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, 2006

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.

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: 26,176,897 shares of Common Stock, par value $0.01 per share, as of April 30 2006.

 

 

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			24
Item 3		Quantitative and Qualitative Disclosures About Market Risk			33
Item 4		Controls and Procedures			33
PART II		OTHER INFORMATION
Item 1		Legal Proceedings			34
Item 1A		Risk Factors			34
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 6		Exhibits			35
SIGNATURES					36
EXHIBIT INDEX					37
Form of Gardner Denver, Inc. Restricted Stock Agreement
Statements Re: Computation of Ratio of Earnings to Fixed Charges
302 Certification of Principal Executive Officer
302 Certification of Principal Financial Officer
906 Certification of Principal Executive Officer
906 Certification of Principal Financial Officer

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

GARDNER DENVER, INC.

(Dollars in thousands, except per share amounts)

(Unaudited)

		Three Months Ended
		March 31,
		2006				2005
Revenues		$	399,294			$	238,824
Costs and expenses:
Cost of sales			259,175				161,014
Depreciation and amortization			11,998				7,282
Selling and administrative expenses			73,705				52,424
Interest expense			10,232				4,033
Other income, net			(687	)			(632	)
Total costs and expenses			354,423				224,121
Income before income taxes			44,871				14,703
Provision for income taxes			14,359				4,411
Net income		$	30,512			$	10,292
Basic earnings per share		$	1.17			$	0.51
Diluted earnings per share		$	1.15			$	0.50

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

GARDNER DENVER, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

		March 31,				December 31,
		2006				2005
		(unaudited)
Assets
Current assets:
Cash and equivalents		$	100,914			$	110,906
Accounts receivables (net of allowances of $10,754 at March 31, 2006 and $9,605 at December 31, 2005)			262,502				229,467
Inventories, net			226,562				207,326
Deferred income taxes			25,163				25,754
Other current assets			15,718				12,814
Total current assets			630,859				586,267
Property, plant and equipment, net			275,154				282,591
Goodwill			635,530				620,244
Other intangibles, net			202,616				203,516
Other assets			28,455				22,442
Total assets		$	1,772,614			$	1,715,060
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings and current maturities of long-term debt		$	24,490			$	26,081
Accounts payable			102,160				103,028
Accrued liabilities			177,997				184,735
Total current liabilities			304,647				313,844
Long-term debt, less current maturities			558,321				542,641
Postretirement benefits other than pensions			33,212				31,387
Deferred income taxes			84,489				86,171
Other liabilities			88,149				82,728
Total liabilities			1,068,818				1,056,771
Stockholders’ equity:
Common stock, $0.01 par value; 50,000,000 shares authorized; 26,159,229 and 25,999,352 shares issued and outstanding at March 31, 2006 and December 31, 2005, respectively			280				278
Capital in excess of par value			479,789				472,825
Retained earnings			236,893				206,381
Accumulated other comprehensive income			16,557				8,124
Treasury stock at cost, 1,815,584 and 1,809,026 shares at March 31, 2006 and December 31, 2005, respectively			(29,723	)			(29,319	)
Total stockholders’ equity			703,796				658,289
Total liabilities and stockholders’ equity		$	1,772,614			$	1,715,060

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

GARDNER DENVER, INC.

(Dollars in thousands)

(Unaudited)

		Three Months Ended
		March 31,
		2006				2005
Cash Flows From Operating Activities
Net income		$	30,512			$	10,292
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization			11,998				7,282
Unrealized foreign currency transaction loss (gain), net			159				(147	)
Net gain on asset dispositions			(85	)			(29	)
Stock issued for employee benefit plans			1,055				897
Excess tax benefits from stock-based compensation			(1,013	)			—
Deferred income taxes			(1,084	)			1,029
Changes in assets and liabilities:
Receivables			(28,930	)			(4,772	)
Inventories			(14,869	)			(446	)
Accounts payable and accrued liabilities			(10,158	)			(21,951	)
Other assets and liabilities, net			3,651				(4,205	)
Net cash used in operating activities			(8,764	)			(12,050	)
Cash Flows From Investing Activities
Net cash paid in business combinations			(16,947	)			(896	)
Capital expenditures			(6,475	)			(5,154	)
Disposals of property, plant and equipment			6,698				54
Other, net			—				(2,231	)
Net cash used in investing activities			(16,724	)			(8,227	)
Cash Flows From Financing Activities
Principal payments on short-term borrowings			(652	)			(8,240	)
Proceeds from short-term borrowings			1,328				—
Principal payments on long-term debt			(24,560	)			(23,365	)
Proceeds from long-term debt			33,641				39,458
Proceeds from stock options			2,173				2,977
Excess tax benefits from stock-based compensation			1,013				—
Purchase of treasury stock			(404	)			(818	)
Debt issuance costs			(63	)			—
Other			(11	)			—
Net cash provided by financing activities			12,465				10,012
Effect of exchange rate changes on cash and equivalents			3,031				(1,639	)
Decrease in cash and equivalents			(9,992	)			(11,904	)
Cash and equivalents, beginning of year			110,906				64,601
Cash and equivalents, end of period		$	100,914			$	52,697

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

GARDNER DENVER, INC.

