Stockholders’ equity:
                                       
Capital in excess of par value
    472,334       396,526       315,660       (711,695 )     472,825  
Total stockholders’ equity
    545,757       425,382       392,269       (705,119 )     658,289  
Total liabilities and stockholders’ equity
  $ 916,336     $ 415,201     $ 1,099,051     $ (715,528 )   $ 1,715,060  
 
RECONCILIATION OF THE CHANGES
                                 
                    Long-term        
    Investment             inter-company     Capital in excess  
    In Affiliates     Other Assets     (receivable) payable     of par value  
Parent Company  
 
December 31, 2005 balance as previously reported
  $ 671,182     $ 21,287     $ (207,110 )   $ 472,334  
 
Reclassification of Investment in Guarantor Subsidiaries from Long-term inter-company (receivable) payable
    212,973             212,973        
Reclassification of Investment in Non-guarantor Subsidiaries from Long-term inter-company (receivable) payable
    (46,105 )           (46,105 )      
 
 
December 31, 2005 balance as revised
  $ 838,050     $ 21,287     $ (40,242 )   $ 472,334  
 

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                    Long-term        
    Investment             inter-company     Capital in excess  
    In Affiliates     Other Assets     (receivable) payable     of par value  
Guarantor Subsidiaries                                
 
December 31, 2005 balance as previously reported
  $ 40,645     $ (5,973 )   $ (98,395 )   $ 396,526  
 
Reclassification of Investment in Non-guarantor Subsidiaries from Long-term inter-company (receivable) payable
    174,416             174,416        
Reclassification of Capital in excess of par from Long-term inter-company (receivable) payable
                (212,973 )     212,973  
 
 
December 31, 2005 balance as revised
  $ 215,061     $ (5,973 )   $ (136,952 )   $ 609,499  
 
                                 
                    Long-term        
    Investment             inter-company     Capital in excess  
    In Affiliates     Other Assets     (receivable) payable     of par value  
 
Non-Guarantor Subsidiaries                                
 
December 31, 2005 balance as previously reported
  $ 32     $ 5,503     $ 319,587     $ 315,660  
 
Reclassification of Capital in excess of par from Long-term inter-company (receivable) payable
                (128,311 )     128,311  
 
 
December 31, 2005 balance as revised
  $ 32     $ 5,503     $ 191,276     $ 443,971  
 
                                 
                    Long-term        
    Investment             inter-company     Capital in excess  
    In Affiliates     Other Assets     (receivable) payable     of par value  
 
Eliminations                                
 
December 31, 2005 balance as previously reported
  $ (711,791 )   $ 1,557     $ (14,082 )   $ (711,695 )
 
Reclassification of Investment in Guarantor Subsidiaries from Long-term inter-company (receivable) payable
    (212,973 )           (212,973 )      
Reclassification of Investment in Non-guarantor Subsidiaries from Long-term inter-company (receivable) payable
    (128,311 )           (128,311 )      
Reclassification of Capital in excess of par from Long-term inter-company (receivable) payable
                341,284       (341,284 )
Other
    (36 )     36              
 
 
December 31, 2005 balance as revised
  $ (1,053,111 )   $ 1,593     $ (14,082 )   $ (1,052,979 )
 
Consolidating Statement of Operations
Three Months Ended September 30, 2006
                                         
    Parent   Guarantor   Non-Guarantor        
    Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
 
Revenues
  $ 107,604     $ 107,625     $ 250,853     $ (52,054 )   $ 414,028  
Costs and expenses:
                                       
Cost of sales (excluding depreciation and amortization)
    71,078       75,693       177,406       (52,628 )     271,549  
Depreciation and amortization
    2,651       3,053       7,296             13,000  
Selling and administrative expenses
    19,516       13,367       40,900             73,783  
Interest expense
    8,800       (2,457 )     2,419             8,762  
Other (income) expense, net
    (1,036 )     (2,064 )     2,149       (64 )     (1,015 )
 
Total costs and expenses
    101,009       87,592       230,170       (52,692 )     366,079  
 
Income before income taxes
    6,595       20,033       20,683       638       47,949  
Provision for income taxes
    2,506       7,587       5,739             15,832  
 
Net income
  $ 4,089     $ 12,446     $ 14,944     $ 638     $ 32,117  
 

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Consolidating Statement of Operations
Three Months Ended September 30, 2005
                                         
    Parent   Guarantor   Non-Guarantor        
    Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
 
Revenues
  $ 86,059     $ 84,045     $ 193,218     $ (7,227 )   $ 356,095  
Costs and expenses:
                                       
Cost of sales (excluding depreciation and amortization)
    59,923       60,246       127,232       (6,866 )     240,535  
Depreciation and amortization
    2,531       2,716       6,088             11,335  
Selling and administrative expenses
    18,238       13,658       39,186             71,082  
Interest expense
    9,896             462             10,358  
Other (income) expense, net
    (727 )     (1,092 )     802       1       (1,016 )
 
Total costs and expenses
    89,861       75,528       173,770       (6,865 )     332,294  
 
Income (loss) before income taxes
    (3,802 )     8,517       19,448       (362 )     23,801  
Provision for income taxes
    (1,388 )     3,109       5,419             7,140  
 
Net income (loss)
  $ (2,414 )   $ 5,408     $ 14,029     $ (362 )   $ 16,661  
 
Consolidating Statement of Operations
Nine Months Ended September 30, 2006
                                         
    Parent   Guarantor   Non-Guarantor        
    Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
 
Revenues
  $ 326,989     $ 320,916     $ 717,879     $ (136,150 )   $ 1,229,634  
Costs and expenses:
                                       
Cost of sales (excluding depreciation and amortization)
    214,663       224,013       497,831       (136,069 )     800,438  
Depreciation and amortization
    7,791       9,561       22,175             39,527  
Selling and administrative expenses
    59,695       40,023       120,813             220,531  
Interest expense
    27,742       (6,900 )     7,732             28,574  
Other (income) expense, net
    (2,439 )     (4,591 )     4,939       (64 )     (2,155 )
 
Total costs and expenses
    307,452       262,106       653,490       (136,133 )     1,086,915  
 
Income (loss) before income taxes
    19,537       58,810       64,389       (17 )     142,719  
Provision for income taxes
    7,424       22,348       17,334             47,106  
 
Net income (loss)
  $ 12,113     $ 36,462     $ 47,055     $ (17 )   $ 95,613  
 
Consolidating Statement of Operations
Nine Months Ended September 30, 2005
                                         
    Parent   Guarantor   Non-Guarantor        
    Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
 
Revenues
  $ 249,309     $ 175,085     $ 442,654     $ (21,783 )   $ 845,265  
Costs and expenses:
                                       
Cost of sales (excluding depreciation and amortization)
    173,346       127,261       291,120       (22,278 )     569,449  
Depreciation and amortization
    7,525       4,543       13,748             25,816  
Selling and administrative expenses
    53,691       29,366       92,188             175,245  
Interest expense
    18,347             1,295             19,642  
Other (income) expense, net
    (2,952 )     (3,187 )     908       893       (4,338 )
 
Total costs and expenses
    249,957       157,983       399,259       (21,385 )     785,814  
 
Income (loss) before income taxes
    (648 )     17,102       43,395       (398 )     59,451  
Provision for income taxes
    (237 )     6,242       11,830             17,835  
 
Net income (loss)
  $ (411 )   $ 10,860     $ 31,565     $ (398 )   $ 41,616  
 

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Consolidating Balance Sheet
September 30, 2006
                                         
    Parent   Guarantor   Non-Guarantor        
    Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
 
Assets
                                       
Current assets:
                                       
