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 March 31, 2008

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

For the transition period from                      to                     .

GARDNER DENVER, INC.

(Exact name of registrant as specified in its charter)

Delaware		76-0419383
(State or other jurisdiction of incorporation or organization)		(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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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: 52,492,155 shares of Common Stock, par value $0.01 per share, as of April 27, 2008.

 

 

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			40
Item 4 Controls and Procedures			41
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 6 Exhibits			42
SIGNATURES			43
EXHIBIT INDEX			44

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

GARDNER DENVER, INC.

(Dollars in thousands, except per share amounts)

(Unaudited)

		Three Months Ended
		March 31,
		2008				2007
Revenues		$	495,670			$	441,418
Cost of sales			334,344				292,491
Gross profit			161,326				148,927
Selling and administrative expenses			85,378				81,022
Operating income			75,948				67,905
Interest expense			5,600				6,737
Other income, net			(241	)			(746	)
Income before income taxes			70,589				61,914
Provision for income taxes			19,730				19,098
Net income		$	50,859			$	42,816
Basic earnings per share		$	0.96			$	0.81
Diluted earnings per share		$	0.95			$	0.80

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

GARDNER DENVER, INC.

(Dollars in thousands, except per share amounts)

		March 31,				December 31,
		2008				2007
		(Unaudited)
Assets
Current assets:
Cash and equivalents		$	111,105			$	92,922
Accounts receivable (net of allowance of $9,537 at March 31, 2008 and $9,737 at December 31, 2007)			324,038				308,748
Inventories, net			266,921				256,446
Deferred income taxes			22,510				21,034
Other current assets			23,811				22,378
Total current assets			748,385				701,528
Property, plant and equipment, net			300,529				293,380
Goodwill			707,601				685,496
Other intangibles, net			213,072				206,314
Other assets			20,628				18,889
Total assets		$	1,990,215			$	1,905,607
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings and current maturities of long-term debt		$	28,997			$	25,737
Accounts payable			104,176				101,615
Accrued liabilities			201,222				184,850
Total current liabilities			334,395				312,202
Long-term debt, less current maturities			264,416				263,987
Postretirement benefits other than pensions			16,932				17,354
Deferred income taxes			66,221				64,188
Other liabilities			87,763				88,163
Total liabilities			769,727				745,894
Stockholders’ equity:
Common stock, $0.01 par value; 100,000,000 shares authorized; 52,470,077 and 53,546,267 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively			574				573
Capital in excess of par value			521,142				515,940
Retained earnings			595,943				545,084
Accumulated other comprehensive income			177,234				128,010
Treasury stock at cost; 4,953,143 and 3,758,853 shares at March 31, 2008 and December 31, 2007, respectively			(74,405	)			(29,894	)
Total stockholders’ equity			1,220,488				1,159,713
Total liabilities and stockholders’ equity		$	1,990,215			$	1,905,607

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

GARDNER DENVER, INC.

(Dollars in thousands)

(Unaudited)

		Three Months Ended
		March 31,
		2008				2007
Cash Flows From Operating Activities
Net income		$	50,859			$	42,816
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			14,920				14,171
Unrealized foreign currency transaction (gain) loss, net			(1,063	)			170
Net gain on asset dispositions			(191	)			(63	)
Stock issued for employee benefit plans			1,402				1,376
Stock-based compensation expense			2,259				2,910
Excess tax benefits from stock-based compensation			(428	)			(1,159	)
Deferred income taxes			(2,521	)			(1,711	)
Changes in assets and liabilities:
Receivables			(6,174	)			(19,263	)
Inventories			325				(18,459	)
Accounts payable and accrued liabilities			10,904				20,665
Other assets and liabilities, net			(4,851	)			(4,733	)
Net cash provided by operating activities			65,441				36,720
Cash Flows From Investing Activities
Capital expenditures			(9,553	)			(8,349	)
Net cash paid in business combinations			—				(114	)
Disposals of property, plant and equipment			979				145
Net cash used in investing activities			(8,574	)			(8,318	)
Cash Flows From Financing Activities
Principal payments on short-term borrowings			(7,128	)			(8,504	)
Proceeds from short-term borrowings			7,705				10,282
Principal payments on long-term debt			(50,582	)			(43,052	)
Proceeds from long-term debt			49,783				23,505
Proceeds from stock option exercises			1,115				2,179
Excess tax benefits from stock-based compensation			428				1,159
Purchase of treasury stock			(44,511	)			(248	)
Other			(1,258	)			(959	)
Net cash used in financing activities			(44,448	)			(15,638	)
Effect of exchange rate changes on cash and equivalents			5,764				821
Net increase in cash and equivalents			18,183				13,585
Cash and equivalents, beginning of year			92,922				62,331
Cash and equivalents, end of period		$	111,105			$	75,916