(Dollars in thousands, except per share amounts or amounts described in millions)

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

     The accompanying consolidated financial statements include the accounts of Gardner Denver, Inc. and those subsidiaries that are majority-owned or over which Gardner Denver, Inc. exercises control (referred to herein as “Gardner Denver” or the “Company”). In consolidation, all significant intercompany transactions and accounts have been eliminated.

     The financial information presented as of any date other than December 31 has been prepared from the books and records without audit. The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of such financial statements, have been included.

     The unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Gardner Denver’s Annual Report on Form 10-K for the year ended December 31, 2005.

     The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results to be expected for the full year. The balance sheet at December 31, 2005 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements.

     Other than as specifically indicated in the “Notes to Consolidated Financial Statements” included in this Quarterly Report on Form 10-Q, the Company has not materially changed its significant accounting policies from those disclosed in its Form 10-K for the year ended December 31, 2005.

     In the first quarter of 2006, the Company made certain organizational changes that resulted in a realignment of its reportable segments. The operations of the Company’s line of specialty bronze and high alloy pumps for the general industrial and marine markets (acquired in July 2005 as part of Thomas Industries Inc. (“Thomas”)) and the operations of its line of self-sealing couplings (acquired in January 2004 as part of Syltone plc (“Syltone”)) were transferred from the Compressor and Vacuum Products segment to the Fluid Transfer Products segment. Accordingly, reportable segment information for these two operations has been included in the Fluid Transfer Products segment results. Results for the three months ended March 31, 2005 have been restated to reflect this realignment. In addition, operating results of the Todo Group (“Todo”), a manufacturer of self-sealing couplings that was acquired in January 2006 (see Note 2) have been included in the Fluid Transfer Products segment from the date of acquisition.

Changes in Accounting Principles and Effects of New Accounting Pronouncements

     In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs – an amendment to ARB No. 43, Chapter 4,” (“SFAS No. 151”). This Statement amends previous guidance and requires expensing for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). In addition, the Statement requires that allocation of fixed production overheads to inventory be based on the normal capacity of production facilities. SFAS No. 151 is effective for inventory costs incurred during annual periods beginning after June 15, 2005. The Company adopted the provisions of SFAS No. 151 effective January 1, 2006. The initial implementation had no effect on the Company’s consolidated financial position or consolidated results of operations.

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB 25 and amends SFAS No. 95, “Statement of Cash Flows.” The Company adopted the provisions of SFAS No. 123(R) effective January 1, 2006. Disclosures related to the Company’s stock-based compensation plans are included in Note 8.

     In May 2005, the FASB issued SFAS No. 154, “ Accounting Changes and Error Corrections,” (“SFAS No. 154”), which requires retrospective application for reporting a voluntary change in accounting principle, unless it is impracticable to do so. SFAS No. 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and also addresses the reporting of a correction of errors by restating previously issued financial statements. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company adopted the provisions of SFAS No. 154 effective January 1, 2006. The initial implementation had no effect on the Company’s consolidated financial position or consolidated results of operations.

     In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140,” (“SFAS No. 155”) to permit fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation in accordance with the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company will adopt SFAS No. 155 effective January 1, 2007, and management does not believe the adoption will have a material effect on the Company’s consolidated results of operations or consolidated financial position.

     In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140,” (“SFAS No. 156”). SFAS No. 156 requires recognition of a servicing asset or liability at fair value each time an obligation is undertaken to service a financial asset by entering into a servicing contract. SFAS No. 156 also provides guidance on subsequent measurement methods for each class of servicing assets and liabilities and specifies financial statement presentation and disclosure requirements. This Statement is effective for fiscal years beginning after September 15, 2006. The Company will adopt SFAS No. 156 effective January 1, 2007, and management does not believe the adoption will have a material effect on the Company’s consolidated results of operations or consolidated financial position.

Note 2. Business Combinations

     Service marks, trademarks and/or tradenames and related designs or logotypes owned by Gardner Denver, Inc. or its subsidiaries are shown in italics.

Consummated Acquisitions

     The following table presents summary information with respect to acquisitions completed by Gardner Denver during 2005:

Date of Acquisition		Acquired Entity		Net Transaction Value
June 1, 2005		Bottarini S.p.A		€8.1 million (approximately $10.1 million)
July 1, 2005		Thomas Industries Inc.		$483.5 million

     On January 9, 2006, the Company completed the acquisition of Todo for a purchase price of 118.5 million Swedish kronor (approximately $15.0 million), net of debt and cash acquired. Todo, with assembly operations in Sweden and the United Kingdom, and a central European sales and distribution operation in the Netherlands, has an extensive offering of dry-break couplers. Todo-Matic self-sealing couplings are used by oil, chemical and gas companies to transfer their products. The Todo acquisition extends the Company’s product line of Emco Wheaton couplers, added as part of the Syltone acquisition in 2004.

     During the three-month period ended March 31, 2006, the Company also made cash acquisition payments of approximately $1.9 million, primarily in connection with Thomas and consisting of payments to former stockholders and transaction-related costs.