Cash and equivalents
  $ 4,604     $ (1,323 )   $ 82,743     $     $ 86,024  
Accounts receivable, net
    90,276       50,251       131,150             271,677  
Inventories, net
    34,409       59,214       138,029       (3,097 )     228,555  
Deferred income taxes
    7,664       14,164       6,646       (1,204 )     27,270  
Other current assets
    741       3,274       9,800       2,729       16,544  
 
Total current assets
    137,694       125,580       368,368       (1,572 )     630,070  
 
Intercompany (payable) receivables
    (102,957 )     97,641       (10,765 )     16,081        
Investments in affiliates
    838,050       215,061       28       (1,053,111 )     28  
Property, plant and equipment, net
    53,477       48,815       164,241             266,533  
Goodwill
    113,441       197,014       368,587             679,042  
Other intangibles, net
    8,390       44,633       144,488             197,511  
Other assets
    16,767       831       4,149             21,747  
 
Total assets
  $ 1,064,862     $ 729,575     $ 1,039,096     $ (1,038,602 )   $ 1,794,931  
 
 
                                       
Liabilities and Stockholders’ Equity
                                       
Short-term borrowings and current maturities of long-term debt
  $ 23,595     $     $ 8,439     $     $ 32,034  
Accounts payable and accrued liabilities
    86,906       55,627       167,214       (8,762 )     300,985  
 
Total current liabilities
    110,501       55,627       175,653       (8,762 )     333,019  
 
Long-term intercompany (receivable) payable
    (38,866 )     (47,741 )     94,746       (8,139 )      
Long-term debt, less current maturities
    386,927       77       72,193             459,197  
Deferred income taxes
    (4,141 )     32,520       56,009       (837 )     83,551  
Other liabilities
    46,566       9,056       50,371       15,518       121,511  
 
Total liabilities
    500,987       49,539       448,972       (2,220 )     997,278  
 
Stockholders’ equity:
                                       
Common stock
    562                         562  
Capital in excess of par value
    486,735       609,499       444,008       (1,053,111 )     487,131  
Retained earnings
    103,130       65,930       116,205       16,729       301,994  
Accumulated other comprehensive income
    5,090       4,607       29,911             39,608  
Treasury stock, at cost
    (31,642 )                       (31,642 )
 
Total stockholders’ equity
    563,875       680,036       590,124       (1,036,382 )     797,653  
 
Total liabilities and stockholders’ equity
  $ 1,064,862     $ 729,575     $ 1,039,096     $ (1,038,602 )   $ 1,794,931  
 

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Consolidating Balance Sheet
December 31, 2005
                                         
    Parent   Guarantor   Non-Guarantor        
    Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
 
Assets
                                       
Current assets:
                                       
Cash and equivalents
  $ 5,557     $ (369 )   $ 105,718     $     $ 110,906  
Accounts receivable, net
    68,006       41,944       119,517             229,467  
Inventories, net
    35,684       54,867       114,009       2,766       207,326  
Deferred income taxes
    4,377       4,308       22,987       (5,918 )     25,754  
Other current assets
    (716 )     2,846       10,684             12,814  
 
Total current assets
    112,908       103,596       372,915       (3,152 )     586,267  
 
Intercompany (payable) receivables
    (68,284 )     53,141       17,285       (2,142 )      
Investments in affiliates
    838,050       215,061       32       (1,053,111 )     32  
Property, plant and equipment, net
    57,167       49,397       176,027             282,591  
Goodwill
    113,441       144,864       361,939             620,244  
Other intangibles, net
    8,635       29,531       165,350             203,516  
Other assets
    21,287       (5,973 )     5,503       1,593       22,410  
 
Total assets
  $ 1,083,204     $ 589,617     $ 1,099,051     $ (1,056,812 )   $ 1,715,060  
 
 
                                       
Liabilities and Stockholders’ Equity
                                       
Short-term borrowings and current maturities of long-term debt
  $ 19,616     $     $ 6,465     $     $ 26,081  
Accounts payable and accrued liabilities
    86,776       73,930       135,382       (8,325 )     287,763  
 
Total current liabilities
    106,392       73,930       141,847       (8,325 )     313,844  
 
Long-term intercompany (receivable) payable
    (40,242 )     (136,952 )     191,276       (14,082 )      
Long-term debt, less current maturities
    428,854       78       113,709             542,641  
Deferred income taxes
          4,380       85,311       (3,520 )     86,171  
Other liabilities
    42,443       9,826       46,328       15,518       114,115  
 
Total liabilities
    537,447       (48,738 )     578,471       (10,409 )     1,056,771  
 
Stockholders’ equity:
                                       
Common stock
    278                         278  
Capital in excess of par value
    472,334       609,499       443,971       (1,052,979 )     472,825  
Retained earnings
    89,449       33,420       78,947       4,565       206,381  
Accumulated other comprehensive income (loss)
    13,015       (4,564 )     (2,338 )     2,011       8,124  
Treasury stock, at cost
    (29,319 )                       (29,319 )
 
Total stockholders’ equity
    545,757       638,355       520,580       (1,046,403 )     658,289  
 
Total liabilities and stockholders’ equity
  $ 1,083,204     $ 589,617     $ 1,099,051     $ (1,056,812 )   $ 1,715,060  
 

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Consolidating Condensed Statement of Cash Flows
Nine Months Ended September 30, 2006
                                         
    Parent   Guarantor   Non-Guarantor        
    Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
 
Cash flows provided by (used in) operating activities
  $ 43,819     $ (7,910 )   $ 77,980     $ (27,149 )   $ 86,740  
Cash flows from investing activities:
                                       
Net cash paid in business combinations
    (3,397 )           (16,660 )           (20,057 )
Capital expenditures
    (6,901 )     (3,331 )     (16,045 )           (26,277 )
Disposals of property, plant and equipment
    2,888       955       7,593             11,436  
Other, net
    20       (20 )                  
 
Net cash used in investing activities
    (7,390 )     (2,396 )     (25,112 )           (34,898 )
 
Cash flows from financing activities:
                                       
Net change in long-term intercompany receivables/payables
    (2,455 )     9,371       (34,065 )     27,149        
Principal payments on short-term borrowings
                (7,997 )           (7,997 )
Proceeds from short-term borrowings
                8,293             8,293  
Principal payments on long-term debt
    (156,501 )           (53,875 )           (210,376 )
Proceeds from long-term debt
    116,000             4,922             120,922  
Proceeds from stock options
    4,593                         4,593  
Excess tax benefits from stock-based compensation
    2,925                         2,925  
Purchase of treasury stock
    (1,222 )                       (1,222 )
Debt issuance costs
    (540 )                       (540 )
Other
    (158 )                       (158 )
 
Net cash (used in) provided by financing activities
    (37,358 )     9,371       (82,722 )     27,149       (83,560 )
 
Effect of exchange rate changes on cash and equivalents
    (24 )     (19 )     6,879             6,836  
 
Decrease in cash and equivalents
    (953 )     (954 )     (22,975 )           (24,882 )
Cash and equivalents, beginning of year
    5,557       (369 )     105,718             110,906  
 
Cash and equivalents, end of period
  $ 4,604     $ (1,323 )   $ 82,743     $     $ 86,024  
 
Consolidating Condensed Statement of Cash Flows
Nine Months Ended September 30, 2005
                                         
    Parent   Guarantor   Non-Guarantor        
    Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
 
Cash flows provided by (used in) operating activities
  $ 33,611     $ (20,624 )   $ 37,982     $ 1,858     $ 52,827  
Cash flows from investing activities:
                                       
Net cash paid in business combinations
    (737,394 )     222,053       34,920             (480,421 )
Capital expenditures
    (10,825 )     (3,233 )     (8,592 )           (22,650 )
Disposals of property, plant and equipment
          2       534             536  
Other, net
    83             (2,231 )           (2,148 )
 
