##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 Form 10-Q
 
 (MARK ONE)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
2005
 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 No. 1-13071
 
 Hanover Compressor Company
 (Exact name of registrant as specified in its charter)
 
 Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
    
    76-0625124
(I.R.S. Employer
Identification No.)12001 North Houston Rosslyn, Houston, Texas
(Address of principal executive offices)
    
    77086
(Zip Code)
 (281) 447-8787
(Registrants telephone number, including area code)
 
 R £
 R £
 o R




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TABLE OF CONTENTS
  
 PagePART I. FINANCIAL INFORMATION
    
    
    3ITEM 1. FINANCIAL STATEMENTS
    
    
    3CONDENSED CONSOLIDATED BALANCE SHEET
    
    
    3CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
    
    
    4CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
    
    
    5CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
    
    
    6NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    
    
    7ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    19ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    35ITEM 4. CONTROLS AND PROCEDURES
    
    
    37PART II. OTHER INFORMATION
    
    
    37ITEM 1. LEGAL PROCEEDINGS
    
    
    37ITEM 5. OTHER INFORMATION
    
    
    37ITEM 6: EXHIBITS
    
    
    38SIGNATURES
    
    
    39EXHIBIT INDEX
    
    
    40Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 HANOVER COMPRESSOR COMPANY
 
 CONDENSED CONSOLIDATED BALANCE SHEET
 September 30,
    
    
    December 31,2005
    
    
    2004(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    29,840
    
    
    $
    38,076Accounts receivable, net of allowance of $7,205 and $7,573, respectively
    
    
    238,718
    
    
    
    205,644Inventory, net
    
    
    218,244
    
    
    
    184,798Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    100,481
    
    
    
    70,103Prepaid taxes
    
    
    4,214
    
    
    
    6,988Current deferred income tax
    
    
    12,286
    
    
    
    12,386Assets held for sale
    
    
    4,576
    
    
    
    5,169Other current assets
    
    
    32,585
    
    
    
    25,674Total current assets
    
    
    640,944
    
    
    
    548,838Property, plant and equipment, net
    
    
    1,810,944
    
    
    
    1,876,348Goodwill, net
    
    
    184,409
    
    
    
    183,190Intangible and other assets
    
    
    52,412
    
    
    
    57,070Investments in non-consolidated affiliates
    
    
    87,628
    
    
    
    90,326Assets held for sale
    
    
    4,680
    
    
    
    6,391Total assets
    
    $
    2,781,017
    
    
    $
    2,762,163LIABILITIES AND COMMON STOCKHOLDERS EQUITYCurrent liabilities:Short-term debt
    
    $
    4,187
    
    
    $
    5,106Current maturities of long-term debt
    
    
    1,478
    
    
    
    1,430Accounts payable, trade
    
    
    67,183
    
    
    
    57,402Accrued liabilities
    
    
    126,154
    
    
    
    118,429Advance billings
    
    
    66,213
    
    
    
    42,588Liabilities related to assets held for sale
    
    
    644
    
    
    
    517Billings on uncompleted contracts in excess of costs and estimated earnings
    
    
    15,721
    
    
    
    20,256Total current liabilities
    
    
    281,580
    
    
    
    245,728Long-term debt
    
    
    1,468,826
    
    
    
    1,637,080Other liabilities
    
    
    42,797
    
    
    
    47,232Deferred income taxes
    
    
    62,908
    
    
    
    53,290Total liabilities
    
    
    1,856,111
    
    
    
    1,983,330Commitments and contingencies (Note 6)Minority interest
    
    
    11,873
    
    
    
    18,778Common stockholders equity:Common stock, $.001 par value; 200,000,000 shares authorized; 102,374,472
and 87,653,970 shares issued, respectively
    
    
    102
    
    
    
    88Additional paid-in capital
    
    
    1,097,576
    
    
    
    913,007Deferred employee compensation  restricted stock grants
    
    
    (14,936
    )
    
    
    (15,180
    )Accumulated other comprehensive income
    
    
    15,970
    
    
    
    17,518Retained deficit
    
    
    (181,889
    )
    
    
    (148,071
    )Treasury stock351,432 and 661,810 common shares, at cost
    
    
    (3,790
    )
    
    
    (7,307
    )Total common stockholders equity
    
    
    913,033
    
    
    
    760,055Total liabilities and common stockholders equity
    
    $
    2,781,017
    
    
    $
    2,762,163
  3




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##### Table of Contents



HANOVER COMPRESSOR COMPANY
 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues and other income:U.S. rentals
    
    $
    87,703
    
    
    $
    85,866
    
    
    $
    262,548
    
    
    $
    256,138International rentals
    
    
    58,208
    
    
    
    52,797
    
    
    
    167,644
    
    
    
    158,896Parts, service and used equipment
    
    
    74,027
    
    
    
    48,741
    
    
    
    157,995
    
    
    
    134,537Compressor and accessory fabrication
    
    
    51,798
    
    
    
    46,605
    
    
    
    125,414
    
    
    
    118,914Production and processing equipment fabrication
    
    
    90,312
    
    
    
    76,193
    
    
    
    284,180
    
    
    
    192,639Equity in income of non-consolidated affiliates
    
    
    6,027
    
    
    
    5,096
    
    
    
    15,759
    
    
    
    14,867Other
    
    
    1,771
    
    
    
    513
    
    
    
    2,714
    
    
    
    2,527369,846
    
    
    
    315,811
    
    
    