     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.

Thomas Merger-related Costs

     In connection with the consummation of the Thomas acquisition, the Company accrued certain merger-related expenses, primarily related to estimated personnel-related costs. In accordance with Emerging Issues Task Force (“EITF”) No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” the amount of the liability was included in the allocation of Thomas’ acquisition cost. The majority of the remaining accrual at March 31, 2006 is expected to be utilized in the current year. The following table summarizes activity with respect to the accrued liability.

		Balance at								Balance at
		December 31,				Amount				March 31,
		2005				Utilized				2006
Personnel-related cost liability		$	9,343			$	(325	)		$	9,018

Note 3. Inventories

		March 31,				December 31,
		2006				2005
Raw materials, including parts and subassemblies		$	107,091			$	95,855
Work-in-process			41,169				37,230
Finished goods			88,626				80,494
			236,886				213,579
Excess of FIFO costs over LIFO costs			(10,324	)			(6,253	)
Inventories, net		$	226,562			$	207,326

Note 4. Goodwill and Other Intangible Assets

     The changes in the carrying amount of goodwill attributable to each business segment for the three months ended March 31, 2006, and the year ended December 31, 2005, are as follows:

		Compressor &				Fluid
		Vacuum				Transfer
		Products				Products				Total
Balance as of December 31, 2004		$	336,075			$	38,084			$	374,159
Acquisitions			256,942				—				256,942
Adjustments to goodwill			4,332				—				4,332
Foreign currency translation			(13,908	)			(1,281	)			(15,189	)
Balance as of December 31, 2005			583,441				36,803				620,244
Acquisitions			—				12,333				12,333
Adjustments to goodwill			(123	)			—				(123	)
Foreign currency translation			2,927				149				3,076
Balance as of March 31, 2006		$	586,245			$	49,285			$	635,530

     The following table presents the gross carrying amount and accumulated amortization of identifiable intangible assets subject to amortization at the dates presented:

		March 31, 2006								December 31, 2005
		Gross								Gross
		Carrying				Accumulated				Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Amortized intangible assets:
Customer lists and relationships		$	106,379			$	(9,326	)		$	105,896			$	(7,389	)
Acquired technology			30,666				(13,773	)			30,802				(13,164	)
Other			14,910				(4,146	)			13,453				(3,558	)
Unamortized intangible assets:
Trademarks			77,906				—				77,476				—
Total other intangible assets		$	229,861			$	(27,245	)		$	227,627			$	(24,111	)

     Amortization of intangible assets for the three months ended March 31, 2006 and 2005, was $3.3 million and $1.8 million, respectively. Amortization of intangible assets is anticipated to be

approximately $13.0 million annually in 2006 through 2010, based upon existing intangible assets with finite useful lives as of March 31, 2006. This estimate is subject to change based upon the finalization of the allocation of the Thomas purchase price.

Note 5. Accrued Product Warranty

     The following is a roll forward of the Company’s product warranty accrual for the three months ended March 31, 2006 and 2005, respectively:

		Three Months Ended
		March 31,
		2006				2005
Balance at beginning of period		$	15,254			$	10,671
Product warranty accruals			3,817				2,185
Settlements			(3,251	)			(1,970	)
Other (acquisitions and foreign currency translation)			174				(154	)
Balance at end of period		$	15,994			$	10,732

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 months ended March 31, 2006 and 2005, respectively:

																		Other
		Pension Benefits																Postretirement
		U.S. Plans								Non-U.S. Plans								Benefits
		2006				2005				2006				2005				2006				2005
Service cost		$	898			$	603			$	1,342			$	1,250			$	33			$	—
Interest cost			1,001				888				2,120				1,991				390				380
Expected return on plan assets			(1,077	)			(975	)			(2,367	)			(2,038	)			—				—
Amortization of prior-service cost			(21	)			(25	)			—				—				(27	)			(25	)
Amortization of net loss (gain)			126				110				122				40				(56	)			(150	)
Net periodic benefit cost		$	927			$	601			$	1,217			$	1,243			$	340			$	205

Note 7. Debt

     The Company’s debt is summarized as follows:

		March 31,				December 31,
		2006				2005
Short-term debt		$	3,213			$	1,860
Long-term debt:
Credit Line, due 2009 (1)		$	174,146			$	158,900
Term Loan, due 2010 (2)			251,731				255,000
Senior Subordinated Notes at 8%, due 2013			125,000				125,000
Secured Mortgages (3)			9,120				8,892
Variable Rate Industrial Revenue Bonds, due 2018 (4)			8,000				8,000
Capitalized leases and other long-term debt			11,601				11,070
Total long-term debt, including current maturities			579,598				566,862
Current maturities of long-term-debt			21,277				24,221
Total long-term debt, less current maturities		$	558,321			$	542,641

Note 8. Stock-Based Compensation Plans

     On January 1, 2006, Gardner Denver adopted SFAS No. 123(R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. SFAS No. 123(R) supersedes the Company’s previous accounting under APB Opinion No. 25, “Accounting for Stock Issued to Employees”(“APB 25”), for periods beginning in fiscal 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) to assist preparers with their implementation of SFAS No. 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

