UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 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		76-0419383
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		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: 53,507,236 shares of Common Stock, par value $0.01 per share, as of October 28, 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			28
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			43
SIGNATURES					44
EXHIBIT INDEX					45
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 Executive Officer

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

GARDNER DENVER, INC.

(Dollars in thousands, except per share amounts)

(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Revenues		$	457,230			$	414,028			$	1,358,517			$	1,229,634
Cost and expenses:
Cost of sales			308,050				280,429				906,578				829,028
Selling and administrative expenses			81,881				77,903				245,034				231,468
Interest expense			6,566				8,762				20,161				28,574
Other income, net			(443	)			(1,015	)			(1,232	)			(2,155	)
Total costs and expenses			396,054				366,079				1,170,541				1,086,915
Income before income taxes			61,176				47,949				187,976				142,719
Provision for income taxes			7,524				15,832				46,737				47,106
Net income		$	53,652			$	32,117			$	141,239			$	95,613
Basic earnings per share		$	1.00			$	0.61			$	2.66			$	1.83
Diluted earnings per share		$	0.99			$	0.60			$	2.62			$	1.79

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

GARDNER DENVER, INC.

(Dollars in thousands, except per share amounts)

		September 30,				December 31,
		2007				2006
		(Unaudited)
Assets
Current assets:
Cash and equivalents		$	88,834			$	62,331
Accounts receivable (net of allowance of $9,507 at September 30, 2007 and $10,314 at December 31, 2006)			295,417				261,115
Inventories, net			266,790				225,067
Deferred income taxes			16,925				14,362
Other current assets			16,948				16,843
Total current assets			684,914				579,718
Property, plant and equipment, net			289,472				276,493
Goodwill			696,893				676,780
Other intangibles, net			206,616				196,466
Other assets			20,330				20,774
Total assets		$	1,898,225			$	1,750,231
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings and current maturities of long-term debt		$	23,689			$	23,789
Accounts payable			103,895				90,703
Accrued liabilities			206,186				202,475
Total current liabilities			333,770				316,967
Long-term debt, less current maturities			302,685				383,459
Postretirement benefits other than pensions			22,426				22,598
Deferred income taxes			59,813				66,460
Other liabilities			98,203				108,217
Total liabilities			816,897				897,701
Stockholders’ equity:
Common stock, $0.01 par value; 100,000,000 shares authorized; 53,501,423 and 52,625,999 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively			573				564
Capital in excess of par value			513,827				490,856
Retained earnings			481,219				339,289
Accumulated other comprehensive income			115,602				50,731
Treasury stock at cost; 3,758,903 and 3,734,507 shares at September 30, 2007 and December 31, 2006, respectively			(29,893	)			(28,910	)
Total stockholders’ equity			1,081,328				852,530
Total liabilities and stockholders’ equity		$	1,898,225			$	1,750,231

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

GARDNER DENVER, INC.

(Dollars in thousands)

(Unaudited)

		Nine Months Ended
		September 30,
		2007				2006
Cash Flows From Operating Activities
Net income		$	141,239			$	95,613
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			42,796				39,527
Unrealized foreign currency transaction (gain) loss, net			(847	)			354
Net loss on asset dispositions			177				51
Stock issued for employee benefit plans			3,583				2,767
Stock-based compensation expense			4,278				4,559
Excess tax benefits from stock-based compensation			(6,253	)			(2,925	)
Deferred income taxes			(9,783	)			(4,787	)
Changes in assets and liabilities:
Receivables			(24,826	)			(32,639	)
Inventories			(30,582	)			(16,581	)
Accounts payable and accrued liabilities			21,554				(2,212	)
Other assets and liabilities, net			(13,864	)			3,013
Net cash provided by operating activities			127,472				86,740
Cash Flows From Investing Activities
Net cash paid in business combinations			(205	)			(20,057	)
Capital expenditures			(32,215	)			(26,277	)
Disposals of property, plant and equipment			511				11,436
Proceeds on sale of business			679				—
Net cash used in investing activities			(31,230	)			(34,898	)
Cash Flows From Financing Activities
Principal payments on short-term borrowings			(29,685	)			(7,997	)
Proceeds from short-term borrowings			32,272				8,293
Principal payments on long-term debt			(226,704	)			(210,376	)
Proceeds from long-term debt			136,180				120,922
Proceeds from stock option exercises			8,748				4,593
Excess tax benefits from stock-based compensation			6,253				2,925
Purchase of treasury stock			(960	)			(1,222	)
Debt issuance costs			—				(540	)
Other			(958	)			(158	)
Net cash used in financing activities			(74,854	)			(83,560	)
Effect of exchange rate changes on cash and equivalents			5,115				6,836
Increase (decrease) in cash and equivalents			26,503				(24,882	)
Cash and equivalents, beginning of year			62,331				110,906
Cash and equivalents, end of period		$	88,834			$	86,024

