##### 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 JUNE 30, 2007
 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)
 þ o
  þ o o
 o þ




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##### Table of Contents



TABLE OF CONTENTS
  
 PagePART I. FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Comprehensive Income
    
    
    5Condensed Consolidated Statements of Cash Flows
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 4. Controls and Procedures
    
    
    39PART II. OTHER INFORMATION
    
    
    39Item 1. Legal Proceedings
    
    
    39Item 1A. Risk Factors
    
    
    39Item 6. Exhibits
    
    
    39SIGNATURES
    
    
    41Merger Severance Benefits PlanCertification of the CEO Pursuant to Section 302Certification of the CFO Pursuant to Section 302Certification of the CEO Pursuant to Section 906Certification of the 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 SHEETS
  June 30,
    
    
    December 31,2007
    
    
    2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    53,784
    
    
    $
    73,286Accounts receivable, net of allowance of $5,567 and $4,938, respectively
    
    
    353,100
    
    
    
    283,073Inventory, net
    
    
    317,028
    
    
    
    308,093Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    129,246
    
    
    
    109,732Current deferred income taxes
    
    
    23,323
    
    
    
    20,129Other current assets
    
    
    93,473
    
    
    
    86,350Total current assets
    
    
    969,954
    
    
    
    880,663Property, plant and equipment, net
    
    
    1,887,905
    
    
    
    1,863,452Goodwill, net
    
    
    181,043
    
    
    
    181,098Intangible and other assets
    
    
    54,093
    
    
    
    55,702Investments in non-consolidated affiliates
    
    
    99,449
    
    
    
    89,974Total assets
    
    $
    3,192,444
    
    
    $
    3,070,889LIABILITIES AND COMMON STOCKHOLDERS EQUITYCurrent liabilities:Short-term debt
    
    $
    5,522
    
    
    $
    4,433Current maturities of long-term debt
    
    
    192,000
    
    
    
    455Accounts payable, trade
    
    
    122,982
    
    
    
    136,908Accrued liabilities
    
    
    164,588
    
    
    
    147,320Advance billings
    
    
    130,555
    
    
    
    170,859Billings on uncompleted contracts in excess of costs and estimated earnings
    
    
    115,601
    
    
    
    94,123Total current liabilities
    
    
    731,248
    
    
    
    554,098Long-term debt
    
    
    1,140,957
    
    
    
    1,365,043Other liabilities
    
    
    61,995
    
    
    
    48,953Deferred income taxes
    
    
    86,390
    
    
    
    76,522Total liabilities
    
    
    2,020,590
    
    
    
    2,044,616Commitments and contingencies (Note 6)Minority interest
    
    
    11,991
    
    
    
    11,991Common stockholders equity:Common stock, $.001 par value; 200,000,000 shares authorized; 109,587,563
and 103,825,732 shares issued, respectively
    
    
    110
    
    
    
    104Additional paid-in capital
    
    
    1,200,724
    
    
    
    1,104,730Accumulated other comprehensive income
    
    
    14,820
    
    
    
    12,983Accumulated deficit
    
    
    (51,821
    )
    
    
    (99,565
    )Treasury stock469,652 and 449,763 common shares, at cost, respectively
    
    
    (3,970
    )
    
    
    (3,970
    )Total common stockholders equity
    
    
    1,159,863
    
    
    
    1,014,282Total liabilities and common stockholders equity
    
    $
    3,192,444
    
    
    $
    3,070,889
  3




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HANOVER COMPRESSOR COMPANY
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues and other income:U.S. rentals
    
    $
    99,562
    
    
    $
    93,073
    
    
    $
    199,198
    
    
    $
    184,716International rentals
    
    
    69,645
    
    
    
    67,520
    
    
    
    136,936
    
    
    
    130,026Parts, service and used equipment
    
    
    72,664
    
    
    
    55,737
    
    
    
    154,004
    
    
    
    105,008Compressor and accessory fabrication
    
    
    139,508
    
    
    
    70,128
    
    
    
    218,216
    
    
    
    124,819Production and processing equipment fabrication
    
    
    122,595
    
    
    
    103,653
    
    
    
    255,833
    
    
    
    182,272Equity in income of non-consolidated affiliates
    
    
    6,279
    
    
    
    5,230
    
    
    
    11,962
    
    
    
    11,078Gain on sale of business and other income
    
    
    5,465
    
    
    
    10,330
    
    
    
    12,797
    
    
    
    40,549515,718
    
    
    
    405,671
    
    
    
    988,946
    
    
    
    778,468Expenses:U.S. rentals
    
    
    40,258
    
    
    
    36,729
    
    
    
    79,135
    
    
    
    74,820International rentals
    
    
    27,675
    
    
    
    23,691
    
    
    
    50,980
    
    
    
    45,023Parts, service and used equipment
    
    
    56,036
    
    
    
    45,061
    
    
    
    122,881
    
    
    
    86,123Compressor and accessory fabrication
    
    
    106,016
    
    
    
    58,482
    
    
    
    169,261
    
    
    
    105,175Production and processing equipment fabrication
    
    
    104,336
    
    
    
    89,203
    
    
    
    215,874
    
    
    
    158,166Selling, general and administrative
    
    
    56,240
    
    
    
    49,783
    
    
    
    108,034
    
    
    
    97,838Merger expenses
    
    
    3,065
    
    
    
    
    
    
    
    3,389
    
    
    
    Depreciation and amortization
    
    
    52,772
    
    
    
    43,077
    
    
    
    103,668
    
    
    
    85,045Interest expense
    
    
    26,775
    
    
    
    29,287
    
    
    
    53,640
    
    
    
    60,927Foreign currency translation
    
    
    319
    
    
    
    (2,236
    )
    
    
    11
    
    
    
    (3,733
    )Debt extinguishment costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,902Other
    
    
    
    
    
    
    1,204
    
    
    
    
    
