Edgar Filing: GARDNER DENVER INC

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller reporting company)

e10vq

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, 2010


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

For the transition period from to

Commission File Number 1-13215

GARDNER DENVER, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		76-0419383 (I.R.S. Employer Identification No.)

1800 Gardner Expressway
Quincy, Illinois 62305
(Address of principal executive offices and Zip Code)

(217) 222-5400
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 52,479,911 shares of Common Stock, par value $0.01 per share, as of October 29, 2010.

GARDNER DENVER, INC.
Table of Contents


	Page
PART I — FINANCIAL INFORMATION

Item 1 Financial Statements
Condensed Consolidated Statements of Operations		3
Condensed Consolidated Balance Sheets		4
Condensed Consolidated Statements of Cash Flows		5
Notes to Condensed Consolidated Financial Statements		6
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
Item 3 Quantitative and Qualitative Disclosures About Market Risk		46
Item 4 Controls and Procedures		48

PART II — OTHER INFORMATION

Item 1 Legal Proceedings		49
Item 1A Risk Factors		49
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		49
Item 5 Other Information		50
Item 6 Exhibits		50

SIGNATURES		51

INDEX TO EXHIBITS		52
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

GARDNER DENVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Revenues	$	493,449		$	428,846		$	1,365,132		$	1,327,375
Cost of sales		333,127			293,651			919,403			921,033

Gross profit		160,322			135,195			445,729			406,342
Selling and administrative expenses		91,070			89,946			270,509			271,699
Other operating expense, net		1,253			10,599			3,170			39,154
Impairment charges		—			2,540			—			263,605

Operating income (loss)		67,999			32,110			172,050			(168,116	)
Interest expense		5,651			7,109			17,829			21,377
Other income, net		(1,110	)		(1,738	)		(1,747	)		(3,169	)

Income (loss) before income taxes		63,458			26,739			155,968			(186,324	)
Provision for income taxes		16,610			7,074			38,943			14,436

Net income (loss)		46,848			19,665			117,025			(200,760	)
Less: Net income attributable to noncontrolling interests		273			248			1,158			1,593

Net income (loss) attributable to Gardner Denver	$	46,575		$	19,417		$	115,867		$	(202,353	)


Net earnings (loss) per share attributable to Gardner Denver common stockholders
Basic earnings (loss) per share	$	0.89		$	0.37		$	2.22		$	(3.90	)

Diluted earnings (loss) per share	$	0.88		$	0.37		$	2.20		$	(3.90	)


Cash dividends declared per common share	$	0.05		$	—		$	0.15		$	—

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

GARDNER DENVER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

(Unaudited)


	September 30,			December 31,
	2010			2009
Assets
Current assets:
Cash and cash equivalents	$	166,596		$	109,736
Accounts receivable (net of allowance of $12,032 at September 30, 2010 and $10,690 at December 31, 2009)		366,766			326,234
Inventories, net		235,894			226,453
Deferred income taxes		30,994			30,603
Other current assets		19,174			25,485

Total current assets		819,424			718,511

Property, plant and equipment (net of accumulated depreciation of $330,606 at September 30, 2010 and $320,635 at December 31, 2009)		284,717			306,235
Goodwill		579,899			578,014
Other intangibles, net		292,712			314,410
Other assets		53,587			21,878

Total assets	$	2,030,339		$	1,939,048


Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings and current maturities of long-term debt	$	32,950		$	33,581
Accounts payable		117,219			94,887
Accrued liabilities		211,802			195,062

Total current liabilities		361,971			323,530

Long-term debt, less current maturities		272,609			330,935
Postretirement benefits other than pensions		14,945			15,269
Deferred income taxes		59,807			67,799
Other liabilities		158,156			137,506

Total liabilities		867,488			875,039

Stockholders’ equity:
Common stock, $0.01 par value; 100,000,000 shares authorized; 52,456,071 and 52,191,675 shares outstanding at September 30, 2010 and December 31, 2009, respectively		593			586
Capital in excess of par value		584,137			558,733
Retained earnings		651,241			543,272
Accumulated other comprehensive income		66,220			82,514
Treasury stock at cost; 6,831,173 and 6,438,993 shares at September 30, 2010 and December 31, 2009, respectively		(150,878	)		(132,935	)

Total Gardner Denver stockholders’ equity		1,151,313			1,052,170
Noncontrolling interests		11,538			11,839

Total stockholders’ equity		1,162,851			1,064,009

Total liabilities and stockholders’ equity	$	2,030,339		$	1,939,048

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

GARDNER DENVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Nine Months Ended
	September 30,
	2010			2009
Cash Flows From Operating Activities
Net income (loss)	$	117,025		$	(200,760	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		44,801			51,378
Impairment charges		—			263,605
Foreign currency transaction loss (gain), net		1,132			(14	)
Net loss on asset dispositions		996			298
Stock issued for employee benefit plans		2,780			3,078
Stock-based compensation expense		4,125			2,293
Excess tax benefits from stock-based compensation		(2,385	)		(151	)
Deferred income taxes		(6,409	)		(9,894	)
Changes in assets and liabilities:
Receivables		(40,368	)		54,772
Inventories		(10,044	)		55,368
Accounts payable and accrued liabilities		36,998			(68,279	)
Other assets and liabilities, net		4,516			(3,305	)

Net cash provided by operating activities		153,167			148,389


Cash Flows From Investing Activities
Capital expenditures		(19,744	)		(34,806	)
Net cash paid in business combinations		(11,810	)		(64	)
Disposals of property, plant and equipment		1,477			875
Other, net		—			(1	)

Net cash used in investing activities		(30,077	)		(33,996	)


Cash Flows From Financing Activities
Principal payments on short-term borrowings		(22,613	)		(26,484	)
Proceeds from short-term borrowings		19,369			21,204
Principal payments on long-term debt		(61,488	)		(165,447	)
Proceeds from long-term debt		8,025			35,372
Proceeds from stock option exercises		15,974			1,208
Excess tax benefits from stock-based compensation		2,385			151
Purchase of treasury stock		(17,942	)		(338	)
Debt issuance costs		—			(166	)
Cash dividends paid		(7,866	)		—
Other		(993	)		(759	)

Net cash used in financing activities		(65,149	)		(135,259	)


Effect of exchange rate changes on cash and cash equivalents		(1,081	)		9,848


Net increase (decrease) in cash and cash equivalents		56,860			(11,018	)
Cash and cash equivalents, beginning of year		109,736			120,735


Cash and cash equivalents, end of period	$	166,596		$	109,717

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

GARDNER DENVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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 condensed consolidated financial statements include the accounts of Gardner Denver, Inc. and its majority-owned subsidiaries (collectively referred to herein as “Gardner Denver” or the “Company”). In consolidation, all significant intercompany transactions and accounts have been eliminated.

The Condensed Consolidated Statements of Operations and Cash Flows and all segment information for the three and nine-month periods ended September 30, 2010 reflect the adoption in 2009 of new reporting guidance for noncontrolling interests codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation.

The financial information presented as of any date other than December 31, 2009 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 (“GAAP”) 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 GAAP 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 condensed 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, 2009.

The results of operations for the nine-month period ended September 30, 2010 are not necessarily indicative of the results to be expected for the full year. The balance sheet at December 31, 2009 has been derived from the audited financial statements as of that date but does not include all of the information and notes required by GAAP for complete financial statements.

Other than as specifically indicated in these “Notes to Condensed 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, 2009.

New Accounting Standards

Recently Adopted Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). This update requires the following new disclosures: (i) the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and a description of the reasons for the transfers; and (ii) a reconciliation for fair value measurements using significant unobservable inputs (Level 3), including separate information about purchases, sales, issuance, and settlements. The update also clarifies existing requirements about fair value measurement disclosures and disclosures about inputs and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the reconciliation of Level 3 activity, which is effective for fiscal years beginning after December 15, 2010. See Note 11 “Hedging Activities and Fair Value Measurements” for the disclosures required by ASU 2010-06. Adoption of this guidance had no effect on the Company’s results of operations, financial position and cash flows.

In February 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic 855) – Amendments to Certain Recognition and Disclosure Requirements (“ASU 2010-09”). ASU 2010-09, among other provisions, eliminates the requirement to disclose the date through which subsequent events have been evaluated, and was adopted by the Company in the first quarter of 2010.

Recently Issued Accounting Pronouncements

In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605) - Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”). It updates the existing multiple-element revenue arrangements guidance currently included under FASB ASC 605-25, Revenue Recognition, Multiple-Element Arrangements. The revised guidance primarily provides two significant changes: (i) eliminates the need for objective and reliable evidence of fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and (ii) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance expands the disclosure requirements for revenue recognition. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. The Company is currently assessing the impact of this new guidance on its consolidated financial statements and related disclosures.

Note 2. Restructuring

In 2008 and 2009, the Company finalized and announced certain restructuring plans designed to address (i) rationalization of the Company’s manufacturing footprint, (ii) slowing global economic growth and the resulting deterioration in the Company’s end markets and (iii) integration of CompAir Holdings Ltd. (“CompAir”) into its existing operations. These plans included the closure and consolidation of manufacturing facilities in Europe and the United States (“U.S.”), and various voluntary and involuntary employee termination and relocation programs. In accordance with FASB ASC 420, Exit or Disposal Cost Obligations, and FASB ASC 712, Compensation — Nonretirement Postemployment Benefits, charges totaling $57.2 million (included in “Other operating expense,

net”) were recorded in 2008 and 2009, of which $34.3 million was associated with the Industrial Products Group and $22.9 million was associated with the Engineered Products Group. Additional net charges totaling $2.3 million were recorded in the nine-month period ended September 30, 2010, of which $3.6 million was associated with the Industrial Products Group, partially offsest by a net credit of $1.3 million in the Engineered Products Group, reflecting the finalization of certain employee termination plans. Implementation of these plans was substantively completed during the first half of 2010. Payment of employee benefits is expected to be substantively completed in 2010.

In 2009 and 2010, the Company recorded charges totaling approximately $8.7 million in connection with the consolidation of certain U.S. operations which it expects to be funded by a state grant. The anticipated amount of the grant was recorded as a reduction to the associated charges and the establishment of a current receivable. To date, the Company has received funding of approximately $8.5 million. If the Company does not maintain certain employment and payroll levels specified in the grant over a ten-year period, it will be obligated to return a portion of the grant to the state on a pro-rata basis. Any such amounts that may be returned to the state will be charged to operating income when identified. The Company currently expects to meet the required employment and payroll levels.

In connection with the acquisition of CompAir, the Company has been implementing plans identified at or prior to the acquisition date to close and consolidate certain former CompAir functions and facilities, primarily in North America and Europe. These plans included various voluntary and involuntary employee termination and relocation programs affecting both salaried and hourly employees and exit costs associated with the sale, lease termination or sublease of certain manufacturing and administrative facilities. The terminations, relocations and facility exits associated with CompAir were substantively completed during 2009. A liability of $8.9 million was included in the allocation of the CompAir purchase price for the estimated cost of these actions at the CompAir acquisition date of October 20, 2008. This liability was increased by $2.1 million in 2009 to reflect the finalization of certain of these plans.

The following table summarizes the activity in the restructuring accrual accounts:


	Termination
	Benefits			Other			Total
Balance as of December 31, 2009	$	17,325		$	3,655		$	20,980
Charged to expense		222			2,110			2,332
Paid		(8,829	)		(2,974	)		(11,803	)
Other, net		(3,366	)		206			(3,160	)

Balance as of September 30, 2010	$	5,352		$	2,997		$	8,349

Note 3. Inventories

Inventories as of September 30, 2010 and December 31, 2009 consisted of the following:


	September 30,			December 31,
	2010			2009
Raw materials, including parts and subassemblies	$	156,727		$	150,085
Work-in-process		34,987			39,691
Finished goods		60,090			51,638

		251,804			241,414
Excess of FIFO costs over LIFO costs		(15,910	)		(14,961	)

Inventories, net	$	235,894		$	226,453

Note 4. 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, 2010, and the year ended December 31, 2009, are presented in the table below. The adjustments to goodwill in 2009 are primarily related to the finalization of the valuation of certain CompAir intangible assets.


	Industrial			Engineered
	Products			Products			Total
Balance as of December 31, 2008	$	491,052		$	313,596		$	804,648
Adjustments to goodwill		16,275			(2	)		16,273
Impairment of goodwill		(252,533	)		—			(252,533	)
Foreign currency translation		2,030			7,596			9,626

Balance as of December 31, 2009		256,824			321,190			578,014
Acquisitions		—			9,821			9,821
Foreign currency translation		(5,150	)		(2,786	)		(7,936	)

Balance as of September 30, 2010	$	251,674		$	328,225		$	579,899

The net goodwill impairment charge in 2009 of $252.5 million was the result of the continuing significant decline in order rates for certain products in the Industrial Products Group during the first quarter of 2009, the uncertain outlook regarding when such order rates might return to levels and growth rates experienced in recent years and the sustained decline in the price of the Company’s common stock through March 31, 2009. The net goodwill balances as of September 30, 2010 and December 31, 2009 reflect cumulative impairment charges of $252.5 million and zero for the Industrial Products and Engineered Products Groups, respectively.

As a result of its annual evaluation of indefinite-lived intangible assets, the Company recorded a $9.9 million non-cash impairment charge during 2009, primarily associated with a trade name in the Industrial Products Group segment.

The $9.8 million increase in goodwill related to acquisitions in the nine-month period of 2010 was associated with the preliminary valuation of ILMVAC GmbH (“ILMVAC”).