    1,016,254
    
    
    
    878,518Expenses:U.S. rentals
    
    
    35,503
    
    
    
    37,816
    
    
    
    102,563
    
    
    
    108,305International rentals
    
    
    19,284
    
    
    
    16,797
    
    
    
    53,930
    
    
    
    45,537Parts, service and used equipment
    
    
    55,865
    
    
    
    34,419
    
    
    
    117,140
    
    
    
    98,752Compressor and accessory fabrication
    
    
    44,418
    
    
    
    41,217
    
    
    
    110,622
    
    
    
    107,584Production and processing equipment fabrication
    
    
    83,146
    
    
    
    68,974
    
    
    
    254,700
    
    
    
    170,557Selling, general and administrative
    
    
    45,442
    
    
    
    43,877
    
    
    
    131,509
    
    
    
    126,133Foreign currency translation
    
    
    1,083
    
    
    
    569
    
    
    
    6,309
    
    
    
    (600
    )Securities related litigation settlement
    
    
    
    
    
    
    (4,000
    )
    
    
    
    
    
    
    (3,903
    )Other
    
    
    133
    
    
    
    222
    
    
    
    526
    
    
    
    569Debt extinguishment costs
    
    
    7,318
    
    
    
    
    
    
    
    7,318
    
    
    
    Depreciation and amortization
    
    
    47,535
    
    
    
    43,506
    
    
    
    138,457
    
    
    
    128,882Interest expense
    
    
    34,612
    
    
    
    37,188
    
    
    
    105,214
    
    
    
    108,169374,339
    
    
    
    320,585
    
    
    
    1,028,288
    
    
    
    889,985Loss from continuing operations before income taxes
    
    
    (4,493
    )
    
    
    (4,774
    )
    
    
    (12,034
    )
    
    
    (11,467
    )Provision for income taxes
    
    
    10,279
    
    
    
    2,557
    
    
    
    20,922
    
    
    
    16,415Loss from continuing operations
    
    
    (14,772
    )
    
    
    (7,331
    )
    
    
    (32,956
    )
    
    
    (27,882
    )Income (loss) from discontinued operations, net of tax
    
    
    (214
    )
    
    
    2,204
    
    
    
    (706
    )
    
    
    3,868Income (loss) from sales or write-downs of discontinued
operations, net of tax
    
    
    48
    
    
    
    (147
    )
    
    
    (156
    )
    
    
    225Net loss
    
    $
    (14,938
    )
    
    $
    (5,274
    )
    
    $
    (33,818
    )
    
    $
    (23,789
    )Basic and diluted loss per common share:Loss from continuing operations
    
    $
    (0.16
    )
    
    $
    (0.09
    )
    
    $
    (0.37
    )
    
    $
    (0.33
    )Income (loss) from discontinued operations, net of tax
    
    
    0.00
    
    
    
    0.03
    
    
    
    (0.01
    )
    
    
    0.05Net loss
    
    $
    (0.16
    )
    
    $
    (0.06
    )
    
    $
    (0.38
    )
    
    $
    (0.28
    )Weighted average common and equivalent shares outstanding:Basic
    
    
    93,888
    
    
    
    85,418
    
    
    
    88,488
    
    
    
    84,527Diluted
    
    
    93,888
    
    
    
    85,418
    
    
    
    88,488
    
    
    
    84,527
  4




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##### Table of Contents



HANOVER COMPRESSOR COMPANY
 
 CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss
    
    $
    (14,938
    )
    
    $
    (5,274
    )
    
    $
    (33,818
    )
    
    $
    (23,789
    )Other comprehensive income (loss):Change in fair value of derivative financial instruments, net of tax
    
    
    
    
    
    
    1,222
    
    
    
    609
    
    
    
    6,970Foreign currency translation adjustment
    
    
    1,900
    
    
    
    4,053
    
    
    
    (2,157
    )
    
    
    155Comprehensive income (loss)
    
    $
    (13,038
    )
    
    $
    1
    
    
    $
    (35,366
    )
    
    $
    (16,664
    )
  5




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##### Table of Contents



HANOVER COMPRESSOR COMPANY
 
 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 Nine Months EndedSeptember 30,2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (33,818
    )
    
    $
    (23,789
    )Adjustments:Depreciation and amortization
    
    
    138,457
    
    
    
    128,882(Gain) loss from discontinued operations, net of tax
    
    
    862
    
    
    
    (4,093
    )Bad debt expense
    
    
    1,568
    
    
    
    1,295Gain on sale of property, plant and equipment
    
    
    (9,736
    )
    
    
    (6,151
    )Equity in income of non-consolidated affiliates, net of dividends received
    
    
    2,924
    
    
    
    (6,975
    )(Gain) loss on derivative instruments
    
    
    416
    
    
    
    (372
    )Provision (release) of litigation settlement, net of cash used
    
    
    
    
    
    
    (5,922
    )Gain on sale of non-consolidated affiliates
    
    
    
    
    
    
    (300
    )Gain on the sale of business
    
    
    (188
    )
    
    
    Restricted stock compensation expense
    
    
    4,059
    
    
    
    1,583Pay-in-kind interest on long-term notes payable
    
    
    17,185
    
    
    
    15,440Deferred income taxes
    
    
    11,749
    
    
    
    9,970Changes in assets and liabilities, excluding business combinations:Accounts receivable and notes
    
    
    (43,835
    )
    
    
    (21,721
    )Inventory
    
    
    (35,956
    )
    