    
    
    1,204473,492
    
    
    
    374,281
    
    
    
    906,873
    
    
    
    716,490Income from continuing operations before income taxes and
minority interest
    
    
    42,226
    
    
    
    31,390
    
    
    
    82,073
    
    
    
    61,978Provision for income taxes
    
    
    16,162
    
    
    
    9,546
    
    
    
    30,607
    
    
    
    17,993Income from continuing operations before minority interest
    
    
    26,064
    
    
    
    21,844
    
    
    
    51,466
    
    
    
    43,985Minority interest, net of taxes
    
    
    
    
    
    
    (93
    )
    
    
    
    
    
    
    (93
    )Income from continuing operations
    
    
    26,064
    
    
    
    21,751
    
    
    
    51,466
    
    
    
    43,892Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (63
    )
    
    
    
    
    
    
    (202
    )Gain from sales of discontinued operations, net of tax
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    63Income before cumulative effect of accounting changes
    
    
    26,064
    
    
    
    21,704
    
    
    
    51,466
    
    
    
    43,753Cumulative effect of accounting changes, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370Net income
    
    $
    26,064
    
    
    $
    21,704
    
    
    $
    51,466
    
    
    $
    44,123Basic income per common share:Income from continuing operations
    
    $
    0.25
    
    
    $
    0.21
    
    
    $
    0.49
    
    
    $
    0.44Loss from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of accounting changes, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    0.25
    
    
    $
    0.21
    
    
    $
    0.49
    
    
    $
    0.44Diluted income per common share:Income from continuing operations
    
    $
    0.23
    
    
    $
    0.21
    
    
    $
    0.46
    
    
    $
    0.43Loss from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of accounting changes, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    0.23
    
    
    $
    0.21
    
    
    $
    0.46
    
    
    $
    0.43Weighted average common and equivalent shares outstanding:Basic
    
    
    105,889
    
    
    
    101,017
    
    
    
    104,631
    
    
    
    100,888Diluted
    
    
    118,054
    
    
    
    112,052
    
    
    
    117,828
    
    
    
    111,740
  4




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HANOVER COMPRESSOR COMPANY
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    26,064
    
    
    $
    21,704
    
    
    $
    51,466
    
    
    $
    44,123Other comprehensive income:Foreign currency translation adjustment
    
    
    1,209
    
    
    
    (4,283
    )
    
    
    1,837
    
    
    
    (3,936
    )Comprehensive income
    
    $
    27,273
    
    
    $
    17,421
    
    
    $
    53,303
    
    
    $
    40,187
  5




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HANOVER COMPRESSOR COMPANY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
   Six Months EndedJune 30,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    51,466
    
    
    $
    44,123Adjustments:Depreciation and amortization
    
    
    103,668
    
    
    
    85,045Loss from discontinued operations, net of tax
    
    
    
    
    
    
    139Cumulative effect of accounting changes, net of tax
    
    
    
    
    
    
    (370
    )Minority interests
    
    
    
    
    
    
    93Bad debt expense
    
    
    1,000
    
    
    
    2,249Gain on sale of property, plant and equipment
    
    
    (3,263
    )
    
    
    (10,594
    )Equity in (income) loss of non-consolidated affiliates, net of dividends received
    
    
    (6,379
    )
    
    
    255Gain on remeasurement of intercompany balances
    
    
    (192
    )
    
    
    (1,539
    )Net realized gain on trading securities
    
    
    (10,313
    )
    
    
    (1,491
    )Zero coupon subordinated notes accreted interest paid by refinancing
    
    
    
    
    
    
    (86,084
    )Gain on sale of business
    
    
    
    
    
    
    (28,476
    )Stock compensation expense
    
    
    6,190
    
    
    
    4,117Pay-in-kind interest on zero coupon subordinated notes
    
    
    
    
    
    
    6,282Sales of trading securities
    
    
    23,593
    
    
    
    9,641Purchase of trading securities
    
    
    (13,280
    )
    
    
    (8,150
    )Deferred income taxes
    
    
    5,788
    
    
    
    7,175Changes in assets and liabilities:Accounts receivable and notes
    
    
    (67,375
    )
    
    
    (8,588
    )Inventory
    
    
    (9,493
    )
    
    
    (37,156
    )Costs and estimated earnings versus billings on uncompleted contracts
    
    
    1,402
    
    
    
    14,681Prepaid and other current assets
    
    
    (6,175
    )
    
    
    (15,175
    )Accounts payable and other liabilities
    
    
    7,176
    
    
    
    9,678Advance billings
    
    
    (37,180
    )
    
    
    42,519Other
    
    
    (3,806
    )
    
    
    (3,639
    )Net cash provided by continuing operations
    
    
    42,827
    
    
    
    24,735Net cash used in discontinued operations
    
    
    
    
    
    
    (139
    )Net cash provided by operating activities
    
    
    42,827
    
    
    
    24,596Cash flows from investing activities:Capital expenditures
    
    
    (142,197
    )
    
    
    (119,289
    )Proceeds from sale of property, plant and equipment
    
    
    21,223
    
    
    
    19,621Cash invested in non-consolidated affiliates
    
    
    (3,095
    )
    
    
    Proceeds from sale of business
    
    
    
    
    
    
    52,125Net cash used in continuing operations
    
    
    (124,069
    )
    
    
    (47,543
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (124,069
    )
    
    
    (47,543
    )Cash flows from financing activities:Borrowings on revolving credit facilities
    
    
    198,400
    
    
    
    110,500Repayments on revolving credit facilities
    
    
    (144,400
    )
    
    
    (88,500
    )Proceeds from issuance of senior notes
    
    
    
    
    
    
    150,000Payments for debt issue costs
    
    
    
    
    
    
    (3,832
    )Repayment of zero coupon subordinated notes principal
    
    
    
    
    
    
    (150,000
    )Proceeds from stock options exercised
    
    
    5,813
    
    
    