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


	September 30, 2010					December 31, 2009
	Gross					Gross
	Carrying		Accumulated			Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
Amortized intangible assets:
Customer lists and relationships	$	117,890	$	(28,671	)	$	121,990	$	(24,580	)
Acquired technology		94,610		(49,838	)		98,163		(47,162	)
Trade names		54,850		(8,138	)		56,245		(6,604	)
Other		6,887		(4,550	)		7,555		(3,781	)
Unamortized intangible assets:
Trade names		109,672		—			112,584		—

Total other intangible assets	$	383,909	$	(91,197	)	$	396,537	$	(82,127	)

Amortization of intangible assets for the three and nine-month periods ended September 30, 2010 was $4.0 million and $12.8 million, respectively. Amortization of intangible assets for the three and nine-month periods ended September 30, 2009 was $4.7 million and $14.6 million, respectively. Amortization of intangible assets held as of September 30, 2010 is anticipated to be approximately $17.5 million annually in 2011 through 2014 based upon exchange rates as of September 30, 2010.

Note 5. Accrued Product Warranty

A reconciliation of the changes in the accrued product warranty liability for the three and nine-month periods ended September 30, 2010 and 2009 is as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Balance at beginning of period	$	17,006		$	19,036		$	19,312		$	19,141
Product warranty accruals		7,164			5,846			18,114			17,003
Settlements		(6,361	)		(6,148	)		(18,346	)		(17,790	)
Acquisitions		133			—			133			—
Effect of foreign currency translation		896			216			(375	)		596

Balance at end of period	$	18,838		$	18,950		$	18,838		$	18,950

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 and nine-month periods ended September 30, 2010 and 2009:


	Three Months Ended September 30,
	Pension Benefits												Other Postretirement
	U.S. Plans						Non-U.S. Plans						Benefits
	2010			2009			2010			2009			2010			2009
Service cost	$	—		$	—		$	257		$	301		$	9		$	14
Interest cost		904			1,019			2,896			2,897			194			269
Expected return on plan assets		(916	)		(686	)		(2,597	)		(2,377	)		—			—
Recognition of:
Unrecognized prior service cost		—			1			6			8			(39	)		(33	)
Unrecognized net actuarial loss (gain)		310			438			248			(19	)		(398	)		(355	)

Net periodic benefit cost (income)		298			772			810			810			(234	)		(105	)
FASB ASC 715-30 curtailment gain		—			—			—			—			—			—

Total net periodic benefit cost (income)	$	298		$	772		$	810		$	810		$	(234	)	$	(105	)


	Nine Months Ended September 30,
	Pension Benefits												Other Postretirement
	U.S. Plans						Non-U.S. Plans						Benefits
	2010			2009			2010			2009			2010			2009
Service cost	$	—		$	—		$	781		$	830		$	17		$	25
Interest cost		2,834			3,205			8,668			8,155			692			799
Expected return on plan assets		(2,686	)		(2,512	)		(7,731	)		(6,678	)		—			—
Recognition of:
Unrecognized prior service cost		—			7			18			23			(89	)		(133	)
Unrecognized net actuarial loss (gain)		1,028			1,348			742			(54	)		(1,048	)		(1,005	)

Net periodic benefit cost (income)		1,176			2,048			2,478			2,276			(428	)		(314	)
FASB ASC 715-30 curtailment gain		—			—			(837	)		(118	)		—			—

Total net periodic benefit cost (income)	$	1,176		$	2,048		$	1,641		$	2,158		$	(428	)	$	(314	)

In March of 2010, the Patient Protection and Affordable Care Act (HR 3590) and the Health Care Education and Affordability Reconciliation Act (HR 4872) (the “Acts”) became law in the U.S. Based on the Company’s current understanding of the provisions of the Acts, it does not expect that the Acts will have a significant impact on its accounting for and valuation of retiree medical benefit plans. The Company will continue to assess the accounting implications of the Acts as related regulations and interpretations of the Acts become available. The

Company’s accumulated benefit obligation for its U.S. post-retirement benefit plan was $15.6 million at December 31, 2009.

The Company previously disclosed in its financial statements for the year ended December 31, 2009, that it expects to contribute approximately $3.6 million to its non-U.S. pension plans in fiscal 2010. In the first quarter of 2010, the Company elected to make additional discretionary contributions to such plans and, as a result, contributions to its non-U.S. pension plans as of the date of this report are expected to be $5.5 million in fiscal 2010.

Note 7. Debt

The Company’s debt at September 30, 2010 and December 31, 2009 is summarized as follows:


	September 30,		December 31,
	2010		2009
Short-term debt	$	2,157	$	5,497


Long-term debt:
Credit Line, due 2013 ⁽¹⁾	$	—	$	2,500
Term Loan, denominated in U.S. dollars, due 2013 ⁽²⁾		91,314		113,000
Term Loan, denominated in euro (“EUR”), due 2013 ⁽³⁾		70,893		100,310
Senior Subordinated Notes at 8%, due 2013		125,000		125,000
Secured Mortgages ⁽⁴⁾		7,777		8,500
Capitalized leases and other long-term debt		8,418		9,709

Total long-term debt, including current maturities		303,402		359,019
Current maturities of long-term debt		30,793		28,084

Total long-term debt, less current maturities	$	272,609	$	330,935


(1)		The loans under this facility may be denominated in U.S. dollars (“USD”) or several foreign currencies. The interest rates under the facility are based on prime, federal funds and/or LIBOR for the applicable currency.

(2)		The interest rate for this loan varies with prime, federal funds and/or LIBOR. At September 30, 2010, this rate was 2.3% and averaged 2.8% for the nine-month period ended September 30, 2010.

(3)		The interest rate for this loan varies with LIBOR. At September 30, 2010, this rate was 2.6% and averaged 2.9% for the nine-month period ended September 30, 2010.

(4)		This amount consists of two fixed-rate commercial loans with an outstanding balance of €5,704 at September 30, 2010. The loans are secured by the Company’s facility in Bad Neustadt, Germany.

Note 8. Stock-Based Compensation

The following table summarizes the total stock-based compensation expense included in the consolidated statements of operations and the realized excess tax benefits included in the consolidated statements of cash flows for the three and nine-month periods ended September 30, 2010 and 2009:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Selling and administrative expenses	$	1,103		$	339		$	4,125		$	2,293

Total stock-based compensation expense included in operating expenses	$	1,103		$	339		$	4,125		$	2,293

Income (loss) before income taxes		(1,103	)		(339	)		(4,125	)		(2,293	)
Provision for income taxes		327			77			1,291			636

Net income (loss)	$	(776	)	$	(262	)	$	(2,834	)	$	(1,657	)


Net cash provided by operating activities	$	(482	)	$	(63	)	$	(2,385	)	$	(151	)
Net cash used in financing activities	$	482		$	63		$	2,385		$	151

Stock Option Awards

A summary of the Company’s stock option activity for the nine-month period ended September 30, 2010 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, 2009		1,381		$	27.10
Granted		288		$	43.87
Exercised		(591	)	$	27.01
Forfeited		(57	)	$	27.87
Expired or canceled		(12	)	$	20.61

Outstanding at September 30, 2010		1,009		$	31.99	$	21,894	4.5 years

Exercisable at September 30, 2010		502		$	30.40	$	11,685	3.3 years

The aggregate intrinsic value was calculated as the difference between the exercise price of the underlying stock options and the quoted closing price of the Company’s common stock at September 30, 2010 multiplied by the number of in-the-money stock options. The weighted-average estimated grant-date fair value of employee

stock options granted during the three and nine-month periods ended September 30, 2010 were $16.42 and $16.55, respectively.

The total pre-tax intrinsic values of stock options exercised during the three-month periods ended September 30, 2010 and 2009 were $3.6 million and $0.5 million, respectively. The total pre-tax intrinsic values of stock options exercised during the nine-month periods of 2010 and 2009 were $11.9 million and $1.2 million, respectively. Pre-tax unrecognized stock-based compensation expense for stock options, net of estimated forfeitures, was $3.8 million as of September 30, 2010 and will be recognized as expense over a weighted-average period of 2.0 years.

Valuation Assumptions

The fair value of each stock option grant under the Company’s Amended and Restated Long-Term Incentive Plan was estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-average assumptions used for the periods indicated are noted in the table below:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Assumptions:
Risk-free interest rate		1.6	%		2.1	%		2.3	%		1.7	%
Dividend yield		0.5	%		—			0.5	%		—
Volatility factor		45			44			43			45
Expected life (in years)		4.4			4.0			4.7			4.6

Restricted Share Awards

A summary of the Company’s restricted share award activity for the nine-month period ended September 30, 2010 is presented in the following table (underlying shares in thousands):


				Weighted-
				Average Grant-
				Date Fair Value
	Shares			(per share)
Nonvested at December 31, 2009		143		$	29.92
Granted		55		$	44.60
Vested		(21	)	$	38.84
Forfeited		—		$	—

Nonvested at September 30, 2010		177		$	33.41

The restricted shares granted in the nine-month period of 2010 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 share awards, net of estimated forfeitures, was $2.7 million as of September 30, 2010, which will be recognized as expense over a weighted-average period of 1.8 years. The total fair value of restricted share awards that vested during the nine-month periods of 2010 and 2009 was $0.9 million and $2.8 million, respectively.

Note 9. Stockholders’ Equity and Earnings (Loss) Per Share

In November 2008, the Company’s Board of Directors authorized a share repurchase program to acquire up to 3.0 million shares of the Company’s outstanding common stock. During the nine-month period ended September 30, 2010, the Company repurchased 0.4 million shares under this program at a total cost of $17.6 million.

The following table details the calculation of basic and diluted earnings (loss) per common share for the three and nine-month periods ended September 30, 2010 and 2009 (shares in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
Net income (loss) attributable to Gardner Denver	$	46,575	$	19,417	$	115,867	$	(202,353	)
Weighted average shares of common stock outstanding:
Basic		52,352		51,923		52,271		51,847
Effect of stock-based compensation awards ⁽¹⁾		397		294		412		—

Diluted		52,749		52,217		52,683		51,847

Earnings (Loss) Per Share:
Basic	$	0.89	$	0.37	$	2.22	$	(3.90	)

Diluted	$	0.88	$	0.37	$	2.20	$	(3.90	)


(1)		Share equivalents totaling 231 thousand, consisting of outstanding stock options and nonvested restricted share awards, were excluded from the computation of diluted loss per share in the nine-month period ended September 30, 2009 because the net loss for the period caused all potentially dilutive shares to be anti-dilutive.

For the three-month periods ended September 30, 2010 and 2009, respectively, anti-dilutive equity-based awards to purchase 220 thousand and 771 thousand weighted-average shares of common stock were outstanding. For the nine-month periods ended September 30, 2010 and 2009, respectively, anti-dilutive equity-based awards to purchase 214 thousand and 792 thousand weighted-average shares of common stock were outstanding. Antidilutive equity-based awards outstanding were not included in the computation of diluted earnings (loss) per common share.

Note 10. Accumulated Other Comprehensive Income (Loss)

The Company’s other comprehensive income (loss) consists of (i) unrealized foreign currency net gains and losses on the translation of the assets and liabilities of its foreign operations, (ii) unrealized gains and losses on hedges of net investments in foreign operations, (iii) unrealized gains and losses on cash flow hedges (consisting of interest rate swaps), net of income taxes, and (iv) pension and other postretirement prior service cost and actuarial gains or losses, net of income taxes.

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


							Unrealized
	Cumulative			Foreign			Gains						Accumulated
	Currency			Currency			(Losses) on			Pension and			Other
	Translation			Gains and			Cash Flow			Postretirement			Comprehensive
	Adjustment⁽¹⁾			(Losses)			Hedges			Benefit Plans			Income
Balance at December 31, 2008	$	113,344		$	(22,982	)	$	—		$	(17,955	)	$	72,407
Before tax (loss) income		(29,688	)		1,512			—			73			(28,103	)
Income tax effect		—			(2,886	)		—			(28	)		(2,914	)

Other comprehensive (loss) income		(29,688	)		(1,374	)		—			45			(31,017	)
Currency translation ⁽²⁾		—			—			—			—			—

Balance at March 31, 2009		83,656			(24,356	)		—			(17,910	)		41,390
Before tax income		32,931			6,682			366			73			40,052
Income tax effect		—			1,294			(139	)		(28	)		1,127

Other comprehensive income		32,931			7,976			227			45			41,179
Currency translation ⁽²⁾		—			—			—			1			1

Balance at June 30, 2009		116,587			(16,380	)		227			(17,864	)		82,570
Before tax income (loss)		27,560			(6,524	)		(901	)		40			20,175
Income tax effect		—			977			342			(17	)		1,302

Other comprehensive income (loss)		27,560			(5,547	)		(559	)		23			21,477
Currency translation ⁽²⁾		—			—			—			3			3

Balance at September 30, 2009	$	144,147		$	(21,927	)	$	(332	)	$	(17,838	)	$	104,050


Balance at December 31, 2009	$	134,573		$	(21,319	)	$	(250	)	$	(30,490	)	$	82,514
Before tax (loss) income		(38,820	)		8,920			(706	)		272			(30,334	)
Income tax effect		—			297			268			(84	)		481

Other comprehensive (loss) income		(38,820	)		9,217			(438	)		188			(29,853	)
Currency translation ⁽²⁾		—			—			—			15			15

Balance at March 31, 2010		95,753			(12,102	)		(688	)		(30,287	)		52,676
Before tax (loss) income		(47,788	)		664			(495	)		252			(47,367	)
Income tax effect		—			(649	)		188			(75	)		(536	)

Other comprehensive (loss) income		(47,788	)		15			(307	)		177			(47,903	)
Currency translation ⁽²⁾		—			—			—			8			8

Balance at June 30, 2010		47,965			(12,087	)		(995	)		(30,102	)		4,781
Before tax income (loss)		29,526			31,850			(247	)		127			61,256
Income tax effect		—			140			94			(6	)		228

Other comprehensive income (loss)		29,526			31,990			(153	)		121			61,484
Currency translation ⁽²⁾		—			—			—			(45	)		(45	)

Balance at September 30, 2010	$	77,491		$	19,903		$	(1,148	)	$	(30,026	)	$	66,220


(1)		Income taxes are generally not provided for foreign currency translation adjustments, as such adjustments relate to permanent investments in international subsidiaries.