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

GARDNER DENVER, INC.

(Amounts in thousands, except per share amounts and 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.

     The financial information presented as of any date other than December 31, 2007 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 complete consolidated financial statements and notes thereto included in Gardner Denver’s Annual Report on Form 10-K for the year ended December 31, 2007.

     The results of operations for the three-month period ended March 31, 2008 are not necessarily indicative of the results to be expected for the full year. The balance sheet at December 31, 2007 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, 2007.

Changes in Accounting Principles and Effects of New Accounting Pronouncements

     In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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 was effective for the Company on January 1, 2008. In February 2008, the FASB released FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which delayed for one year the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Items in this classification include goodwill, asset retirement obligations, rationalization accruals, intangibles assets with indefinite lives and certain other items. The adoption of the provisions of SFAS No. 157 with respect to the Company’s financial assets and liabilities only did not have a significant effect on the Company’s statement of

operations, balance sheet and statement of cash flows. The adoption of SFAS No. 157 with respect to the Company’s non-financial assets and liabilities, effective January 1, 2009, is not expected to have a significant effect on the Company’s consolidated financial statements. See Note 11 “Fair Value of Financial Instruments” for the disclosures required by SFAS No. 157 regarding the Company’s financial instruments measured at fair value.

     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 and certain other items 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 and was adopted by the Company effective January 1, 2008. The Company has currently chosen not to elect the fair value option permitted by SFAS No. 159 for any items that are not already required to be measured at fair value in accordance with generally accepted accounting principles. Accordingly, the adoption of this standard had no effect on the Company’s consolidated financial statements.

     In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”), which establishes principles and requirements for how the acquirer of a business is to (i) recognize and measure in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (ii) recognize and measure the goodwill acquired in the business combination or a gain from a bargain purchase; and (iii) determine what information to disclose to enable users of its financial statements to evaluate the nature and financial effects of the business combination. This statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. This replaces the guidance of SFAS No. 141, “Business Combinations” (“SFAS No. 141”) which requires the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. In addition, costs incurred by the acquirer to effect the acquisition and restructuring costs that the acquirer expects to incur, but is not obligated to incur, are to be recognized separately from the acquisition. SFAS No. 141(R) applies to all transactions or other events in which an entity obtains control of one or more businesses. This statement requires an acquirer to recognize assets acquired and liabilities assumed arising from contractual contingencies as of the acquisition date, measured at their acquisition-date fair values. An acquirer is required to recognize assets or liabilities arising from all other contingencies as of the acquisition date, measured at their acquisition-date fair values, only if it is more likely than not that they meet the definition of an asset or a liability in FASB Concepts Statement No. 6, “Elements of Financial Statements.” This Statement requires the acquirer to recognize goodwill as of the acquisition date, measured as a residual, which generally will be the excess of the consideration transferred plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired. Contingent consideration should be recognized at the acquisition date, measured at its fair value at that date. SFAS No. 141(R) defines a bargain purchase as a business combination in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any noncontrolling interest in the acquiree, and requires the acquirer to recognize that excess in earnings as attributable to the acquirer. This statement is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early application is prohibited. The Company is currently evaluating the effect SFAS No. 141(R) will have on its accounting for, and reporting of, business combinations consummated on or after January 1, 2009.