    3,834Stock-based compensation excess tax benefit
    
    
    1,576
    
    
    
    Proceeds (repayments) of other debt, net
    
    
    (615
    )
    
    
    7,526
 6




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Six Months EndedJune 30,2007
    
    
    2006Net cash provided by continuing operations
    
    
    60,774
    
    
    
    29,528Net cash used in discontinued operations
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    60,774
    
    
    
    29,528Effect of exchange rate changes on cash and equivalents
    
    
    966
    
    
    
    623Net increase (decrease) in cash and cash equivalents
    
    
    (19,502
    )
    
    
    7,204Cash and cash equivalents at beginning of period
    
    
    73,286
    
    
    
    48,233Cash and cash equivalents at end of period
    
    $
    53,784
    
    
    $
    55,437Supplemental disclosure of non-cash transactions:Conversion of debt to common stock
    
    $
    84,392
    
    
    $
    
  7




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HANOVER COMPRESSOR COMPANY
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. BASIS OF PRESENTATION
  Proposed Merger
    8




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Earnings Per Common Share
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Weighted average common shares outstandingused in basic
income per common share
    
    
    105,889
    
    
    
    101,017
    
    
    
    104,631
    
    
    
    100,888Net dilutive potential common stock issuable:On exercise of options and vesting of restricted stock
    
    
    1,721
    
    
    
    1,452
    
    
    
    1,615
    
    
    
    1,269On conversion of convertible senior notes due 2008
    
    
    **
    
    
    
    **
    
    
    
    **
    
    
    
    **On conversion of convertible subordinated notes due 2029
    
    
    861
    
    
    
    **
    
    
    
    1,999
    
    
    
    **On conversion of convertible senior notes due 2014
    
    
    9,583
    
    
    
    9,583
    
    
    
    9,583
    
    
    
    9,583Weighted average common shares and dilutive potential common
shares used in diluted income per common share
    
    
    118,054
    
    
    
    112,052
    
    
    
    117,828
    
    
    
    111,740
 
 **
    
    Excluded from diluted income per common share as the effect would have been
anti-dilutive. 9




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Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Net dilutive potential common shares issuable:On exercise of options-exercise price greater
than average market value at end of period
    
    
    28
    
    
    
    48
    
    
    
    28
    
    
    
    58On conversion of convertible subordinated notes
due 2029
    
    
    
    
    
    
    4,825
    
    
    
    
    
    
    
    4,825On conversion of convertible senior notes due 2008
    
    
    4,370
    
    
    
    4,370
    
    
    
    4,370
    
    
    
    4,3704,398
    
    
    
    9,243
    
    
    
    4,398
    
    
    
    9,253
 Stock Options and Stock-based Compensation
   Incentive Plans
  Stock Options
  Restricted Stock Awards
  10




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##### Table of Contents



Reclassifications
  2. INVENTORY
  June 30,
    
    
    December 31,2007
    
    
    2006Parts and supplies
    
    $
    135,602
    
    
    $
    135,632Work in progress
    
    
    163,020
    
    
    
    162,096Finished goods
    
    
    18,406
    
    
    
    10,365$
    317,028
    
    
    $
    308,093
  3. PROPERTY, PLANT AND EQUIPMENT
  June 30,
    
    
    December 31,2007
    
    
    2006Compression equipment, facilities and other rental assets
    
    $
    2,671,420
    
    
    $
    2,587,377Land and buildings
    
    
    113,274
    
    
    
    107,444Transportation and shop equipment
    
    
    94,575
    
    
    
    89,673Other
    
    
    61,083
    
    
    
    58,7882,940,352
    
    
    
    2,843,282Accumulated depreciation
    
    
    (1,052,447
    )
    
    
    (979,830
    )$
    1,887,905
    
    
    $
    1,863,452
  11




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##### Table of Contents



4. DEBT
  June 30,
    
    
    
    December 31,2007
    
    
    2006Bank credit facility due November 2010
    
    $
    74,000
    
    
    $
    20,0004.75% 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
    
    
    
    200,0007.5% senior notes due 2013**
    
    
    150,000
    
    
    
    150,0009.0% senior notes due 2014**
    
    
    200,000
    
    
    
    200,0002001A equipment lease notes, interest at 8.5%, due September 2008
    
    
    133,000
    
    
    
    133,0002001B equipment lease notes, interest at 8.75%, due September 2011
    
    
    250,000
    
    
    
    250,0007.25% convertible junior subordinated
notes due 2029*
    
    
    
    
    
    
    84,803Fair value adjustment  fixed to floating interest rate swaps
    
    
    (10,015
    )
    
    
    (8,732
    )Other, interest at various rates, collateralized by equipment and other assets
    
    
    222
    
    
    
    6771,332,957
    
    
    
    1,365,498Less-current maturities
    
    
    (192,000
    )
    
    
    (455
    )Long-term debt
    
    $
    1,140,957
    
    
    $
    1,365,043
 
 *
    
    Securities issued by Hanover (parent company).**
    
    Securities issued by Hanover (parent company) and guaranteed by Hanover Compression
Limited Partnership (HCLP).      12




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##### Table of Contents



7.5% Senior Notes due 2013
   7.25% Convertible Junior Subordinated Notes due 2029
  5. ACCOUNTING FOR DERIVATIVES
  13




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##### Table of Contents



Fair Value ofFixed Rate to be
    
    Notional
    
    Swap atFloating Rate to be Paid
    
    Maturity Date
    
    Received
    
    Amount
    
    June 30, 2007Six Month LIBOR +4.72%
    
    December 15, 2010
    
    
    8.625
    %
    
    $
    100,000
    
    
    $
    (5,125
    )Six Month LIBOR +4.64%
    
    December 15, 2010
    
    
    8.625
    %
    
    $
    100,000
    
    
    $
    (4,890
    )
   6. COMMITMENTS AND CONTINGENCIES
  Maximum PotentialUndiscountedPayments as ofTerm
    