(2)		The Company uses the historical rate approach in determining the USD amounts of changes to accumulated other comprehensive income associated with non-U.S. pension benefit plans.

The Company’s comprehensive income (loss) for the three and nine-month periods ended September 30, 2010 and 2009 was as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010			2009
Net income (loss) attributable to Gardner Denver	$	46,575	$	19,417	$	115,867		$	(202,353	)
Other comprehensive income (loss)		61,484		21,477		(16,272	)		31,639

Comprehensive income (loss) attributable to Gardner Denver		108,059		40,894		99,595			(170,714	)

Net income attributable to noncontrolling interests		273		248		1,158			1,593
Other comprehensive income (loss)		347		8		(462	)		753

Comprehensive income attributable to noncontrolling interests		620		256		696			2,346

Total comprehensive income (loss)	$	108,679	$	41,150	$	100,291		$	(168,368	)

Note 11. Hedging Activities and Fair Value Measurements

Hedging Activities

The Company is exposed to certain market risks during the normal course of its business arising from adverse changes in commodity prices, interest rates, and foreign currency exchange rates. The Company’s exposure to these risks is managed through a combination of operating and financing activities. The Company selectively uses derivative financial instruments (“derivatives”), including foreign currency forward contracts and interest rate swaps, to manage the risks from fluctuations in foreign currency exchange rates and interest rates, respectively. The Company does not purchase or hold derivatives for trading or speculative purposes. Fluctuations in commodity prices, interest rates, and foreign currency exchange rates can be volatile, and the Company’s risk management activities do not totally eliminate these risks. Consequently, these fluctuations could have a significant effect on the Company’s financial results.

The Company’s exposure to interest rate risk results primarily from its borrowings of $305.6 million at September 30, 2010. The Company manages its debt centrally, considering tax consequences and its overall financing strategies. The Company manages its exposure to interest rate risk by maintaining a mixture of fixed and variable rate debt and, from time to time, uses pay-fixed interest rate swaps as cash flow hedges of variable rate debt in order to adjust the relative proportions.

A substantial portion of the Company’s operations is conducted by its subsidiaries outside of the U.S. in currencies other than the USD. Almost all of the Company’s non-U.S. subsidiaries conduct their business primarily in their local currencies, which are also their functional currencies. The USD, Euro, British pound sterling (“GBP”), and Chinese yuan (“CNY”) are the principal currencies in which the Company and its subsidiaries enter into transactions. The Company is exposed to the impacts of changes in foreign currency exchange rates on the translation of its non-U.S. subsidiaries’ assets, liabilities, and earnings into USD. The Company partially offsets these exposures by having certain of its non-U.S. subsidiaries act as the obligor on a portion of its borrowings and by denominating such borrowings, as well as a portion of the borrowings for which the Company is the obligor, in currencies other than the USD.

The Company and its subsidiaries are also subject to the risk that arises when they, from time to time, enter into transactions in currencies other than their functional currency. To mitigate this risk, the Company and its subsidiaries typically settle intercompany trading balances monthly. The Company also selectively uses forward currency contracts to manage this risk. These contracts for the sale or purchase of European and other currencies generally mature within one year.

In accordance with FASB ASC 815, Derivatives and Hedging (“FASB ASC 815”), the Company records its derivatives as assets or liabilities on the balance sheet at fair value. Changes in the fair value of derivatives are recognized either in net income or in other comprehensive income (“OCI”), depending on the designated purpose of the derivative. All cash flows associated with derivatives are classified as operating cash flows in the Condensed Consolidated Statements of Cash Flows. It is the Company’s policy not to speculate in derivative instruments.

Fluctuations due to changes in foreign currency exchange rates in the value of non-USD borrowings that have been designated as hedges of the Company’s net investment in foreign operations are included in other comprehensive income.

The following tables summarize the notional amounts, fair values and classification of the Company’s outstanding derivatives by risk category and instrument type within the Condensed Consolidated Balance Sheets:


	September 30, 2010
				Asset		Liability
		Notional		Derivatives		Derivatives
	Balance Sheet Location	Amount (1)		Fair Value (1)		Fair Value (1)
Derivatives designated as hedging instruments under FASB ASC 815

Interest rate swap contracts	Other liabilities	$	77,267	$	—	$	1,907

Derivatives not designated as hedging instruments under FASB ASC 815

Foreign currency forwards	Current liabilities	$	109,915	$	122	$	4,714


	December 30, 2009
				Asset		Liability
		Notional		Derivatives		Derivatives
	Balance Sheet Location	Amount (1)		Fair Value (1)		Fair Value (1)
Derivatives designated as hedging instruments under FASB ASC 815

Interest rate swap contracts	Other assets	$	132,320	$	—	$	479

Derivatives not designated as hedging instruments under FASB ASC 815

Foreign currency forwards	Accrued liabilities	$	3,049	$	6	$	128

Foreign currency forwards	Other current assets	$	119,738	$	1,603	$	11


(1)		Notional amounts represent the gross contract amounts of the outstanding derivatives excluding the total notional amount of positions that have been effectively closed through offsetting positions. The net gains and net losses associated with positions that have been effectively closed through offsetting positions but not yet settled are included in the asset and liability derivatives fair value columns, respectively.

Gains and losses on derivatives designated as cash flow hedges in accordance with FASB ASC 815 included in the Condensed Consolidated Statement of Operations for the three and nine-month periods ended September 30, 2010 and 2009, respectively, are as presented in the table below:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Interest rate swap contracts ⁽¹⁾

Amount of gain or (loss) recognized in AOCI on derivatives (effective portion)	$	(543	)	$	(1,258	)	$	(2,455	)	$	(1,051	)
Amount of gain or (loss) reclassified from AOCI into income (effective portion)		(295	)		(359	)		(1,006	)		(518	)
Amount of gain or (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)		—			(3	)		(5	)		(1	)


(1)		Losses on derivatives reclassified from accumulated other comprehensive income (“AOCI”) into income (effective portion) were included in the interest expense line on the face of the Condensed Consolidated Statements of Operations.

At September 30, 2010, the Company is the fixed rate payor on three interest rate swap contracts that effectively fix the LIBOR-based index used to determine the interest rates charged on a total of $50.0 million and €20.0 million of the Company’s LIBOR-based variable rate borrowings. These contracts carry fixed rates ranging from 1.8% to 2.2% and have expiration dates ranging from 2012 to 2013. These swap agreements qualify as hedging instruments and have been designated as cash flow hedges of forecasted LIBOR-based interest payments. Based on LIBOR-based swap yield curves as of September 30, 2010, the Company expects to reclassify losses of $1.6 million out of AOCI into earnings during the next 12 months. The Company’s LIBOR-based variable rate borrowings outstanding at September 30, 2010 were $91.3 million and €52.0 million.

There were 57 foreign currency forward contracts outstanding as of September 30, 2010 with notional amounts ranging from $0.1 million to $10.9 million. The Company has not designated any forward contracts as hedging instruments. The majority of these contracts are used to hedge the change in fair value of recognized foreign currency denominated assets or liabilities caused by changes in foreign currency exchange rates. The changes in the fair value of these contracts generally offset the changes in the fair value of a corresponding amount of the hedged items, both of which are included in the other operating expense, net, line on the face of the Condensed Consolidated Statements of Operations. The Company recorded net losses of $6.2 million and $1.0 million during the three-month periods ended September 30, 2010 and 2009, respectively, relating to foreign currency forward contracts outstanding during all or part of each period. During the nine-month periods ended September 30, 2010 and 2009, the Company recorded net losses of $0.8 million and $14.9 million, respectively, relating to foreign currency forward contracts outstanding during all or part of each period. Total net foreign currency gains or losses reported in other operating expense were losses of $1.7 million and gains of $1.6 million for the three-month periods ended September 30, 2010 and 2009, respectively, and losses of $1.1 million and zero in the nine-month periods ended September 30, 2010 and 2009, respectively.

As of September 30, 2010, the Company has designated a portion of its term loan denominated in EUR of approximately €19.0 million as a hedge of the Company’s net investment in subsidiaries with EUR functional currencies. Accordingly, changes in the fair value of this debt due to changes in the USD to EUR exchange rate are recorded through other comprehensive income. During the three-month periods ended September 30, 2010 and 2009, the Company recorded losses of $0.9 million and $0.8 million, net of tax, respectively, through other comprehensive income. During the nine-month periods ended September 30, 2010 and 2009, the Company recorded gains of $1.7 million and losses of $1.2 million, net of tax, respectively, through other comprehensive income. As of September 30, 2010 and 2009, the net balances of such gains and losses included in accumulated other comprehensive income were losses of $3.8 million and $4.5 million, net of tax, respectively.

Fair Value Measurements

The Company’s financial instruments consist primarily of cash equivalents, trade receivables, trade payables, deferred compensation assets and obligations, derivatives and debt instruments. The book values of these instruments, other than the Senior Subordinated Notes, are a reasonable estimate of their respective fair values.

The Senior Subordinated Notes outstanding are carried at cost. Their estimated fair value was approximately $127.5 million as of September 30, 2010 based upon non-binding market quotations that were corroborated by observable market data (Level 2).

The following table summarizes the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2010:


	Level 1		Level 2		Level 3		Total
Financial Assets
Foreign currency forwards ⁽¹⁾	$	—	$	122	$	—	$	122
Trading securities held in deferred compensation plan ⁽²⁾		9,112		—		—		9,112

Total	$	9,112	$	122	$	—	$	9,234


Financial Liabilities
Foreign currency forwards ⁽¹⁾	$	—	$	4,714	$	—	$	4,714
Interest rate swaps ⁽³⁾		—		1,907		—		1,907
Phantom stock plan ⁽⁴⁾		—		3,759		—		3,759
Deferred compensation plan ⁽⁵⁾		9,112		—		—		9,112

Total	$	9,112	$	10,380	$	—	$	19,492


(1)		Based on internally-developed models that use as their basis readily observable market parameters such as current spot and forward rates, and the LIBOR index.

(2)		Based on the observable price of publicly traded mutual funds which, in accordance with FASB ASC 710, Compensation – General, are classified as “Trading” securities and accounted for using the mark-to-market method.

(3)		Measured as the present value of all expected future cash flows based on the LIBOR-based swap yield curve as of September 30, 2010. The present value calculation uses discount rates that have been adjusted to reflect the credit quality of the Company and its counterparties.

(4)		Based on the price of the Company’s common stock.

(5)		Based on the fair value of the investments in the deferred compensation plan.

Note 12. Income Taxes

As of September 30, 2010, the total balance of unrecognized tax benefits was $5.4 million compared with $5.2 million at December 31, 2009. The increase in the balance was primarily due to an increase in tax reserves related to tax audits in Germany, net of a Canadian settlement. The unrecognized tax benefits at September 30, 2010 include $5.4 million of uncertain tax positions that would affect the Company’s effective tax rate if recognized, of which $2.6 million would be offset by a reduction of a corresponding deferred tax asset. The Company does not expect any significant changes to its unrecognized tax benefits within the next twelve months.

The Company’s accounting policy with respect to interest expense on underpayments of income tax and related penalties is to recognize such interest expense and penalties as part of the provision for income taxes. The Company’s income tax liabilities at September 30, 2010 include approximately $1.3 million of accrued interest and $0.3 million of penalties.

The Company’s U.S. federal income tax returns for the tax years 2005 to 2007 are under examination by the Internal Revenue Service. As of the date of this report, the examination has not identified any material changes. A separate examination for the tax years 2008 and 2009 was initiated by the Internal Revenue Service during the

quarter ending September 30, 2010, which examination was pending as of the date of this report. The statutes of limitations for the U.S. state tax returns are open beginning with the 2006 tax year, except for four states for which the statutes have been extended, beginning with the 2003 tax year for one state, the 2004 tax year for one state and the 2005 tax year for two states.

The Company is subject to income tax in approximately 30 jurisdictions outside the U.S. The statute of limitations varies by jurisdiction. The Company’s significant operations outside the U.S. are located in China, the United Kingdom and Germany. In Germany, six subsidiaries are under audit for the tax years beginning with the 2003 tax year, two subsidiaries beginning with the 2004 tax year, six subsidiaries beginning with the 2005 tax year and one subsidiary beginning with the 2006 tax year. As of the date of this report, the examinations have not identified any material changes. In China and the United Kingdom, tax years prior to 2006 are closed. In addition, audits are being conducted in other various countries. To date, no material adjustments have been proposed as a result of these audits.

The provision for income taxes was $38.9 million for the nine-month period ended September 30, 2010, compared to $14.4 million for the nine-month period ended September 30, 2009. The provision in the nine-month period of 2009 reflected the reversal of deferred tax liabilities totaling $11.6 million associated with a portion of the net goodwill and all of the trade name impairment charges recorded in the nine-month period of 2009. Deferred tax liabilities were recorded when the trade name was established and as tax deductible goodwill was amortized, a corresponding deferred tax liability was established. A portion of the goodwill for which the impairment charge was taken was not amortizable for tax purposes and, accordingly, deferred tax liabilities were not recorded when the goodwill was established and a corresponding tax benefit did not arise upon the impairment of that portion of goodwill. In addition, a $3.6 million credit for the reversal of an income tax reserve and the related interest associated with the completion of a foreign tax examination was recorded in the nine-month period of 2009. These benefits were partially offset by an $8.6 million valuation allowance against deferred tax assets related to net operating losses recorded in connection with the acquisition of CompAir based on revised financial projections.