    
    (29,223
    )Costs and estimated earnings versus billings on uncompleted contracts
    
    
    (41,694
    )
    
    
    12,552Accounts payable and other liabilities
    
    
    18,792
    
    
    
    (7,012
    )Advance billings
    
    
    27,508
    
    
    
    9,046Prepaid, effects of exchange rate on accounts denominated in foreign currencies and other
    
    
    7,171
    
    
    
    8,065Net cash provided by continuing operations
    
    
    65,464
    
    
    
    81,275Net cash provided by (used in) discontinued operations
    
    
    (376
    )
    
    
    7,931Net cash provided by operating activities
    
    
    65,088
    
    
    
    89,206Cash flows from investing activities:Capital expenditures
    
    
    (103,155
    )
    
    
    (57,407
    )Proceeds from sale of property, plant and equipment
    
    
    38,028
    
    
    
    23,401Proceeds from sale of business
    
    
    2,500
    
    
    
    Proceeds from sale of non-consolidated affiliates
    
    
    
    
    
    
    4,663Cash used for business acquisitions
    
    
    (3,426
    )
    
    
    Cash used to acquire investments in and advances to non-consolidated affiliates
    
    
    (500
    )
    
    
    (250
    )Net cash used in continuing operations
    
    
    (66,553
    )
    
    
    (29,593
    )Net cash provided by discontinued operations
    
    
    220
    
    
    
    8,644Net cash used in investing activities
    
    
    (66,333
    )
    
    
    (20,949
    )Cash flows from financing activities:Borrowings on revolving credit facilities
    
    
    120,000
    
    
    
    41,000Repayments on revolving credit facilities
    
    
    (79,000
    )
    
    
    (55,000
    )Proceeds from warrant conversions and stock options exercised
    
    
    4,829
    
    
    
    7,719Net repayments of other debt
    
    
    (1,421
    )
    
    
    (16,613
    )Proceeds from equity offering, net of issuance costs
    
    
    179,202
    
    
    
    Proceeds from issuance of senior notes, net
    
    
    
    
    
    
    194,125Payments of debt issuance costs
    
    
    
    
    
    
    (254
    )Payments of 2000A compression equipment lease obligations
    
    
    
    
    
    
    (200,000
    )Payments of 2000B compression equipment lease obligations
    
    
    (57,589
    )
    
    
    (65,000
    )Payments of 2001A compression equipment lease obligations
    
    
    (172,177
    )
    
    
    Net cash used in continuing operations
    
    
    (6,156
    )
    
    
    (94,023
    )Net cash used in discontinued operations
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    (6,156
    )
    
    
    (94,023
    )Effect of exchange rate changes on cash and equivalents
    
    
    (835
    )
    
    
    (160
    )Net decrease in cash and cash equivalents
    
    
    (8,236
    )
    
    
    (25,926
    )Cash and cash equivalents at beginning of period
    
    
    38,076
    
    
    
    56,619Cash and cash equivalents at end of period
    
    $
    29,840
    
    
    $
    30,693
  6




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##### Table of Contents



HANOVER COMPRESSOR COMPANY
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. BASIS OF PRESENTATION
  Earnings Per Common Share
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Weighted average common shares outstandingused in
basic loss per common share
    
    
    93,888

    
    
    85,418

    
    
    88,488

    
    
    84,527Net dilutive potential common stock issuable:On exercise of options and vesting of restricted stock
    
    
    *
    *
    
    
    *
    *
    
    
    *
    *
    
    
    *
    *On exercise of warrants
    
    
    *
    *
    
    
    *
    *
    
    
    *
    *
    
    
    *
    *On conversion of convertible subordinated notes due
2029
    
    
    *
    *
    
    
    *
    *
    
    
    *
    *
    
    
    *
    *On conversion of convertible senior notes due 2008
    
    
    *
    *
    
    
    *
    *
    
    
    *
    *
    
    
    *
    *On conversion of convertible senior notes due 2014
    
    
    *
    *
    
    
    *
    *
    
    
    *
    *
    
    
    *
    *Weighted average common shares and dilutive potential
common shares used in diluted loss per common share
    
    
    93,888

    
    
    85,418

    
    
    88,488

    
    
    84,527
 
 **
    
    Excluded from diluted loss per common share as the effect would have been anti-dilutive. 7




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Net dilutive potential common shares issuable:On exercise of options and vesting of restricted stock
    
    
    2,066
    
    
    
    2,795
    
    
    
    2,534
    
    
    
    2,298On exercise of options-exercise price greater than
average market value at end of period
    
    
    745
    
    
    
    1,074
    
    
    
    749
    
    
    
    1,073On exercise of warrants
    
    
    2
    
    
    
    4
    
    
    
    3
    
    
    
    4On conversion of convertible subordinated notes due
2029
    
    
    4,825
    
    
    
    4,825
    
    
    
    4,825
    
    
    
    4,825On conversion of convertible senior notes due 2008
    
    
    4,370
    
    
    
    4,370
    
    
    
    4,370
    
    
    
    4,370On conversion of convertible senior notes due 2014
    
    
    9,583
    
    
    
    9,583
    
    
    
    9,583
    
    
    
    9,58321,591
    
    
    
    22,651
    
    
    
    22,064
    
    
    
    22,153
 Stock Options and Stock-Based Compensation
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss as reported
    
    $
    (14,938
    )
    
    $
    (5,274
    )
    