     The Company adopted SFAS No. 123(R) using the modified prospective transition method. Under this method, the Company’s consolidated financial statements as of and for the three months ended

March 31, 2006, reflect the impact of SFAS No. 123(R), while the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R). Stock-based compensation expense recognized under SFAS No. 123(R) was $2.8 million for the first quarter 2006, which consisted of: (1) compensation expense for all unvested share-based awards outstanding as of December 31, 2005, based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and (2) compensation expense for share-based awards granted subsequent to adoption based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that are ultimately expected to vest. SFAS No. 123(R) amends SFAS No. 95, “Statement of Cash Flows”, to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid, which is included within operating cash flows. The following table shows the impact of the adoption of SFAS No. 123(R) on the Consolidated Statements of Operations and the Consolidated Statements of Cash Flows.

		Three Months
		Ended
		March 31, 2006
Selling and administrative expenses		$	(2,830	)
Total stock-based compensation expense included in operating expenses			(2,830	)
Income before income taxes			(2,830	)
Provision for income taxes			(861	)
Net income		$	(1,969	)
Basic and diluted earnings per share		$	(0.07	)
Net cash used in operating activities		$	(1,013	)
Net cash provided by financing activities		$	1,013

Plan Descriptions

     Under the Company’s Long-Term Incentive Plan (the “Incentive Plan”), designated employees are eligible to receive awards in the form of stock options, stock appreciation rights, restricted stock awards or performance shares, as determined by the Management Development and Compensation Committee of the Board of Directors. The Company’s Incentive Plan is intended to assist the Company in recruiting and retaining employees and directors, and to associate the interests of eligible participants with those of the Company and its shareholders. An aggregate of 4,250,000 shares of common stock has been authorized for issuance under the Incentive Plan. Under the Incentive Plan, the grant price of an option is determined by the Management Development and Compensation Committee, but must not be less than the average of the high price and low price of the Company’s common stock on the grant date. The Incentive Plan provides that the term of any option granted may not exceed ten years. Under the terms of existing awards, one-third of employee options granted become vested and exercisable on each of the first three anniversaries of the date of grant (or upon retirement, death or cessation of service due to disability, if earlier). The options granted to employees in 2006, 2005 and 2004 expire seven years after the date of grant.

     Pursuant to the Incentive Plan, the Company also issues share-based awards to directors who are not employees of Gardner Denver or its affiliates. In certain years, each nonemployee director has been granted options to purchase 4,500 shares of common stock on the day after the annual meeting of stockholders. These options are granted at the fair market value (the average of the high and low price) of the common stock on the date of grant, become exercisable on the first anniversary of the date of grant (or upon retirement, death or cessation of service due to disability, if earlier) and expire five years after the date of grant. The maximum grant to nonemployee directors in any given year is an option to purchase 9,000 shares of common stock.

     The Company also has an employee stock purchase plan (the “Stock Purchase Plan”), a qualified plan under the requirements of Section 423 of the Internal Revenue Code, and has reserved 1,150,000 shares for issuance under this plan. The Stock Purchase Plan requires participants to have the purchase price of their options withheld from their pay over a one-year period. No additional options were offered to employees under the Stock Purchase Plan in 2006, 2005 or 2004.

Stock Option Awards

     The following summary presents information regarding outstanding stock options as of March 31, 2006 and changes during the first quarter then ended (underlying shares in thousands):

						Outstanding								Weighted-
						Weighted-				Aggregate				Average
						Average Exercise				Intrinsic				Remaining
		Shares				Price				Value				Contractual Life
Outstanding at December 31, 2005			1,333			$	24.78
Granted			149			$	61.17
Exercised			(123	)		$	17.64
Forfeited or canceled			(2	)		$	37.52
Outstanding at March 31, 2006			1,357			$	29.42			$	48,543			4.9 years
Exercisable at March 31, 2006			940			$	22.34			$	40,311			4.5 years

     The weighted-average estimated grant-date fair value of employee stock options granted during the first quarter of 2006 was $19.80.

     The total pre-tax intrinsic value of options exercised during the first quarter of 2006 and 2005, was $5.4 million and $3.0 million, respectively. Pre-tax unrecognized compensation expense for stock options, net of estimated forfeitures, was $4.2 million as of March 31, 2006, and will be recognized as expense over a weighted-average period of 1.9 years.

Restricted Stock Awards

     The following summary presents information regarding outstanding restricted stock awards as of March 31, 2006 and changes during the first quarter then ended (underlying shares in thousands):

						Weighted-
		Shares				Average Price
Nonvested at December 31, 2005			18			$	17.69
Granted			25			$	61.17
Vested			(18	)		$	17.69
Forfeited			—			$	—
Nonvested at March 31, 2006			25			$	61.17

     The restricted stock awards granted during the first quarter of 2006 cliff vest three years after the date of grant. The restricted share award grants were valued at the stock price on the date of grant. Pre-tax unrecognized compensation expense, net of estimated forfeitures, for nonvested restricted stock awards was $0.4 million as of March 31, 2006, which will be recognized as expense over a weighted-average period of 2.9 years. The total fair value of restricted stock awards that vested during the three months ended March 31, 2006 was $1.1 million. No restricted stock awards vested during the three months ended March 31, 2005.