Note 13. Supplemental Information

The components of other operating expense, net, and supplemental cash flow information are as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Other Operating Expense, Net
Foreign currency losses (gains), net	$	1,760		$	(1,577	)	$	1,132		$	(14	)
Restructuring charges, net ⁽¹⁾		(364	)		12,586			2,332			40,205
Other, net		(143	)		(410	)		(294	)		(1,037	)

Total other operating expense, net	$	1,253		$	10,599		$	3,170		$	39,154


Supplemental Cash Flow Information
Cash taxes paid							$	37,752		$	33,446
Interest paid								13,866			17,161


⁽¹⁾		See Note 2 “Restructuring.”

Note 14. Contingencies

The Company is a party to various legal proceedings, lawsuits and administrative actions, which are of an ordinary or routine nature. In addition, due to the bankruptcies of several asbestos manufacturers and other primary defendants, among other things, the Company has been named as a defendant in a number of asbestos personal injury lawsuits. The Company has also been named as a defendant in a number of silica 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 silica 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, if any, were enclosed within the subject Products.

The Company has entered into a series of agreements with certain of its or its predecessors’ legacy insurers and certain potential indemnitors to secure insurance coverage and/or reimbursement for the costs associated with the asbestos and silica lawsuits filed against the Company. The Company has also pursued litigation against certain insurers or indemnitors where necessary. The latest of these actions, Gardner Denver, Inc. v. Certain Underwriters at Lloyd’s, London, et al., was filed on July 9, 2010, in the Eighth Judicial District, Adams County, Illinois, as case number 10-L-48 (the “Adams County Case”). In the lawsuit, the Company seeks, among other things, to require certain excess insurer defendants to honor their insurance policy obligations to the Company, including payment in whole or in part of the costs associated with the asbestos lawsuits filed against the Company.

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

The Company has been identified as a potentially responsible party (“PRP”) with respect to several sites designated for cleanup under federal “Superfund” or similar state laws that 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. Based on currently available information, the Company does not anticipate that any of these sites will result in material additional costs beyond those already accrued on its balance sheet.

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

Note 15. Guarantor Subsidiaries

The Company’s obligations under its 8% Senior Subordinated Notes due 2013 are jointly and severally, fully and unconditionally guaranteed by certain wholly-owned domestic subsidiaries of the Company (the “Guarantor Subsidiaries”). The Company’s subsidiaries that do not guarantee the Senior Subordinated Notes are referred to as the “Non-Guarantor Subsidiaries.” The guarantor condensed consolidating financial data below presents the statements of operations, balance sheets and statements of cash flows data (i) for Gardner Denver, Inc. (the “Parent Company”), the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries on a consolidated basis (which is derived from Gardner Denver’s historical reported financial information); (ii) for the Parent Company alone (accounting for its Guarantor Subsidiaries and Non-Guarantor Subsidiaries on a cost basis under which the investments are recorded by each entity owning a portion of another entity at historical cost); (iii) for the Guarantor Subsidiaries alone; and (iv) for the Non-Guarantor Subsidiaries alone.

Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2010


							Non-
	Parent			Guarantor			Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues	$	100,476		$	115,147		$	371,267		$	(93,441	)	$	493,449
Cost of sales		72,046			83,336			271,082			(93,337	)		333,127

Gross profit		28,430			31,811			100,185			(104	)		160,322
Selling and administrative expenses		21,006			9,981			60,083			—			91,070
Other operating expense (income), net		8,969			(8,128	)		412			—			1,253

Operating (loss) income		(1,545	)		29,958			39,690			(104	)		67,999
Interest expense (income)		5,513			(3,407	)		3,545			—			5,651
Other income, net		(588	)		(260	)		(262	)		—			(1,110	)

(Loss) income before income taxes		(6,470	)		33,625			36,407			(104	)		63,458
Provision for income taxes		(2,942	)		16,428			2,871			253			16,610

Net (loss) income		(3,528	)		17,197			33,536			(357	)		46,848
Less: Net income attributable to noncontrolling interests		—			—			273			—			273

Net (loss) income attributable to Gardner Denver	$	(3,528	)	$	17,197		$	33,263		$	(357	)	$	46,575

Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2009


							Non-
	Parent			Guarantor			Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues	$	76,658		$	77,750		$	342,429		$	(67,991	)	$	428,846
Cost of sales		54,150			58,172			252,408			(71,079	)		293,651

Gross profit		22,508			19,578			90,021			3,088			135,195
Selling and administrative expenses		21,569			10,483			57,894			—			89,946
Other operating expense (income), net		5,199			(6,180	)		11,580			—			10,599
Impairment charges		813			985			742			—			2,540

Operating (loss) income		(5,073	)		14,290			19,805			3,088			32,110
Interest expense (income)		2,616			(4,452	)		8,945			—			7,109
Other income, net		(1,024	)		(3	)		(711	)		—			(1,738	)

(Loss) income before income taxes		(6,665	)		18,745			11,571			3,088			26,739
Provision for income taxes		(2,054	)		6,168			2,035			925			7,074

Net (loss) income		(4,611	)		12,577			9,536			2,163			19,665
Less: Net income attributable to noncontrolling interests		—			—			248			—			248

Net (loss) income attributable to Gardner Denver	$	(4,611	)	$	12,577		$	9,288		$	2,163		$	19,417

Condensed Consolidating Statement of Operations
Nine Months Ended September 30, 2010


							Non-
	Parent			Guarantor			Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues	$	267,901		$	314,446		$	1,040,630		$	(257,845	)	$	1,365,132
Cost of sales		193,028			227,491			754,821			(255,937	)		919,403

Gross profit		74,873			86,955			285,809			(1,908	)		445,729
Selling and administrative expenses		64,804			30,140			175,565			—			270,509
Other operating expense (income), net		1,980			(3,384	)		4,574			—			3,170

Operating income		8,089			60,199			105,670			(1,908	)		172,050
Interest expense (income)		17,106			(10,571	)		11,294			—			17,829
Other income, net		(763	)		(284	)		(700	)		—			(1,747	)

(Loss) income before income taxes		(8,254	)		71,054			95,076			(1,908	)		155,968
Provision for income taxes		(2,485	)		32,897			8,807			(276	)		38,943

Net (loss) income		(5,769	)		38,157			86,269			(1,632	)		117,025
Less: Net income attributable to noncontrolling interests		—			—			1,158			—			1,158

Net (loss) income attributable to Gardner Denver	$	(5,769	)	$	38,157		$	85,111		$	(1,632	)	$	115,867

Condensed Consolidating Statement of Operations
Nine Months Ended September 30, 2009


							Non-
	Parent			Guarantor			Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues	$	256,529		$	272,925		$	1,004,816		$	(206,895	)	$	1,327,375
Cost of sales		185,359			199,254			748,616			(212,196	)		921,033

Gross profit		71,170			73,671			256,200			5,301			406,342
Selling and administrative expenses		59,878			33,003			178,818			—			271,699
Other operating expense (income), net		3,359			(8,429	)		44,224			—			39,154
Impairment charges		48,803			12,488			202,314			—			263,605

Operating (loss) income		(40,870	)		36,609			(169,156	)		5,301			(168,116	)
Interest expense (income)		8,693			(12,879	)		25,563			—			21,377
Other income, net		(1,904	)		(11	)		(1,254	)		—			(3,169	)

(Loss) income before income taxes		(47,659	)		49,499			(193,465	)		5,301			(186,324	)
Provision for income taxes		(5,310	)		21,537			(3,534	)		1,743			14,436

Net (loss) income		(42,349	)		27,962			(189,931	)		3,558			(200,760	)
Less: Net income attributable to noncontrolling interests		—			—			1,593			—			1,593

Net (loss) income attributable to Gardner Denver	$	(42,349	)	$	27,962		$	(191,524	)	$	3,558		$	(202,353	)

Condensed Consolidating Balance Sheet
September 30, 2010


							Non-
	Parent			Guarantor			Guarantor
	Company			Subsidiaries			Subsidiaries		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	44,874		$	—		$	121,722	$	—		$	166,596
Accounts receivable, net		57,843			63,323			245,600		—			366,766
Inventories, net		29,043			53,286			171,098		(17,533	)		235,894
Deferred income taxes		24,251			—			4,660		2,083			30,994
Other current assets		808			2,343			16,023		—			19,174

Total current assets		156,819			118,952			559,103		(15,450	)		819,424

Intercompany (payable) receivable		(123,482	)		107,894			15,588		—			—
Investments in affiliates		958,009			186,313			72,856		(1,217,178	)		—
Property, plant and equipment, net		51,716			44,429			188,572		—			284,717
Goodwill		76,680			190,722			312,497		—			579,899
Other intangibles, net		8,322			43,810			240,580		—			292,712
Other assets		57,546			288			6,860		(11,107	)		53,587

Total assets	$	1,185,610		$	692,408		$	1,396,056	$	(1,243,735	)	$	2,030,339


Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings and current maturities of long-term debt	$	28,625		$	—		$	4,325	$	—		$	32,950
Accounts payable and accrued liabilities		61,637			80,766			189,365		(2,747	)		329,021

Total current liabilities		90,262			80,766			193,690		(2,747	)		361,971

Long-term intercompany payable (receivable)		191,738			(299,492	)		107,754		—			—
Long-term debt, less current maturities		258,583			75			13,951		—			272,609
Deferred income taxes		—			23,558			47,356		(11,107	)		59,807
Other liabilities		94,719			756			77,626		—			173,101

Total liabilities		635,302			(194,337	)		440,377		(13,854	)		867,488

Stockholders’ equity:
Common stock		593			—			—		—			593
Capital in excess of par value		582,827			592,735			625,753		(1,217,178	)		584,137
Retained earnings		135,796			274,316			252,858		(11,729	)		651,241
Accumulated other comprehensive (loss) income		(18,030	)		19,694			65,530		(974	)		66,220
Treasury stock, at cost		(150,878	)		—			—		—			(150,878	)

Total Gardner Denver stockholders’ equity		550,308			886,745			944,141		(1,229,881	)		1,151,313
Noncontrolling interests		—			—			11,538		—			11,538

Total stockholders’ equity		550,308			886,745			955,679		(1,229,881	)		1,162,851

Total liabilities and stockholders’ equity	$	1,185,610		$	692,408		$	1,396,056	$	(1,243,735	)	$	2,030,339

Condensed Consolidating Balance Sheet
December 31, 2009


							Non-
	Parent			Guarantor			Guarantor
	Company			Subsidiaries			Subsidiaries		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	3,404		$	54		$	106,278	$	—		$	109,736
Accounts receivable, net		49,997			38,128			238,109		—			326,234
Inventories, net		29,907			56,049			155,874		(15,377	)		226,453
Deferred income taxes		22,440			—			7,043		1,120			30,603
Other current assets		4,824			5,826			14,835		—			25,485

Total current assets		110,572			100,057			522,139		(14,257	)		718,511

Intercompany (payable) receivable		(49,624	)		36,969			12,655		—			—
Investments in affiliates		949,584			203,516			72,856		(1,225,956	)		—
Property, plant and equipment, net		54,693			44,743			206,799		—			306,235
Goodwill		76,680			190,010			311,324		—			578,014
Other intangibles, net		8,890			44,724			260,796		—			314,410
Other assets		28,923			214			5,606		(12,865	)		21,878

Total assets	$	1,179,718		$	620,233		$	1,392,175	$	(1,253,078	)	$	1,939,048


Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings and current maturities of long-term debt	$	27,630		$	—		$	5,951	$	—		$	33,581
Accounts payable and accrued liabilities		59,701			48,330			185,195		(3,277	)		289,949

Total current liabilities		87,331			48,330			191,146		(3,277	)		323,530

Long-term intercompany payable (receivable)		162,211			(304,515	)		142,304		—			—
Long-term debt, less current maturities		314,866			76			15,993		—			330,935
Deferred income taxes		—			24,995			55,669		(12,865	)		67,799
Other liabilities		65,817			707			86,251		—			152,775

Total liabilities		630,225			(230,407	)		491,363		(16,142	)		875,039

Stockholders’ equity:
Common stock		586			—			—		—			586
Capital in excess of par value		557,626			587,521			639,542		(1,225,956	)		558,733
Retained earnings		149,619			236,004			167,746		(10,097	)		543,272
Accumulated other comprehensive (loss) income		(25,403	)		27,115			81,685		(883	)		82,514
Treasury stock, at cost		(132,935	)		—			—		—			(132,935	)

Total Gardner Denver stockholders’ equity		549,493			850,640			888,973		(1,236,936	)		1,052,170
Noncontrolling interests		—			—			11,839		—			11,839

Total stockholders’ equity		549,493			850,640			900,812		(1,236,936	)		1,064,009

Total liabilities and stockholders’ equity	$	1,179,718		$	620,233		$	1,392,175	$	(1,253,078	)	$	1,939,048

Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2010


							Non-
	Parent			Guarantor			Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations		Consolidated
Net Cash Provided by (Used In) Operating Activities	$	80,380		$	(14,534	)	$	87,321		$	—	$	153,167


Cash Flows From Investing Activities
Capital expenditures		(3,965	)		(4,676	)		(11,103	)		—		(19,744	)
Net cash (paid) acquired in business combinations		(58	)		325			(12,077	)		—		(11,810	)
Disposals of property, plant and equipment		40			223			1,214			—		1,477
Other		159			(159	)		—			—		—

Net cash used in investing activities		(3,824	)		(4,287	)		(21,966	)		—		(30,077	)


Cash Flows From Financing Activities
Net change in long-term intercompany receivables/payables		22,360			18,728			(41,088	)		—		—
Principal payments on short-term borrowings		(1,687	)		—			(20,926	)		—		(22,613	)
Proceeds from short-term borrowings		—			—			19,369			—		19,369
Principal payments on long-term debt		(56,385	)		—			(5,103	)		—		(61,488	)
Proceeds from long-term debt		8,000			—			25			—		8,025
Proceeds from stock option exercises		15,974			—			—			—		15,974
Excess tax benefits from stock-based compensation		2,176			—			209			—		2,385
Purchase of treasury stock		(17,942	)		—			—			—		(17,942	)
Cash dividends paid		(7,866	)		—			—			—		(7,866	)
Other		—			—			(993	)		—		(993	)