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. 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 complete 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 nine-month period ended September 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 Financial Accounting Standards Board (“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 September 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 was 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 nine-month periods ended September 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 consolidated 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 and costs 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. 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 initial 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 final 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 nine-month period ended September 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			(1,636	)			(1,028	)			(2,664	)
Other			162				26				188
Balance at September 30, 2007		$	1,580			$	330			$	1,910

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. During the third quarter of 2007, the statute of limitations expired with respect to the 2003 U.S. federal tax return and the Company made payments that further reduced the liability to $8.8 million. Included in the unrecognized tax benefits at September 30, 2007 are $1.3 million of uncertain tax positions that would affect the Company’s effective tax rate if recognized. The balance of the unrecognized tax benefits, $7.5 million, would be recognized as an adjustment to goodwill.

     The Company expects the following changes to its unrecognized tax benefits within the next twelve months. The U.S. federal statute of limitations will expire on tax reserves totaling $0.3 million; and tax payments on various state reserves totaling $0.4 million are expected to be paid in the fourth quarter of 2007. Accordingly, the total change in the reserve in the next twelve months is expected to be $0.7 million.

     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 September 30, 2007 include approximately $2.1 million of accrued interest, of which approximately $0.7 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 examination of an acquired subsidiary, Thomas, for the year 2004. As of the date of this report, the examination has not commenced. The statutes of limitations for the U.S. state tax returns are open beginning with the 2003 and 2004 tax years depending upon whether each state’s extended filing deadline for its 2003 tax return occurs after or before September 30, 2004, 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 United Kingdom (“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.

     The Company’s provision for income taxes and effective tax rate decreased to $7.5 million and 12.3%, respectively, in the three-month period ending September 30, 2007 from $15.8 million and 33.0%, respectively, in the three-month period ending September 30, 2006. This change was due primarily to an approximately $10.5 million non-recurring, non-cash reduction in net deferred tax liabilities recorded in connection with corporate income tax rate reductions in Germany and the U.K. These rate reductions were enacted in the third quarter of 2007 and will become effective in early 2008. The Company’s effective income tax rate in the fourth quarter of 2007 is expected to be approximately 31.0%.

Note 4. Inventories

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

		September 30,				December 31,
		2007				2006
Raw materials, including parts and subassemblies		$	150,514			$	125,278
Work-in-process			51,798				38,052
Finished goods			76,951				72,228
			279,263				235,558
Excess of FIFO costs over LIFO costs			(12,473	)			(10,491	)
Inventories, net		$	266,790			$	225,067

Note 5. Goodwill and Other Intangible Assets

     The changes in the carrying amount of goodwill attributable to each business segment for the nine-month period ended September 30, 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			(16,329	)			2				(16,327	)
Foreign currency translation			34,875				1,565				36,440
Balance as of September 30, 2007		$	619,172			$	77,721			$	696,893

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

		September 30, 2007								December 31, 2006
		Gross								Gross
		Carrying				Accumulated				Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Amortized intangible assets:
Customer lists and relationships		$	73,173			$	(15,048	)		$	63,300			$	(9,723	)
Acquired technology			43,912				(27,119	)			40,246				(20,927	)
Other			10,750				(3,498	)			10,595				(3,787	)
Unamortized intangible assets:
Trademarks			124,446				—				116,762				—
Total other intangible assets		$	252,281			$	(45,665	)		$	230,903			$	(34,437	)

     In the third quarter of 2007, certain assets and liabilities associated with the Company’s September 2004 acquisition of nash_elmo Holdings LLC were reclassified from a U.S. dollar subsidiary to various non-U.S. dollar (primarily euro) subsidiaries based on the exchange rate in effect at the acquisition date. The resulting unrealized foreign currency translation gain for the period September 30, 2004 to December 31, 2006 increased the U.S. dollar gross carrying amounts of goodwill by approximately $9.8 million and net identifiable intangible assets by approximately $6.9 million.

     Amortization of intangible assets for the three and nine-month periods ended September 30, 2007 was $3.4 million and $9.7 million, respectively. Amortization of intangible assets for each of the three and nine-month periods ended September 30, 2006 was $2.6 million and $5.8 million, respectively. Finalization of the fair value of the Thomas amortizable intangible assets resulted in a cumulative $3.2

million pre-tax credit to amortization expense in the 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 current exchange rates.