    $
    (33,818
    )
    
    $
    (23,789
    )Add back: Restricted stock grant expense
    
    
    1,836
    
    
    
    818
    
    
    
    4,059
    
    
    
    1,583Deduct: Stock-based employee
compensation expense determined under
the fair value method
    
    
    (2,297
    )
    
    
    (1,463
    )
    
    
    (5,846
    )
    
    
    (3,155
    )Pro forma net loss
    
    $
    (15,399
    )
    
    $
    (5,919
    )
    
    $
    (35,605
    )
    
    $
    (25,361
    )Loss per share:Basic, as reported
    
    $
    (0.16
    )
    
    $
    (0.06
    )
    
    $
    (0.38
    )
    
    $
    (0.28
    )Basic, pro forma
    
    $
    (0.16
    )
    
    $
    (0.07
    )
    
    $
    (0.40
    )
    
    $
    (0.30
    )Diluted, as reported
    
    $
    (0.16
    )
    
    $
    (0.06
    )
    
    $
    (0.38
    )
    
    $
    (0.28
    )Diluted, pro forma
    
    $
    (0.16
    )
    
    $
    (0.07
    )
    
    $
    (0.40
    )
    
    $
    (0.30
    )
  Reclassifications
 8




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##### Table of Contents



2. INVENTORY
  September 30,
    
    
    December 31,2005
    
    
    2004Parts and supplies
    
    $
    128,167
    
    
    $
    135,751Work in progress
    
    
    79,635
    
    
    
    42,708Finished goods
    
    
    10,442
    
    
    
    6,339$
    218,244
    
    
    $
    184,798
  3. PROPERTY, PLANT AND EQUIPMENT
  September 30,
    
    
    December 31,2005
    
    
    2004Compression equipment, facilities and other rental assets
    
    $
    2,401,774
    
    
    $
    2,360,799Land and buildings
    
    
    85,879
    
    
    
    89,573Transportation and shop equipment
    
    
    76,750
    
    
    
    78,577Other
    
    
    54,173
    
    
    
    51,0542,618,576
    
    
    
    2,580,003Accumulated depreciation
    
    
    (807,632
    )
    
    
    (703,655
    )$
    1,810,944
    
    
    $
    1,876,348
  4. DEBT
  September 30,
    
    
    December 31,2005
    
    
    2004Belleli-factored receivables
    
    $
    1,163
    
    
    $
    1,011Belleli-revolving credit facility
    
    
    3,024
    
    
    
    4,095Short-term debt
    
    $
    4,187
    
    
    $
    5,106
  9




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##### Table of Contents



September 30,
    
    
    December 31,2005
    
    
    2004Bank credit facility due December 2006
    
    $
    48,000
    
    
    $
    7,0004.75% convertible senior notes due 2008*
    
    
    192,000
    
    
    
    192,0004.75% convertible senior notes due 2014*
    
    
    143,750
    
    
    
    143,7508.625% senior notes due 2010**
    
    
    200,000
    
    
    
    200,0009.0% senior notes due 2014**
    
    
    200,000
    
    
    
    200,0002000B compression equipment lease notes, interest at 5.2%, due October 2005
    
    
    
    
    
    
    55,8612001A compression equipment lease notes, interest at 8.5%, due September 2008
    
    
    133,000
    
    
    
    300,0002001B compression equipment lease notes, interest at 8.75%, due September 2011
    
    
    250,000
    
    
    
    250,000Zero coupon subordinated notes, interest at 11.0%, due March 2007*
    
    
    223,652
    
    
    
    206,4677.25% convertible subordinated notes due 2029*
    
    
    86,250
    
    
    
    86,250Fair value adjustment  fixed to floating interest rate swaps
    
    
    (8,447
    )
    
    
    (5,996
    )Other, interest at various rates, collateralized by equipment and other
assets, net of unamortized discount
    
    
    2,099
    
    
    
    3,1781,470,304
    
    
    
    1,638,510Less-current maturities
    
    
    (1,478
    )
    
    
    (1,430
    )Long-term debt
    
    $
    1,468,826
    
    
    $
    1,637,080
 
 *
    
    Securities issued by Hanover (parent company).**
    
    Securities issued by Hanover (parent company) and guaranteed by Hanover Compression Limited
Partnership.     10




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##### Table of Contents



5. ACCOUNTING FOR DERIVATIVES
    Fair Value ofFixed Rate to be
    
    
    Notional
    
    
    Swap atFloating Rate to be Paid
    
    Maturity Date
    
    
    Received
    
    
    Amount
    
    
    September 30, 2005Six Month LIBOR +4.72%
    
    December 15, 2010
    
    
    8.625
    %
    
    $
    100,000
    
    
    $
    (4,344
    )Six Month LIBOR +4.64%
    
    December 15, 2010
    
    
    8.625
    %
    
    $
    100,000
    
    
    $
    (4,103
    )
   Fair Value ofFixed Rate to be
    
    
    Notional
    
    
    Swap atLease
    
    Maturity Date
    
    
    Paid
    
    
    Amount
    
    
    September 30, 2005March 2000
    
    March 11, 2005
    
    
    5.2550
    %
    
    $
    100,000
    
    
    $
    August 2000
    
    March 11, 2005
    
    
    5.2725
    %
    
    $
    100,000
    
    
    $
    
  11




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##### Table of Contents



6. COMMITMENTS AND CONTINGENICES
 Maximum PotentialUndiscountedPayments as ofTerm
    
    
    September 30, 2005Indebtedness of non-consolidated affiliates:Simco/Harwat Consortium (1)
    