Net cash (used in) provided by investing activities
    (748,136 )     218,822       24,631             (504,683 )
 
Cash flows from financing activities:
                                       
Net change in long-term intercompany receivables/payables
    196,952       (200,305 )     5,211       (1,858 )      
Principal payments on short-term borrowings
                (23,380 )           (23,380 )
Proceeds from short-term borrowings
                16,663             16,663  
Principal payments on long-term debt
    (459,318 )           (8,010 )           (467,328 )
Proceeds from long-term debt
    786,119             31             786,150  
Proceeds from issuance of common stock
    199,318                         199,318  
Proceeds from stock options
    5,498                         5,498  
Purchase of treasury stock
    (2,810 )                       (2,810 )
Debt issuance costs
    (7,789 )                       (7,789 )
Other
                             
 
Net cash provided by (used in) financing activities
    717,970       (200,305 )     (9,485 )     (1,858 )     506,322  
 
Effect of exchange rate changes on cash and equivalents
    (133 )           (4,378 )           (4,511 )
 
Increase (decrease) in cash and equivalents
    3,312       (2,107 )     48,750             49,955  
Cash and equivalents, beginning of year
    2,857       2,612       59,132             64,601  
 
Cash and equivalents, end of period
  $ 6,169     $ 505     $ 107,882     $     $ 114,556  
 

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Note 16. Subsequent Event
     During the third quarter of 2006, the Company notified most of its U.S. employees that it would implement certain revisions to the Gardner Denver, Inc. Pension Plan (the “Pension Plan”) effective November 1, 2006. Future service credits under the Pension Plan (a form of defined benefit retirement plan) will cease, effective October 31, 2006. Benefits under the Pension Plan will not be less than the amount of each participant’s accrued and vested benefits as of such date. If a participant is not fully vested in his or her accrued benefit under the Pension Plan, the participant will continue to earn time toward vesting based on continued service.
     The Company also notified these same U.S. employees that, in connection with the revisions to the Pension Plan, it would increase future Company contributions to certain Company-sponsored defined contribution savings plans, which are qualified plans under the requirements of Section 401-(k) of the Internal Revenue Code.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
     The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, including the financial statements and accompanying notes, and the interim consolidated financial statements and accompanying notes included in this Report on Form 10-Q.
Consummated Acquisitions
     On January 9, 2006, the Company completed the acquisition of Todo. The total purchase price was 126.2 million Swedish kronor (approximately $16.1 million), net of debt and cash acquired. Todo, with assembly operations in Sweden and the United Kingdom, and a central European sales and distribution operation in the Netherlands, has an extensive offering of dry-break couplers. Todo-Matic self-sealing couplings are used by oil, chemical and gas companies to transfer their products. The Todo acquisition extends the Company’s product line of Emco Wheaton couplers, added as part of the Syltone acquisition in 2004.
Operating Segments
     The Company’s organizational structure is based on the products and services it offers and consists of five operating divisions: Compressor, Blower, Liquid Ring Pump, Fluid Transfer and Thomas Products. These divisions comprise two reportable segments: Compressor and Vacuum Products and Fluid Transfer Products. The Compressor, Blower, Liquid Ring Pump and Thomas Products divisions are aggregated into the Compressor and Vacuum Products segment because the long-term financial performance of these businesses are affected by similar economic conditions and their products, manufacturing processes and other business characteristics are similar in nature.

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     In the first quarter of 2006, the Company made certain organizational changes that resulted in a realignment of its reportable segments. The operations of the Company’s line of specialty bronze and high alloy pumps for the general industrial and marine markets (acquired in July 2005 as part of Thomas) and the operations of its line of self-sealing couplings (acquired in January 2004 as part of Syltone) were transferred from the Compressor and Vacuum Products segment to the Fluid Transfer Products segment. Accordingly, the results of these two operations have been included in the Fluid Transfer Products segment results. Results for the three and nine-month periods ended September 30, 2005 have been restated to reflect this realignment. In addition, operating results of Todo have been included in the Fluid Transfer Products segment from the date of acquisition.
     The Company evaluates the performance of its reportable segments based on income before interest expense, other income, net, and income taxes. Reportable segment operating earnings (defined as revenues less cost of sales (excluding depreciation and amortization), depreciation and amortization, and selling and administrative expenses) and segment operating margin (defined as segment operating earnings divided by revenues) are indicative of short-term operating performance and ongoing profitability. Management closely monitors the operating earnings of its reportable segments to evaluate past performance, management performance and compensation, and actions required to improve profitability.
Stock Split
     On May 2, 2006, the Company’s stockholders approved an increase in the number of authorized shares of common stock from 50 million to 100 million. This increase in shares allowed the Company to complete the previously announced two-for-one stock split (in the form of a 100% stock dividend). Refer to Note 3 in the Notes to Consolidated Financial Statements. Current and prior year share and per share amounts appearing in this Management’s Discussion and Analysis of Financial Condition and Results of Operations reflect the effect of this stock split.
Non-GAAP Financial Measures
     To supplement Gardner Denver’s financial information presented in accordance with U.S. generally accepted accounting principles (“GAAP”), management, from time to time, uses additional measures to clarify and enhance understanding of past performance and prospects for the future. These measures may exclude, for example, the impact of unique and infrequent items or items outside of management’s control (e.g. foreign currency exchange rates).
Results of Operations
Performance in the Quarter Ended September 30, 2006 Compared
with the Quarter Ended September 30, 2005
Revenues
     Revenues increased $57.9 million (16%) to $414.0 million for the three-month period ended September 30, 2006, compared to the same period of 2005. Stronger demand for drilling and well servicing pumps, compressors and blowers, combined with price increases, accounted for approximately $47.1 million of the increase. Favorable changes in foreign currency exchange rates and the acquisition of Todo also contributed to the growth in revenues. The Company also implemented certain manufacturing and supply chain improvements in late 2005 and in 2006 that resulted in increased production output to meet the improved demand for its products.
     For the three-month period ended September 30, 2006, revenues in the Compressor and Vacuum Products segment increased $30.9 million (10%) to $326.1 million, compared to the same period of 2005. This increase was primarily due to higher compressor and blower shipments in the U.S., Europe and China (4%), improved pricing (3%), and favorable changes in foreign currency exchange rates (3%).