Note 6. Accrued Product Warranty

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Balance at beginning of period		$	15,461			$	17,048			$	15,298			$	15,254
Product warranty accruals			2,179				3,101				8,705				10,985
Settlements			(3,014	)			(3,961	)			(9,578	)			(10,709	)
Effect of foreign currency translation			298				747				499				1,405
Balance at end of period		$	14,924			$	16,935			$	14,924			$	16,935

Note 7. Pension and Other Postretirement Benefits

     The following table summarizes the components of net periodic benefit cost for the Company’s defined benefit pension plans and other postretirement benefit plans recognized for the three and nine-month periods ended September 30, 2007 and 2006:

		Three Months Ended September 30,
		Pension Benefits																Other
		U.S. Plans								Non-U.S. Plans								Postretirement Benefits
		2007				2006				2007				2006				2007				2006
Service cost		$	—			$	857			$	611			$	1,342			$	4			$	33
Interest cost			877				993				2,751				2,120				353				390
Expected return on plan assets			(1,051	)			(1,087	)			(3,082	)			(2,367	)			—				—
Recognition of:
Unrecognized prior-service cost			4				(18	)			—				—				(111	)			(27	)
Unrecognized net actuarial loss (gain)			137				124				101				122				(207	)			(56	)
Net periodic benefit (income) cost		$	(33	)		$	869			$	381			$	1,217			$	39			$	340

		Nine Months Ended September 30,
		Pension Benefits																Other
		U.S. Plans								Non-U.S. Plans								Postretirement Benefits
		2007				2006				2007				2006				2007				2006
Service cost		$	—			$	2,571			$	3,271			$	4,026			$	12			$	99
Interest cost			3,151				2,979				8,120				6,360				1,059				1,170
Expected return on plan assets			(3,401	)			(3,261	)			(8,707	)			(7,101	)			—				—
Recognition of:
Unrecognized prior-service cost			12				(54	)			—				—				(333	)			(81	)
Unrecognized net actuarial loss (gain)			139				372				298				366				(621	)			(168	)
Net periodic benefit (income) cost		$	(99	)		$	2,607			$	2,982			$	3,651			$	117			$	1,020

     During the third quarter of 2007, the Company implemented certain revisions to its three defined benefit pension plans (the “Plans”) in the U.K. and adjusted the net periodic benefit cost associated with these plans. These revisions included making a planned one-time contribution of £7.5 million into the Plans, merging the Plans into a single plan, and ceasing future service credits under the combined plan effective August 1, 2007. As from that date, future credits will be earned in a contributory defined contribution plan.

     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:

		September 30,				December 31,
		2007				2006
Short-term debt		$	4,506			$	1,740
Long-term debt:
Credit Line, due 2010 (1)		$	90,813			$	109,968
Term Loan, due 2010 (2)			79,785				145,000
Senior Subordinated Notes at 8%, due 2013			125,000				125,000
Secured Mortgages (3)			10,088				9,635
Variable Rate Industrial Revenue Bonds, due 2018 (4)			8,000				8,000
Capitalized leases and other long-term debt			8,182				7,905
Total long-term debt, including current maturities			321,868				405,508
Current maturities of long-term-debt			19,183				22,049
Total long-term debt, less current maturities		$	302,685			$	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 nine-month periods ended September 30, 2007 and 2006.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Selling and administrative expenses		$	658			$	953			$	4,278			$	4,559
Total stock-based compensation expense included in operating expenses		$	658			$	953			$	4,278			$	4,559
Income before income taxes			(658	)			(953	)			(4,278	)			(4,559	)
Provision for income taxes			92				260				927				1,079
Net income		$	(566	)		$	(693	)		$	(3,351	)		$	(3,480	)
Basic and diluted earnings per share		$	(0.01	)		$	(0.01	)		$	(0.06	)		$	(0.07	)

     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		$	(83	)		$	(643	)		$	(6,253	)		$	(2,925	)
Net cash used in financing activities		$	83			$	643			$	6,253			$	2,925

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 (the “Committee”). Under the Incentive Plan, the grant price of an 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 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 nine-month period ended September 30, 2007 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, 2006			2,422			$	15.78
Granted			251			$	36.00
Exercised			(760	)		$	11.52
Forfeited or canceled			(15	)		$	22.30
Outstanding at September 30, 2007			1,898			$	20.13			$	35,822			4.3 years
Exercisable at September 30, 2007			1,306			$	15.57			$	30,587			3.7 years

     The weighted-average estimated grant-date fair values of employee and director stock options granted during the nine-month period ending September 30, 2007 was $12.15. No stock options were granted during the third quarter of 2007 and third quarter of 2006.

     The total pre-tax intrinsic value of stock options exercised during the third quarters of 2007 and 2006 was $0.4 million and $1.8 million, respectively. The total pre-tax intrinsic value of stock options exercised during the first nine months of 2007 and 2006 was $20.5 million and $11.7 million, respectively. Pre-tax unrecognized compensation expense for stock options, net of estimated forfeitures, was $2.3 million as of September 30, 2007, and will be recognized as expense over a weighted-average period of 1.5 years.