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51”, (“SFAS No. 160”). This statement establishes accounting and reporting standards that require (i) ownership interest in subsidiaries held by parties other than the parent be presented and identified in the equity section of the consolidated balance sheet, separate from the parent’s equity; (ii) the amount of consolidated net income attributable to the parent and to the noncontrolling interest be identified and presented on the face of the consolidated statement of operations; (iii) changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for consistently; (iv) when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value, and the resulting gain or loss be measured using the fair value of any noncontrolling equity investment rather than the carrying amount of that retained investment; and (v) disclosures be provided that clearly identify and distinguish between the interests of the parent and interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, or the Company’s 2009 fiscal year. The Company is currently evaluating the effect SFAS No. 160 will have on its financial statements and related disclosure requirements.

     In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 110, “Certain Assumptions Used in Valuation Methods” (“SAB 110”). SAB 110 allows public companies which do not have historically sufficient experience to provide a reasonable estimate, to continue use of the “simplified” method for estimating the expected term of “plain vanilla” share option grants after December 31, 2007. The Company used the “simplified” method to determine the expected term for the majority of its 2006 and 2007 option grants. SAB 110 was effective for the Company on January 1, 2008 and, accordingly, the Company will no longer use the “simplified” method to estimate the expected term of future option grants. The adoption of SAB 110 had no effect on the Company’s consolidated financial statements.

     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (SFAS No. 161”). SFAS No. 161 requires enhanced disclosures for derivative instruments and hedging activities, including (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Under SFAS No. 161, entities must disclose the fair value of derivative instruments, their gains or losses and their location in the balance sheet in tabular format, and information about credit-risk-related contingent features in derivative agreements, counterparty credit risk, and strategies and objectives for using derivative instruments. The fair value amounts must be disaggregated by asset and liability values, by derivative instruments that are designated and qualify as hedging instruments and those that are not, and by each major type of derivative contract. SFAS No. 161 is effective prospectively for interim periods and fiscal years beginning after November 15, 2008. The Company is currently evaluating the effect SFAS No. 161 will have on its disclosure requirements for derivative instruments and hedging activities.

Note 2. Income Taxes

     As of March 31, 2008, the total balance of unrecognized tax benefits increased $0.3 million to $7.6 million, primarily as a result of changes in foreign currency exchange rates. Included in the unrecognized tax benefits at March 31, 2008 is $1.1 million of uncertain tax positions that would affect the Company’s effective tax rate if recognized. The balance of the unrecognized tax benefits, $6.5 million, would be recognized as an adjustment to goodwill if recognized prior to the adoption of SFAS No. 141(R).

     The Company expects the following significant changes to its unrecognized tax benefits within the next twelve months: the U.S. federal statutes of limitations with respect to the 2004 tax year will expire on $0.3 million of tax reserves and multiple state statutes of limitations will expire on $2.0 million of tax reserves. The total change in the tax reserves in the next twelve months is expected to be $2.3 million.

     The Company’s accounting policy with respect to interest expense on underpayments of income tax and related penalties is to recognize such interest expense and penalties as part of the provision for income taxes. The Company’s income tax liabilities at March 31, 2008 include approximately $2.2 million of accrued interest, of which approximately $0.8 million relates to goodwill, and no penalties.

     The Company’s U.S. federal income tax returns for the tax years 2004 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 Industries Inc. (“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 2004 tax year, except for one state for which the statute has been extended beginning with the 2001 tax year.

     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 China, the United Kingdom and Germany. In China and the United Kingdom, tax years prior to 2005 are closed. 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. In addition, audits are being conducted in various countries for years ranging from 2001 through 2005. To date, no material adjustments have been proposed as a result of these audits.

