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 June 30, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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: 53,462,091 shares of Common Stock, par value $0.01 per share, as of July 29, 2007.

 

 

GARDNER DENVER, INC.
Table of Contents

		Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Operations			3
Consolidated Balance Sheets			4
Consolidated Statements of Cash Flows			5
Notes to Consolidated Financial Statements			6
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3 Quantitative and Qualitative Disclosures About Market Risk			39
Item 4 Controls and Procedures			40
PART II OTHER INFORMATION
Item 1 Legal Proceedings			42
Item 1A Risk Factors			42
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 4 Submission of Matters to a Vote of Security Holders			43
Item 6 Exhibits			43
SIGNATURES			44
EXHIBIT INDEX			45
Amendment No.3 to Third Amended and Restated Credit Agreement
Phantom Stock Plan
Executive and Director Stock Repurchase Program
Statements 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

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

GARDNER DENVER, INC.

(Dollars in thousands, except per share amounts)

(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Revenues		$	459,869			$	416,312			$	901,287			$	815,606
Cost and expenses:
Cost of sales			306,037				281,989				598,528				548,599
Selling and administrative expenses			82,324				75,297				163,153				153,565
Interest expense			6,858				9,580				13,595				19,812
Other income, net			(236	)			(453	)			(789	)			(1,140	)
Total costs and expenses			394,983				366,413				774,487				720,836
Income before income taxes			64,886				49,899				126,800				94,770
Provision for income taxes			20,115				16,915				39,213				31,274
Net income		$	44,771			$	32,984			$	87,587			$	63,496
Basic earnings per share		$	0.84			$	0.63			$	1.65			$	1.22
Diluted earnings per share		$	0.83			$	0.62			$	1.63			$	1.19

The accompanying notes are an integral part of these consolidated financial statements.

GARDNER DENVER, INC.

(Dollars in thousands, except per share amounts)

		June 30,				December 31,
		2007				2006
		(unaudited)
Assets
Current assets:
Cash and equivalents		$	71,483			$	62,331
Accounts receivable (net of allowances of $9,510 at June 30, 2007 and $10,314 at December 31, 2006)			301,809				261,115
Inventories, net			258,750				225,067
Deferred income taxes			17,402				14,362
Other current assets			17,087				16,843
Total current assets			666,531				579,718
Property, plant and equipment, net			276,310				276,493
Goodwill			674,612				676,780
Other intangibles, net			193,469				196,466
Other assets			21,701				20,774
Total assets		$	1,832,623			$	1,750,231
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings and current maturities of long-term debt		$	26,639			$	23,789
Accounts payable			101,347				90,703
Accrued liabilities			189,254				202,475
Total current liabilities			317,240				316,967
Long-term debt, less current maturities			341,091				383,459
Postretirement benefits other than pensions			22,352				22,598
Deferred income taxes			65,742				66,460
Other liabilities			111,347				108,217
Total liabilities			857,772				897,701
Stockholders’ equity:
Common stock, $0.01 par value; 100,000,000 shares authorized; 53,456,404 and 52,625,999 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively			572				564
Capital in excess of par value			511,629				490,856
Retained earnings			427,567				339,289
Accumulated other comprehensive income			64,956				50,731
Treasury stock at cost, 3,759,487 and 3,734,507 shares at June 30, 2007 and December 31, 2006, respectively			(29,873	)			(28,910	)
Total stockholders’ equity			974,851				852,530
Total liabilities and stockholders’ equity		$	1,832,623			$	1,750,231

The accompanying notes are an integral part of these consolidated financial statements.

GARDNER DENVER, INC.