    
    June 30, 2007Indebtedness of non-consolidated affiliates:Simco/Harwat Consortium (1)
    
    
    2009
    
    
    $
    1,328El Furrial (1)
    
    
    2013
    
    
    
    26,017Other:Performance guarantees through letters of credit (2)
    
    
    2007-2010
    
    
    
    246,715Standby letters of credit
    
    
    2007-2008
    
    
    
    14,498Commercial letters of credit
    
    
    2007
    
    
    
    3,725Bid bonds and performance bonds (2)
    
    
    2007-2012
    
    
    
    112,496$
    404,779
 
 (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.    14




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##### Table of Contents



7. RELATED-PARTY TRANSACTIONS
   15




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##### Table of Contents



8. RECENT ACCOUNTING PRONOUNCEMENTS
    Accounting for Income
Taxes
   16




---



##### Table of Contents



9. REPORTABLE SEGMENTS
    Production andParts,
    
    Compressor
    
    Processingservice and
    
    and
    
    Surface
    
    
    
    
    
    ReportableU.S.
    
    International
    
    used
    
    accessory
    
    equipment
    
    
    
    
    
    Segmentsrentals
    
    rentals
    
    equipment
    
    fabrication
    
    fabrication
    
    Belleli
    
    Total(in thousands)June 30, 2007:Revenue from
external
customers
    
    $
    99,562
    
    
    $
    69,645
    
    
    $
    72,664
    
    
    $
    139,508
    
    
    $
    41,617
    
    
    $
    80,978
    
    
    $
    503,974Gross profit
    
    
    59,304
    
    
    
    41,970
    
    
    
    16,628
    
    
    
    33,492
    
    
    
    11,978
    
    
    
    6,281
    
    
    
    169,653June 30, 2006:Revenue from
external
customers
    
    $
    93,073
    
    
    $
    67,520
    
    
    $
    55,737
    
    
    $
    70,128
    
    
    $
    47,079
    
    
    $
    56,574
    
    
    $
    390,111Gross profit
    
    
    56,344
    
    
    
    43,829
    
    
    
    10,676
    
    
    
    11,646
    
    
    
    8,532
    
    
    
    5,918
    
    
    
    136,945
 17




---



##### Table of Contents



Three Months EndedJune 30,2007
    
    
    2006(in thousands)Total revenue for reportable segments
    
    $
    503,974
    
    
    $
    390,111Gain on sale of business and other income *
    
    
    11,744
    
    
    
    15,560Total consolidated revenues and other income
    
    $
    515,718
    
    
    $
    405,671
 
 *
    
    Includes equity in income of non-consolidated affiliates and gain on sale of business and
other income.  Production andParts,
    
    
    Compressor
    
    
    Processingservice and
    
    
    and
    
    
    Surface
    
    
    
    
    
    
    ReportableU.S.
    
    
    International
    
    
    used
    
    
    accessory
    
    
    equipment
    
    
    
    
    
    
    Segmentsrentals
    
    
    rentals
    
    
    equipment
    
    
    fabrication
    
    
    fabrication
    
    
    Belleli
    
    
    Total(in thousands)June 30, 2007:Revenue from
external
customers
    
    $
    199,198
    
    
    $
    136,936
    
    
    $
    154,004
    
    
    $
    218,216
    
    
    
    $77,221
    
    
    
    $178,612
    
    
    $
    964,187Gross profit
    
    
    120,063
    
    
    
    85,956
    
    
    
    31,123
    
    
    
    48,955
    
    
    
    21,282
    
    
    
    18,677
    
    
    
    326,056June 30, 2006:Revenue from
external
customers
    
    $
    184,716
    
    
    $
    130,026
    
    
    $
    105,008
    
    
    $
    124,819
    
    
    
    $84,589
    
    
    
    $97,683
    
    
    $
    726,841Gross profit
    
    
    109,896
    
    
    
    85,003
    
    
    
    18,885
    
    
    
    19,644
    
    
    
    14,416
    
    
    
    9,690
    
    
    
    257,534
 Six Months EndedJune 30,2007
    
    
    2006(in thousands)Total revenue for reportable segments
    
    $
    964,187
    
    
    $
    726,841Gain on sale of business and other income *
    
    
    24,759
    
    
    
    51,627Total consolidated revenues and other income
    
    $
    988,946
    
    
    $
    778,468
 
 *
    
    Includes equity in income of non-consolidated affiliates and gain on sale of business and
other income. 10. DISPOSITIONS
  
 18




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##### Table of Contents



11. SUBSEQUENT EVENT
   12. GUARANTOR SUBSIDIARY
  19




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##### Table of Contents



Condensed Consolidating Balance Sheet
June 30, 2007
(unaudited)
 Guarantor
    
    
    OtherParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidation(In thousands)ASSETSTotal current assets
    
    $
    
    
    
    $
    498,010
    
    
    $
    479,558
    
    
    $
    (7,614
    )
    
    $
    969,954Property, plant and equipment, net
    
    
    
    
    
    
    1,041,348
    
    
    
    846,557
    
    
    
    
    
    
    
    1,887,905Investments in non-consolidated affiliates
    
    
    
    
    
    
    
    
    
    
    99,449
    
    
    
    
    
    
    
    99,449Investments in affiliates
    
    
    1,285,444
    
    
    
    231,930
    
    
    
    1,285,444
    
    
    
    (2,802,818
    )
    
    
    Intercompany receivables
    
    
    780,373
    
    
    
    438,734
    
    
    
    701,872
    
    
    
    (1,920,979
    )
    
    
    Other assets
    
    
    54,259
    
    
    
    222,475
    
    
    
    12,038
    
    
    
    (53,636
    )
    
    
    235,136Total Long-term Assets
    
    
    2,120,076
    
    
    