Note 3. Inventories

     Inventories as of March 31, 2008 and December 31, 2007 consisted of the following:

		March 31,				December 31,
		2008				2007
Raw materials, including parts and subassemblies		$	149,346			$	142,546
Work-in-process			50,971				47,622
Finished goods			79,815				77,629
			280,132				267,797
Excess of FIFO costs over LIFO costs			(13,211	)			(11,351	)
Inventories, net		$	266,921			$	256,446

Note 4. Goodwill and Other Intangible Assets

     The changes in the carrying amount of goodwill attributable to each business segment for the three-month period ended March 31, 2008, and the year ended December 31, 2007, are presented in the table below. 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, 2006		$	600,626			$	76,154			$	676,780
Adjustments to goodwill			(34,608	)			(403	)			(35,011	)
Foreign currency translation			42,512				1,215				43,727
Balance as of December 31, 2007			608,530				76,966				685,496
Adjustments to goodwill			109				(64	)			45
Foreign currency translation			21,274				786				22,060
Balance as of March 31, 2008		$	629,913			$	77,688			$	707,601

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

		March 31, 2008								December 31, 2007
		Gross								Gross
		Carrying				Accumulated				Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Amortized intangible assets:
Customer lists and relationships		$	78,468			$	(17,754	)		$	74,187			$	(16,063	)
Acquired technology			46,357				(30,852	)			44,658				(28,431	)
Other			10,620				(3,311	)			9,634				(3,074	)
Unamortized intangible assets:
Trademarks			129,544				—				125,403				—
Total other intangible assets		$	264,989			$	(51,917	)		$	253,882			$	(47,568	)

     Amortization of intangible assets for the three-month periods ended March 31, 2008 and 2007, was $3.0 million and $3.3 million, respectively. Amortization of intangible assets is anticipated to be approximately $12.7 million annually in 2008 through 2012, based upon exchange rates as of March 31, 2008.

Note 5. Accrued Product Warranty

     A reconciliation of the changes in the accrued product warranty liability for the three-month periods ended March 31, 2008 and 2007 is as follows:

		Three Months Ended
		March 31,
		2008				2007
Balance at beginning of period		$	15,087			$	15,298
Product warranty accruals			4,301				3,560
Settlements			(3,553	)			(3,155	)
Effect of foreign currency translation			449				79
Balance at end of period		$	16,284			$	15,782

Note 6. 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-month periods ended March 31, 2008 and 2007:

		Three Months Ended March 31,
		Pension Benefits																Other
		U.S. Plans								Non-U.S. Plans								Postretirement Benefits
		2008				2007				2008				2007				2008				2007
Service cost		$	—			$	—			$	188			$	1,319			$	4			$	4
Interest cost			1,066				1,137				3,120				2,662				282				353
Expected return on plan assets			(1,175	)			(1,175	)			(3,364	)			(2,791	)			—				—
Recognition of:
Unrecognized prior-service cost			4				4				—				—				(94	)			(111	)
Unrecognized net actuarial loss (gain)			55				1				(22	)			98				(336	)			(207	)
Net periodic benefit (income) cost		$	(50	)		$	(33	)		$	(78	)		$	1,288			$	(144	)		$	39

Note 7. Debt

     The Company’s debt is summarized as follows:

		March 31,				December 31,
		2008				2007
Short-term debt		$	4,764			$	4,099
Long-term debt:
Credit Line, due 2010 (1)		$	63,691			$	58,329
Term Loan, due 2010 (2)			72,420				76,103
Senior Subordinated Notes at 8%, due 2013			125,000				125,000
Secured Mortgages (3)			10,805				9,993
Variable Rate Industrial Revenue Bonds, due 2018 (4)			8,000				8,000
Capitalized leases and other long-term debt			8,733				8,200
Total long-term debt, including current maturities			288,649				285,625
Current maturities of long-term debt			24,233				21,638
Total long-term debt, less current maturities		$	264,416			$	263,987

Note 8. Stock-Based Compensation

     The Company accounts for its stock-based compensation in accordance with 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 stock-based compensation expense for share-based awards over the requisite service period for vesting of the award or to an employee’s eligible retirement date, if earlier. The following table summarizes the total stock-based compensation expense included in the consolidated statements of operations and the realized excess tax benefits included in the consolidated statements of cash flows for the three-month periods ended March 31, 2008 and 2007.