(Dollars in thousands)

(Unaudited)

		Six Months Ended
		June 30,
		2007				2006
Cash Flows From Operating Activities
Net income		$	87,587			$	63,496
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			27,898				26,527
Unrealized foreign currency transaction loss (gain), net			366				(79	)
Net (gain) loss on asset dispositions			(34	)			91
Stock issued for employee benefit plans			2,494				1,869
Stock-based compensation expense			3,620				3,606
Excess tax benefits from stock-based compensation			(6,170	)			(2,282	)
Deferred income taxes			(1,474	)			(3,737	)
Changes in assets and liabilities:
Receivables			(37,283	)			(27,998	)
Inventories			(29,440	)			(17,905	)
Accounts payable and accrued liabilities			6,990				(19,428	)
Other assets and liabilities, net			(172	)			(884	)
Net cash provided by operating activities			54,382				23,276
Cash Flows From Investing Activities
Net cash paid in business combinations			(119	)			(19,471	)
Capital expenditures			(17,911	)			(16,133	)
Disposals of property, plant and equipment			338				11,157
Net cash used in investing activities			(17,692	)			(24,447	)
Cash Flows From Financing Activities
Principal payments on short-term borrowings			(13,729	)			(3,979	)
Proceeds from short-term borrowings			15,973				4,557
Principal payments on long-term debt			(93,836	)			(97,578	)
Proceeds from long-term debt			49,327				64,500
Proceeds from stock option exercises			8,488				3,945
Excess tax benefits from stock-based compensation			6,170				2,282
Purchase of treasury stock			(955	)			(1,223	)
Debt issuance costs			—				(95	)
Other			(958	)			(154	)
Net cash used in financing activities			(29,520	)			(27,745	)
Effect of exchange rate changes on cash and equivalents			1,982				6,610
Increase (decrease) in cash and equivalents			9,152				(22,306	)
Cash and equivalents, beginning of year			62,331				110,906
Cash and equivalents, end of period		$	71,483			$	88,600

The accompanying notes are an integral part of these consolidated financial statements.

GARDNER DENVER, INC.

(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 its majority-owned subsidiaries (referred to herein as “Gardner Denver” or the “Company”). In consolidation, all significant intercompany transactions and accounts have been eliminated. As discussed below, certain prior year amounts have been reclassified to conform to the current year presentation.

     The financial information presented as of any date other than December 31, 2006 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, 2006.

     The results of operations for the six-month period ended June 30, 2007 are not necessarily indicative of the results to be expected for the full year. The balance sheet at December 31, 2006 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 these “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, 2006.

     In connection with the Company’s adoption of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”) effective January 1, 2007 (see Note 3, “Income Taxes”), the liability established for unrecognized income tax benefits relative to matters not expected to be resolved within twelve months at June 30, 2007 has been classified as a non-current liability. The balance sheet at December 31, 2006 was reclassified to conform to the current presentation and, accordingly, approximately $9.4 million of the liability for unrecognized tax benefits at December 31, 2006 was reclassified from current liabilities to non-current liabilities.

     Effective January 1, 2007, the Company’s presentation of certain expenses within its consolidated statements of operations has been changed. Depreciation expense recorded in connection with the manufacture of the Company’s products sold during each reporting period is included in the caption “Cost of sales.” Depreciation expense not associated with the manufacture of the Company’s products and amortization expense are included in the caption “Selling and administrative expenses.” Depreciation and

amortization expense were previously combined and reported in the caption “Depreciation and amortization.” The Company believes that this change in classification provides a more meaningful measure of its respective cost of sales and selling and administrative expenses. These reclassifications had no effect on reported consolidated income before income taxes, net income, per share amounts or reportable segment operating earnings. Amounts presented for the three and six-month periods ended June 30, 2006 have been reclassified to conform to the current classification. The following table provides the reclassified statements of operations and amounts reclassified for the periods indicated.