Net cash (used in) provided by financing activities		(35,370	)		18,728			(48,507	)		—		(65,149	)


Effect of exchange rate changes on cash and cash equivalents		284			39			(1,404	)		—		(1,081	)


Net increase (decrease) in cash and cash equivalents		41,470			(54	)		15,444			—		56,860
Cash and cash equivalents, beginning of year		3,404			54			106,278			—		109,736


Cash and cash equivalents, end of period	$	44,874		$	—		$	121,722		$	—	$	166,596

Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2009


							Non-
	Parent			Guarantor			Guarantor
	Company			Subsidiaries			Subsidiaries			Eliminations		Consolidated
Net Cash Provided by (Used In) Operating Activities	$	100,318		$	(12,791	)	$	60,862		$	—	$	148,389


Cash Flows From Investing Activities
Capital expenditures		(8,369	)		(4,746	)		(21,691	)		—		(34,806	)
Disposals of property, plant and equipment		56			348			471			—		875
Other		209			(273	)		(1	)		—		(65	)

Net cash used in investing activities		(8,104	)		(4,671	)		(21,221	)		—		(33,996	)


Cash Flows From Financing Activities
Net change in long-term intercompany receivables/payables		34,222			16,821			(51,043	)		—		—
Principal payments on short-term borrowings		(1,949	)		—			(24,535	)		—		(26,484	)
Proceeds from short-term borrowings		1			—			21,203			—		21,204
Principal payments on long-term debt		(151,366	)		—			(14,081	)		—		(165,447	)
Proceeds from long-term debt		24,000			—			11,372			—		35,372
Proceeds from stock option exercises		1,208			—			—			—		1,208
Excess tax benefits from stock-based compensation		151			—			—			—		151
Purchase of treasury stock		(338	)		—			—			—		(338	)
Other		(166	)		—			(759	)		—		(925	)

Net cash (used in) provided by financing activities		(94,237	)		16,821			(57,843	)		—		(135,259	)


Effect of exchange rate changes on cash and cash equivalents		2,738			(112	)		7,222			—		9,848


Net increase (decrease) in cash and cash equivalents		715			(753	)		(10,980	)		—		(11,018	)
Cash and cash equivalents, beginning of year		2,126			807			117,802			—		120,735


Cash and cash equivalents, end of period	$	2,841		$	54		$	106,822		$	—	$	109,717

Note 16. Segment Results

The Company has determined its reportable segments in accordance with FASB ASC 280 Segment Reporting (“FASB ASC 280”) and evaluates the performance of its reportable segments based on, among other measures, operating income (loss), which is defined as income (loss) before interest expense, other income, net, and income taxes. Reportable segment operating income (loss) and segment operating margin (defined as segment operating income (loss) divided by segment revenues) are indicative of short-term operating performance and ongoing profitability. Management closely monitors the operating income and operating margin of each reportable segment to evaluate past performance and actions required to improve profitability.

In the Industrial Products Group, the Company designs, manufactures, markets and services the following products and related aftermarket parts for industrial and commercial applications: rotary screw, reciprocating, and sliding vane air and gas compressors; positive displacement, centrifugal and side channel blowers; and vacuum pumps primarily serving manufacturing, transportation and general industry and selected original equipment manufacturer (“OEM”) and engineered system applications. The Company also designs, manufactures, markets and services complementary ancillary products. Stationary air compressors are used in manufacturing, process applications and materials handling, and to power air tools and equipment. Blowers are used primarily in pneumatic conveying, wastewater aeration, numerous applications in industrial manufacturing and engineered vacuum systems. The markets served are primarily in Europe, the U.S. and Asia.

In the Engineered Products Group, the Company designs, manufactures, markets and services a diverse group of pumps, compressors, liquid ring vacuum pumps, water jetting and loading arm systems and related aftermarket parts. These products are used in well drilling, well servicing and production of oil and natural gas; industrial, commercial and transportation applications; and in industrial cleaning and maintenance. Liquid ring pumps are used in many different applications such as water removal, distilling, reacting, flare gas recovery, efficiency improvement, lifting and handling, and filtering, principally in the pulp and paper, industrial manufacturing, petrochemical and power industries. This segment also designs, manufactures, markets and services other engineered products and components and equipment for the chemical, petroleum and food industries. The markets served are primarily in the U.S., Europe, Canada and Asia.

The following table provides financial information by business segment for the three and nine-month periods ended September 30, 2010 and 2009:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Industrial Products Group
Revenues	$	280,633		$	258,525		$	795,677		$	762,679
Operating income (loss)		26,476			7,554			66,186			(260,157	)
Operating income (loss) as a percentage of revenues		9.4	%		2.9	%		8.3	%		(34.1	)%

Engineered Products Group
Revenues	$	212,816		$	170,321		$	569,455		$	564,696
Operating income		41,523			24,556			105,864			92,041
Operating income as a percentage of revenues		19.5	%		14.4	%		18.6	%		16.3	%

Consolidated
Revenues	$	493,449		$	428,846		$	1,365,132		$	1,327,375
Operating income (loss)		67,999			32,110			172,050			(168,116	)
Operating income (loss) as a percentage of revenues		13.8	%		7.5	%		12.6	%		(12.7	)%

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, including the financial statements, accompanying notes and management’s discussion and analysis of financial condition and results of operations, and the interim condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q.

Operating Segments

In the Industrial Products Group, the Company designs, manufactures, markets and services the following products and related aftermarket parts for industrial and commercial applications: rotary screw, reciprocating, and sliding vane air and gas compressors; positive displacement, centrifugal and side channel blowers; and vacuum pumps primarily serving manufacturing, transportation and general industry and selected OEM and engineered system applications. The Company also designs, manufactures, markets and services complementary ancillary products. Stationary air compressors are used in manufacturing, process applications and materials handling, and to power air tools and equipment. Blowers are used primarily in pneumatic conveying, wastewater aeration, numerous applications in industrial manufacturing and engineered vacuum systems. The markets served are primarily in Europe, the U.S. and Asia.

petrochemical and power industries. This segment also designs, manufactures, markets and services other engineered products and components and equipment for the chemical, petroleum and food industries. The markets served are primarily in the U.S., Europe, Canada and Asia.

The Company has determined its reportable segments in accordance with FASB ASC 280 and evaluates the performance of its reportable segments based on, among other measures, operating income (loss), which is defined as income (loss) before interest expense, other income, net, and income taxes. Reportable segment operating income (loss) and segment operating margin (defined as segment operating income (loss) divided by segment revenues) are indicative of short-term operating performance and ongoing profitability. Management closely monitors the operating income and operating margin of each reportable segment to evaluate past performance and actions required to improve profitability. See Note 16 “Segment Results” in the “Notes to Condensed Consolidated Financial Statements” included in this Quarterly Report on Form 10-Q.

Non-GAAP Financial Measures

To supplement the Company’s financial information presented in accordance with GAAP, management, from time to time, uses additional measures to clarify and enhance understanding of past performance and prospects for the future. These measures may exclude, for example, the impact of unique and infrequent items or items outside of management’s control (e.g. impairment charges and foreign currency exchange rates). Such measures are provided in addition to and should not be considered to be a substitute for, or superior to, the comparable measure under GAAP.

Results of Operations

Performance during the Quarter Ended September 30, 2010 Compared
with the Quarter Ended September 30, 2009

Revenues

Revenues increased $64.6 million, or 15%, to $493.4 million in the three-month period ended September 30, 2010, compared to $428.8 million in the three-month period of 2009. This increase was attributable to increased volume ($59.7 million, or 14%), price increases ($13.7 million, or 3%) and the acquisition of ILMVAC ($4.0 million, or 1%), partially offset by unfavorable changes in foreign currency exchange rates ($12.8 million, or 3%).

Revenues in the Industrial Products Group increased $22.1 million, or 9%, to $280.6 million in the third quarter of 2010, compared to $258.5 million in the third quarter of 2009. This increase reflects higher volume (11%) and price increases (1%), partially offset by unfavorable changes in foreign currency exchange rates (3%). The volume increase was attributable to improvement in demand for OEM products and aftermarket parts and services on a global basis.

Revenues in the Engineered Products Group increased $42.5 million, or 25%, to $212.8 million in the third quarter of 2010, compared to $170.3 million in the third quarter of 2009. This increase reflects higher volume (18%), price increases (7%) and the acquisition of ILMVAC (2%), partially offset by unfavorable changes in

foreign currency exchange rates (2%). The volume increase reflected accelerating demand for drilling and well servicing pumps, loading arms, engineered packages and OEM products.

Gross Profit

Gross profit increased $25.1 million, or 19%, to $160.3 million in the three-month period ended September 30, 2010, compared to $135.2 million in the three-month period of 2009, and as a percentage of revenues was 32.5% in 2010, compared to 31.5% in 2009. The increase in gross profit primarily reflects the volume increases discussed above, favorable product mix and cost reductions, partially offset by unfavorable changes in foreign currency exchange rates. The improvement in gross profit as a percentage of revenues was due primarily to the benefits of operational improvements, cost reductions, volume leverage and favorable product mix.

Selling and Administrative Expenses

Selling and administrative expenses increased $1.1 million, or 1%, to $91.1 million in the third quarter of 2010, compared to $90.0 million in the third quarter of 2009. This increase reflects higher variable compensation and benefit expenses, largely offset by cost reductions and the favorable effect of changes in foreign currency exchange rates ($3.0 million). As a percentage of revenues, selling and administrative expenses improved to 18.5% in the third quarter of 2010 compared to 21.0% in the third quarter of 2009, primarily as a result of cost reductions and leverage from higher revenues.

Other Operating Expense, Net

Other operating expense, net, was $1.3 million in the third quarter of 2010 compared to $10.6 million in the third quarter of 2009. The year-over-year change was due primarily to lower restructuring charges in 2010.

Impairment Charges

An impairment charge of $2.5 million was recorded in the third quarter of 2009 in connection with the evaluation of goodwill and other indefinite-lived intangible assets in the Industrial Products Group.

Operating Income

Operating income of $68.0 million in the third quarter of 2010 increased $35.9 million, or 112%, compared to $32.1 million in the third quarter of 2009. This improvement reflects the gross profit, selling and administrative expenses, other operating expense, net, and impairment charge factors discussed above. Operating income as a percentage of revenues in the third quarter of 2010 was 13.8%. Charges associated with profit improvement initiatives and other items were not material. Operating income as a percentage of revenues in the third quarter of 2009 was 7.5% and reflects net charges totaling $15.8 million, or 3.7% of revenues, associated with profit improvement initiatives, the impairment charge and other items.

The Industrial Products Group generated segment operating income and segment operating margin of $26.5 million and 9.4%, respectively, in the third quarter of 2010, compared to $7.6 million and 2.9%, respectively, in the third quarter of 2009 (see Note 16 “Segment Results” in the “Notes to Condensed Consolidated Financial

Statements” included in this Quarterly Report on Form 10-Q for a reconciliation of segment operating income (loss) to consolidated operating income (loss)). Charges associated with profit improvement initiatives and other items were not material in the third quarter of 2010. Results in the third quarter of 2009 reflect the net goodwill and trade name impairment charge of $2.5 million and charges totaling $7.6 million associated with profit improvement initiatives and other items. Other than the impairment charge and the lower charges for profit improvement initiatives and other items, the year over year improvement in operating income was primarily attributable to cost reductions completed over the previous twelve months and incremental profit on revenue growth.

The Engineered Products Group generated segment operating income and segment operating margin of $41.5 million and 19.5%, respectively, in the third quarter of 2010, compared to $24.6 million and 14.4%, respectively, in the third quarter of 2009 (see Note 16 “Segment Results” in the “Notes to Condensed Consolidated Financial Statements” included in this Quarterly Report on Form 10-Q for a reconciliation of segment operating income (loss) to consolidated operating income (loss)). Charges associated with profit improvement initiatives and other items were not material in the third quarter of 2010. Results in the third quarter of 2009 were negatively impacted by charges totaling $5.7 million, or 3.4% of segment revenues, associated with profit improvement initiatives and other items. Other than these items, the year over year improvement in operating income was primarily attributable to cost reductions completed over the previous twelve months, favorable product mix and incremental profitability on revenue growth.

Interest Expense

Interest expense of $5.7 million in the third quarter of 2010 decreased $1.4 million from $7.1 million in the third quarter of 2009 due primarily to lower average borrowings in the third quarter of 2010 compared to the third quarter of 2009. The weighted average interest rate, including the amortization of debt issuance costs, increased to 7.2% in the third quarter of 2010 compared to 6.2% in the third quarter of 2009 due primarily to the greater relative weight of the fixed interest rate on the Company’s 8% Senior Subordinated Notes.

Provision for Income Taxes

The provision for income taxes was $16.6 million and the effective tax rate was 26.2% in the third quarter of 2010, compared to $7.1 million and 26.5%, respectively, in the third quarter of 2009. The year over year increase in the provision reflects higher taxable income.

Net Income Attributable to Gardner Denver

Net income attributable to Gardner Denver of $46.6 million and diluted earnings per share (“DEPS”) of $0.88 in the third quarter of 2010 compares with net income attributable to Gardner Denver and DEPS of $19.4 million and $0.37, respectively, in the third quarter of 2009. This improvement reflects the operating income, interest expense and income tax factors discussed above. Charges for profit improvement initiatives and other items were not material in the third quarter of 2010. Results in the third quarter of 2009 reflect the net goodwill and trade name impairment charge of $2.5 million after income tax ($0.05 per diluted share) and charges for profit improvement initiatives and other items totaling $10.1 million after income taxes ($0.19 per diluted share). These items reduced third quarter 2009 net income attributable to Gardner Denver by $12.6 million and DEPS by $0.24.