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     Fluid Transfer Products segment revenues increased $27.0 million (44%) to $87.9 million for the three-month period ended September 30, 2006, compared to the same period of 2005. This improvement was primarily due to volume increases (30%) which were primarily attributable to stronger demand for oil and natural gas well drilling and servicing pumps, manufacturing and supply chain improvements and incremental shipments as a result of increased outsourcing, price increases (9%) and the incremental effect of the Todo acquisition (4%). Favorable changes in foreign currency exchange rates (1%) also contributed to the increase in revenues.
Costs and Expenses
     Cost of sales (excluding depreciation and amortization) as a percentage of revenues improved to 65.6% in the three-month period ended September 30, 2006, from 67.5% in the same period of 2005. This improvement was attributable to cost reduction initiatives and leveraging fixed and semi-fixed costs over higher production volume. Favorable sales mix also contributed to the year-over-year improvement. The third quarter of 2006 included a higher percentage of drilling pump and replacement pump parts shipments compared with the third quarter of 2005. These products have cost of sales (excluding depreciation and amortization) percentages below the Company’s average. Cost of sales (excluding depreciation and amortization) for the three-month period of 2005 was negatively impacted by approximately $3.9 million of non-recurring costs attributable to the sales of inventory of acquired businesses recorded at fair value. Decreases in manufacturing productivity related to product line relocations associated with acquisition integration projects in 2006 and material and other cost increases partially offset these improvements.
     Depreciation and amortization for the three-month period ended September 30, 2006 increased $1.7 million (15%) to $13.0 million, compared to the same period of the prior year, primarily due to the incremental depreciation and amortization associated with capital investments and the effect of finalizing the fair market value of the Thomas tangible and amortizable intangible assets.
     Selling and administrative expenses as a percentage of revenues improved to 17.8% in the third quarter of 2006 from 20.0% in the third quarter of 2005 as a result of cost reduction initiatives and leveraging these expenses over higher revenues. Compared to the third quarter of 2005, selling and administrative expenses increased $2.7 million (4%) in 2006 to $73.8 million. This increase was primarily attributable to severance and integration costs ($1.1 million), the incremental effect of stock-based compensation expense associated with the implementation of SFAS No. 123(R) ($1.0 million) and salary and benefit expense increases. SFAS No. 123(R), which became effective on January 1, 2006, requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. The above increases were partially offset by cost reductions realized through completed integration activities, net of inflationary factors such as salary increases.
     The Compressor and Vacuum Products segment generated operating margin of 10.2% in the three-month period ended September 30, 2006, compared to 7.8% for the same period of 2005 (see Note 14 to the Consolidated Financial Statements for a reconciliation of segment operating earnings to consolidated income before income taxes). Cost reductions and favorable sales mix accounted for the majority of the improvement. These positive factors were partially offset by increased material costs and compensation-related expenses. The operating margin in the three-month period of 2005 was also impacted by the non-recurring costs attributable to the sales of inventory of acquired businesses recorded at fair value as mentioned previously.

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     The Fluid Transfer Products segment operating margin increased to 25.4% for the three-month period ended September 30, 2006, compared to 16.7% for the same period of 2005 (see Note 14 to the Consolidated Financial Statements for a reconciliation of segment operating earnings to consolidated income before income taxes). This improvement was primarily due to the positive impact of increased leverage of the segment’s fixed and semi-fixed costs over additional production volume and price increases. Improved productivity, benefits from capital investments, favorable sales mix associated with a higher proportion of drilling pump and replacement pump parts shipments, and the acquisition of Todo also contributed to the increase.
     Interest expense decreased $1.6 million to $8.8 million in the third quarter of 2006, compared to the third quarter of 2005. This decrease was primarily due to debt repayments over the previous twelve months, partially offset by increases in market interest rates on floating rate debt.
     Income before income taxes increased $24.1 million (101%) to $47.9 million for the three-month period ended September 30, 2006, compared to the same period of 2005. This increase was primarily due to increased sales volume in both segments as a result of internal growth, favorable sales mix from increased drilling pump sales, cost reductions and price improvements. These positive factors were partially offset by increased stock-based compensation expense, inflation, and higher depreciation and amortization expenses.
     The provision for income taxes increased $8.7 million to $15.8 million in the third quarter of 2006, compared to the prior year period, as a result of higher pre-tax income and a higher effective income tax rate. The Company’s effective tax rate for the three-month period ended September 30, 2006 increased to 33% compared to 30% in the same period of 2005. This increase occurred primarily as a result of incremental pre-tax income generated by the Company’s operations in the United States and Germany in 2006, which is taxed at higher rates than the Company’s effective tax rate in 2005. In addition, the Company’s income tax planning strategies generally provide a fixed rate of return resulting in a reduced effective tax rate benefit as pre-tax earnings increase.
     Net income for the three-month period ended September 30, 2006 increased $15.5 million (93%) to $32.1 million, compared to $16.7 million for the same period of 2005. This improvement was the result of higher income before taxes, partially offset by the increased provision for income taxes. On a diluted per share basis, earnings for the three-month period ended September 30, 2006 were $0.60, compared to $0.32 for the same period of 2005, representing an 88% increase.

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Performance in the Nine Months Ended September 30, 2006 Compared with
the Nine Months Ended September 30, 2005
Revenues
     Revenues increased $384.3 million (45%) to $1.2 billion for the nine-month period ended September 30, 2006, compared to the same period of 2005. This increase was primarily due to the acquisitions of Thomas, Bottarini and Todo, which contributed approximately $229.4 million (27%) of additional revenues. Increased shipments of oil and natural gas well drilling and servicing pumps, compressors and blowers, combined with price increases, contributed the other 18% growth in revenues compared to 2005. The Company also implemented certain manufacturing and supply chain improvements in late 2005 and in 2006 that resulted in increased production output to meet the improved demand for its products. Changes in foreign currency exchange rates did not have a material effect on the comparison of year-over-year revenues.
     For the nine-month period ended September 30, 2006, revenues in the Compressor and Vacuum Products segment increased $288.2 million (42%) to $969.9 million, compared to the same period of 2005. This increase was primarily due to the incremental effect of the acquisitions of Thomas and Bottarini in the third and second quarters of 2005, respectively, (32%), higher compressor and blower shipments, primarily in the U.S., Europe and China (7%), and improved pricing (3%).
     Fluid Transfer Products segment revenues increased $96.1 million (59%) to $259.7 million for the nine-month period ended September 30, 2006, compared to the same period of 2005. This improvement was due to volume increases (39%), which were primarily attributable to stronger demand for oil and natural gas well drilling and servicing pumps, water jetting systems and related aftermarket parts, price increases (13%), and the incremental effect of the Thomas and Todo acquisitions (7%).
Costs and Expenses
     Cost of sales (excluding depreciation and amortization) as a percentage of revenues improved to 65.1% in the nine-month period ended September 30, 2006, from 67.4% in the same period of 2005. This improvement was attributable to cost reduction initiatives and leveraging fixed and semi-fixed costs over higher production volume. Favorable sales mix also contributed to the year-over-year improvement. The nine-month period of 2006 included a higher percentage of drilling pump and replacement pump parts shipments compared with the nine-month period of 2005. These products have cost of sales (excluding depreciation and amortization) percentages below the Company’s average. Cost of sales (excluding depreciation and amortization) for the nine-month period of 2005 was negatively impacted by approximately $3.9 million of non-recurring costs attributable to the sales of inventory of acquired businesses recorded at fair value. Decreases in manufacturing productivity related to product line relocations associated with acquisition integration projects in 2006 and material and other cost increases partially offset these improvements.
     Depreciation and amortization for the nine-month period ended September 30, 2006 increased $13.7 million (53%) to $39.5 million, compared to the same period of the prior year, primarily due to the incremental effect of acquisitions in the second and third quarters of 2005. The year over year increase reflects a $2.3 million net charge to depreciation and amortization recorded in the second quarter of 2006 as a result of the finalization of the fair value of the Thomas tangible and amortizable intangible assets, of which $1.0 million was associated with the six-month period ended December 31, 2005.
     Selling and administrative expenses as a percentage of revenues improved to 17.9% in the first nine months of 2006 from 20.7% in the first nine months of 2005 due to increased leverage of these expenses over additional volume and the completion of various integration activities and cost reduction initiatives. Compared to the nine-month period of 2005, selling and administrative expenses increased $45.3 million (26%) in the same period of 2006 to $220.5 million. This increase was primarily attributable to the incremental effect of acquisitions, which contributed approximately $41.2 million of additional selling and administrative expenses, and $4.6 million of incremental stock-based compensation expense associated with the implementation of SFAS No. 123(R) effective January 1, 2006. The above increases were partially offset by cost reductions realized through integration activities, net of inflationary factors such as salary increases.