GARDNER DENVER, INC.
RECLASSIFIED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Year Ended December 31, 2006
		First				Second				Third				Fourth				Total				Years Ended December 31,
		Quarter				Quarter				Quarter				Quarter				Year				2005				2004
Revenues		$	399,294			$	416,312			$	414,028			$	439,542			$	1,669,176			$	1,214,552			$	739,539
Costs and expenses:
Cost of sales			266,610				281,989				280,429				290,832				1,119,860				836,237				513,927
Selling and administrative expenses			78,268				75,297				77,903				82,775				314,243				257,680				163,862
Interest expense			10,232				9,580				8,762				8,805				37,379				30,433				10,102
Other income, net			(687	)			(453	)			(1,015	)			(766	)			(2,921	)			(5,442	)			(638	)
Total costs and expenses			354,423				366,413				366,079				381,646				1,468,561				1,118,908				687,253
Income before income taxes			44,871				49,899				47,949				57,896				200,615				95,644				52,286
Provision for income taxes			14,359				16,915				15,832				20,601				67,707				28,693				15,163
Net income		$	30,512			$	32,984			$	32,117			$	37,295			$	132,908			$	66,951			$	37,123
Basic earnings per share		$	0.59			$	0.63			$	0.61			$	0.71			$	2.54			$	1.40			$	0.98
Diluted earnings per share		$	0.57			$	0.62			$	0.60			$	0.70			$	2.49			$	1.37			$	0.96
Amounts Reclassified
Cost of sales		$	7,435			$	12,275			$	8,880			$	7,213			$	35,803			$	23,010			$	15,492
Selling and administrative expenses			4,563				2,254				4,120				5,469				16,406				15,312				6,409
Depreciation and amortization			(11,998	)			(14,529	)			(13,000	)			(12,682	)			(52,209	)			(38,322	)			(21,901	)
Total costs and expenses		$	—			$	—			$	—			$	—			$	—			$	—			$	—

Changes in Accounting Principles and Effects of New Accounting Pronouncements

     In June 2006, the FASB issued 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 and was adopted by the Company in the first quarter of 2007. See Note 3, “Income Taxes,” for a discussion of the effect of adoption of FIN 48 on the Company’s financial statements.

     In June 2006, the Emerging Issues Task Force (“EITF”) 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. The Company adopted EITF 06-3 effective January 1, 2007. The Company reports revenues net of taxes within the scope of EITF 06-3 and, accordingly, adoption of this issue had no effect on its consolidated financial statements and related disclosures.

     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. The Company is currently evaluating the impact that the adoption of SFAS No. 157 will have on its consolidated financial statements and related disclosure requirements.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which permits all entities to elect to measure eligible financial instruments at fair value. Additionally, this statement establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This statement is effective for fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS No. 157. The Company is currently evaluating the impact the adoption of SFAS No. 159 will have on its consolidated financial statements and related disclosure requirements.

Note 2. Business Combinations

     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.

     In connection with the acquisition of Thomas Industries Inc. (“Thomas”) in 2005, 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 2007. 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 $16,487 was 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		$	14,454
Lease termination and related costs			1,007
Other			1,026
Total		$	16,487

     The following table summarizes the activity in the associated accrual account. Additional amounts accrued (reversed), net, in 2006 were recorded as adjustments to the cost of acquiring Thomas. Amounts reversed in the six-month period ended June 30, 2007 consisted of $95 recorded as adjustments to the cost of acquiring Thomas and $245 credited to income.

		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			(2,360	)			1,347				(1,013	)
Amounts paid			(3,449	)			(719	)			(4,168	)
Other			301				263				564
Balance at December 31, 2006			3,149				1,577				4,726
Amounts reversed			(95	)			(245	)			(340	)
Amounts paid			(831	)			(928	)			(1,759	)
Other			76				27				103
Balance at June 30, 2007		$	2,299			$	431			$	2,730

Note 3. Income Taxes

     The Company adopted the provisions of FIN 48 effective January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a decrease of $1.3 million in the liability for unrecognized tax benefits, which was accounted for as a $0.7 million increase to retained earnings at January 1, 2007, and a $0.6 million decrease to goodwill at January 1, 2007. As of the date of adoption and after the impact of recognizing the decrease in the liability noted above, the Company’s unrecognized tax benefits totaled $14.0 million. During the first quarter of 2007, the Company resolved certain tax issues that reduced the liability to $11.3 million. During the second quarter of 2007, the Company made payments that further reduced the liability to $9.7 million. Included in the unrecognized tax benefits at June 30, 2007 are $1.8 million of uncertain tax positions that would affect the Company’s effective tax rate if recognized. The balance of the unrecognized tax benefits, $7.9 million, would be recognized as an adjustment to goodwill.