Performance during the Nine Months Ended September 30, 2010 Compared
with the Nine Months Ended September 30, 2009

Revenues

Revenues increased $37.7 million, or 3%, to $1,365.1 million in the nine-month period ended September 30, 2010, compared to $1,327.4 million in the nine-month period of 2009. This increase was due to higher volume ($12.6 million, or 1%, in total) attributable to on-going improvements in demand for petroleum products, OEM products, and aftermarket parts and services, price increases ($19.0 million, or 2%), the acquisition of ILMVAC ($4.0 million) and favorable changes in foreign currency exchange rates ($2.1 million).

Revenues in the Industrial Products Group increased $33.0 million, or 4%, to $795.7 million in the nine-month period of 2010, compared to $762.7 million in the nine-month period of 2009. This increase reflects higher volume (3%), price increases (1%) and favorable changes in foreign currency exchange rates. The volume increase was attributable to improvement in demand for OEM products and aftermarket parts and services on a global basis.

Revenues in the Engineered Products Group increased $4.8 million, or 1%, to $569.5 million in the nine-month period of 2010, compared to $564.7 million in the nine-month period of 2009. This increase reflects the acquisition of ILMVAC ($4.0 million, or 1%), price increases (2%) and favorable changes in foreign currency exchange rates, partially offset by lower volume (2%). The decline in volume was attributable to the global economic slowdown and was realized across most product lines and geographic regions, other than OEM products, in the first half of the year, partially offset by increases for petroleum products and loading arms in the third quarter of 2010.

Gross Profit

Gross profit increased $39.4 million, or 10%, to $445.7 million in the nine-month period ended September 30, 2010, compared to $406.3 million in the nine-month period of 2009, and as a percentage of revenues was 32.7% in 2010, compared to 30.6% in 2009. The increase in gross profit primarily reflects volume improvements, cost reductions and favorable product mix. The improvement in gross profit as a percentage of revenues was due primarily to the benefits of operational improvements, cost reductions and favorable product mix.

Selling and Administrative Expenses

Selling and administrative expenses decreased $1.2 million to $270.5 million in the nine-month period ended September 30, 2010, compared to $271.7 million in the nine-month period of 2009. This decrease reflects cost reductions, partially offset by higher variable compensation and benefit expenses and the unfavorable effect of changes in foreign currency exchange rates ($0.3 million). As a percentage of revenues, selling and administrative expenses improved to 19.8% in the nine-month period of 2010 compared to 20.5% in the nine-month period of 2009, primarily due to cost reductions and leverage from higher revenues.

Other Operating Expense, Net

Other operating expense, net, was $3.2 million in the nine-month period ended September 30, 2010, compared to $39.2 million in the nine-month period of 2009. The year-over-year change was due primarily to lower restructuring charges in 2010 compared to 2009 and an insurance settlement received in the first quarter of 2010.

Impairment Charges

In the nine-month period ended September 30, 2009, the Company recorded non-cash impairment charges of $253.6 million and $10.0 million to reduce the carrying amount of goodwill and a trade name, respectively, in its Industrial Products Group. The net goodwill and trade name impairment charges in 2009 of $252.5 million and $9.9 million, respectively, were finalized in the fourth quarter of 2009. See Note 4 “Goodwill and Other Intangible Assets” in the “Notes to Condensed Consolidated Financial Statements” included in this Quarterly Report on Form 10-Q.

Operating Income (Loss)

Operating income of $172.1 million in the nine-month period ended September 30, 2010 compares to an operating loss of $168.1 million in the nine-month period of 2009. These results reflect the gross profit, selling and administrative expenses, other operating expense, net, and impairment charge factors discussed above. Operating income as a percentage of revenues in the nine-month period of 2010 was 12.6% and reflects charges totaling $2.9 million, or 0.2% of revenues, associated with profit improvement initiatives and other items. The operating loss recorded in the nine-month period of 2009 reflects the $263.6 million net goodwill and trade name impairment charges and charges totaling $41.3 million associated with profit improvement initiatives and other items.

The Industrial Products Group generated segment operating income and segment operating margin of $66.2 million and 8.3%, respectively, in the nine-month period of 2010, compared to a segment operating loss of $260.2 million in the nine-month period of 2009 (see Note 16 “Segment Results” in the “Notes to Condensed Consolidated Financial Statements” included in this Quarterly Report on Form 10-Q for a reconciliation of segment operating income (loss) to consolidated operating income (loss)). Results in the nine-month period of 2010 reflect charges totaling $3.7 million, or 0.5% of segment revenues, associated with profit improvement initiatives and other items. Results in the nine-month period of 2009 reflect the net goodwill and trade name impairment charges of $263.6 million and charges totaling $25.7 million associated with profit improvement initiatives and other items. Other than the charges for profit improvement initiatives, impairment and other items, the year over year improvement was primarily attributable to cost reductions completed over the previous twelve months and incremental profit on revenue growth.

The Engineered Products Group generated segment operating income and segment operating margin of $105.9 million and 18.6%, respectively, in the nine-month period of 2010, compared to $92.0 million and 16.3%, respectively, in the nine-month period of 2009 (see Note 16 “Segment Results” in the “Notes to Condensed Consolidated Financial Statements” included in this Quarterly Report on Form 10-Q for a reconciliation of segment operating income (loss) to consolidated operating income (loss)). Charges associated with profit improvement initiatives and other items were not material in the nine-month period of 2010. Results in the

nine-month period of 2009 were negatively impacted by charges totaling $15.6 million, or 2.8% of segment revenues, associated with profit improvement initiatives and other items. Excluding these items, operating income in 2010 was lower than in 2009 due primarily to volume reductions and unfavorable product mix during the first two quarters of 2010, largely offset by cost reductions completed over the previous twelve months and favorable product mix and incremental profitability on revenue growth in the third quarter of 2010.

Interest Expense

Interest expense of $17.8 million in the nine-month period ended September 30, 2010 decreased $3.6 million from $21.4 million in the nine-month period of 2009 due primarily to lower average borrowings in the nine-month period of 2010, compared to the nine-month period of 2009. The weighted average interest rate, including the amortization of debt issuance costs, increased to 7.1% in the nine-month period of 2010, compared to 5.8% in the nine-month period of 2009, due primarily to the greater relative weight of the fixed interest rate on the Company’s 8% Senior Subordinated Notes.

Provision for Income Taxes

The provision for income taxes was $38.9 million and the effective tax rate was 25.0% in the nine-month period ended September 30, 2010 compared to an income tax provision of $14.4 million in the nine-month period of 2009. The provision in the nine-month period of 2009 reflected a benefit for the reversal of deferred tax liabilities totaling $11.6 million associated with a portion of the net goodwill and all of the trade name impairment charges recorded in the nine-month period of 2009. Deferred tax liabilities were recorded when the trade name was established and as tax deductible goodwill was amortized, a corresponding deferred tax liability was established. A portion of the goodwill for which the impairment charge was taken was not amortizable for tax purposes and, accordingly, deferred tax liabilities were not recorded when the goodwill was established and a corresponding tax benefit did not arise upon the impairment of that portion of goodwill. In addition, a $3.6 million credit for the reversal of an income tax reserve and the related interest associated with the completion of a foreign tax examination was recorded in the nine-month period of 2009. These benefits were partially offset by an $8.6 million valuation allowance against deferred tax assets related to net operating losses recorded in connection with the acquisition of CompAir based on revised financial projections.

Net Income (Loss) Attributable to Gardner Denver

Net income attributable to Gardner Denver of $115.9 million and DEPS of $2.20 in the nine-month period ended September 30, 2010 compares with a net loss attributable to Gardner Denver of $202.4 million, or $3.90 per diluted share, in the nine-month period of 2009. Results in the nine-month period of 2010 include charges for profit improvement initiatives and other items totaling $2.2 million after income taxes, or $0.04 on a per diluted share basis. Results in the nine-month period of 2009 reflect the net goodwill and trade name impairment charges and associated reversal of deferred income tax liabilities ($252.0 million, after income taxes), write-off of deferred tax assets ($8.6 million), charges for profit improvement initiatives and other non-recurring items ($29.6 million, after income taxes), partially offset by the reversal of the income tax reserve and related interest ($3.6 million). These items reduced net income attributable to Gardner Denver in the nine-month period of 2009 by $286.6 million, or $5.52 per diluted share.

Outlook

In general, the Company believes that demand for products in its Industrial Products Group tends to correlate with the rate of total industrial capacity utilization and the rate of change of industrial production because compressed air is often used as a fourth utility in the manufacturing process. Capacity utilization rates above 80% have historically indicated a good demand environment for industrial equipment such as compressor and vacuum products. Over longer time periods, the Company believes that demand also tends to follow economic growth patterns indicated by the rates of change in the gross domestic product around the world. The significant contraction in manufacturing capacity utilization in the U.S. and Europe, which began in 2008, has resulted in lower demand for capital equipment, such as compressor packages, as existing equipment remained idle. The Company believes there have been recent improvements in global capacity utilization rates, which indicate a slightly more positive environment for aftermarket parts and services for industrial equipment, but that the improvements have not been sufficient to warrant significant capital investments by manufacturing companies in the U.S. and Europe.

In the third quarter of 2010, orders in the Industrial Products Group increased $28.2 million, or 12%, to $270.8 million, compared to $242.6 million in the third quarter of 2009. This increase reflected on-going improvement in demand for OEM products and aftermarket parts and services in North America and Asia Pacific and relatively stable demand in Europe ($36.4 million, or 15%), partially offset by the unfavorable effect of changes in foreign currency exchange rates ($8.2 million, or 3%). Order backlog for the Industrial Products Group increased 12% to $217.0 million as of September 30, 2010 from $193.2 million at December 31, 2009 due primarily to the impact of orders exceeding shipments during the first nine months of 2010 ($25.6 million, or 13%), partially offset by the unfavorable effect of changes in foreign currency exchange rates ($1.8 million, or 1%). Order backlog for the Industrial Products Group as of September 30, 2010 increased 3% compared to $211.0 million as of September 30, 2009, primarily due to orders exceeding shipments during the twelve-month period, partially offset by unfavorable changes in foreign currency exchange rates. As a result of the Company’s expectations for a slow economic recovery and its existing backlog, it anticipates revenues for Industrial Products to increase slightly in the fourth quarter of 2010, but continues to remain cautious in its outlook.

Orders in the Engineered Products Group increased 64% to $279.9 million in the third quarter of 2010, compared to $170.2 million in the third quarter of 2009, due to accelerating demand for drilling and well servicing pumps, loading arms and engineered packages for infrastructure investments and continuing strong demand for OEM products ($111.9 million, or 65%) and the acquisition of ILMVAC ($3.6 million, or 2%), partially offset by the unfavorable effect of changes in foreign currency exchange rates ($5.8 million, or 3%). Order backlog for the Engineered Products Group increased 69% to $341.7 million as of September 30, 2010 from $202.0 million at December 31, 2009 due primarily to the impact of orders exceeding shipments during the first nine months of 2010 ($140.6 million, or 70%) and the acquisition of ILMVAC ($2.0 million, or 1%), partially offset by the unfavorable effect of changes in foreign currency exchange rates ($2.9 million, or 2%). Order backlog for the Engineered Products Group as of September 30, 2010 increased 44% compared to $237.0 million as of September 30, 2009, primarily as a result of increased demand during the first nine months of 2010 and the acquisition of ILMVAC, partially offset by the unfavorable effect of changes in foreign currency exchange rates. Orders for products in the Engineered Products Group have historically corresponded to demand for petrochemical products and been influenced by prices for oil and natural gas, and rig count, among other factors, which the Company cannot predict. Revenues for Engineered Products depend more on existing backlog levels than revenues for

Industrial Products. Many of these products are used in process applications, such as oil and gas refining and chemical processing, which are industries that typically experience increased demand very late in economic cycles. At present, orders for products used in these applications are primarily for replacement units, aftermarket parts and services, or for infrastructure investments in developing countries. Furthermore, the Company is uncertain whether reduced prices for natural gas will ultimately affect demand for well servicing pumps and related aftermarket parts and services. The Company’s current outlook assumes that drilling pump shipments will improve in the fourth quarter of 2010 and that demand for well servicing equipment and OEM compressors will remain strong through the balance of the year.

Order backlog consists of orders believed to be firm for which a customer purchase order has been received or communicated. However, since orders may be rescheduled or canceled, order backlog is not necessarily indicative of future revenue levels.

Liquidity and Capital Resources

Operating Working Capital

During the nine-month period ended September 30, 2010, net working capital (defined as total current assets less total current liabilities) increased to $457.5 million from $395.0 million at December 31, 2009. Operating working capital (defined as accounts receivable plus inventories, less accounts payable and accrued liabilities) increased $10.9 million to $273.6 million from $262.7 million at December 31, 2009 due to higher accounts receivable ($40.5 million) and inventory ($9.4 million), partially offset by higher accounts payable ($22.3 million) and accrued liabilities ($16.7 million). The increase in accounts receivable was due primarily to higher revenues and the timing of shipments within the third quarter. Days sales in receivables increased to 68 at September 30, 2010 from 67 at December 31, 2009 due primarily to the timing of shipments within the third quarter, and were down from 74 days at September 30, 2009. The increase in inventory primarily reflects growth attributable to increases in both orders and backlog in 2010 primarily as a result of increased demand for petroleum and OEM products, aftermarket parts, loading arms and engineered packages. Inventory turns improved to 5.6 in the third quarter of 2010, compared with 5.4 in the fourth quarter of 2009 and 4.9 in the third quarter of 2009, primarily as a result of productivity improvements. The increase in accounts payable and accrued liabilities was due primarily to the timing of payments to vendors and higher accruals for compensation and benefit expenses, primarily in the first quarter of 2010, partially offset by cash payments for employee termination benefits.