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

     The fair value of each stock option grant under the Company’s Long-Term Incentive Plan was estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-average assumptions for the periods indicated are noted in the table below. Expected volatility is based on historical volatility of the Company’s common stock calculated over the expected term of the option. The expected term for the majority of the options granted in the first quarter of 2006 was calculated in accordance with SAB 107 using the simplified method for “plain-vanilla” options. The expected term for options granted to certain executives that have similar historical exercise behavior was determined separately for valuation purposes. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the date of grant.

		For the Three Months
		Ended March 31,
		2006				2005
Assumptions:
Risk-free interest rate			4.6	%			3.9	%
Dividend yield			—				—
Volatility factor			27				33
Expected life (in years)			4.9				4.5

Pro Forma Net Earnings

     In accordance with the modified prospective transition method, the Company’s consolidated financial statements for prior periods have not been restated and do not include the impact of SFAS No. 123(R). Accordingly, no compensation expense related to stock option awards was recognized in the first quarter of 2005, as all stock options granted had an exercise price equal to the fair market value of the underlying common stock on the date of grant. The following table provides pro forma net income and earnings per share as if the fair-value-based method of accounting had been applied to all outstanding and unvested stock option awards prior to the adoption of SFAS 123(R). For purposes of this pro forma disclosure, the estimated fair value of an award is assumed to be expensed over the award’s vesting periods using the Black-Scholes model.

		Three
		Months
		Ended
		March 31,
		2005
Net income, as reported		$	10,292
Less: Total stock-based employee compensation expense determined under fair value method, net of related tax effects			(348	)
Pro forma net income		$	9,944
Basic earnings per share, as reported		$	0.51
Basic earnings per share, pro forma		$	0.50
Diluted earnings per share, as reported		$	0.50
Diluted earnings per share, pro forma		$	0.48

     For stock option awards with accelerated vesting provisions that are granted to retirement-eligible employees and to employees that become eligible for retirement subsequent to the grant date, the Company previously followed the guidance of APB 25 and SFAS No. 123, which allowed compensation costs to be recognized ratably over the vesting period of the award. SFAS No. 123(R) requires compensation costs to be recognized over the requisite service period of the award instead of ratably over the vesting period stated in the grant. For awards granted prior to adoption, the Securities and Exchange Commission clarified that companies should continue to follow the vesting method they had previously been using. As a result, for awards granted prior to adoption, the Company will continue to recognize compensation costs ratably over the vesting period with accelerated recognition of the unvested portion upon actual retirement. The Company will follow the guidance of SFAS No. 123(R) for awards granted subsequent to the adoption date.

     The Company’s income taxes currently payable have been reduced by the tax benefits from employee stock option exercises. These benefits totaled $1.0 million and $0.7 million for the three months ended March 31, 2006 and 2005, respectively, and were recorded as an increase to additional paid-in capital.

Note 9. Earnings Per Share

     The following table details the calculation of basic and diluted earnings per share (shares in thousands):

		Three Months Ended
		March 31,
		2006				2005
Basic Earnings Per Share:
Net income		$	30,512			$	10,292
Shares:
Weighted average number of common shares outstanding			26,055				20,044
Basic earnings per share		$	1.17			$	0.51
Diluted Earnings Per Share:
Net income		$	30,512			$	10,292
Shares:
Weighted average number of common shares outstanding			26,055				20,044
Assumed conversion of dilutive stock options issued and outstanding			573				594
Weighted average number of diluted common shares			26,628				20,638
Diluted earnings per share		$	1.15			$	0.50

     For the quarters ended March 31, 2006 and 2005, respectively, antidilutive options to purchase 66 thousand and 116 thousand weighted-average shares of common stock were outstanding. Antidilutive options outstanding were not included in the computation of diluted earnings per share.

Note 10. Comprehensive Income

     For the three months ended March 31, 2006 and 2005, comprehensive income was $38.9 million and $6.9 million, respectively. Items impacting the Company’s comprehensive income, but not included in net income, consist of foreign currency translation adjustments, including realized and unrealized gains and losses (net of income taxes) on the foreign currency hedge of the Company’s investment in foreign subsidiaries, fair market value adjustments of interest rate swaps and additional minimum pension liability (net of income taxes).

Note 11. Supplemental Cash Flow Information

     In the first three months of 2006 and 2005, the Company paid $19.2 million and $1.4 million, respectively, to various taxing authorities for income taxes. Interest paid for the first three months of 2006 and 2005, was $7.4 million and $4.1 million, respectively.

Note 12. Contingencies

     The Company is a party to various legal proceedings, lawsuits and administrative actions, which are of an ordinary or routine nature. In addition, due to the bankruptcies of several asbestos manufacturers and other primary defendants, among other things, the Company has been named as a

defendant in an increasing number of asbestos personal injury lawsuits. The Company has also been named as a defendant in an increasing number of silicosis personal injury lawsuits. The plaintiffs in these suits allege exposure to asbestos or silica from multiple sources and typically the Company is one of approximately 25 or more named defendants. In the Company’s experience, the vast majority of the plaintiffs are not impaired with a disease for which the Company bears any responsibility.