     The Company’s accounting policy with respect to interest expense on underpayments of income tax and related penalties is to recognize it as part of the provision for income taxes. The Company’s income tax liabilities at June 30, 2007 include approximately $2.2 million of accrued interest, of which approximately $0.9 million relates to goodwill, and no penalties.

     The Company’s U.S. federal income tax returns for the tax years 2003 and beyond remain subject to examination by the U.S. Internal Revenue Service (“IRS”). The IRS in October 2006 announced an exam of an acquired subsidiary, Thomas, for the year 2004. As of the date of this report, the exam has not commenced. The statutes of limitations for the U.S. state tax returns are open beginning with the 2003 tax

year except for two states for which the statute has been extended beginning with the 2001 tax year. The statute of limitations for each 2003 tax return will expire during 2007.

     The Company is subject to income tax in approximately 30 jurisdictions outside the U.S. The statute of limitations varies by jurisdiction with 2001 being the oldest tax year still open, except as noted below. The Company’s significant operations outside the U.S. are located in the U.K. and Germany. In the U.K., one inquiry of a tax return for a tax year prior to 2005 remains open. The Company expects to resolve the inquiry without a material change. In Germany, generally, the tax years 2003 and beyond remain subject to examination with the statute of limitations for the 2003 tax year expiring during 2008. An acquired subsidiary group is under audit for the tax years 2000 through 2002. The findings to date are not material. In addition, audits are being conducted in various states and countries for years ranging from 2001 through 2005. To date, no material adjustments have been proposed as a result of these audits.

Note 4. Inventories

     Inventories as of June 30, 2007 and December 31, 2006 consisted of the following:

		June 30,				December 31,
		2007				2006
Raw materials, including parts and subassemblies		$	145,427			$	125,278
Work-in-process			48,204				38,052
Finished goods			77,594				72,228
			271,225				235,558
Excess of FIFO costs over LIFO costs			(12,475	)			(10,491	)
Inventories, net		$	258,750			$	225,067

Note 5. Goodwill and Other Intangible Assets

     The changes in the carrying amount of goodwill attributable to each business segment for the six-month period ended June 30, 2007, and the year ended December 31, 2006, are presented in the table below. The balances as of December 31, 2005 and 2006 have been revised to reflect the Company’s realignment of its reportable segments in the first quarter of 2006. This revision resulted in a $10.0 million decrease in the previously reported balances for the Compressor and Vacuum Products segment and a corresponding increase in the balances for the Fluid Transfer Products segment. The adjustments to goodwill reflect reallocations of purchase price, primarily related to income tax matters, subsequent to the dates of acquisition for acquisitions completed in prior fiscal years.

		Compressor				Fluid
		& Vacuum				Transfer
		Products				Products				Total
Balance as of December 31, 2005		$	573,377			$	46,867			$	620,244
Acquisitions			—				13,641				13,641
Adjustment to goodwill			(6,181	)			12,365				6,184
Foreign currency translation			33,430				3,281				36,711
Balance as of December 31, 2006			600,626				76,154				676,780
Adjustment to goodwill			(8,749	)			110				(8,639	)
Foreign currency translation			5,406				1,065				6,471
Balance as of June 30, 2007		$	597,283			$	77,329			$	674,612

     The following table presents the gross carrying amount and accumulated amortization of identifiable intangible assets, other than goodwill, at the dates presented:

		June 30, 2007								December 31, 2006
		Gross								Gross
		Carrying				Accumulated				Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Amortized intangible assets:
Customer lists and relationships		$	63,522			$	(12,189	)		$	63,300			$	(9,723	)
Acquired technology			41,253				(24,304	)			40,246				(20,927	)
Other			10,585				(3,585	)			10,595				(3,787	)
Unamortized intangible assets:
Trademarks			118,187				—				116,762				—
Total other intangible assets		$	233,547			$	(40,078	)		$	230,903			$	(34,437	)

     Amortization of intangible assets for the three and six-month periods ended June 30, 2007 was $3.0 million and $6.3 million, respectively. Amortization of intangible assets for each of the three and six-month periods ended June 30, 2006 was $0.02 million and $3.3 million, respectively. Finalization of the fair value of the Thomas tangible and amortizable intangible assets resulted in a cumulative $3.2 million pre-tax credit to amortization expense in the three-month period ended June 30, 2006. Amortization of intangible assets is anticipated to be approximately $12.0 million annually in 2007 through 2011, based upon exchange rates in effect at June 30, 2007.