Cash Flows

Cash provided by operating activities of $153.2 million in the nine-month period of 2010 increased $4.8 million from $148.4 million in the comparable period of 2009. This change was primarily due to higher net income (excluding non-cash charges for the impairment of intangible assets, depreciation and amortization and unrealized foreign currency transaction gains). A net increase in accounts payable and accrued liabilities (excluding the effect of changes in foreign currency exchange rates) in 2010 compared to a net decrease in 2009, was offset by increases in accounts receivable and inventories (excluding the effect of changes in foreign currency exchange rates) in the nine-month period of 2010 compared with decreases in the nine-month period of 2009. Cash used for operating working capital of $13.4 million in the nine-month period of 2010 compares to cash

generated of $41.9 million in the nine-month period of 2009. Cash used by accounts receivable of $40.4 million in the nine-month period of 2010 compares with cash generated of $54.8 million in the nine-month period of 2009. This change primarily reflects the increase in revenues in 2010, while revenues were declining in the prior year period. Cash used by inventories of $10.0 million in the nine-month period of 2010 compares with cash generated of $55.4 million in the nine-month period of 2009 and was attributable to increases in both orders and backlog during the first nine months of 2010, partially offset by the benefits realized from productivity improvements. Inventory reductions in the nine-month period of 2009 reflected the initial benefits realized from completion of certain lean manufacturing initiatives and reductions attributable to volume declines. Cash inflows from accounts payable and accrued liabilities of $37.0 million in the nine-month period of 2010 compares to outflows of $68.3 million in the nine-month period of 2009. The year over year change primarily reflects higher accruals for variable compensation and benefits expense in 2010 and cash payments under the Company’s restructuring plans in 2009.

Net cash used in investing activities of $30.1 million and $34.0 million in the nine-month periods of 2010 and 2009, respectively, consisted primarily of capital expenditures on assets intended to increase operating efficiency and flexibility, support acquisition integration initiatives and bring new products to market and, in 2010, cash paid for the acquisition of ILMVAC in the third quarter. The Company currently expects capital expenditures to total approximately $35 to $40 million for the full year 2010. As a result of the Company’s application of lean principles, non-capital or less capital-intensive solutions are often utilized in process improvement initiatives and capital replacement. Capital expenditures related to environmental projects have not been significant in the past and are not expected to be significant in the foreseeable future.

Net cash used in financing activities of $65.1 million in the nine-month period of 2010 compares with $135.3 million used in the nine-month period of 2009. Cash provided by operating activities was used for net repayments of short-term and long-term borrowings totaling $56.7 million in the nine-month period of 2010 and $135.4 million in the nine-month period of 2009. Lower debt repayments in the nine-month period of 2010 compared with the nine-month period of 2009 were partly attributable to the Company’s repurchase of shares of its common stock totaling $17.9 million, including shares exchanged or surrendered in connection with its stock option plans of $0.3 million, the payment of cash dividends on its common stock of $7.9 million, and the acquisition of ILMVAC on July 1, 2010.

Share Repurchase Program

In November 2008, the Company’s Board of Directors authorized a share repurchase program to acquire up to 3.0 million shares of the Company’s outstanding common stock, of which approximately 2.6 million shares remain available for repurchase as of September 30, 2010.

Liquidity

The Company’s debt to total capital ratio (defined as total debt divided by the sum of total debt plus total stockholders’ equity) was 20.8% as of September 30, 2010 compared to 25.5% as of December 31, 2009. This decrease primarily reflects a $59.0 million net decrease in borrowings between these two dates.

The Company’s primary cash requirements include working capital, capital expenditures, principal and interest payments on indebtedness, cash dividends on its common stock, selective acquisitions and any stock repurchases. The Company’s primary sources of funds are its ongoing net cash flows from operating activities and availability under its Revolving Line of Credit (as defined below). At September 30, 2010, the Company had cash and cash equivalents of $166.6 million, of which $3.5 million was pledged to financial institutions as collateral to support the issuance of standby letters of credit and similar instruments. The Company also had $294.0 million of unused availability under its Revolving Line of Credit at September 30, 2010. Based on the Company’s financial position at September 30, 2010 and its pro-forma results of operations for the twelve months then ended, the unused availability under its Revolving Line of Credit would not have been limited by the financial ratio covenants in the 2008 Credit Agreement (as described below).

On September 19, 2008, the Company entered into the 2008 Credit Agreement consisting of (i) a $310.0 million Revolving Line of Credit (the “Revolving Line of Credit”), (ii) a $180.0 million term loan (“U.S. Dollar Term Loan”) and (iii) a €120.0 million term loan (“Euro Term Loan”). In addition, the 2008 Credit Agreement provides for a possible increase in the Revolving Line of Credit of up to $200.0 million.

The interest rates per annum applicable to loans under the 2008 Credit Agreement are, at the Company’s option, either a base rate plus an applicable margin percentage or a Eurocurrency rate plus an applicable margin. The base rate is the greater of (i) the prime rate or (ii) one-half of 1% over the weighted average of rates on overnight federal funds as published by the Federal Reserve Bank of New York. The Eurocurrency rate is LIBOR.

The initial applicable margin percentage over LIBOR under the 2008 Credit Agreement was 2.5% with respect to the term loans and 2.1% with respect to loans under the Revolving Line of Credit, and the initial applicable margin percentage over the base rate was 1.25%. After the Company’s delivery of its financial statements and compliance certificate for each fiscal quarter, the applicable margin percentages are subject to adjustments based upon the ratio of the Company’s consolidated total debt to consolidated adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) (each as defined in the 2008 Credit Agreement) being within certain defined ranges. The applicable margin percentage over LIBOR was adjusted down during the third quarter of 2010. At September 30, 2010, the applicable margin percentage over LIBOR under the 2008 Credit Agreement was 2.0% with respect to the term loans and 1.65% with respect to loans under the Revolving Line of Credit, and the applicable margin percentage over the base rate was 0.75%.

The obligations under the 2008 Credit Agreement are guaranteed by the Company’s existing and future domestic subsidiaries. The obligations under the 2008 Credit Agreement are also secured by a pledge of the capital stock of each of the Company’s existing and future material domestic subsidiaries, as well as 65% of the capital stock of each of the Company’s existing and future first-tier material foreign subsidiaries.

The 2008 Credit Agreement includes customary covenants. Subject to certain exceptions, these covenants restrict or limit the ability of the Company and its subsidiaries to, among other things: incur liens; engage in mergers, consolidations and sales of assets; incur additional indebtedness; pay dividends and redeem stock; make investments (including loans and advances); enter into transactions with affiliates, make capital expenditures and incur rental obligations. In addition, the 2008 Credit Agreement requires the Company to maintain compliance with certain financial ratios on a quarterly basis, including a maximum total leverage ratio test and a minimum interest coverage ratio test. As of September 30, 2010, the Company was in compliance with each of the financial ratio covenants under the 2008 Credit Agreement.

The 2008 Credit Agreement contains customary events of default, including upon a change of control. If an event of default occurs, the lenders under the 2008 Credit Agreement will be entitled to take various actions, including the acceleration of amounts due under the 2008 Credit Agreement.

The U.S. Dollar and Euro Term Loans have a final maturity of October 15, 2013. The U.S. Dollar Term Loan requires quarterly principal payments aggregating approximately $4.0 million, $17.5 million, $29.5 million and $40.3 million in fiscal years 2010 through 2013, respectively. The Euro Term Loan requires quarterly principal payments aggregating approximately €2.3 million, €9.9 million, €16.8 million and €23.0 million in fiscal years 2010 through 2013, respectively.

The Revolving Line of Credit also matures on October 15, 2013. Loans under this facility may be denominated in USD or several foreign currencies and may be borrowed by the Company or two of its foreign subsidiaries as outlined in the 2008 Credit Agreement.

The Company issued $125.0 million of 8% Senior Subordinated Notes (the “Notes”) in 2005. The Notes have a fixed annual interest rate of 8% and are guaranteed by certain of the Company’s domestic subsidiaries (the “Guarantors”). The Company may redeem all or a part of the Notes issued under the Indenture among the Company, the Guarantors and The Bank of New York Trust Company, N.A. (the “Indenture”) at varying redemption prices, plus accrued and unpaid interest. The Company may also repurchase Notes from time to time in open market purchases or privately negotiated transactions. Upon a change of control, as defined in the Indenture, the Company is required to offer to purchase all of the Notes then outstanding at 101% of the principal amount thereof plus accrued and unpaid interest. The Indenture contains events of default and affirmative, negative and financial covenants customary for such financings, including, among other things, limits on incurring additional debt and restricted payments.

Management currently expects that the Company’s cash on hand and future cash flows from operating activities will be sufficient to fund its working capital, capital expenditures, scheduled principal and interest payments on indebtedness, cash dividends on its common stock and any stock repurchases for at least the next twelve months. The Company continues to consider acquisition opportunities, but the size and timing of any future acquisitions and the related potential capital requirements cannot be predicted. In the event that suitable businesses are available for acquisition upon acceptable terms, the Company may obtain all or a portion of the necessary financing through the incurrence of additional long-term borrowings.

Contractual Obligations and Commitments

The following table and accompanying disclosures summarize the Company’s significant contractual obligations at September 30, 2010 and the effect such obligations are expected to have on its liquidity and cash flow in future periods:


			Payments Due by Period
(Dollars in millions)			Balance						After
Contractual Cash Obligations	Total		of 2010		2011-2012		2013–2014		2014
Debt	$	297.4	$	9.7	$	87.1	$	197.4	$	3.2
Estimated interest payments ⁽¹⁾		57.1		4.6		35.6		10.4		6.5
Capital leases		8.2		0.4		1.4		0.5		5.9
Operating leases		83.9		6.9		36.9		17.3		22.8
Purchase obligations ⁽²⁾		231.3		187.3		43.3		0.7		—

Total	$	677.9	$	208.9	$	204.3	$	226.3	$	38.4


(1)		Estimated interest payments for long-term debt were calculated as follows: for fixed-rate debt and term debt, interest was calculated based on applicable rates and payment dates; for variable-rate debt and/or non-term debt, interest rates and payment dates were estimated based on management’s determination of the most likely scenarios for each relevant debt instrument.

(2)		Purchase obligations consist primarily of agreements to purchase inventory or services made in the normal course of business to meet operational requirements. The purchase obligation amounts do not represent the entire anticipated purchases in the future, but represent only those items for which the Company is contractually obligated as of September 30, 2010. For this reason, these amounts will not provide a complete and reliable indicator of the Company’s expected future cash outflows.

The above table does not include the Company’s total pension and other postretirement benefit liabilities and net deferred income tax liabilities recognized on the consolidated balance sheet as of September 30, 2010 because such liabilities, due to their nature, do not represent expected liquidity needs. There have not been material changes to such liabilities or the Company’s minimum pension funding obligations other than as disclosed in Note 6 “Pension and Other Postretirement Benefits” and Note 12 “Income Taxes” in the “Notes to Condensed Consolidated Financial Statements” included in this Quarterly Report on Form 10-Q. Also please refer to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

In the normal course of business, the Company or its subsidiaries may sometimes be required to provide surety bonds, standby letters of credit or similar instruments to guarantee its performance of contractual or legal obligations. As of September 30, 2010, the Company had $71.6 million in such instruments outstanding and had pledged $3.5 million of cash to the issuing financial institutions as collateral for such instruments.

Contingencies

Refer to Note 14 “Contingencies” in the “Notes to Condensed Consolidated Financial Statements” included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference, for a description of various legal proceedings, lawsuits and administrative actions.

New Accounting Standards

Refer to Note 1 “Summary of Significant Accounting Policies” in the “Notes to Condensed Consolidated Financial Statements” included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference, for a description of new accounting pronouncements, including the expected impact on the Company’s Condensed Consolidated Financial Statements and related disclosures.

Critical Accounting Policies and Estimates

Management has evaluated the accounting policies used in the preparation of the Company’s condensed financial statements and related notes and believes those policies to be reasonable and appropriate. Certain of these accounting policies require the application of significant judgment by management in selecting appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, trends in the industry, information provided by customers and information available from other outside sources, as appropriate. The most significant areas involving management judgments and estimates may be found in the Company’s 2009 Annual Report on Form 10-K, filed on February 26, 2010, in the Critical Accounting Policies and Estimates section of Management’s Discussion and Analysis and in Note 1 “Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements.” There were no significant changes to the Company’s critical accounting polices during the quarter ended September 30, 2010.

Cautionary Statement Regarding Forward-Looking Statements

All of the statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” other than historical facts, are forward-looking statements, including, without limitation, the statements made under the caption “Outlook.” As a general matter, forward-looking statements are those focused upon anticipated events or trends, expectations, and beliefs relating to matters that are not historical in nature. The words “could,” “anticipate,” “preliminary,” “expect,” “believe,” “estimate,” “intend,” “plan,” “will,” “foresee,” “project,” “forecast,” or the negative thereof or variations thereon, and similar expressions identify forward-looking statements.

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for these forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that forward-looking statements are subject to known and unknown risks, uncertainties and other factors relating to the Company’s operations and business environment, all of which are difficult to predict and many of which are beyond the control of the Company. These known and unknown risks, uncertainties and other factors could cause actual results to differ materially from those matters expressed in, anticipated by or implied by such forward-looking statements.