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     The Compressor and Vacuum Products segment generated operating margin of 10.6% during the nine-month period ended September 30, 2006, compared to 7.6% for the same period of 2005 (see Note 14 to the Consolidated Financial Statements for a reconciliation of segment operating earnings to consolidated income before income taxes). Contributions from acquisitions (net of cost reductions realized) with operating margins higher than the Company’s previously existing businesses, cost reductions and favorable sales mix accounted for the majority of the improvement. These positive factors were partially offset by increased material costs and compensation-related expenses. The operating margin in the nine-month period of 2005 was also reduced by the non-recurring costs attributable to the sales of inventory of acquired businesses recorded at fair value as mentioned previously.
     The Fluid Transfer Products segment operating margin increased to 25.5% for the nine-month period ended September 30, 2006, compared to 14.1% for the same period of 2005 (see Note 14 to the Consolidated Financial Statements for a reconciliation of segment operating earnings to consolidated income before income taxes). This improvement was primarily due to the positive impact of increased leverage of the segment’s fixed and semi-fixed costs over additional production volume and price increases. Improved productivity, benefits from capital investments, favorable sales mix associated with a higher proportion of drilling pump and replacement pump parts shipments, and the acquisition of Todo also contributed to the increase.
     Interest expense increased $8.9 million to $28.6 million during the nine-month period of 2006, compared to the same period of 2005. This increase was primarily due to additional funds borrowed to finance recent acquisitions and higher short-term interest rates. The weighted average interest rate for the nine-month period of 2006 was 6.7%, compared to 6.5% in the comparable prior year period. The higher weighted average interest rate in 2006 was primarily attributable to increases in market interest rates on floating rate debt and the issuance of $125.0 million of 8% Senior Subordinated Notes in May 2005.
     Other income, net, in the nine-month period of 2005 included approximately $0.7 million of interest income earned on the investment of financing proceeds, prior to their use to complete the Thomas acquisition, and proceeds from litigation-related settlements of $1.7 million. The additional interest income and litigation-related settlements were excluded from segment operating earnings because such transactions occur infrequently and are generally not controlled by operating management at the segment level.
     Income before income taxes increased $83.3 million (140%) to $142.7 million for the nine-month period ended September 30, 2006, compared to the same period of 2005. This increase was primarily due to increased sales volume in both segments as a result of recent acquisitions, favorable sales mix and internal growth, cost reductions and price improvements. These positive factors were partially offset by increased stock-based compensation expense, higher depreciation and amortization expenses, and interest expense.
     The provision for income taxes increased $29.3 million to $47.1 million for the nine-month period of 2006, compared to the prior year period, as a result of higher pre-tax income and a higher effective income tax rate. The Company’s effective tax rate for the nine-month period ended September 30, 2006

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increased to 33% compared to 30% in the same period of 2005, primarily as a result of incremental pre-tax income generated by the Company’s operations in the United States and Germany in 2006, which is taxed at higher rates than the Company’s effective tax rate in 2005. In addition, the Company’s income tax planning strategies generally provide a fixed rate of return resulting in a reduced effective tax rate benefit as pre-tax earnings increase.
     Net income for the nine-month period ended September 30, 2006 increased $54.0 million (130%) to $95.6 million, compared to $41.6 million for the same period of 2005. This improvement was the result of higher income before taxes, partially offset by the increased provision for income taxes. On a diluted per share basis, earnings for the nine-month period ended September 30, 2006 were $1.79, compared to $0.88 in the prior year period, representing a 103% increase. Diluted earnings per share for the nine-month period of 2006 includes the impact of the issuance of 11,316,000 shares of the Company’s common stock during May 2005 (adjusted for the two-for-one stock split in the form of a 100% stock dividend that was completed on June 1, 2006).
Outlook
     In general, demand for compressor and vacuum products tends to correlate to the rate of manufacturing capacity utilization and the rate of change of industrial equipment production because air is often used as a fourth utility in the manufacturing process. Over longer time periods, demand also follows economic growth patterns indicated by the rates of change in the Gross Domestic Product around the world. Total industry capacity utilization in the U.S. has remained above the key threshold level of 80% since November 2005, which is a positive indicator of demand for the Company’s compressor and vacuum products in this region.
     Generally, demand for the Company’s products used in industrial applications lags economic cycle changes by approximately six months. Therefore, management expects orders for industrial products to remain strong through the rest of 2006 and the rate of order growth for these products to begin to slow in 2007 from the current double-digit level. Demand for the Company’s drilling and well servicing pumps also remains strong and, given the extended visibility in this portion of the Company’s business as a result of existing order backlog, management expects demand to remain strong for these products at least through 2007. The Company was successful in improving revenues in the Fluid Transfer Products segment during 2006 through price increases and additional outsourcing of component production. Further revenue increases for oil and natural gas-related products will depend upon the Company’s ability to identify additional outsourcing alternatives, implement incremental price increases and expand machining capacity through selective capital investment.
     In the third quarter of 2006, orders for compressor and vacuum products were $339.9 million, compared to $294.5 million in the same period of 2005. Order backlog for the Compressor and Vacuum Products segment was $356.1 million as of September 30, 2006, compared to $290.0 million as of September 30, 2005. The increase in orders and backlog compared to the prior year was primarily due to stronger industrial demand, pricing and favorable changes in foreign currency exchange rates. The Company has also experienced increased demand for products used in environmental applications. The order growth was relatively broad-based, with no other specific market segment driving the improvement.

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     Demand for petroleum-related fluid transfer products has historically corresponded to market conditions and expectations for oil and natural gas prices. Orders for fluid transfer products were $83.8 million in the third quarter of 2006, compared to $116.8 million in the same period of 2005. As management expected, orders for fluid transfer products decreased due to the timing of bookings for drilling pumps and loading arms. The level of orders in the third quarter of 2005 was unusually high and represented 192% of revenues for that quarter as customers for oil and gas products began securing future production capacities. Order backlog for the Fluid Transfer Products segment was $189.6 million at September 30, 2006, compared to $153.1 million at September 30, 2005, representing a 24% increase. The increase in backlog was primarily due to strong demand for drilling pumps, well servicing pumps and petroleum pump parts as a result of continued high prices for oil and natural gas and price increases. Future increases in demand for these products will likely be dependent upon rig counts and oil and natural gas prices, which the Company cannot predict. In response to current and expected future demand for fluid transfer products, the Company has made selective capital investments to improve production efficiency and outsourced certain machining operations to reduce the potential for manufacturing bottlenecks.
     The Company has launched several initiatives aimed at integrating recent acquisitions and streamlining manufacturing operations.
     The Company previously announced its plan to transfer the manufacturing of standard liquid ring pumps from a production facility in Nuremberg, Germany to other existing Company facilities in China and Brazil. Construction of the facility expansion in China was finished during the third quarter and management expects the transfer of production to be completed by the end of 2006.
     In addition, management began rationalizing the Company’s European blower product lines and manufacturing facilities. Through this project, the Company’s separate blower manufacturing operations located in Schopfheim, Germany were merged, and the Company is currently in the process of relocating the mobile blower product line from Schopfheim to a Gardner Denver facility in the U.K., where other European mobile equipment is currently manufactured. As part of this project, management is also rationalizing the side-channel blower product lines acquired as part of the Nash Elmo and Thomas acquisitions and intends to centralize production of standard products in the Company’s manufacturing facility in Bad Neustadt, Germany. These projects are scheduled to be completed by the fourth quarter of 2007.
     The Company expects the costs associated with the integration projects discussed above to negatively impact financial results in the fourth quarter of 2006 and, to a lesser extent, in 2007. The impact of these costs on results in the fourth quarter of 2006 is currently estimated to be in the range of $2.0 million to $2.5 million before income taxes. Scheduled plant shut-downs at certain of the Company’s facilities during the holiday period are also expected to negatively impact operating margins in both reportable segments in the fourth quarter of 2006.
Liquidity and Capital Resources
Operating Working Capital
     During the nine-month period ended September 30, 2006, operating working capital (defined as accounts receivable plus inventories, less accounts payable and accrued liabilities) increased $50.2 million to $199.2 million. This increase was driven by higher accounts receivable resulting from the revenue growth during 2006 compared to 2005 and higher inventory levels required to support the