		Three Months Ended
		March 31,
		2008				2007
Selling and administrative expenses		$	2,259			$	2,910
Total stock-based compensation expense included in operating expenses		$	2,259			$	2,910
Income before income taxes			(2,259	)			(2,910	)
Provision for income taxes			643				502
Net income		$	(1,616	)		$	(2,408	)
Basic and diluted earnings per share		$	(0.03	)		$	(0.04	)
Net cash provided by operating activities		$	(428	)		$	(1,159	)
Net cash used in financing activities		$	428			$	1,159

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, performance shares or restricted stock and restricted stock units (“restricted shares”), as determined by the Management Development and Compensation Committee of the Board of Directors (the “Committee”). Under the Incentive Plan, the grant price of a stock option is determined by the Committee, but must not be less than the market close price of the Company’s common stock on the date of grant. The Incentive Plan provides that the term of any stock option granted may not exceed ten years. There are no vesting provisions tied to performance conditions for any of the outstanding stock options and restricted shares. Vesting for all outstanding stock options and restricted shares is based solely on continued service as an employee or director of the Company and generally occurs upon retirement, death or cessation of service due to disability, if earlier.

Stock Option Awards

     Under the terms of existing awards, employee stock options become vested and exercisable ratably on each of the first three anniversaries of the date of grant. The options granted to employees in 2008 and 2007 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.

     A summary of the Company’s stock option activity for the three-month period ended March 31, 2008 is presented in the following table (underlying shares in thousands):

														Weighted-
						Outstanding								Average
						Weighted-				Aggregate				Remaining
						Average				Intrinsic				Contractual
		Shares				Exercise Price				Value				Life
Outstanding at December 31, 2007			1,870			$	20.06
Granted			305			$	35.88
Exercised			(78	)		$	14.22
Forfeited or canceled			(19	)		$	20.85
Outstanding at March 31, 2008			2,078			$	22.59			$	30,273			4.2 years
Exercisable at March 31, 2008			1,523			$	18.03			$	29,135			3.5 years

     The aggregate intrinsic value was calculated as the difference between the exercise price of the underlying stock options and the quoted closing price of the Company’s common stock at March 31, 2008 multiplied by the number of in-the-money stock options. The weighted-average estimated grant-date fair values of employee and director stock options granted during the three-month period ending March 31, 2008 was $10.73.

     The total pre-tax intrinsic value of stock options exercised during the first quarters of 2008 and 2007 was $1.8 million and $4.2 million, respectively. Pre-tax unrecognized compensation expense for stock options, net of estimated forfeitures, was $3.3 million as of March 31, 2008 and will be recognized as expense over a weighted-average period of 2.1 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 used for the periods indicated are noted in the table below.

		Three Months Ended
		March 31,
		2008				2007
Assumptions:
Risk-free interest rate			2.6	%			4.7	%
Dividend yield			—				—
Volatility factor			30				29
Expected life (in years)			4.6				5.0

Restricted Share Awards

     In the first quarter of 2008, the Company began granting restricted stock units in lieu of restricted stock. Upon vesting, restricted stock units result in the issuance of the equivalent number of shares of the Company’s common stock. All restricted shares cliff vest three years after the date of grant.

     A summary of the Company’s restricted share activity for the three-month period ended March 31, 2008 is presented in the following table (underlying shares in thousands):

						Weighted-
						Average Grant-
						Date Fair Value
		Shares				(per share)
Nonvested at December 31, 2007			90			$	33.43
Granted			60			$	35.88
Vested			(2	)		$	38.32
Forfeited			—				—
Nonvested at March 31, 2008			148			$	34.37

     The restricted stock units granted in the first three months of 2008 were valued at the market close price of the Company’s common stock on the date of grant. Pre-tax unrecognized compensation expense for nonvested restricted shares, net of estimated forfeitures, was $1.9 million as of March 31, 2008, which will be recognized as expense over a weighted-average period of 2.0 years. The total fair value of restricted shares that vested during the first quarter of 2008 was $0.1 million. No restricted shares vested during the first quarter of 2007.

Note 9. Stockholders’ Equity and Earnings Per Share

     In November 2007, the Company’s Board of Directors authorized a new share repurchase program to acquire up to 2,700,000 shares of the Company’s outstanding common stock. All common stock acquired will be held as treasury stock and will be available for general corporate purposes. During the three-month period ended March 31, 2008, the Company repurchased 1,184,065 shares under this program at a total cost of $44.1 million.