    1,934,487
    
    
    
    2,945,360
    
    
    
    (4,777,433
    )
    
    
    2,222,490Total Assets
    
    $
    2,120,076
    
    
    $
    2,432,497
    
    
    $
    3,424,918
    
    
    $
    (4,785,047
    )
    
    $
    3,192,444LIABILITIES AND STOCKHOLDERS EQUITYTotal current liabilities
    
    $
    202,478
    
    
    $
    286,479
    
    
    $
    250,109
    
    
    $
    (7,818
    )
    
    $
    731,248Long-term debt
    
    
    757,735
    
    
    
    74,222
    
    
    
    383,000
    
    
    
    (74,000
    )
    
    
    1,140,957Intercompany payables
    
    
    
    
    
    
    667,055
    
    
    
    1,179,924
    
    
    
    (1,846,979
    )
    
    
    Other long-term liabilities
    
    
    
    
    
    
    119,297
    
    
    
    82,520
    
    
    
    (53,432
    )
    
    
    148,385Total liabilities
    
    
    960,213
    
    
    
    1,147,053
    
    
    
    1,895,553
    
    
    
    (1,982,229
    )
    
    
    2,020,590Minority interest
    
    
    
    
    
    
    
    
    
    
    11,991
    
    
    
    
    
    
    
    11,991Stockholders equity
    
    
    1,159,863
    
    
    
    1,285,444
    
    
    
    1,517,374
    
    
    
    (2,802,818
    )
    
    
    1,159,863Total Liabilities and Stockholders Equity
    
    $
    2,120,076
    
    
    $
    2,432,497
    
    
    $
    3,424,918
    
    
    $
    (4,785,047
    )
    
    $
    3,192,444Condensed Consolidating Balance Sheet
December 31, 2006Guarantor
    
    
    OtherParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidation(In thousands)ASSETSTotal current assets
    
    $
    
    
    
    $
    443,759
    
    
    $
    444,561
    
    
    $
    (7,657
    )
    
    $
    880,663Property, plant and equipment, net
    
    
    
    
    
    
    1,027,123
    
    
    
    836,329
    
    
    
    
    
    
    
    1,863,452Investments in non-consolidated affiliates
    
    
    
    
    
    
    
    
    
    
    89,974
    
    
    
    
    
    
    
    89,974Investments in affiliates
    
    
    1,227,369
    
    
    
    216,536
    
    
    
    1,227,369
    
    
    
    (2,671,274
    )
    
    
    Intercompany receivables
    
    
    725,804
    
    
    
    378,344
    
    
    
    698,891
    
    
    
    (1,803,039
    )
    
    
    Other assets
    
    
    53,649
    
    
    
    220,921
    
    
    
    12,038
    
    
    
    (49,808
    )
    
    
    236,800Total Long-term Assets
    
    
    2,006,822
    
    
    
    1,842,924
    
    
    
    2,864,601
    
    
    
    (4,524,121
    )
    
    
    2,190,226Total Assets
    
    $
    2,006,822
    
    
    $
    2,286,683
    
    
    $
    3,309,162
    
    
    $
    (4,531,778
    )
    
    $
    3,070,889LIABILITIES AND STOCKHOLDERS EQUITYTotal current liabilities
    
    $
    10,719
    
    
    $
    270,413
    
    
    $
    280,769
    
    
    $
    (7,803
    )
    
    $
    554,098Long-term debt
    
    
    981,821
    
    
    
    20,222
    
    
    
    383,000
    
    
    
    (20,000
    )
    
    
    1,365,043Intercompany payables
    
    
    
    
    
    
    666,250
    
    
    
    1,116,789
    
    
    
    (1,783,039
    )
    
    
    Other long-term liabilities
    
    
    
    
    
    
    102,429
    
    
    
    72,708
    
    
    
    (49,662
    )
    
    
    125,475Total liabilities
    
    
    992,540
    
    
    
    1,059,314
    
    
    
    1,853,266
    
    
    
    (1,860,504
    )
    
    
    2,044,616Minority interest
    
    
    
    
    
    
    
    
    
    
    11,991
    
    
    
    
    
    
    
    11,991Stockholders equity
    
    
    1,014,282
    
    
    
    1,227,369
    
    
    
    1,443,905
    
    
    
    (2,671,274
    )
    
    
    1,014,282Total Liabilities and Stockholders Equity
    
    $
    2,006,822
    
    
    $
    2,286,683
    
    
    $
    3,309,162
    
    
    $
    (4,531,778
    )
    
    $
    3,070,889
 20




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##### Table of Contents



Condensed Consolidating Statement of Operations
Three Months Ended June 30, 2007
(unaudited)
 Guarantor
    
    
    OtherParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidation(In thousands)Revenues
    
    $
    
    
    
    $
    327,408
    
    
    $
    176,566
    
    
    $
    
    
    
    $
    503,974Equity in income of non-consolidating affiliates
    
    
    
    
    
    
    
    
    
    
    6,279
    
    
    
    
    
    
    
    6,279Gain on sale of business and other income
    
    
    
    
    
    
    (425
    )
    
    
    5,890
    
    
    
    
    
    
    
    5,465Revenues and other income
    
    
    
    
    
    
    326,983
    
    
    
    188,735
    
    
    
    
    
    
    
    515,718Costs and expenses
    
    
    233
    
    
    
    265,836
    
    
    
    177,264
    
    
    
    
    
    
    
    443,333Other (income) expense:Interest expense, net
    
    
    16,413
    
    
    
    1,580
    
    
    
    8,782
    
    
    
    
    
    
    
    26,775Intercompany charges, net
    
    
    (14,224
    )
    
    
    25,828
    
    
    
    (11,604
    )
    
    
    
    
    
    
    Equity in (income) loss of affiliates
    
    
    (25,717
    )
    
    
    (6,570
    )
    
    
    (25,717
    )
    