     Predecessors to the Company sometimes manufactured, distributed and/or sold products allegedly at issue in the pending asbestos and silicosis litigation lawsuits (the “Products”). However, neither the Company nor its predecessors ever mined, manufactured, mixed, produced or distributed asbestos fiber or silica sand, the materials that allegedly caused the injury underlying the lawsuits. Moreover, the asbestos-containing components used in the Products were enclosed within the subject Products.

     The Company has entered into a series of cost-sharing agreements with multiple insurance companies to secure coverage for asbestos and silicosis lawsuits. The Company also believes some of the potential liabilities regarding these lawsuits are covered by indemnity agreements with other parties. The Company’s uninsured settlement payments for past asbestos and silicosis lawsuits have been immaterial.

     The Company believes that the pending and future asbestos and silicosis lawsuits will not, in the aggregate, have a material adverse effect on its consolidated financial position, results of operations or liquidity, based on: the Company’s anticipated insurance and indemnification rights to address the risks of such matters; the limited potential asbestos exposure from the components described above; the Company’s experience that the vast majority of plaintiffs are not impaired with a disease attributable to alleged exposure to asbestos or silica from or relating to the Products or for which the Company otherwise bears responsibility; various potential defenses available to the Company with respect to such matters; and the Company’s prior disposition of comparable matters. However, due to inherent uncertainties of litigation and because future developments, including, without limitation, potential insolvencies of insurance companies, could cause a different outcome, there can be no assurance that the resolution of pending or future lawsuits, whether by judgment, settlement or dismissal, will not have a material adverse effect on its consolidated financial position, results of operations or liquidity.

     The Company has also been identified as a potentially responsible party with respect to several sites designated for environmental cleanup under various state and federal laws. The Company does not believe that the future potential costs related to these sites will have a material adverse effect on its consolidated financial position, results of operations or liquidity.

Note 13. Segment Results

     The Company’s organizational structure is based on the products and services it offers and consists of five operating divisions: Compressor, Blower, Liquid Ring Pump, Fluid Transfer and Thomas Products. These divisions comprise two reportable segments: Compressor and Vacuum Products and Fluid Transfer Products. The Compressor, Blower, Liquid Ring Pump and Thomas Products divisions are aggregated into the Compressor and Vacuum Products segment because the long-term financial performance of these businesses are affected by similar economic conditions and their products, manufacturing processes and other business characteristics are similar in nature.

     In the first quarter of 2006, the Company made certain organizational changes that resulted in a realignment of its reportable segments. The operations of the Company’s line of specialty bronze and

high alloy pumps for the general industrial and marine markets (acquired in July 2005 as part of Thomas) and the operations of its line of self-sealing couplings (acquired in January 2004 as part of Syltone) were transferred from the Compressor and Vacuum Products segment to the Fluid Transfer Products segment. Accordingly, the results of these two operations have been included in the Fluid Transfer Products segment results. Results for the three months ended March 31, 2005 have been restated to reflect this realignment. In addition, operating results of Todo, a manufacturer of self-sealing couplings that was acquired in January 2006 (see Note 2) have been included in the Fluid Transfer Products segment from the date of acquisition.

     The following table provides financial information by business segment for the three-month periods ended March 31, 2006 and 2005:

		Three Months Ended
		March 31,
		2006				2005
Compressor and Vacuum Products
Revenues		$	318,433			$	189,173
Operating earnings			35,808				12,718
Operating earnings as a percentage of revenues			11.2	%			6.7	%
Fluid Transfer Products
Revenues		$	80,861			$	49,651
Operating earnings			18,608				5,386
Operating earnings as a percentage of revenues			23.0	%			10.8	%
Reconciliation of Segment Results to Consolidated Results
Total segment operating earnings		$	54,416			$	18,104
Interest expense			10,232				4,033
Other income, net			(687	)			(632	)
Consolidated income before income taxes		$	44,871			$	14,703

     The following table provides financial information by business segment for the years ended December 31, 2005, 2004 and 2003 reflecting the organizational change described above. Segment disclosures in 2003, which are included in the table for comparative purposes, were not affected by the reorganization because the relevant operations were acquired by the Company in 2004 and 2005:

		Year Ended December 31,
		2005				2004				2003
Compressor and Vacuum Products
Revenues		$	982,476			$	572,181			$	369,023
Operating earnings			83,093				42,398				27,792
Operating earnings as a percentage of revenues			8.5	%			7.4	%			7.5	%
Fluid Transfer Products
Revenues		$	232,076			$	167,358			$	70,507
Operating earnings			37,542				19,352				4,093
Operating earnings as a percentage of revenues			16.2	%			11.6	%			5.8	%
Reconciliation of Segment Results to Consolidated Results
Total segment operating earnings		$	120,635			$	61,750			$	31,885
Interest expense			30,433				10,102				4,748
Other income, net			(5,442	)			(638	)			(3,221	)
Consolidated income before income taxes		$	95,644			$	52,286			$	30,358
LIFO Liquidation Income
Compressor and Vacuum Products		$	—			$	132			$	316
Fluid Transfer Products			—				—				50
Total		$	—			$	132			$	366
Depreciation and Amortization Expense
Compressor and Vacuum Products		$	33,705			$	17,414			$	11,739
Fluid Transfer Products			4,617				4,487				2,827
Total		$	38,322			$	21,901			$	14,566
Capital Expenditures
Compressor and Vacuum Products		$	30,588			$	15,221			$	8,864
Fluid Transfer Products			4,930				4,329				3,086
Total		$	35,518			$	19,550			$	11,950
Identifiable Assets as of December 31
Compressor and Vacuum Products		$	1,422,119			$	811,290			$	375,376
Fluid Transfer Products			156,281				143,253				72,528
General corporate (unallocated)			136,660				74,066				141,829
Total assets		$	1,715,060			$	1,028,609			$	589,733

Note 14. Guarantor Subsidiaries

     The Company’s obligations under its 8% Senior Subordinated Notes due 2013 are jointly and severally, fully and unconditionally guaranteed by certain wholly-owned domestic subsidiaries of the Company (the “Guarantor Subsidiaries”). The Company’s subsidiaries that do not guarantee the Senior Subordinated Notes are referred to as the “Non-Guarantor Subsidiaries”. The guarantor condensed consolidating financial data presented below presents the statements of operations, balance sheets and statements of cash flow 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, 2006

		Parent				Guarantor				Non-Guarantor
		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Revenues		$	109,145			$	106,255			$	224,296			$	(40,402	)		$	399,294
Costs and expenses:
Cost of sales			72,773				73,354				152,398				(39,350	)			259,175
Depreciation and amortization			2,531				2,680				6,787				—				11,998
Selling and administrative expenses			21,251				13,393				39,061				—				73,705
Interest expense			9,767				(2,240	)			2,705				—				10,232
Other (income) expense, net			(656	)			(1,062	)			1,031				—				(687	)
Total costs and expenses			105,666				86,125				201,982				(39,350	)			354,423
Income (loss) before income taxes			3,479				20,130				22,314				(1,052	)			44,871
Provision for income taxes			1,322				7,682				5,355				—				14,359
Net income (loss)		$	2,157			$	12,448			$	16,959			$	(1,052	)		$	30,512

Consolidating Statement of Operations
Three Months Ended March 31, 2005

		Parent				Guarantor				Non-Guarantor
		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Revenues		$	79,363			$	43,682			$	123,872			$	(8,093	)		$	238,824
Costs and expenses:
Cost of sales			55,937				32,017				82,463				(9,403	)			161,014
Depreciation and amortization			2,482				928				3,872				—				7,282
Selling and administrative expenses			17,929				8,170				26,325				—				52,424
Interest expense			3,633				—				400				—				4,033
Other (income) expense, net			(343	)			(1,180	)			891				—				(632	)
Total costs and expenses			79,638				39,935				113,951				(9,403	)			224,121
Income (loss) before income taxes			(275	)			3,747				9,921				1,310				14,703
Provision for income taxes			(100	)			1,367				3,144				—				4,411
Net (loss) income		$	(175	)		$	2,380			$	6,777			$	1,310			$	10,292

Consolidating Balance Sheet
March 31, 2006

		Parent				Guarantor				Non-Guarantor
		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Assets
Current assets:
Cash and equivalents		$	4,610			$	2,768			$	93,536			$	—			$	100,914
Accounts receivable, net			81,473				51,561				129,468				—				262,502
Inventories, net			40,154				57,862				126,833				1,713				226,562
Deferred income taxes			5,597				13,539				13,971				(7,944	)			25,163
Other current assets			2,982				2,105				10,631				—				15,718
Total current assets			134,816				127,835				374,439				(6,231	)			630,859
Intercompany receivables (payable)			(60,609	)			52,387				5,294				2,928				—
Investments in affiliates			671,182				28,959				32				(700,105	)			68
Property, plant and equipment, net			53,820				48,264				173,070				—				275,154
Goodwill			113,441				145,484				376,605				—				635,530
Other intangibles, net			8,352				29,048				165,216				—				202,616
Other assets			22,705				(3,693	)			8,815				560				28,387
Total assets		$	943,707			$	428,284			$	1,103,471			$	(702,848	)		$	1,772,614
Liabilities and Stockholders’ Equity
Short-term borrowings and current maturities of long-term debt		$	16,346			$	—			$	8,144			$	—			$	24,490
Accounts payable and accrued liabilities			86,227				56,378				146,728				(9,176	)			280,157
Total current liabilities			102,573				56,378				154,872				(9,176	)			304,647
Long-term intercompany payable (receivable)			(206,877	)			(113,675	)			339,673				(19,121	)			—
Long-term debt, less current maturities			450,227				77				108,017				—				558,321
Deferred income taxes			—				27,512				61,508				(4,531	)			84,489
Other liabilities			42,413				13,514				49,915				15,519				121,361
Total liabilities			388,336				(16,194	)			713,985				(17,309	)			1,068,818
Stockholders’ equity:
Common stock			280				—				—				—				280
Capital in excess of par value			479,393				393,425				301,777				(694,806	)			479,789
Retained earnings			91,605				47,199				94,575				3,514				236,893
Accumulated other comprehensive income (loss)			13,816				3,854				(6,866	)			5,753				16,557
Treasury stock, at cost			(29,723	)			—				—				—				(29,723	)
Total stockholders’ equity			555,371				444,478				389,486				(685,539	)			703,796
Total liabilities and stockholders’ equity		$	943,707			$	428,284			$	1,103,471			$	(702,848	)		$	1,772,614