    
    2005
    
    
    $
    8,763El Furrial (1)
    
    
    2013
    
    
    
    33,022Other:Performance guarantees through letters of credit (2)
    
    
    2005-2006
    
    
    
    101,098Standby letters of credit
    
    
    2005-2006
    
    
    
    20,249Commercial letters of credit
    
    
    2005
    
    
    
    3,133Bid bonds and performance bonds (2)
    
    
    2005-2011
    
    
    
    103,436$
    269,701
 
 (1)
    
    We have guaranteed the amount included above, which is a percentage of the total debt of this
non-consolidated affiliate equal to our ownership percentage in such affiliate.(2)
    
    We have issued guarantees to third parties to ensure performance of our obligations, some of
which may be fulfilled by third parties.    12




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##### Table of Contents



7. RELATED-PARTY TRANSACTIONS
  13




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##### Table of Contents



8. STOCKHOLDERS EQUITY
  9. RECENT ACCOUNTING PRONOUNCEMENTS
    14




---



##### Table of Contents



Accounting for Stock Issued to Employees,
    10. REPORTABLE SEGMENTS
    15




---



##### Table of Contents



SegmentsProductionParts,
    
    
    Compressor
    
    
    andservice
    
    
    and
    
    
    processingU.S.
    
    
    International
    
    
    and used
    
    
    accessory
    
    
    equipment
    
    
    Otherrentals
    
    
    rentals
    
    
    equipment
    
    
    fabrication
    
    
    fabrication
    
    
    income
    
    
    Total(in thousands)September 30, 2005:Revenues from external customers
    
    $
    87,703
    
    
    $
    58,208
    
    
    $
    74,027
    
    
    $
    51,798
    
    
    $
    90,312
    
    
    $
    7,798
    
    
    $
    369,846Gross profit
    
    
    52,200
    
    
    
    38,924
    
    
    
    18,162
    
    
    
    7,380
    
    
    
    7,166
    
    
    
    7,798
    
    
    
    131,630September 30, 2004:Revenues from external customers
    
    $
    85,866
    
    
    $
    52,797
    
    
    $
    48,741
    
    
    $
    46,605
    
    
    $
    76,193
    
    
    $
    5,609
    
    
    $
    315,811Gross profit
    
    
    48,050
    
    
    
    36,000
    
    
    
    14,322
    
    
    
    5,388
    
    
    
    7,219
    
    
    
    5,609
    
    
    
    116,588
  SegmentsProductionParts,
    
    
    Compressor
    
    
    andservice
    
    
    and
    
    
    processingU.S.
    
    
    International
    
    
    and used
    
    
    accessory
    
    
    equipment
    
    
    Otherrentals
    
    
    rentals
    
    
    equipment
    
    
    fabrication
    
    
    fabrication
    
    
    income
    
    
    Total(in thousands)September 30, 2005:Revenues from external customers
    
    $
    262,548
    
    
    $
    167,644
    
    
    $
    157,995
    
    
    $
    125,414
    
    
    $
    284,180
    
    
    $
    18,473
    
    
    $
    1,016,254Gross profit
    
    
    159,985
    
    
    
    113,714
    
    
    
    40,855
    
    
    
    14,792
    
    
    
    29,480
    
    
    
    18,473
    
    
    
    377,299September 30, 2004:Revenues from external customers
    
    $
    256,138
    
    
    $
    158,896
    
    
    $
    134,537
    
    
    $
    118,914
    
    
    $
    192,639
    
    
    $
    17,394
    
    
    $
    878,518Gross profit
    
    
    147,833
    
    
    
    113,359
    
    
    
    35,785
    
    
    
    11,330
    
    
    
    22,082
    
    
    
    17,394
    
    
    
    347,783
 11. DISCONTINUED OPERATIONS AND OTHER ASSETS HELD FOR SALE
   16




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues and other:U.S. rentals
    
    $
    250
    
    
    $
    93
    
    
    $
    320
    
    
    $
    108International rentals
    
    
    
    
    
    
    3,782
    
    
    
    
    
    
    
    11,611Parts, service and used equipment
    
    
    
    
    
    
    2,636
    
    
    
    
    
    
    
    9,378Equity in income of non-consolidated affiliates
    
    
    
    
    
    
    51
    
    
    
    
    
    
    
    39Other
    
    
    74
    
    
    
    732
    
    
    
    79
    
    
    
    453324
    
    
    
    7,294
    
    
    
    399
    
    
    
    21,589Expenses:U.S. rentals
    
    
    274
    
    
    
    240
    
    
    
    657
    
    
    
    631International rentals
    
    
    
    
    
    
    1,332
    
    
    
    
    
    
    
    4,914Parts, service and used equipment
    
    
    
    
    
    
    2,297
    
    
    
    
    
    
    
    6,888Compressor and accessory fabrication
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    Selling, general and administrative
    
    
    101
    
    
    
    356
    
    
    
    280
    
    
    
    1,331Foreign currency translation
    
    
    
    
    
    
    (1,101
    )
    
    
    5
    
    
    
    (807
    )Depreciation and amortization
    
    
    
    
    
    
    638
    
    
    
    
    
    
    
    2,706Interest expense
    
    
    163
    
    
    
    
    
    
    
    163
    
    
    
    Other
    
    
    
    
    
    
    333
    
    
    