    
    58,004
    
    
    
    Other, net
    
    
    
    
    
    
    4,400
    
    
    
    (1,016
    )
    
    
    
    
    
    
    3,384Income from continuing operations before
income taxes
    
    
    23,295
    
    
    
    35,909
    
    
    
    41,026
    
    
    
    (58,004
    )
    
    
    42,226Provision for (benefit from) income taxes
    
    
    (2,769
    )
    
    
    10,192
    
    
    
    8,739
    
    
    
    
    
    
    
    16,162Net income
    
    $
    26,064
    
    
    $
    25,717
    
    
    $
    32,287
    
    
    $
    (58,004
    )
    
    $
    26,064Condensed Consolidating Statement of Operations
Three Months Ended June 30, 2006
(unaudited)Guarantor
    
    
    OtherParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidation(In thousands)Revenues
    
    $
    
    
    
    $
    256,718
    
    
    $
    133,393
    
    
    $
    
    
    
    $
    390,111Equity in income of non-consolidating affiliates
    
    
    
    
    
    
    
    
    
    
    5,230
    
    
    
    
    
    
    
    5,230Gain on sale of business and other income
    
    
    
    
    
    
    895
    
    
    
    9,435
    
    
    
    
    
    
    
    10,330Revenues and other income
    
    
    
    
    
    
    257,613
    
    
    
    148,058
    
    
    
    
    
    
    
    405,671Costs and expenses
    
    
    233
    
    
    
    217,570
    
    
    
    128,223
    
    
    
    
    
    
    
    346,026Other (income) expense:Interest expense, net
    
    
    18,111
    
    
    
    2,383
    
    
    
    8,793
    
    
    
    
    
    
    
    29,287Intercompany charges, net
    
    
    (14,227
    )
    
    
    22,698
    
    
    
    (8,471
    )
    
    
    
    
    
    
    Equity in (income) loss of affiliates
    
    
    (29,237
    )
    
    
    (15,974
    )
    
    
    (29,237
    )
    
    
    74,448
    
    
    
    Other, net
    
    
    
    
    
    
    317
    
    
    
    (1,349
    )
    
    
    
    
    
    
    (1,032
    )Income from continuing operations before
income taxes and minority interest
    
    
    25,120
    
    
    
    30,619
    
    
    
    50,099
    
    
    
    (74,448
    )
    
    
    31,390Provision for (benefit from) income taxes
    
    
    3,416
    
    
    
    1,398
    
    
    
    4,732
    
    
    
    
    
    
    
    9,546Income from continuing operations before
minority interest
    
    
    21,704
    
    
    
    29,221
    
    
    
    45,367
    
    
    
    (74,448
    )
    
    
    21,844Minority interest
    
    
    
    
    
    
    
    
    
    
    (93
    )
    
    
    
    
    
    
    (93
    )Income from continuing operations
    
    
    21,704
    
    
    
    29,221
    
    
    
    45,274
    
    
    
    (74,448
    )
    
    
    21,751Income (loss) from discontinued operations
    
    
    
    
    
    
    16
    
    
    
    (63
    )
    
    
    
    
    
    
    (47
    )Net income
    
    $
    21,704
    
    
    $
    29,237
    
    
    $
    45,211
    
    
    $
    (74,448
    )
    
    $
    21,704
 21




---



##### Table of Contents



Condensed Consolidating Statement of Operations
Six Months Ended June 30, 2007
(unaudited)
 Guarantor
    
    
    OtherParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidation(In thousands)Revenues
    
    $
    
    
    
    $
    602,838
    
    
    $
    361,349
    
    
    $
    
    
    
    $
    964,187Equity in income of non-consolidating affiliates
    
    
    
    
    
    
    
    
    
    
    11,962
    
    
    
    
    
    
    
    11,962Gain on sale of business and other income
    
    
    
    
    
    
    (657
    )
    
    
    13,454
    
    
    
    
    
    
    
    12,797Revenues and other income
    
    
    
    
    
    
    602,181
    
    
    
    386,765
    
    
    
    
    
    
    
    988,946Costs and expenses
    
    
    466
    
    
    
    493,135
    
    
    
    356,232
    
    
    
    
    
    
    
    849,833Other (income) expense:Interest expense, net
    
    
    33,231
    
    
    
    2,835
    
    
    
    17,574
    
    
    
    
    
    
    
    53,640Intercompany charges, net
    
    
    (28,204
    )
    
    
    52,464
    
    
    
    (24,260
    )
    
    
    
    
    
    
    Equity in (income) loss of affiliates
    
    
    (53,130
    )
    
    
    (25,634
    )
    
    
    (53,130
    )
    
    
    131,894
    
    
    
    Other, net
    
    
    
    
    
    
    4,546
    
    
    
    (1,146
    )
    
    
    
    
    
    
    3,400Income from continuing operations before
income taxes
    
    
    47,637
    
    
    
    74,835
    
    
    
    91,495
    
    
    
    (131,894
    )
    
    
    82,073Provision for (benefit from) income taxes
    
    
    (3,829
    )
    
    
    21,705
    
    
    
    12,731
    
    
    
    
    
    
    
    30,607Net income
    
    $
    51,466
    
    
    $
    53,130
    
    
    $
    78,764
    
    
    $
    (131,894
    )
    
    $
    51,466Condensed Consolidating Statement of Operations
Six Months Ended June 30, 2006
(unaudited)Guarantor
    
    
    OtherParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidation(In thousands)Revenues
    
    $
    
    
    
    $
    483,908
    
    
    $
    242,933
    
    
    $
    
    
    
    $
    726,841Equity in income of non-consolidating affiliates
    
    
    
    
    
    
    
    
    
    
    11,078
    
    
    
    
    
    
    
    11,078Gain on sale of business and other income
    
    
    
    
    
    
    30,146
    
    
    
    10,403
    
    
    
    
    
    
    