     The following table details the calculation of basic and diluted earnings per common share for the three-month periods ended March 31, 2008 and 2007 (shares in thousands):

		Three Months Ended
		March 31,
		2008				2007
Basic Earnings Per Share:
Net income		$	50,859			$	42,816
Shares:
Weighted average number of common shares outstanding			53,030				52,754
Basic earnings per common share		$	0.96			$	0.81
Diluted Earnings Per Share:
Net income		$	50,859			$	42,816
Shares:
Weighted average number of common shares outstanding			53,030				52,754
Effect of dilutive outstanding equity-based awards			719				1,001
Weighted average number of diluted common shares			53,749				53,755
Diluted earnings per common share		$	0.95			$	0.80

     For the three months ended March 31, 2008 and 2007, respectively, antidilutive equity-based awards to purchase 473 and 254 weighted-average shares of common stock were outstanding. Antidilutive equity-based awards outstanding were not included in the computation of diluted earnings per share.

Note 10. Accumulated Other Comprehensive Income

     The Company’s accumulated 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 unamortized pension and other postretirement benefit prior service cost and actuarial gains or losses, net of income taxes.

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

						Unrealized
		Foreign				Gains								Accumulated
		Currency				(Losses) on				Pension and				Other
		Translation				Cash Flow				Postretirement				Comprehensive
		Adjustment (1)				Hedges				Benefit Plans				Income
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
Balance at December 31, 2007		$	133,467			$	(110	)		$	(5,347	)		$	128,010
Before tax income (loss)			50,157				(1,110	)			(393	)			48,654
Income tax effect			—				422				147				569
Other comprehensive income (loss)			50,157				(688	)			(246	)			49,223
Currency translation (2)			—				—				1				1
Balance at March 31, 2008		$	183,624			$	(798	)		$	(5,592	)		$	177,234

     The Company’s comprehensive income for the three-month periods ended March 31, 2008 and 2007 was as follows:

		Three Months Ended
		March 31,
		2008				2007
Net income		$	50,859			$	42,816
Other comprehensive income			49,223				1,854
Comprehensive income		$	100,082			$	44,670

Note 11. Fair Value of Financial Instruments

     A financial instrument is defined as a cash equivalent, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from another party. The Company’s financial instruments consist primarily of cash and equivalents, trade receivables, trade payables, deferred compensation obligations and debt instruments. The book values of these instruments are a reasonable estimate of their respective fair values.

     The Company selectively uses derivative financial instruments to manage interest costs and currency exchange risks. The Company does not hold derivatives for trading purposes.

     The Company uses interest rate swaps to manage its exposure to market changes in interest rates. Also, as part of its hedging strategy, the Company uses purchased option and forward exchange contracts to minimize the impact of currency fluctuations on transactions, cash flows and firm commitments. These contracts for the sale or purchase of European and other currencies generally mature within one year. The following table summarizes the notional amounts and fair values of the Company’s outstanding derivative financial instruments by risk category and instrument type:

		March 31, 2008																December 31, 2007
						Average				Average				Estimated								Average				Average				Estimated
		Notional				Receive				Pay				Fair				Notional				Receive				Pay				Fair
		Amount				Rate				Rate				Value				Amount				Rate				Rate				Value
Foreign currency forwards		$	31,626				N/A				N/A			$	1,381			$	29,757				N/A				N/A			$	580
Interest rate swaps		$	30,000				3.1	%			4.1	%		$	(1,335	)		$	30,000				4.9	%			4.1	%		$	(141	)

     Effective January 1, 2008, the Company adopted SFAS No. 157 with respect to its financial assets and liabilities. SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS No. 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS No. 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:

	Level 1		Quoted prices in active markets for identical assets or liabilities as of the reporting date.
	Level 2		Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities as of the reporting date.
	Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

     The following table summarizes the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2008:

		Level 1				Level 2				Level 3				Total
Financial Assets
Foreign currency forwards (1)		$	—			$	1,381			$	—			$	1,381
Trading securities held in deferred compensation plan (2)			10,477				—				—				10,477
Total		$	10,477			$	1,381			$	—			$	11,858
Financial Liabilities
Interest rate swaps (1)		$	—			$	1,335			$	—			$	1,335
Phantom stock plan (3)			—				2,085				—				2,085
Deferred compensation plan (4)			10,477				—				—				10,477
Total		$	10,477			$	3,420			$	—			$	13,897

Note 12. Acquisition-Related Restructuring Costs

     In connection with the acquisition of Thomas in 2005, the Company initiated plans to close and consolidate certain former Thomas facilities, primarily in the U.S. and Europe. The total estimated cost of these plans was $16.5 million and included 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. These actions were substantively completed during 2007.