    
    
    
    
    467538
    
    
    
    4,092
    
    
    
    1,105
    
    
    
    16,130Income (loss) from discontinued operations before income taxes
    
    
    (214
    )
    
    
    3,202
    
    
    
    (706
    )
    
    
    5,459Provision for income taxes
    
    
    
    
    
    
    998
    
    
    
    
    
    
    
    1,591Income (loss) from discontinued operations
    
    $
    (214
    )
    
    $
    2,204
    
    
    $
    (706
    )
    
    $
    3,868
   Non-OilfieldUsed
    
    
    PowerEquipment
    
    
    Generation
    
    
    Facilities
    
    
    TotalCurrent assets
    
    $
    2,455
    
    
    $
    2,121
    
    
    $
    
    
    
    $
    4,576Property, plant and equipment
    
    
    
    
    
    
    766
    
    
    
    3,914
    
    
    
    4,680Assets held for sale
    
    
    2,455
    
    
    
    2,887
    
    
    
    3,914
    
    
    
    9,256Current liabilities
    
    
    
    
    
    
    644
    
    
    
    
    
    
    
    644Liabilities held for sale
    
    
    
    
    
    
    644
    
    
    
    
    
    
    
    644Net assets held for sale
    
    $
    2,455
    
    
    $
    2,243
    
    
    $
    3,914
    
    
    $
    8,612
  Non-OilfieldUsed
    
    
    PowerEquipment
    
    
    Generation
    
    
    Facilities
    
    
    TotalCurrent assets
    
    $
    2,455
    
    
    $
    2,714
    
    
    $
    
    
    
    $
    5,169Property, plant and equipment
    
    
    
    
    
    
    1,077
    
    
    
    5,314
    
    
    
    6,391Assets held for sale
    
    
    2,455
    
    
    
    3,791
    
    
    
    5,314
    
    
    
    11,560Current liabilities
    
    
    
    
    
    
    517
    
    
    
    
    
    
    
    517Liabilities held for sale
    
    
    
    
    
    
    517
    
    
    
    
    
    
    
    517Net assets held for sale
    
    $
    2,455
    
    
    $
    3,274
    
    
    $
    5,314
    
    
    $
    11,043
  17




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12. INCOME TAXES
    13. IMPACT OF HURRICANES
   18




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
  
    
    our inability to renew our short-term leases of equipment with our customers so as to
fully recoup our cost of the equipment;
    
    a prolonged substantial reduction in oil and natural gas prices, which could cause a
decline in the demand for our compression and oil and natural gas production and processing
equipment;
    
    reduced profit margins or the loss of market share resulting from competition or the
introduction of competing technologies by other companies;
    
    changes in economic or political conditions in the countries in which we do business,
including civil uprisings, riots, terrorism, the taking of property without fair
compensation and legislative changes;
    
    changes in currency exchange rates;
    
    the inherent risks associated with our operations, such as equipment defects, malfunctions and natural disasters;
    
    our inability to implement certain business objectives, such as:
 
    
    international expansion including our ability to timely and cost-effectively
execute projects in new international operating environments,
    
    integrating acquired businesses,
    
    generating sufficient cash,
    
    accessing the capital markets,
    
    refinancing existing or incurring additional indebtedness to fund our business, and
    
    executing our exit and sale strategy with respect to assets classified on our balance sheet as held for sale;
 
    
    risks associated with any significant failure or malfunction of our enterprise resource planning system;
    
    governmental safety, health, environmental and other regulations, which could require us
to make significant expenditures; and
    
    our inability to comply with covenants in our debt agreements and the decreased financial
flexibility associated with our substantial debt.
  19




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GENERAL
   OVERVIEW
     Industry Conditions
  20




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##### Table of Contents



U.S. Tax Position
  21




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RESULTS OF OPERATIONS
 THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2004
 Summary of Business Segment Results
 U.S. Rentals
 Three months endedSeptember 30,
    
    
    Increase2005
    
    
    2004
    
    
    (Decrease)Revenue
    
    $
    87,703
    
    
    $
    85,866
    
    
    
    2
    %Operating expense
    
    
    35,503
    
    
    
    37,816
    
    
    
    (6
    )%Gross profit
    
    $
    52,200
    
    
    $
    48,050
    
    
    
    9
    %Gross margin
    
    
    60
    %
    
    
    56
    %
    
    
    4
    %
  International Rentals
 Three months endedSeptember 30,
    
    
    Increase2005
    
    
    2004
    
    
    (Decrease)Revenue
    
    $
    58,208
    
    
    $
    52,797
    
    
    
    10
    %Operating expense
    
    
    19,284
    
    
    
    16,797
    
    
    
    15
    %Gross profit
    
    $
    38,924
    
    
    $
    36,000
    
    
    
    8
    %Gross margin
    
    
    67
    %
    
    
    68
    %
    
    
    (1
    )%
  22




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##### Table of Contents



Parts, Service and Used Equipment
 Three months endedSeptember 30,
    
    
    Increase2005
    
    
    2004
    
    
    (Decrease)Revenue
    
    $
    74,027
    
    
    $
    48,741
    
    
    
    52
    %Operating expense
    
    
    55,865
    
    
    
    34,419
    
    
    
    62
    %Gross profit
    
    $
    18,162
    
    
    $
    14,322
    
    
    
    27
    %Gross margin
    
    
    25
    %
    
    
    29
    %
    
    
    (4
    )%
  Compression and Accessory Fabrication
 Three months endedSeptember 30,
    