    40,549Revenues and other income
    
    
    
    
    
    
    514,054
    
    
    
    264,414
    
    
    
    
    
    
    
    778,468Costs and expenses
    
    
    466
    
    
    
    417,560
    
    
    
    234,164
    
    
    
    
    
    
    
    652,190Other (income) expense:Interest expense, net
    
    
    39,573
    
    
    
    3,793
    
    
    
    17,561
    
    
    
    
    
    
    
    60,927Debt extinguishment costs
    
    
    
    
    
    
    5,902
    
    
    
    
    
    
    
    
    
    
    
    5,902Intercompany charges, net
    
    
    (31,806
    )
    
    
    47,178
    
    
    
    (15,372
    )
    
    
    
    
    
    
    Equity in (income) loss of affiliates
    
    
    (51,564
    )
    
    
    (16,774
    )
    
    
    (51,564
    )
    
    
    119,902
    
    
    
    Other, net
    
    
    
    
    
    
    (349
    )
    
    
    (2,180
    )
    
    
    
    
    
    
    (2,529
    )Income from continuing operations before
income taxes and minority interest
    
    
    43,331
    
    
    
    56,744
    
    
    
    81,805
    
    
    
    (119,902
    )
    
    
    61,978Provision for (benefit from) income taxes
    
    
    (792
    )
    
    
    5,553
    
    
    
    13,232
    
    
    
    
    
    
    
    17,993Income from continuing operations before
minority interest
    
    
    44,123
    
    
    
    51,191
    
    
    
    68,573
    
    
    
    (119,902
    )
    
    
    43,985Minority interest
    
    
    
    
    
    
    
    
    
    
    (93
    )
    
    
    
    
    
    
    (93
    )Income from continuing operations
    
    
    44,123
    
    
    
    51,191
    
    
    
    68,480
    
    
    
    (119,902
    )
    
    
    43,892Income (loss) from discontinued operations
    
    
    
    
    
    
    3
    
    
    
    (142
    )
    
    
    
    
    
    
    (139
    )Cumulative effect of accounting change
    
    
    
    
    
    
    370
    
    
    
    
    
    
    
    
    
    
    
    370Net income
    
    $
    44,123
    
    
    $
    51,564
    
    
    $
    68,338
    
    
    $
    (119,902
    )
    
    $
    44,123
 22




---



##### Table of Contents



Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2007
(Unaudited)
 Guarantor
    
    
    OtherParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidation(In thousands)Cash flows from operating activities:Net cash provided by (used in) continuing
operations
    
    $
    (4,996
    )
    
    $
    78,629
    
    
    $
    (30,806
    )
    
    $
    
    
    
    $
    42,827Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (90,861
    )
    
    
    (51,336
    )
    
    
    
    
    
    
    (142,197
    )Proceeds from sale of property, plant and
equipment
    
    
    
    
    
    
    20,179
    
    
    
    1,044
    
    
    
    
    
    
    
    21,223Cash invested in non-consolidated affiliates
    
    
    
    
    
    
    
    
    
    
    (3,095
    )
    
    
    
    
    
    
    (3,095
    )Net cash used in investing activities
    
    
    
    
    
    
    (70,682
    )
    
    
    (53,387
    )
    
    
    
    
    
    
    (124,069
    )Cash flows from financing activities:Borrowings (repayments) on revolving credit
facilities, net
    
    
    
    
    
    
    54,000
    
    
    
    
    
    
    
    
    
    
    
    54,000Proceeds from stock options exercised
    
    
    5,813
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,813Stock-based compensation excess tax benefit
    
    
    
    
    
    
    1,576
    
    
    
    
    
    
    
    
    
    
    
    1,576Capital contribution (distribution), net
    
    
    (817
    )
    
    
    817
    
    
    
    
    
    
    
    
    
    
    
    Borrowings (repayments) between subsidiaries, net
    
    
    
    
    
    
    (76,070
    )
    
    
    76,070
    
    
    
    
    
    
    
    Borrowings (repayments) on other debt, net
    
    
    
    
    
    
    1,244
    
    
    
    (1,859
    )
    
    
    
    
    
    
    (615
    )Net cash provided by financing activities
    
    
    4,996
    
    
    
    (18,433
    )
    
    
    74,211
    
    
    
    
    
    
    
    60,774Effect of exchange rate changes on in cash and
cash equivalents
    
    
    
    
    
    
    
    
    
    
    966
    
    
    
    
    
    
    
    966Net decrease in cash and cash equivalents
    
    
    
    
    
    
    (10,486
    )
    
    
    (9,016
    )
    
    
    
    
    
    
    (19,502
    )Cash and cash equivalents at beginning of year
    
    
    
    
    
    
    13,353
    
    
    
    59,933
    
    
    
    
    
    
    
    73,286Cash and cash equivalents at end of year
    
    $
    
    
    
    $
    2,867
    
    
    $
    50,917
    
    
    $
    
    
    
    $
    53,784
 23




---



##### Table of Contents



Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2006
(Unaudited)
 Guarantor
    
    
    OtherParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidation(In thousands)Cash flows from operating activities:Net cash provided by (used in) continuing
operations
    
    $
    (7,707
    )
    
    $
    (20,696
    )
    
    $
    53,138
    
    
    $
    
    
    
    $
    24,735Net cash used in discontinued operations
    
    
    
    
    
    
    (139
    )
    
    
    
    
    
    
    
    
    
    
    (139
    )Net cash provided by (used in)
operating activities
    
    
    (7,707
    )
    
    
    (20,835
    )
    
    
    53,138
    
    
    
    
    
    
    
    24,596Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (66,114
    )
    
    
    (53,175
    )
    
    
    
    
    
    
    (119,289
    )Proceeds from sale of property, plant and
equipment
    
    
    
    
    
    
    11,127
    
    
    
    8,494
    
    
    
    
    
    
    