These risks, uncertainties and other factors include, but are not limited to: (1) the Company’s exposure to the risks associated with weak global economic growth, which may negatively impact its revenues, liquidity, suppliers and customers; (2) exposure to economic downturns and market cycles, particularly the level of oil and natural gas prices and oil and natural gas drilling production, which affect demand for the Company’s petroleum products, and industrial production and manufacturing capacity utilization rates, which affect demand for the

Company’s industrial products; (3) the risks associated with intense competition in the Company’s market segments, particularly the pricing of the Company’s products; (4) the risks that the Company will not realize the expected financial and other benefits from the acquisition of CompAir and restructuring actions; (5) the risks of large or rapid increases in raw material costs or substantial decreases in their availability, and the Company’s dependence on particular suppliers, particularly iron casting and other metal suppliers; (6) economic, political and other risks associated with the Company’s international sales and operations, including changes in currency exchange rates (primarily between the USD, the EUR, the GBP and the CNY); (7) the risk of non-compliance with U.S. and foreign laws and regulations applicable to the Company’s international operations, including the U.S. Foreign Corrupt Practices Act and other similar laws; (8) the risks associated with the potential loss of key customers for petroleum products and the potential resulting negative impact on the Company’s profitability and cash flows; (9) the risks associated with potential product liability and warranty claims due to the nature of the Company’s products; (10) the risk of possible future charges if the Company determines that the value of goodwill and other intangible assets, representing a significant portion of the Company’s total assets, are impaired; (11) the ability to attract and retain quality executive management and other key personnel; (12) risks associated with the Company’s indebtedness and changes in the availability or costs of new financing to support the Company’s operations and future investments; (13) the ability to continue to identify and complete strategic acquisitions and effectively integrate such acquired companies to achieve desired financial benefits; (14) changes in discount rates used for actuarial assumptions in pension and other postretirement obligation and expense calculations and market performance of pension plan assets; (15) the risks associated with pending asbestos and silica personal injury lawsuits; (16) the risks associated with environmental compliance costs and liabilities, including the compliance costs and liabilities of future climate change regulations; (17) the risk that communication or information systems failure may disrupt the Company’s business and result in financial loss and liability to its customers; (18) the risks associated with enforcing the Company’s intellectual property rights and defending against potential intellectual property claims; and (19) the ability to avoid employee work stoppages and other labor difficulties. The foregoing factors should not be construed as exhaustive and should be read together with important information regarding risks and factors that may affect the Company’s future performance set forth under Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

These statements reflect the current views and assumptions of management with respect to future events. The Company does not undertake, and hereby disclaims, any duty to update these forward-looking statements, even though its situation and circumstances may change in the future. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report. The inclusion of any statement in this report does not constitute an admission by the Company or any other person that the events or circumstances described in such statement are material.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to certain market risks during the normal course of business arising from adverse changes in commodity prices, interest rates, and foreign currency exchange rates. The Company’s exposure to these risks is managed through a combination of operating and financing activities. The Company selectively uses derivatives, including foreign currency forward contracts and interest rate swaps, to manage the risks from fluctuations in foreign currency exchange rates and interest rates. The Company does not purchase or hold derivatives for trading or speculative purposes. Fluctuations in commodity prices, interest rates, and foreign

currency exchange rates can be volatile, and the Company’s risk management activities do not totally eliminate these risks. Consequently, these fluctuations could have a significant effect on the Company’s financial results.

Notional transaction amounts and fair values for the Company’s outstanding derivatives, by risk category and instrument type, as of September 30, 2010, are summarized in Note 11 “Hedging Activities and Fair Value Measurements” in the “Notes to Condensed Consolidated Financial Statements” included in this Quarterly Report on Form 10-Q.

Commodity Price Risk

The Company is a purchaser of certain commodities, principally aluminum. In addition, the Company is a purchaser of components and parts containing various commodities, including cast iron, aluminum, copper, and steel. The Company generally buys these commodities and components based upon market prices that are established with the vendor as part of the purchase process. The Company does not use commodity derivatives to hedge commodity prices.

The Company has long-term contracts with some of its suppliers of key components. However, to the extent that commodity prices increase and the Company does not have firm pricing from its suppliers, or its suppliers are not able to honor such prices, the Company may experience margin declines to the extent it is not able to increase selling prices of its products.

Interest Rate Risk

The Company’s exposure to interest rate risk results primarily from its borrowings of $305.6 million at September 30, 2010. The Company manages its exposure to interest rate risk by maintaining a mixture of fixed and variable rate debt and, from time to time, uses pay-fixed interest rate swaps as cash flow hedges of variable rate debt in order to adjust the relative proportions of fixed and variable rate debt. The interest rates on approximately 69% of the Company’s borrowings were effectively fixed as of September 30, 2010. If the relevant LIBOR-based interest rates for all of the Company’s borrowings had been 100 basis points higher than actual in the nine-month period of 2010, the Company’s interest expense would have increased by $0.8 million.

Exchange Rate Risk

The Company is exposed to the impacts of changes in foreign currency exchange rates on the translation of its non-U.S. subsidiaries’ net assets and earnings into USD. The Company partially offsets these exposures by having certain of its non-U.S. subsidiaries act as the obligor on a portion of its borrowings and by denominating such borrowings, as well as a portion of the borrowings for which the Company is the obligor, in currencies other than the USD. Of the Company’s total net assets of $1,162.9 million at September 30, 2010, approximately $955.7 million was denominated in currencies other than the USD. Borrowings by the Company’s non-U.S.

subsidiaries at September 30, 2010 totaled $18.3 million, and the Company’s consolidated borrowings denominated in currencies other than the USD totaled $89.2 million. Fluctuations due to changes in foreign currency exchange rates in the value of non-USD borrowings that have been designated as hedges of the Company’s net investment in foreign operations are included in other comprehensive income.

The Company and its subsidiaries are also subject to the risk that arises when they, from time to time, enter into transactions in currencies other than their functional currency. To mitigate this risk, the Company and its subsidiaries typically settle intercompany trading balances monthly. The Company also selectively uses forward currency contracts to manage this risk. At September 30, 2010, the notional amount of open forward currency contracts was $109.9 million and their aggregate fair value was a liability of $4.6 million.

To illustrate the impact of foreign currency exchange rates on the Company’s financial results, the Company’s operating income for the nine-month period of 2010 would have decreased by approximately $10.6 million if the USD had been 10 percent more valuable than actual relative to other currencies. This calculation assumes that all currencies change in the same direction and proportion to the USD and that there are no indirect effects of the change in the value of the USD such as changes in non-USD sales volumes or prices.

Item 4. Controls and Procedures

The Company’s management carried out an evaluation (as required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), with the participation of the President and Chief Executive Officer and the Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon this evaluation, the President and Chief Executive Officer and Vice President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q, such that the information relating to the Company and its consolidated subsidiaries required to be disclosed by the Company in the reports that it files or submits under the Exchange Act (i) is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to the Company’s management, including its principal executive and financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

In addition, the Company’s management carried out an evaluation, as required by Rule 13a-15(d) of the Exchange Act, with the participation of the President and Chief Executive Officer and the Vice President and Chief Financial Officer, of changes in the Company’s internal control over financial reporting. Based on this evaluation, the President and Chief Executive Officer and the Vice President and Chief Financial Officer concluded that there were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2010 that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The Company is a party to various legal proceedings and administrative actions. The information regarding these proceedings and actions is included under Note 14 “Contingencies” to the Company’s Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

Item 1A. Risk Factors

For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see (i) the risk factors discussion provided under Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and (ii) the “Cautionary Statement Regarding Forward-Looking Statements” included in Part I, Item 2 of this Quarterly Report on Form 10-Q, which are incorporated herein by reference.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases of equity securities during the three months ended September 30, 2010 are listed in the following table.

Total Number of

Maximum Number

Shares Purchased

of Shares that May

Total Number

as Part of Publicly

Yet Be Purchased

of Shares

Average Price

Announced Plans

Under the Plans or

Period

Purchased⁽¹⁾

Paid per Share⁽²⁾

or Programs⁽³⁾

Programs⁽³⁾

July 1, 2010 – July 31, 2010

—

n/a

—

2,616,987

August 1, 2010 – August 31, 2010

1,647

47.34

—

2,616,987

September 1, 2010 – September 30, 2010

—

n/a

—

2,616,987

Total

1,647

47.34

—

2,616,987


(1)		Includes shares exchanged or surrendered in connection with the exercise of options under Gardner Denver’s Amended and Restated Long-Term Incentive Plan.

(2)		Excludes commissions.

(3)		In November 2008, the Board of Directors authorized the Company to acquire up to 3.0 million shares of its common stock. As of September 30, 2010, 383,013 shares had been repurchased under this repurchase program.

Item 5. Other Information

Separation Agreement with Helen W. Cornell

As previously reported in the Company’s Current Report on Form 8-K filed on September 23, 2010, Michael M. Larsen succeeded Helen W. Cornell as the Company’s Chief Financial Officer effective October 11, 2010. On November 3, 2010, the Company and Mrs. Cornell entered into a separation agreement under which Mrs. Cornell will leave the Company on November 26, 2010 (the “Separation Date”). Under the agreement, Mrs. Cornell agreed to certain non-disparagement, non-competition, and confidentiality provisions and released the Company from any claims arising out of her employment. All of Mrs. Cornell’s outstanding long-term cash bonus awards, along with restricted stock units and stock options that were granted after December 31, 2009, will be forfeited and cancelled in full on the Separation Date. Mrs. Cornell’s outstanding restricted stock units and stock options granted prior to December 31, 2009 will vest on the Separation Date, and such stock options will remain exercisable for 90 days following the Separation Date. Mrs. Cornell will also receive a grant of restricted stock units under the Company’s Long-Term Incentive Plan with a market value of $150,000, which will cliff vest in three years. Mrs. Cornell will also be entitled to receive a pro-rata cash payment under the Company’s Executive Annual Bonus Plan (to the extent that the performance goals for this bonus are met), a one-time cash bonus to compensate for certain taxes on Mrs. Cornell’s distribution from the Supplemental Excess Defined Contribution Plan, and other specified benefits. All other employee benefits terminate on the Separation Date.

Relocation Policy for Executive Officers

Consistent with past practice and policy, on November 2, 2010 the Company’s Board of Directors approved a relocation policy (the “Relocation Policy”) for the Company’s executive officers in connection with the relocation of the Company’s headquarters to the greater Philadelphia metropolitan area. The Company’s relocation benefits are intended to approximate the relocation benefits received by industry counterparts and will be subject to periodic review by the Company’s Management Development and Compensation Committee.

Under the terms of the Relocation Policy, the Company’s executive officers are eligible to receive relocation benefits, including, among things:

•

Shipment and storage of household goods;

•

Reimbursement of temporary living, including closing costs;

•

A miscellaneous expense allowance equal to one month’s base salary;

•

Subject to a minimum 90 day marketing period, a guaranteed buy-out of each executive’s current home at an appraised value;

•

Loss on sale protection, if necessary, for the sale of each executive’s home; and

•

Tax assistance for certain relocation benefits.

The Relocation Policy also contains a two year clawback feature.

Item 6. Exhibits

See the list of exhibits in the Index to Exhibits to this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		GARDNER DENVER, INC. (Registrant)
Date: November 4, 2010	By:	/s/ Barry L. Pennypacker
		Barry L. Pennypacker
		President and Chief Executive Officer


Date: November 4, 2010	By:	/s/ Michael M. Larsen
		Michael M. Larsen
		Vice President and Chief Financial Officer


Date: November 4, 2010	By:	/s/ David J. Antoniuk
		David J. Antoniuk
		Vice President and Corporate Controller (Principal Accounting Officer)

GARDNER DENVER, INC.

INDEX TO EXHIBITS


Exhibit
No.		Description
3.1		Certificate of Incorporation of Gardner Denver, Inc., as amended on May 3, 2006, filed as Exhibit 3.1 to Gardner Denver, Inc.’s Current Report on Form 8-K, filed May 3, 2006, and incorporated herein by reference.
3.2		Amended and Restated Bylaws of Gardner Denver, Inc., filed as Exhibit 3.2 to Gardner Denver, Inc.’s Current Report on Form 8-K, filed August 4, 2008, and incorporated herein by reference.
4.1		Amended and Restated Rights Agreement, dated as of January 17, 2005, between Gardner Denver, Inc. and National City Bank as Rights Agent, filed as Exhibit 4.1 to Gardner Denver, Inc.’s Current Report on Form 8-K, filed January 21, 2005, and incorporated herein by reference.
4.2		Amendment No. 1 to the Amended and Restated Rights Agreement, dated as of October 29, 2009, between Gardner Denver, Inc. and Wells Fargo Bank, National Association as Rights Agent, filed as Exhibit 4.2 to Gardner Denver, Inc.’s Current Report on Form 8-K, filed October 29, 2009, and incorporated herein by reference.
4.3		Form of Indenture by and among Gardner Denver, Inc., the Guarantors and The Bank of New York Trust Company, N.A., as trustee, filed as Exhibit 4.1 to Gardner Denver, Inc.’s Current Report on Form 8-K, filed May 4, 2005, and incorporated herein by reference.
10.1+		Offer Letter of Employment, effective as of September 17, 2010, between Gardner Denver, Inc. and Michael M. Larsen, filed as Exhibit 10.1 to Gardner Denver, Inc’s Current Report on Form 8-K, filed September 23, 2010, and incorporated herein by reference.
31.1*		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS§		XBRL Instance Document
101.SCH§		XBRL Taxonomy Extension Schema Document
101.CAL§		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB§		XBRL Taxonomy Extension Label Linkbase Document


Exhibit
No.		Description
101.PRE§		XBRL Taxonomy Extension Presentation Linkbase Document


+		Management contract or compensatory plan or arrangement.

*		Filed herewith.

**		This exhibit is furnished herewith and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except as expressly set forth by specific reference in such filing.

§		These exhibits are furnished herewith. In accordance with Rule 406T of Regulation S-T, these exhibits are not deemed to be filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are not deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.