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current year increase in customer orders and backlog. These factors were partially offset by the realization of benefits from the implementation of lean manufacturing initiatives in 2005 and 2006. Inventory turnover and days sales outstanding in the third quarter of 2006 were comparable to the levels of the fourth quarter of 2005. Net working capital (defined as total current assets less total current liabilities) was $297.1 million at September 30, 2006, compared with $272.4 million at December 31, 2005.
Cash Flows
     During the nine-month period of 2006, net cash provided by operating activities was $86.7 million, a 64% increase compared to $52.8 million generated during the comparable period of 2005. This increase was primarily due to higher net income and depreciation and amortization expense, partially offset by volume-related increases in accounts receivable and inventories. Net cash used in financing activities of $83.6 million during the nine-month period of 2006 primarily reflected the use of available cash and cash generated from operating activities to repay long-term borrowings. During the nine-month period ended September 30, 2006, the Company’s net repayments of long-term borrowings totaled $89.5 million. On September 30, 2006, the Company’s debt to total capital was 38.1%, compared to 46.4% on December 31, 2005.
Capital Expenditures and Commitments
     Capital projects designed to increase operating efficiency and flexibility, expand production capacity and bring new products to market resulted in capital expenditures of approximately $26.3 million in the nine-month period of 2006. Capital spending in 2006 was $3.6 million higher than in the comparable period in 2005, primarily due to spending related to cost reduction initiatives and spending at acquired businesses. Commitments for capital expenditures at September 30, 2006 were approximately $35.1 million. Capital expenditures related to environmental projects have not been significant in the past and are not expected to be significant in the foreseeable future.
     In October 1998, the Company’s Board of Directors authorized the repurchase of up to 3,200,000 shares of the Company’s common stock to be used for general corporate purposes, of which 420,600 shares remain available for repurchase under this program as of September 30, 2006. The Company has also established a Stock Repurchase Program for its executive officers to provide a means for them to sell the Company’s common stock and obtain sufficient funds to meet income tax obligations which arise from the exercise or vesting of incentive stock options, restricted stock or performance shares. The Company’s Board of Directors has authorized up to 800,000 shares for repurchase under this program, and of this amount, 405,916 shares remain available for repurchase as of September 30, 2006. As of September 30, 2006, a total of 3,173,484 shares have been repurchased at a cost of approximately $23.5 million under both repurchase programs.
Liquidity
     On July 1, 2005, the Company’s $605.0 million amended and restated credit agreement (the “2005 Credit Agreement”) became effective with the completion of the Thomas acquisition. The 2005 Credit Agreement provided the Company with access to senior secured credit facilities, including a $380.0 million Term Loan, and restated its $225.0 million Revolving Line of Credit, in addition to superceding the Company’s previously existing credit agreement.

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     The Term Loan has a final maturity of July 1, 2010 and the outstanding principal balance at September 30, 2006 was $194.0 million. The Term Loan requires quarterly principal payments aggregating $5 million for the remainder of 2006 and $26 million, $42 million, $74 million and $47 million per year in 2007 through 2010, respectively.
     The Revolving Line of Credit matures on July 1, 2010. Loans under this facility may be denominated in U.S. dollars or several foreign currencies and may be borrowed by the Company or two of its foreign subsidiaries as outlined in the 2005 Credit Agreement. On September 30, 2006, the Revolving Line of Credit had an outstanding principal balance of $140.3 million, leaving $84.7 million available for letters of credit or for future use, subject to the terms of the Revolving Line of Credit.
     The interest rates applicable to loans under the 2005 Credit Agreement are variable and will be, at the Company’s option, the prime rate plus an applicable margin or LIBOR plus an applicable margin. The applicable margin percentages are adjustable at the end of each quarter, based upon financial ratio guidelines defined in 2005 Credit Agreement.
     The Company’s obligations under the 2005 Credit Agreement are guaranteed by the Company’s existing and future domestic subsidiaries, and are secured by a pledge of certain subsidiaries’ capital stock. The Company is subject to customary covenants regarding certain earnings, liquidity and capital ratios.
     Management currently expects the Company’s future cash flows to be sufficient to fund its scheduled debt service and provide required resources for working capital and capital investments for at least the next twelve months.
Contractual Obligations and Commitments
     The following table and accompanying disclosures summarize the Company’s significant contractual obligations at September 30, 2006 and the effect such obligations are expected to have on its liquidity and cash flow in future periods:
                                         
            Payments Due by Period    
(dollars in millions)           Balance                   After
Contractual Cash Obligations   Total   of 2006   2007 - 2008   2009 - 2010   2010
 
Debt
  $ 484.0     $ 12.6     $ 69.5     $ 262.0     $ 139.9  
Estimated interest payments (1)
    96.5       7.3       43.4       24.2       21.6  
Capital leases
    7.2       0.1       0.5       0.5       6.1  
Operating leases
    44.5       3.5       18.2       9.4       13.4  
Purchase obligations (2)
    214.2       152.2       60.1       1.1       0.8  
 
Total
  $ 846.4     $ 175.7     $ 191.7     $ 297.2     $ 181.8  
 
 
(1)   Estimated interest payments for long-term debt were calculated as follows: for fixed-rate debt and term debt, interest was calculated based on applicable rates and payment dates; for variable-rate debt and/or non-term debt, interest rates and payment dates were estimated based on management’s determination of the most likely scenarios for each relevant debt instrument. Management expects to settle such interest payments with cash flows from operating activities and/or short-term borrowings.
 
(2)   Purchase obligations consist primarily of agreements to purchase inventory or services made in the normal course of business to meet operational requirements. The purchase obligation amounts do not represent the entire anticipated purchases in the future, but represent only those items for which the Company is contractually obligated as of September 30, 2006. For this reason, these numbers will not provide a complete and reliable indicator of the Company’s expected future cash outflows.

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     In accordance with SFAS No. 87, “Employers’ Accounting for Pensions,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” the total accrued benefit liability for pension and other postretirement benefit plans recognized as of December 31, 2005, was $92.2 million. This amount excludes $5.9 million of deferred income taxes and $9.6 million of accumulated other comprehensive income relating to the Company’s recognition of a minimum pension liability. The accrued liability for pension and other postretirement benefit plans is included in the consolidated balance sheet line items accrued liabilities, postretirement benefits other than pensions and other liabilities. This amount is impacted by, among other items, plan funding levels, changes in plan demographics and assumptions, and investment return on plan assets. Because the accrued liability does not represent expected liquidity needs, the Company did not include this amount in the contractual obligations table above.
     The Company funds its U.S. qualified pension plans in accordance with Employee Retirement Income Security Act of 1974 regulations for the minimum annual required contribution and Internal Revenue Service regulations for the maximum annual allowable tax deduction. The Company is committed to making the required minimum contributions and expects to contribute a total of approximately $3.0 million to its U.S. qualified pension plans during 2006. Furthermore, the Company expects to contribute a total of approximately $2.5 million to the U.S. postretirement health care benefit plan during 2006. Future contributions are dependent upon various factors including the performance of the plan assets, benefit payment experience and changes, if any, to current funding requirements. Therefore, no amounts were included as a contractual obligation in the above table. The Company generally expects to fund all future contributions with cash flows from operating activities.
     The Company’s non-U.S. pension plans are funded in accordance with local laws and income tax regulations. The Company expects to contribute a total of approximately $4.2 million to its non-U.S. qualified pension plans during 2006. No amounts have been included in the contractual obligations table due to the same reasons noted above.
     As of December 31, 2005, the projected benefit obligation of the U.S. qualified pension plans was $74.9 million, and the fair value of plan assets was $56.8 million. As of December 31, 2005, the projected benefit obligation of the non-U.S. pension plans was $182.3 million, and the fair value of non-U.S. pension plan assets was $122.1 million. Disclosure of amounts in the above table regarding expected benefit payments in future years for the Company’s pension plans and other postretirement benefit plans cannot be properly reflected due to the ongoing nature of the obligations of these plans. However, in order to inform the reader about expected benefit payments for these plans over the next several years, the Company anticipates annual benefit payments to be in the range of approximately $8.0 million to $9.0 million and $3.0 million to $4.0 million for the U.S. plans and the non-U.S. plans, respectively, in 2006 and remain at or near this annual level for the next several years. During the third quarter of 2006, the Company initiated certain revisions to the Gardner Denver, Inc. Pension Plan effective November 1, 2006. Refer to Note 16 “Subsequent Event” in the “Notes to Consolidated Financial Statements.”
     Deferred income tax liabilities were $83.6 million as of September 30, 2006. This amount is not included in the total contractual obligations table because the Company believes this presentation would not be meaningful. Deferred income tax liabilities are calculated based on temporary differences between the tax basis of assets and liabilities and their book basis, which will result in taxable amounts in future years when the book basis is settled. The results of these calculations do not have a direct connection with the amount of cash taxes to be paid in any future periods. As a result, scheduling deferred income tax liabilities as payments due by period could be misleading, because this scheduling would not relate to liquidity needs.