Restricted Stock Awards

     A summary of the Company’s restricted stock activity for the nine-month period ended September 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 September 30, 2007			90			$	33.43

     The restricted stock awards granted during the first nine months of 2007 cliff vest three years after the date of grant. The restricted stock awards granted in the first quarter of 2007 were valued at the average of the high and low price of the Company’s Common Stock on the date of grant. The restricted stock awards granted subsequent to May 1, 2007 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 stock awards, net of estimated forfeitures, was $0.8 million as of September 30, 2007, which will be recognized as expense over a weighted-average period of 1.9 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								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Assumptions:
Risk-free interest rate			N/A				N/A				4.7	%			4.7	%
Dividend yield			N/A				N/A				—				—
Volatility factor			N/A				N/A				29				27
Expected life (in years)			N/A				N/A				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 nine-month periods ended September 30, 2007 and 2006:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Basic Earnings Per Share:
Net income		$	53,652			$	32,117			$	141,239			$	95,613
											~~~~~ ~~~~~~~				~~~~~ ~~~~~~
Shares:
Weighted average number of common shares outstanding			53,472				52,436				53,124				52,258
Basic earnings per common share		$	1.00			$	0.61			$	2.66			$	1.83
Diluted Earnings Per Share:
Net income		$	53,652			$	32,117			$	141,239			$	95,613
Shares:
Weighted average number of common shares outstanding			53,472				52,436				53,124				52,258
Assuming conversion of dilutive stock options issued and outstanding			764				1,112				874				1,147
Weighted average number of common shares outstanding, as adjusted			54,236				53,548				53,998				53,405
Diluted earnings per common share		$	0.99			$	0.60			$	2.62			$	1.79

     For the three months ended September 30, 2007 and 2006, respectively, antidilutive options to purchase 144 and 208 weighted-average shares of Common Stock were outstanding. For the nine months ended September 30, 2007 and 2006, respectively, antidilutive options to purchase 200 and 196 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
Before tax income (loss)			7,295				(2,821	)			—								4,474
Income tax effect			—				1,072				—								1,072
Other comprehensive income (loss)			7,295				(1,749	)			—								5,546
Balance at September 30, 2006		$	47,547			$	1,689			$	(9,628	)						$	39,608
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
Before tax income (loss)			29,906				(2,072	)							(76	)			27,758
Income tax effect (2)			—				787								(375	)			412
Other comprehensive income (loss)			29,906				(1,285	)							(451	)			28,170
Cumulative prior period translation adjustment (3)			22,476				—								—				22,476
Balance at September 30, 2007		$	130,763			$	475							$	(15,636	)		$	115,602

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Net income		$	53,652			$	32,117			$	141,239			$	95,613
Other comprehensive income (1)			28,170				5,546				49,226				31,484
Comprehensive income		$	81,822			$	37,663			$	190,465			$	127,097

Note 12. Supplemental Information

     In the nine-month periods ended September 30, 2007 and 2006, the Company paid $64.6 million and $51.3 million, respectively, to various taxing authorities for income taxes. Interest paid for the same nine-month periods of 2007 and 2006, was $17.3 million and $24.9 million, respectively.

     The Company selectively uses derivative financial instruments to manage interest costs and foreign currency exchange risks. The Company does not hold derivatives for trading purposes. The fair values of derivative financial instruments are determined based on dealer quotes. The following is a summary of the notional transaction amounts and fair values for the Company’s outstanding derivative financial instruments by risk category and instrument type:

September 30, 2007

December 31, 2006

Average

Average

Average

Average

Notional

Receive

Pay

Fair

Notional

Receive

Pay

Fair

Amount

Rate

Rate

Value

Amount

Rate

Rate

Value

Foreign currency forwards

$

29,837

N/A

N/A

11

—

N/A

N/A

—

Interest rate swaps

$

70,000

5.4

%

4.4

%

877

70,000

5.4

%

4.4

%

1,850

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 nine-month periods ended September 30, 2007 and 2006:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Compressor and Vacuum Products
Revenues		$	359,990			$	326,094			$	1,053,241			$	969,929
Operating earnings			42,322				33,332				122,634				102,891
Operating earnings as a percentage of revenues			11.8	%			10.2	%			11.6	%			10.6	%
Fluid Transfer Products
Revenues		$	97,240			$	87,934			$	305,276			$	259,705
Operating earnings			24,977				22,364				84,271				66,247
Operating earnings as a percentage of revenues			25.7	%			25.4	%			27.6	%			25.5	%
Reconciliation of Segment Results to Consolidated Results
Total segment operating earnings		$	67,299			$	55,696			$	206,905			$	169,138
Interest expense			6,566				8,762				20,161				28,574
Other income, net			(443	)			(1,015	)			(1,232	)			(2,155	)
Consolidated income before income taxes		$	61,176			$	47,949			$	187,976			$	142,719