Note 6. Accrued Product Warranty

     A reconciliation of the changes in the accrued product warranty liability for the three and six-month periods ended June 30, 2007 and 2006 is as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Balance at beginning of period		$	15,782			$	15,994			$	15,298			$	15,254
Product warranty accruals			3,626				4,067				7,186				7,884
Settlements			(3,409	)			(3,497	)			(6,564	)			(6,748	)
Other (primarily acquisitions and foreign currency translation)			(538	)			484				(459	)			658
Balance at end of period		$	15,461			$	17,048			$	15,461			$	17,048

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 six-month periods ended June 30, 2007 and 2006:

		Three Months Ended June 30,
		Pension Benefits																Other
		U.S. Plans								Non-U.S. Plans								Postretirement Benefits
		2007				2006				2007				2006				2007				2006
Service cost		$	—			$	816			$	1,341			$	1,342			$	4			$	33
Interest cost			1,137				985				2,707				2,120				353				390
Expected return on plan assets			(1,175	)			(1,097	)			(2,834	)			(2,367	)			—				—
Recognition of:
Unrecognized prior-service cost			4				(15	)			—				—				(111	)			(27	)
Unrecognized net actuarial loss (gain)			1				122				99				122				(207	)			(56	)
Net periodic benefit (income) cost		$	(33	)		$	811			$	1,313			$	1,217			$	39			$	340

		Six Months Ended June 30,
		Pension Benefits																Other
		U.S. Plans								Non-U.S. Plans								Postretirement Benefits
		2007				2006				2007				2006				2007				2006
Service cost		$	—			$	1,714			$	2,660			$	2,684			$	8			$	66
Interest cost			2,274				1,986				5,369				4,240				706				780
Expected return on plan assets			(2,350	)			(2,174	)			(5,625	)			(4,734	)			—				—
Recognition of:
Unrecognized prior-service cost			8				(36	)			—				—				(222	)			(54	)
Unrecognized net actuarial loss (gain)			2				248				197				244				(414	)			(112	)
Net periodic benefit (income) cost		$	(66	)		$	1,738			$	2,601			$	2,434			$	78			$	680

     During 2006, the Company implemented certain revisions to the domestic Gardner Denver, Inc. Pension Plan (the “Pension Plan”). Future service credits under the Pension Plan ceased effective October 31, 2006. In connection with the revisions to the Pension Plan, future credits that had

previously been made to employee accounts in the Pension Plan are made to employee accounts in the U.S. defined contribution plan.

Note 8. Debt

     The Company’s debt is summarized as follows:

		June 30,				December 31,
		2007				2006
Short-term debt		$	4,070			$	1,740
Long-term debt:
Credit Line, due 2010 (1)		$	96,266			$	109,968
Term Loan, due 2010 (2)			116,944				145,000
Senior Subordinated Notes at 8%, due 2013			125,000				125,000
Secured Mortgages (3)			9,574				9,635
Variable Rate Industrial Revenue Bonds, due 2018 (4)			8,000				8,000
Capitalized leases and other long-term debt			7,876				7,905
Total long-term debt, including current maturities			363,660				405,508
Current maturities of long-term-debt			22,569				22,049
Total long-term debt, less current maturities		$	341,091			$	383,459