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     In the normal course of business, the Company or its subsidiaries may sometimes be required to provide surety bonds, standby letters of credit or similar instruments to guarantee its performance of contractual or legal obligations. As of September 30, 2006, the Company had $42.9 million in such instruments outstanding and had pledged $2.0 million of cash to the issuing financial institutions as collateral for such instruments.
Contingencies
     The Company is a party to various legal proceedings, lawsuits and administrative actions, which are of an ordinary or routine nature. In addition, due to the bankruptcies of several asbestos manufacturers and other primary defendants, among other things, the Company has been named as a defendant in an increasing number of asbestos personal injury lawsuits. The Company has also been named as a defendant in an increasing number of silicosis personal injury lawsuits. The plaintiffs in these suits allege exposure to asbestos or silica from multiple sources and typically the Company is one of approximately 25 or more named defendants. In the Company’s experience, the vast majority of the plaintiffs are not impaired with a disease for which the Company bears any responsibility.
     Predecessors to the Company sometimes manufactured, distributed and/or sold products allegedly at issue in the pending asbestos and silicosis litigation lawsuits (the “Products”). However, neither the Company nor its predecessors ever mined, manufactured, mixed, produced or distributed asbestos fiber or silica sand, the materials that allegedly caused the injury underlying the lawsuits. Moreover, the asbestos-containing components used in the Products were enclosed within the subject Products.
     The Company has entered into a series of cost-sharing agreements with multiple insurance companies to secure coverage for asbestos and silicosis lawsuits. The Company also believes some of the potential liabilities regarding these lawsuits are covered by indemnity agreements with other parties. The Company’s uninsured settlement payments for past asbestos and silicosis lawsuits have been immaterial.
     The Company believes that the pending and future asbestos and silicosis lawsuits will not, in the aggregate, have a material adverse effect on its consolidated financial position, results of operations or liquidity, based on: the Company’s anticipated insurance and indemnification rights to address the risks of such matters; the limited potential asbestos exposure from the components described above; the Company’s experience that the vast majority of plaintiffs are not impaired with a disease attributable to alleged exposure to asbestos or silica from or relating to the Products or for which the Company otherwise bears responsibility; various potential defenses available to the Company with respect to such matters; and the Company’s prior disposition of comparable matters. However, due to inherent uncertainties of litigation and because future developments, including, without limitation, potential insolvencies of insurance companies, could cause a different outcome, there can be no assurance that the resolution of pending or future lawsuits, whether by judgment, settlement or dismissal, will not have a material adverse effect on its consolidated financial position, results of operations or liquidity.
     The Company has also been identified as a potentially responsible party with respect to several sites designated for environmental cleanup under various state and federal laws. The Company does not believe that the future potential costs related to these sites will have a material adverse effect on its consolidated financial position, results of operations or liquidity.

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Changes in Accounting Principles and Effects of New Accounting Pronouncements
     In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). SFAS No. 123(R) supersedes Accounting Principals Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and amends SFAS No. 95, “Statement of Cash Flows.” The Company adopted the provisions of SFAS No. 123(R) effective January 1, 2006. Disclosures related to the Company’s stock-based compensation plans are included in Note 9.
     In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 in the first quarter of 2007. The cumulative effects, if any, of applying FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. Management has commenced the process of evaluating the expected effect of FIN 48 on the Company’s consolidated financial statements and related disclosure requirements.
     In June 2006, the Emerging Issues Task Force reached a consensus on the income statement presentation of various types of taxes. The new guidance, Emerging Issues Task Force Issue 06-3 “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF 06-3”) applies to any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes. The presentation of taxes within the scope of this issue on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy decision that should be disclosed pursuant to APB Opinion No. 22, “Disclosure of Accounting Policies.” The EITF’s decision on gross versus net presentation requires that any such taxes reported on a gross basis be disclosed on an aggregate basis in interim and annual financial statements, for each period for which an income statement is presented, if those amounts are significant. EITF 06-3 is effective for fiscal years beginning after December 15, 2006. Management has commenced the process of evaluating the expected effect of EITF 06-3 on the Company’s disclosure requirements.
     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. SFAS No. 157 applies whenever other statements require or permit assets or liabilities to be measured at fair value. This statement is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact the adoption of SFAS No. 157 will have on the Company’s consolidated financial statements and related disclosure requirements.
     In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”), which requires companies to recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income to report the funded status of defined

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benefit pension and other postretirement benefit plans. SFAS No.158 requires prospective application, and the recognition and disclosure requirements are effective for fiscal years ending after December 15, 2006. Additionally, this statement requires companies to measure plan assets and obligations at their year-end balance sheet date. This requirement is effective for fiscal years ending after December 15, 2008. Management has commenced the process of evaluating the expected effect of SFAS No. 158 on the Company’s consolidated financial statements and related disclosure requirements.
     In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”), which addresses the diversity in practice in quantifying financial statement misstatements and provides interpretive guidance regarding the consideration given to prior year misstatements when determining materiality in current year financial statements. SAB No. 108 is effective for fiscal years ending after November 15, 2006. Management is currently evaluating the impact the adoption of SAB No. 108 will have on the Company’s consolidated financial statements and related disclosure requirements.
Critical Accounting Policies
     Management has evaluated the accounting policies used in the preparation of the Company’s financial statements and related notes and believes those policies to be reasonable and appropriate. Certain of these accounting policies require the application of significant judgment by management in selecting appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, trends in the industry, information provided by customers and information available from other outside sources, as appropriate. The most significant areas involving management judgments and estimates may be found in the Company’s 2005 Annual Report on Form 10-K, filed on March 15, 2006, in the Critical Accounting Policies section of Management’s Discussion and Analysis and in Note 1 to the Consolidated Financial Statements.
Cautionary Statements Regarding Forward-Looking Statements
     All of the statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, other than historical facts, are forward-looking statements made in reliance upon the safe harbor of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements made under the caption “Outlook.” As a general matter, forward-looking statements are those focused upon anticipated events or trends, expectations, and beliefs relating to matters that are not historical in nature. Such forward-looking statements are subject to uncertainties and factors relating to the Company’s operations and business environment, all of which are difficult to predict and many of which are beyond the control of the Company. These uncertainties and factors could cause actual results to differ materially from those matters expressed in or implied by such forward-looking statements.
     The following uncertainties and factors, among others, including those set forth under “Risk Factors” in our Form 10-K for the fiscal year ended December 31, 2005, could affect future performance and cause actual results to differ materially from those expressed in or implied by forward-looking statements: (1) the ability to effectively integrate acquisitions, including product and manufacturing rationalization initiatives, and realize anticipated cost savings, synergies and revenue enhancements; (2) the risk that the Company may incur significant cash integration costs to achieve any such cost savings;