Consolidating Balance Sheet
December 31, 2005

		Parent				Guarantor				Non-Guarantor
		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Assets
Current assets:
Cash and equivalents		$	5,557			$	(369	)		$	105,718			$	—			$	110,906
Accounts receivable, net			68,006				41,944				119,517				—				229,467
Inventories, net			35,684				54,867				114,009				2,766				207,326
Deferred income taxes			4,377				4,308				22,987				(5,918	)			25,754
Other current assets			(716	)			2,846				10,684				—				12,814
Total current assets			112,908				103,596				372,915				(3,152	)			586,267
Intercompany (payable) receivables			(68,284	)			53,141				17,285				(2,142	)			—
Investments in affiliates			671,182				40,645				32				(711,791	)			68
Property, plant and equipment, net			57,167				49,397				176,027				—				282,591
Goodwill			113,441				144,864				361,939				—				620,244
Other intangibles, net			8,635				29,531				165,350				—				203,516
Other assets			21,287				(5,973	)			5,503				1,557				22,374
Total assets		$	916,336			$	415,201			$	1,099,051			$	(715,528	)		$	1,715,060
Liabilities and Stockholders’ Equity
Short-term borrowings and current maturities of long-term debt		$	19,616			$	—			$	6,465			$	—			$	26,081
Accounts payable and accrued liabilities			86,776				73,930				135,382				(8,325	)			287,763
Total current liabilities			106,392				73,930				141,847				(8,325	)			313,844
Long-term intercompany (receivable) payable			(207,110	)			(98,395	)			319,587				(14,082	)			—
Long-term debt, less current maturities			428,854				78				113,709				—				542,641
Deferred income taxes			—				4,380				85,311				(3,520	)			86,171
Other liabilities			42,443				9,826				46,328				15,518				114,115
Total liabilities			370,579				(10,181	)			706,782				(10,409	)			1,056,771
Stockholders’ equity:
Common stock			278				—				—				—				278
Capital in excess of par value			472,334				396,526				315,660				(711,695	)			472,825
Retained earnings			89,449				33,420				78,947				4,565				206,381
Accumulated other comprehensive income (loss)			13,015				(4,564	)			(2,338	)			2,011				8,124
Treasury stock, at cost			(29,319	)			—				—				—				(29,319	)
Total stockholders’ equity			545,757				425,382				392,269				(705,119	)			658,289
Total liabilities and stockholders’ equity		$	916,336			$	415,201			$	1,099,051			$	(715,528	)		$	1,715,060

Consolidating Condensed Statement of Cash Flows
Three Months Ended March 31, 2006

		Parent				Guarantor				Non-Guarantor
		Company				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Cash flows provided by (used in) operating activities		$	(19,595	)		$	262			$	11,457			$	(888	)		$	(8,764	)
Cash flows from investing activities:
Net cash paid in business combinations			(1,342	)			—				(15,605	)			—				(16,947	)
Capital expenditures			(1,793	)			(1,035	)			(3,647	)			—				(6,475	)
Disposals of property, plant and equipment			33				3				6,662				—				6,698
Other, net			—				—				—				—				—
Net cash provided by (used in) investing activities			(3,102	)			(1,032	)			(12,590	)			—				(16,724	)
Cash flows from financing activities:
Net change in long-term intercompany receivables/payables			1,836				3,912				(6,636	)			888				—
Principal payments on short-term borrowings			—				—				(652	)			—				(652	)
Proceeds from short-term borrowings			—				—				1,328				—				1,328
Principal payments on long-term debt			(16,269	)			—				(8,291	)			—				(24,560	)
Proceeds from long-term debt			33,500				—				141				—				33,641
Proceeds from stock options			2,173				—				—				—				2,173
Excess tax benefits from stock-based compensation			1,013				—				—				—				1,013
Purchase of treasury stock			(404	)			—				—				—				(404	)
Debt issuance costs			(63	)			—				—				—				(63	)
Other			(11	)							—				—				(11	)
Net cash provided by (used in) financing activities			21,775				3,912				(14,110	)			888				12,465
Effect of exchange rate changes on cash and equivalents			(25	)			(5	)			3,061				—				3,031
Increase (decrease) in cash and equivalents			(947	)			3,137				(12,182	)			—				(9,992	)
Cash and equivalents, beginning of year			5,557				(369	)			105,718				—				110,906
Cash and equivalents, end of period		$	4,610			$	2,768			$	93,536			$	—			$	100,914