Note 9. Stock-Based Compensation

     On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-based Payment,” (“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 their estimated fair values. The Company recognizes compensation expense for stock options and restricted stock awards over the requisite service period for vesting of the award or to an employee’s eligible retirement date, if earlier. The following table shows total stock-based compensation expense included in the consolidated statements of operations and the consolidated statements of cash flows for the three and six-month periods ended June 30, 2007 and 2006.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Selling and administrative expenses		$	710			$	776			$	3,620			$	3,606
Total stock-based compensation expense included in operating expenses		$	710			$	776			$	3,620			$	3,606
Income before income taxes			(710	)			(776	)			(3,620	)			(3,606	)
Provision for income taxes			333				190				835				819
Net income		$	(377	)		$	(586	)		$	(2,785	)		$	(2,787	)
Basic and diluted earnings per share		$	(0.01	)		$	(0.01	)		$	(0.05	)		$	(0.05	)

     The following table summarizes the excess tax benefits from stock-based compensation realized during each period indicated and included in the consolidated statements of cash flows.

Net cash provided by operating activities		$	(5,011	)		$	(1,269	)		$	(6,170	)		$	(2,282	)
Net cash used in financing activities		$	5,011			$	1,269			$	6,170			$	2,282

Plan Descriptions

     Under the Company’s Amended and Restated Long-Term Incentive Plan (the “Incentive Plan”), designated employees and non-employee directors 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. 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 market close price of the Company’s common stock on the date of grant. The grant price for options granted prior to May 1, 2007 could not be less than the average of the high 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. There are no vesting provisions tied to performance conditions for any of the outstanding options and restricted stock awards. Vesting for all outstanding options or restricted stock awards is based solely on continued service as an employee or director of the Company and generally vest upon retirement, death or cessation of service due to disability, if earlier.

     Under the terms of existing awards, employee options become vested and exercisable ratably on each of the first three anniversaries of the date of grant. The options granted to employees in 2007 and 2006 expire seven years after the date of grant. The options granted to non-employee directors become exercisable on the first anniversary of the date of grant and expire five years after the date of grant.

Stock Option Awards

     A summary of the Company’s stock option activity for the six-month period ended June 30, 2007 is presented in the following table (underlying shares in thousands):

						Outstanding								Weighted-
						Weighted-				Aggregate				Average
						Average Exercise				Intrinsic				Remaining
		Shares				Price				Value				Contractual Life
Outstanding at December 31, 2006			2,422			$	15.78
Granted			251			$	36.00
Exercised			(742	)		$	11.43
Forfeited or canceled			(15	)		$	22.30
Outstanding at June 30, 2007			1,916			$	20.09			$	43,032			4.5 years
Exercisable at June 30, 2007			1,323			$	15.57			$	35,693			3.9 years

     The weighted-average estimated grant-date fair values of employee stock options granted during the three and six-month periods ending June 30, 2007 were $11.51 and $12.15, respectively.

     The total pre-tax intrinsic value of stock options exercised during the second quarters of 2007 and 2006 was $15.9 million and $4.5 million, respectively. The total pre-tax intrinsic value of stock options exercised during the first six months of 2007 and 2006 was $20.1 million and $9.9 million, respectively. Pre-tax unrecognized compensation expense for stock options, net of estimated forfeitures, was $2.8 million as of June 30, 2007, and will be recognized as expense over a weighted-average period of 1.7 years.

Restricted Stock Awards

     A summary of the Company’s restricted stock activity for the six-month period ended June 30, 2007 is presented in the following table (underlying shares in thousands):

						Weighted-
		Shares				Average Price
Nonvested at December 31, 2006			45			$	30.58
Granted			45			$	36.36
Vested			—				—
Forfeited			—				—
Nonvested at June 30, 2007			90			$	33.43

     The restricted stock awards granted during the first six months of 2007 cliff vest three years after the date of grant. The restricted stock 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 for nonvested restricted stock awards, net of estimated forfeitures, was $0.8 million as of June 30, 2007, which will be recognized as expense over a weighted-average period of 2.3 years.