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(3) the Company’s exposure to economic downturns and market cycles, particularly the level of oil and natural gas prices and oil and gas drilling and production, which affect demand for the Company’s petroleum products, and industrial production and manufacturing capacity utilization rates, which affect demand for the Company’s compressor and vacuum products; (4) the risks of large or rapid increases in raw material costs or substantial decreases in their availability, and the Company’s dependence on particular suppliers, particularly iron casting and other metal suppliers; (5) the risks associated with intense competition in the Company’s markets, particularly the pricing of the Company’s products; (6) the Company’s ability to continue to identify and complete other strategic acquisitions and effectively integrate such acquisitions to achieve desired financial benefits; (7) economic, political and other risks associated with the Company’s international sales and operations, including changes in currency exchange rates (primarily between the U.S. dollar, the Euro, the British pound and the Chinese yuan); (8) changes in the availability or costs of new financing to support the Company’s operations and future investments; (9) the risks associated with pending asbestos and silicosis personal injury lawsuits, as well as other potential product liability and warranty claims due to the nature of the Company’s products; (10) the risks associated with environmental compliance costs and liabilities; (11) the ability to attract and retain quality management personnel; (12) the ability to avoid employee work stoppages and other labor difficulties; (13) the risks associated with defending against potential intellectual property claims and enforcing intellectual property rights; (14) market performance of pension plan assets and changes in discount rates used for actuarial assumptions in pension and other postretirement obligation and expense calculations; (15) the risk of possible future charges if the Company determines that the value of goodwill or other intangible assets has been impaired; and (16) changes in laws and regulations, including accounting standards, tax requirements and related interpretations or guidance. The Company does not undertake, and hereby disclaims, any duty to update these forward-looking statements, although its situation and circumstances may change in the future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
     The Company is exposed to market risk related to changes in interest rates, as well as certain European and other foreign currency exchange rates, and selectively uses derivative financial instruments, including forwards and swaps, to manage these risks. The Company does not hold derivatives for trading purposes. The value of market-risk sensitive derivatives and other financial instruments is subject to change as a result of movements in market rates and prices. Sensitivity analysis is one technique used to evaluate these impacts. As a result of recent acquisitions, a significant amount of the Company’s net income is earned in foreign currencies. Therefore, a strengthening in the U.S. dollar across relevant foreign currencies, principally the Euro, British pound and Chinese yuan, would have a corresponding negative impact on the Company’s future earnings.
     All derivative instruments are reported on the balance sheet at fair value. For each derivative instrument designated as a cash flow hedge, the gain or loss on the derivative is deferred in accumulated other comprehensive income until recognized in earnings with the underlying hedged item. For each derivative instrument designated as a fair value hedge, the gain or loss on the derivative instrument and the offsetting gain or loss on the hedged item are recognized immediately in earnings. Currency fluctuations on non-U.S. dollar borrowings that have been designated as hedges on the Company’s investment in foreign subsidiaries are included in other comprehensive income.
     To effectively manage interest costs, the Company uses interest rate swaps as cash flow hedges of variable rate debt. Including the impact of interest rate swaps outstanding, the interest rates on approximately 62% of the Company’s total borrowings were effectively fixed as of September 30, 2006. Also as part of its hedging strategy, the Company periodically uses purchased option and forward exchange contracts as cash flow hedges to minimize the impact of currency fluctuations on transactions, future cash flows and firm commitments. These contracts for the sale or purchase of currencies generally mature within one year.

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Item 4. Controls and Procedures
     The Company’s management carried out an evaluation, as required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), with the participation of the Chairman, President and Chief Executive Officer and the Vice President, Finance and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as of the end of the period covered by this report. Based upon this evaluation, the Chairman, President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q, such that the information relating to the Company and its consolidated subsidiaries required to be disclosed by the Company in the reports that it files or submits under the Exchange Act (i) is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to the Company’s management, including its principal executive and financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
     In addition, the Company’s management carried out an evaluation, as required by Rule 13a-15(d) of the Exchange Act, with the participation of the Chairman, President and Chief Executive Officer and the Vice President, Finance and Chief Financial Officer, of changes in the Company’s internal control over financial reporting. Based on this evaluation, the Chairman, President and Chief Executive Officer and the Vice President, Finance and Chief Financial Officer concluded that there were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.
     In designing and evaluating the disclosure controls and procedures, the Company’s management recognized that any controls and procedures, no matter how well designed, can provide only reasonable assurances of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
     The Company is a party to various legal proceedings and administrative actions. The information regarding these proceedings and actions is included under “Contingencies” in Part I, Item 2 of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
     For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussion provided under Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005. See also “Cautionary Statements Regarding Forward-Looking Statements” included in Part I, Item 2 of this Quarterly Report on Form 10-Q. There has not been any material change in the risk factors since December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
     Repurchases of equity securities during the three months ended September 30, 2006 are listed in the following table. All share and per share amounts reflect the effect of a two-for-one stock split (in the form of a 100% stock dividend) that was completed on June 1, 2006.
                                 
                    Total Number of   Maximum Number
                    Shares Purchased   of Shares that May
    Total Number of           as Part of Publicly   Yet Be Purchased
    Shares Purchased   Average Price   Announced Plans   Under the Plans or
Period   (1)   Paid per Share   or Programs (2)   Programs
July 1, 2006– July 31, 2006
          N/A             826,516  
 
                               
August 1, 2006 – August 31, 2006
          N/A             826,516  
 
                               
September 1, 2006 – September 30, 2006
          N/A             826,516  
 
                               
Total
          N/A             826,516  
 
(1)   Includes shares exchanged or surrendered in connection with the exercise of options under Gardner Denver’s stock option plans.
 
(2)   In October 1998, Gardner Denver’s Board of Directors authorized the repurchase of up to 3,200,000 shares of the Company’s Common Stock to be used for general corporate purposes and the repurchase of up to 800,000 shares of the Company’s Common Stock under a Stock Repurchase Program for Gardner Denver’s executive officers. Both authorizations remain in effect until all the authorized shares are repurchased unless modified by the Board of Directors.

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Item 6. Exhibits
11   Statement re: Computation of Earnings Per Share, filed herewith as Note 10.
 
12   Statements re: Computation of Ratio of Earnings to Fixed Charges.
 
31.1   Certification of Chief Executive Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2   Certification of Chief Financial Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2   Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
             
    GARDNER DENVER, INC.    
    (Registrant)    
 
           
Date: November 8, 2006
  By:   /s/ Ross J. Centanni    
 
           
    Ross J. Centanni    
    Chairman, President & CEO    
 
           
Date: November 8, 2006
  By:   /s/ Helen W. Cornell    
 
           
    Helen W. Cornell    
    Vice President, Finance & CFO    
 
           
Date: November 8, 2006
  By:   /s/ David J. Antoniuk    
 
           
    David J. Antoniuk    
    Vice President and Corporate    
    Controller (Principal Accounting Officer)    

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GARDNER DENVER, INC.
EXHIBIT INDEX
     
Exhibit    
No.   Description
 
11
  Statement re: Computation of Earnings Per Share, filed herewith as Note 10.
 
   
12
  Statements re: Computation of Ratio of Earnings to Fixed Charges.
 
   
31.1
  Certification of Chief Executive Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification of Chief Financial Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
32.2
  Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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