    
    Increase2005
    
    
    2004
    
    
    (Decrease)Revenue
    
    $
    51,798
    
    
    $
    46,605
    
    
    
    11
    %Operating expense
    
    
    44,418
    
    
    
    41,217
    
    
    
    8
    %Gross profit
    
    $
    7,380
    
    
    $
    5,388
    
    
    
    37
    %Gross margin
    
    
    14
    %
    
    
    12
    %
    
    
    2
    %
  Production and Processing Equipment Fabrication
 Three months endedSeptember 30,
    
    
    Increase2005
    
    
    2004
    
    
    (Decrease)Revenue
    
    $
    90,312
    
    
    $
    76,193
    
    
    
    19
    %Operating expense
    
    
    83,146
    
    
    
    68,974
    
    
    
    21
    %Gross profit
    
    $
    7,166
    
    
    $
    7,219
    
    
    
    (1
    )%Gross margin
    
    
    8
    %
    
    
    9
    %
    
    
    (1
    )%
  23




---



##### Table of Contents



Expenses
       Three Months EndedSeptember 30,2005
    
    
    2004Canada
    
    $
    (1,447
    )
    
    $
    (189
    )Argentina
    
    
    (112
    )
    
    
    (420
    )Venezuela
    
    
    304
    
    
    
    (134
    )Italy
    
    
    (273
    )
    
    
    100All other countries
    
    
    445
    
    
    
    74Exchange gain/(loss)
    
    $
    (1,083
    )
    
    $
    (569
    )
    24




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Income Taxes
   Discontinued Operations
  25




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NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2004
 Summary of Business Segment Results
 U.S. Rentals
 Nine months endedSeptember 30,
    
    
    Increase2005
    
    
    2004
    
    
    (Decrease)Revenue
    
    $
    262,548
    
    
    $
    256,138
    
    
    
    3
    %Operating expense
    
    
    102,563
    
    
    
    108,305
    
    
    
    (5
    )%Gross profit
    
    $
    159,985
    
    
    $
    147,833
    
    
    
    8
    %Gross margin
    
    
    61
    %
    
    
    58
    %
    
    
    3
    %
  International Rentals
 Nine months endedSeptember 30,
    
    
    Increase2005
    
    
    2004
    
    
    (Decrease)Revenue
    
    $
    167,644
    
    
    $
    158,896
    
    
    
    6
    %Operating expense
    
    
    53,930
    
    
    
    45,537
    
    
    
    18
    %Gross profit
    
    $
    113,714
    
    
    $
    113,359
    
    
    
    0
    %Gross margin
    
    
    68
    %
    
    
    71
    %
    
    
    (3
    )%
  Parts, Service and Used Equipment
 Nine months endedSeptember 30,
    
    
    Increase2005
    
    
    2004
    
    
    (Decrease)Revenue
    
    $
    157,995
    
    
    $
    134,537
    
    
    
    17
    %Operating expense
    
    
    117,140
    
    
    
    98,752
    
    
    
    19
    %Gross profit
    
    $
    40,855
    
    
    $
    35,785
    
    
    
    14
    %Gross margin
    
    
    26
    %
    
    
    27
    %
    
    
    (1
    )%
  26




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##### Table of Contents



Compression and Accessory Fabrication
 Nine months endedSeptember 30,
    
    
    Increase2005
    
    
    2004
    
    
    (Decrease)Revenue
    
    $
    125,414
    
    
    $
    118,914
    
    
    
    5
    %Operating expense
    
    
    110,622
    
    
    
    107,584
    
    
    
    3
    %Gross profit
    
    $
    14,792
    
    
    $
    11,330
    
    
    
    31
    %Gross margin
    
    
    12
    %
    
    
    10
    %
    
    
    2
    %
  Production and Processing Equipment Fabrication
 Nine months endedSeptember 30,
    
    
    Increase2005
    
    
    2004
    
    
    (Decrease)Revenue
    
    $
    284,180
    
    
    $
    192,639
    
    
    
    48
    %Operating expense
    
    
    254,700
    
    
    
    170,557
    
    
    
    49
    %Gross profit
    
    $
    29,480
    
    
    $
    22,082
    
    
    
    34
    %Gross margin
    
    
    10
    %
    
    
    11
    %
    
    
    (1
    )%
  Expenses
   27




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Nine Months EndedSeptember 30,2005
    
    
    2004Canada
    
    $
    (1,252
    )
    
    $
    44Argentina
    
    
    362
    
    
    
    (868
    )Venezuela
    
    
    3,453
    
    
    
    1,299Italy
    
    
    (9,165
    )
    
    
    193All other countries
    
    
    293
    
    
    
    (68
    )Exchange gain/(loss)
    
    $
    (6,309
    )
    
    $
    600
    Income Taxes
  28




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Discontinued Operations
  LIQUIDITY AND CAPITAL RESOURCES
   Nine Months EndedSeptember 30,2005
    
    
    2004Net cash provided by (used in) continuing operations:Operating activities
    
    $
    65,464
    
    
    $
    81,275Investing activities
    
    
    (66,553
    )
    
    
    (29,593
    )Financing activities
    
    
    (6,156
    )
    
    
    (94,023
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (835
    )
    
    
    (160
    )Net cash provided by (used in) discontinued operations
    
    
    (156
    )
    
    
    16,575Net change in cash and cash equivalents
    
    $
    (8,236
    )
    