     At March 31, 2008 and December 31, 2007, the balance in the related accruals was $1.3 million and $1.4 million, respectively, of which $1.0 million and $1.1 million, respectively, was associated with termination benefits. Changes to the balance during the three-month period ended March 31, 2008 primarily reflect cash payments and the effect of changes in foreign currency exchange rates. The remaining accruals are expected to be utilized during 2008, unless they relate to specific contracts that expire in later years.

Note 13. Supplemental Cash Flow Information

     In the three-month periods ended March 31, 2008 and 2007, the Company paid $7.1 million and $12.2 million, respectively, to various taxing authorities for income taxes. Interest paid for the same three-month periods of 2008 and 2007, was $2.8 million and $4.0 million, respectively.

Note 14. 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 not been material.

     The Company believes that the pending and future asbestos and silicosis lawsuits are not likely to, 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 the Company’s 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 cleanup program with other potentially responsible parties 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 reasonably estimated for its remaining financial obligations for these matters. Based upon consideration of currently available information, the Company does not anticipate any material 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 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.

Consolidating Statement of Operations
Three Months Ended March 31, 2008

										Non-
		Parent				Guarantor				Guarantor
		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Revenues		$	95,899			$	134,222			$	338,254			$	(72,705	)		$	495,670
Cost of sales			65,722				93,217				244,715				(69,310	)			334,344
Gross profit			30,177				41,005				93,539				(3,395	)			161,326
Selling and administrative expenses			23,535				9,269				52,570				4				85,378
Operating income			6,642				31,736				40,969				(3,399	)			75,948
Interest expense (income)			5,979				(2,943	)			2,564				—				5,600
Other expense (income), net			47				(1	)			(287	)			—				(241	)
Income before income taxes			616				34,680				38,692				(3,399	)			70,589
Provision for income taxes			168				13,006				7,221				(665	)			19,730
Net income		$	448			$	21,674			$	31,471			$	(2,734	)		$	50,859

Consolidating Statement of Operations
Three Months Ended March 31, 2007

										Non-
		Parent				Guarantor				Guarantor
		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Revenues		$	112,349			$	118,643			$	272,775			$	(62,349	)		$	441,418
Cost of sales			72,884				82,625				197,996				(61,014	)			292,491
Gross profit			39,465				36,018				74,779				(1,335	)			148,927
Selling and administrative expenses			20,795				12,544				47,683				—				81,022
Operating income			18,670				23,474				27,096				(1,335	)			67,905
Interest expense (income)			6,946				(2,406	)			2,197				—				6,737
Other (income) expense, net			(373	)			(8	)			(366	)			1				(746	)
Income before income taxes			12,097				25,888				25,265				(1,336	)			61,914
Provision for income taxes			4,792				13,320				986				—				19,098
Net income		$	7,305			$	12,568			$	24,279			$	(1,336	)		$	42,816