Valuation Assumptions and Expense under SFAS No. 123(R)

     The fair value of each stock option grant under the 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.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Assumptions:
Risk-free interest rate			4.6	%			5.0	%			4.7	%			4.7	%
Dividend yield			—				—				—				—
Volatility factor			28				28				29				27
Expected life (in years)			4.1				4.4				4.9				4.8

Note 10. Earnings Per Share (shares in thousands)

     The following table details the calculation of basic and diluted earnings per share for the three and six-month periods ended June 30, 2007 and 2006:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Basic Earnings Per Share:
Net income		$	44,771			$	32,984			$	87,587			$	63,496
Shares:
Weighted average number of common shares outstanding			53,147				52,388				52,951				52,249
Basic earnings per common share		$	0.84			$	0.63			$	1.65			$	1.22
Diluted Earnings Per Share:
Net income		$	44,771			$	32,984			$	87,587			$	63,496
Shares:
Weighted average number of common shares outstanding			53,147				52,388				52,951				52,249
Assuming conversion of dilutive stock options issued and outstanding			896				1,191				939				1,171
Weighted average number of common shares outstanding, as adjusted			54,043				53,579				53,890				53,420
Diluted earnings per common share		$	0.83			$	0.62			$	1.63			$	1.19

     For the three months ended June 30, 2007 and 2006, respectively, antidilutive options to purchase 138 and 210 weighted-average shares of common stock were outstanding. For the six months ended June 30, 2007 and 2006, respectively, antidilutive options to purchase 235 and 234 weighted-average shares of common stock were outstanding. Antidilutive options outstanding were not included in the computation of diluted earnings per share.

Note 11. Accumulated Other Comprehensive Income

     The Company’s other comprehensive income (loss) consists of unrealized net gains and losses on the translation of the assets and liabilities of its foreign operations (including the foreign currency hedge of the Company’s net investments in foreign operations), unrecognized gains and losses on cash flow hedges (consisting of interest rate swaps), net of income taxes, and changes in the funded status of the Company’s pension and postretirement benefit plans or minimum pension liability.

     The following table sets forth the changes in each component of accumulated other comprehensive income (loss):

						Unrealized
		Foreign				Gains												Accumulated
		Currency				(Losses) on				Minimum				Pension and				Other
		Translation				Cash Flow				Pension				Postretirement				Comprehensive
		Adjustment (1)				Hedges				Liability				Benefit Plans				Income
Balance at December 31, 2005		$	15,865			$	1,887			$	(9,628	)						$	8,124
Before tax income			7,467				1,558				—								9,025
Income tax effect			—				(592	)			—								(592	)
Other comprehensive income			7,467				966				—								8,433
Balance at March 31, 2006			23,332				2,853				(9,628	)							16,557
Before tax income			16,920				943				—								17,863
Income tax effect			—				(358	)			—								(358	)
Other comprehensive income			16,920				585				—								17,505
Balance at June 30, 2006		$	40,252			$	3,438			$	(9,628	)						$	34,062
Balance at December 31, 2006		$	64,109			$	1,557							$	(14,935	)		$	50,731
Before tax income (loss)			2,233				(410	)							(215	)			1,608
Income tax effect			—				156								90				246
Other comprehensive income (loss)			2,233				(254	)							(125	)			1,854
Balance at March 31, 2007			66,342				1,303								(15,060	)			52,585
Before tax income (loss)			12,039				737								(214	)			12,562
Income tax effect			—				(280	)							89				(191	)
Other comprehensive income (loss)			12,039				457								(125	)			12,371
Balance at June 30, 2007		$	78,381			$	1,760							$	(15,185	)		$	64,956

     The Company’s total comprehensive income for the three and six-month periods ended June 30, 2007 and 2006 was as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30
		2007				2006				2007				2006
Net income		$	44,771			$	32,984			$	87,587			$	63,496
Other comprehensive income			12,371				17,505				14,225				25,938
Comprehensive income		$	57,142			$	50,489			$	101,812			$	89,434

Note 12. Supplemental Cash Flow Information

     In the six-month periods ended June 30, 2007 and 2006, the Company paid $48.7 million and $42.5 million, respectively, to various taxing authorities for income taxes. Interest paid for the same six-month periods of 2007 and 2006, was $13.1 million and $19.0 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 a number of asbestos personal injury lawsuits. The Company has also been named as a defendant in a 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 to date, the substantial majority of the plaintiffs have not suffered an injury for which the Company bears 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 of 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 or other defendants, could cause a different outcome, there can be no assurance that the resolution of pending or future lawsuits will not have a material adverse effect on its consolidated financial position, results of operations or liquidity.