    $
    (25,926
    )
     29




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30




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##### Table of Contents



StandardMoodys
    
    & PoorsOutlook
    
    Stable
    
    StableSenior implied rating
    
    B1
    
    BB-Liquidity rating
    
    SGL-3
    
    Bank credit facility due December 2006
    
    Ba3
    
    2001A compression equipment lease notes, interest at 8.5%, due September 2008
    
    B2
    
    B+2001B compression equipment lease notes, interest at 8.8%, due September 2011
    
    B2
    
    B+4.75% convertible senior notes due 2008
    
    B3
    
    B4.75% convertible senior notes due 2014
    
    B3
    
    B8.625% senior notes due 2010
    
    B3
    
    B9.0% senior notes due 2014
    
    B3
    
    BZero coupon subordinated notes, interest at 11%, due March 31, 2007
    
    Caa1
    
    B-7.25% convertible subordinated notes due 2029*
    
    Caa1
    
    B-
 
 *
    
    Rating is on the Mandatorily Redeemable Convertible Preferred Securities issued by Hanover
Compressor Capital Trust, our wholly-owned subsidiary. Prior to adoption of FIN 46 in 2003,
these securities were reported on our balance sheet as mandatorily redeemable convertible
preferred securities. Because we only have a limited ability to make decisions about its
activities and we are not the primary beneficiary of the trust, the trust is a variable
interest entity under FIN 46. As such, the Mandatorily Redeemable Convertible Preferred
Securities issued by the trust are no longer reported on our balance sheet. Instead, we now
report our subordinated notes payable to the trust as a debt. These notes have previously been
eliminated in our consolidated financial statements. The changes related to our Mandatorily
Redeemable Convertible Preferred Securities for our balance sheet are reclassifications and
had no impact on our consolidated results of operations or cash flow.  31




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Derivative Financial Instruments.
   Fair Value ofFixed Rate to be
    
    
    
    
    
    
    Swap atFloating Rate to be Paid
    
    Maturity Date

    
    Received
    
    
    Notional Amount
    
    
    September 30, 2005Six Month LIBOR +4.72%
    
    December 15, 2010
    
    
    8.625
    %
    
    $
    100,000
    
    
    $
    (4,344
    )Six Month LIBOR +4.64%
    
    December 15, 2010
    
    
    8.625
    %
    
    $
    100,000
    
    
    $
    (4,103
    )
   Fair Value ofSwap atLease
    
    Maturity Date

    
    Fixed Rate to be Paid
    
    
    Notional Amount
    
    
    September 30, 2005March 2000
    
    March 11, 2005
    
    
    5.2550
    %
    
    $
    100,000
    
    
    $
    August 2000
    
    March 11, 2005
    
    
    5.2725
    %
    
    $
    100,000
    
    
    $
    
   32




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##### Table of Contents



International Operations
      Nine Months EndedSeptember 30,2005
    
    
    2004Canada
    
    $
    (1,252
    )
    
    $
    44Argentina
    
    
    362
    
    
    
    (868
    )Venezuela
    
    
    3,453
    
    
    
    1,299Italy
    
    
    (9,165
    )
    
    
    193All other countries
    
    
    293
    
    
    
    (68
    )Exchange gain/(loss)
    
    $
    (6,309
    )
    
    $
    600
   33




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##### Table of Contents



NEW ACCOUNTING PRONOUNCEMENTS
    34




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##### Table of Contents



Accounting for Stock Issued to Employees,
    
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   35




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##### Table of Contents



Fair Value ofFixed Rate
    
    
    
    
    
    
    Swap atto be
    
    
    Notional
    
    
    September 30,Floating Rate to be Paid
    
    Maturity Date

    
    Received
    
    
    Amount
    
    
    2005Six Month LIBOR +4.72%
    
    December 15, 2010
    
    
    8.625
    %
    
    $
    100,000
    
    
    $
    (4,344
    )Six Month LIBOR +4.64%
    
    December 15, 2010
    
    
    8.625
    %
    
    $
    100,000
    
    
    $
    (4,103
    )
        36




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##### Table of Contents



Nine Months EndedSeptember 30,2005
    
    
    2004Canada
    
    $
    (1,252
    )
    
    $
    44Argentina
    
    
    362
    
    
    
    (868
    )Venezuela
    
    
    3,453
    
    
    
    1,299Italy
    
    
    (9,165
    )
    
    
    193All other countries
    
    
    293
    
    
    
    (68
    )Exchange gain/(loss)
    
    $
    (6,309
    )
    
    $
    600
  
 ITEM 4. CONTROLS AND PROCEDURES
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 5. OTHER INFORMATION
  37




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##### Table of Contents



ITEM 6: EXHIBITS
 (a)
    
    Exhibits
 31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)31.2
    
    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)32.1
    
    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (2)32.2
    
    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (2)
 
 (1)
    
    Filed herewith.(2)
    
    Furnished herewith. 38




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##### Table of Contents



SIGNATURES
    By:
    
    /s/ JOHN E. JACKSONJohn E. JacksonPresident and Chief Executive Officer
  By:
    
    /s/ LEE E. BECKELMANLee E. BeckelmanVice President and Chief Financial Officer
 39




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##### Table of Contents



EXHIBIT INDEX
 31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)31.2
    
    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)32.1
    
    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (2)32.2
    
    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (2)
 
 (1)
    
    Filed herewith.(2)
    
    Furnished herewith. 40