Consolidating Balance Sheet
March 31, 2008

										Non-
		Parent				Guarantor				Guarantor
		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Assets
Current assets:
Cash and equivalents		$	6,250			$	(2,689	)		$	107,544			$	—			$	111,105
Accounts receivable, net			58,511				63,609				201,918				—				324,038
Inventories, net			28,489				65,349				190,592				(17,509	)			266,921
Deferred income taxes			15,773				2,360				—				4,377				22,510
Other current assets			3,945				5,088				14,778				—				23,811
Total current assets			112,968				133,717				514,832				(13,132	)			748,385
Intercompany (payable) receivable			(311,560	)			306,907				4,653				—				—
Investments in affiliates			902,131				198,654				29				(1,100,785	)			29
Property, plant and equipment, net			54,466				47,258				198,805				—				300,529
Goodwill			111,115				212,024				384,462				—				707,601
Other intangibles, net			7,320				47,170				158,582				—				213,072
Other assets			17,982				263				5,451				(3,097	)			20,599
Total assets		$	894,422			$	945,993			$	1,266,814			$	(1,117,014	)		$	1,990,215
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings and current maturities of long-term debt		$	22,094			$	—			$	6,903			$	—			$	28,997
Accounts payable and accrued liabilities			69,539				49,064				187,457				(662	)			305,398
Total current liabilities			91,633				49,064				194,360				(662	)			334,395
Long-term intercompany (receivable) payable			(24,174	)			(19,526	)			43,700				—				—
Long-term debt, less current maturities			196,326				77				68,013				—				264,416
Deferred income taxes			—				25,933				43,385				(3,097	)			66,221
Other liabilities			50,518				—				54,177				—				104,695
Total liabilities			314,303				55,548				403,635				(3,759	)			769,727
Stockholders’ equity:
Common stock			574				—				—				—				574
Capital in excess of par value			520,363				660,280				441,284				(1,100,785	)			521,142
Retained earnings			161,471				187,235				259,707				(12,470	)			595,943
Accumulated other comprehensive (loss) income			(27,884	)			42,930				162,188				—				177,234
Treasury stock, at cost			(74,405	)			—				—				—				(74,405	)
Total stockholders’ equity			580,119				890,445				863,179				(1,113,255	)			1,220,488
Total liabilities and stockholders’ equity		$	894,422			$	945,993			$	1,266,814			$	(1,117,014	)		$	1,990,215

Consolidating Balance Sheet
December 31, 2007

										Non-
		Parent				Guarantor				Guarantor
		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Assets
Current assets:
Cash and equivalents		$	10,409			$	(2,261	)		$	84,774			$	—			$	92,922
Accounts receivable, net			59,537				56,634				192,577				—				308,748
Inventories, net			25,340				70,134				175,086				(14,114	)			256,446
Deferred income taxes			15,204				2,006				—				3,824				21,034
Other current assets			4,367				5,977				12,034				—				22,378
Total current assets			114,857				132,490				464,471				(10,290	)			701,528
Intercompany (payable) receivable			(278,396	)			276,809				1,587				—				—
Investments in affiliates			914,680				198,654				29				(1,113,334	)			29
Property, plant and equipment, net			54,606				48,260				190,514				—				293,380
Goodwill			111,033				211,983				362,480				—				685,496
Other intangibles, net			7,537				47,560				151,217				—				206,314
Other assets			17,266				479				5,074				(3,959	)			18,860
Total assets		$	941,583			$	916,235			$	1,175,372			$	(1,127,583	)		$	1,905,607
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings and current maturities of long-term debt		$	19,639			$	—			$	6,098			$	—			$	25,737
Accounts payable and accrued liabilities			70,407				39,017				177,649				(608	)			286,465
Total current liabilities			90,046				39,017				183,747				(608	)			312,202
Long-term intercompany (receivable) payable			(14,541	)			(18,176	)			32,717				—				—
Long-term debt, less current maturities			189,463				77				74,447				—				263,987
Deferred income taxes			—				26,306				41,841				(3,959	)			64,188
Other liabilities			52,561				313				52,643				—				105,517
Total liabilities			317,529				47,537				385,395				(4,567	)			745,894
Stockholders’ equity:
Common stock			573				—				—				—				573
Capital in excess of par value			515,194				672,918				441,162				(1,113,334	)			515,940
Retained earnings			150,768				165,606				238,392				(9,682	)			545,084
Accumulated other comprehensive (loss) income			(12,587	)			30,174				110,423				—				128,010
Treasury stock, at cost			(29,894	)			—				—				—				(29,894	)
Total stockholders’ equity			624,054				868,698				789,977				(1,123,016	)			1,159,713
Total liabilities and stockholders’ equity		$	941,583			$	916,235			$	1,175,372			$	(1,127,583	)		$	1,905,607