     The Company has been identified as a potentially responsible party (“PRP”) with respect to several sites designated for cleanup under federal “Superfund” or similar state laws, which impose liability for cleanup of certain waste sites and for related natural resource damages. Persons potentially liable for such costs and damages generally include the site owner or operator and persons that disposed or arranged for the disposal of hazardous substances found at those sites. Although these laws impose joint and several liability, in application, the PRPs typically allocate the investigation and cleanup costs based upon the volume of waste contributed by each PRP. Based on currently available information, the Company was only a small contributor to these waste sites, and the Company has, or is attempting to negotiate, de minimis settlements for their cleanup. The cleanup of the remaining sites is substantially complete and the Company’s future obligations entail a share of the sites’ ongoing operating and maintenance expense.

     The Company is also addressing three on-site cleanups for which it is the primary responsible party. Two of these cleanup sites are in the operation and maintenance stage and the third is in the implementation stage. The Company is also participating in a voluntary clean-up program with other PRPs on a fourth site which is in the assessment stage. Based on currently available information, the Company does not anticipate that any of these sites will result in material additional costs beyond those already accrued on its balance sheet.

     The Company has an accrued liability on its balance sheet to the extent costs are known or can be estimated for its remaining financial obligations for these matters. Based upon consideration of currently available information, the Company does not anticipate any materially adverse effect on its results of operations, financial condition, liquidity or competitive position as a result of compliance with federal, state, local or foreign environmental laws or regulations, or cleanup costs relating to the sites discussed above.

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, Engineered Products, Thomas Products and Fluid Transfer. These divisions comprise two reportable segments: Compressor and Vacuum Products and Fluid Transfer Products. The Compressor, Blower, Engineered Products 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.

     The following table provides financial information by business segment for the three and six-month periods ended June 30, 2007 and 2006:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Compressor and Vacuum Products
Revenues		$	354,394			$	325,402			$	693,251			$	643,835
Operating earnings			41,350				33,751				80,312				69,559
Operating earnings as a percentage of revenues			11.7	%			10.4	%			11.6	%			10.8	%
Fluid Transfer Products
Revenues		$	105,475			$	90,910			$	208,036			$	171,771
Operating earnings			30,158				25,275				59,294				43,883
Operating earnings as a percentage of revenues			28.6	%			27.8	%			28.5	%			25.5	%
Reconciliation of Segment Results to Consolidated Results
Total segment operating earnings		$	71,508			$	59,026			$	139,606			$	113,442
Interest expense			6,858				9,580				13,595				19,812
Other income, net			(236	)			(453	)			(789	)			(1,140	)
Consolidated income before income taxes		$	64,886			$	49,899			$	126,800			$	94,770

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 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 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 statements of operations for the three and six months ended June 30, 2006 have been reclassified to reflect the inclusion of depreciation and amortization expense in cost of sales and selling and administrative expenses (see Note 1, “Summary of Significant Accounting Policies”).

Consolidating Statement of Operations
Three Months Ended June 30, 2007

		Parent				Guarantor				Non-Guarantor
		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Revenues		$	109,075			$	125,399			$	290,531			$	(65,136	)		$	459,869
Costs and expenses:
Cost of sales			69,565				86,017				215,156				(64,701	)			306,037
Selling and administrative expenses			21,637				13,912				46,775				—				82,324
Interest expense			6,994				(2,558	)			2,422				—				6,858
Other (income) expense, net			(822	)			(1,639	)			2,226				(1	)			(236	)
Total costs and expenses			97,374				95,732				266,579				(64,702	)			394,983
Income before income taxes			11,701				29,667				23,952				(434	)			64,886
Provision for income taxes			3,276				10,000				6,839				—				20,115
Net income		$	8,425			$	19,667			$	17,113			$	(434	)		$	44,771