    19,621Proceeds from sale of business
    
    
    
    
    
    
    51,500
    
    
    
    625
    
    
    
    
    
    
    
    52,125Net cash used in investing activities
    
    
    
    
    
    
    (3,487
    )
    
    
    (44,056
    )
    
    
    
    
    
    
    (47,543
    )Cash flows from financing activities:Borrowings (repayments) on revolving credit
facilities, net
    
    
    
    
    
    
    22,000
    
    
    
    
    
    
    
    
    
    
    
    22,000Proceeds from issuance of senior notes
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,000Repayment of zero coupon subordinated notes
principal
    
    
    (150,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (150,000
    )Capital contribution (distribution), net
    
    
    3,873
    
    
    
    (3,873
    )
    
    
    
    
    
    
    
    
    
    
    Proceeds from stock options exercised
    
    
    3,834
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,834Borrowings (repayments) between subsidiaries,
net
    
    
    
    
    
    
    4,896
    
    
    
    (4,896
    )
    
    
    
    
    
    
    Payments for debt issue costs
    
    
    
    
    
    
    (3,832
    )
    
    
    
    
    
    
    
    
    
    
    (3,832
    )Borrowings (repayments) on other debt, net
    
    
    
    
    
    
    7,210
    
    
    
    316
    
    
    
    
    
    
    
    7,526Net cash provided by (used in)
financing activities
    
    
    7,707
    
    
    
    26,401
    
    
    
    (4,580
    )
    
    
    
    
    
    
    29,528Effect of exchange rate changes on in cash
and cash equivalents
    
    
    
    
    
    
    
    
    
    
    623
    
    
    
    
    
    
    
    623Net increase in cash and cash equivalents
    
    
    
    
    
    
    2,079
    
    
    
    5,125
    
    
    
    
    
    
    
    7,204Cash and cash equivalents at beginning of year
    
    
    
    
    
    
    10,724
    
    
    
    37,509
    
    
    
    
    
    
    
    48,233Cash and cash equivalents at end of year
    
    $
    
    
    
    $
    12,803
    
    
    $
    42,634
    
    
    $
    
    
    
    $
    55,437
 24




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##### Table of Contents



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, kidnappings, 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;
    
    ability to obtain components used to fabricate our products;
    
    our inability to implement certain business objectives, such as:
 
    
    international expansion,
    
    ability to timely and cost-effectively execute integrated projects,
    
    integrating acquired businesses,
    
    generating sufficient cash,
    
    accessing the capital markets, and
    
    refinancing existing or incurring additional indebtedness to fund our business;
 
    
    our inability to consummate the proposed merger with Universal Compression Holdings, Inc;
    
    changes in 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.
  25




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##### Table of Contents



GENERAL
   Proposed Merger
  OVERVIEW
    26




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##### Table of Contents



Industry Conditions
  RESULTS OF OPERATIONS
 THREE MONTHS ENDED JUNE 30, 2007 COMPARED TO THREE MONTHS ENDED JUNE 30, 2006
 Summary of Business Line Results
 U.S. Rentals
 Three months endedJune 30,
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)Revenue
    
    $
    99,562
    
    
    $
    93,073
    
    
    
    7
    %Operating expense
    
    
    40,258
    
    
    
    36,729
    
    
    
    10
    %Gross profit
    
    $
    59,304
    
    
    $
    56,344
    
    
    
    5
    %Gross margin
    
    
    60
    %
    
    
    61
    %
    
    
    (1
    )%
  International Rentals
 Three months endedJune 30,
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)Revenue
    
    $
    69,645
    
    
    $
    67,520
    
    
    
    3
    %Operating expense
    
    
    27,675
    
    
    
    23,691
    
    
    
    17
    %Gross profit
    
    $
    41,970
    
    
    $
    43,829
    
    
    
    (4
    )%Gross margin
    
    
    60
    %
    
    
    65
    %
    
    
    (5
    )%
  27




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##### Table of Contents



Parts, Service and Used Equipment
 Three months endedJune 30,
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)Revenue
    
    $
    72,664
    
    
    $
    55,737
    
    
    
    30
    %Operating expense
    
    
    56,036
    
    
    
    45,061
    
    
    
    24
    %Gross profit
    
    $
    16,628
    
    
    $
    10,676
    
    
    
    56
    %Gross margin
    
    
    23
    %
    
    
    19
    %
    
    
    4
    %
   Compressor and Accessory Fabrication
 Three months endedJune 30,
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)Revenue
    
    $
    139,508
    
    
    $
    70,128
    
    
    
    99
    %Operating expense
    
    
    106,016
    
    
    
    58,482
    
    
    
    81
    %Gross profit
    
    $
    33,492
    
    
    $
    11,646
    
    
    
    188
    %Gross margin
    
    
    24
    %
    
    
    17
    %
    
    
    7
    %
  Production and Processing Equipment Fabrication
 Three months endedJune 30,
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)Revenue
    
    $
    122,595
    
    
    $
    103,653
    
    
    
    18
    %Operating expense
    
    
    104,336
    
    
    
    89,203
    
    
    
    17
    %Gross profit
    
    $
    18,259
    
    
    $
    14,450
    
    
    
    26
    %Gross margin
    
    
    15
    %
    
    
    14
    %
    
    
    1
    %
  28




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##### Table of Contents



Gain on sale of business and other income
  Expenses
       Three Months EndedJune 30,2007
    
    
    2006Canada
    
    $
    280
    
    
    $
    (927
    )Argentina
    
    
    (52
    )
    
    
    (845
    )Venezuela
    
    
    14
    
    
    
    295Italy
    
    
    (245
    )
    
    
    3,136All other countries
    
    
    (316
    )
    
    
    577Exchange gain (loss)
    
    $
    (319
    )
    
    $
    2,236
  29




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##### Table of Contents



Income Taxes
   SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO SIX MONTHS ENDED JUNE 30, 2006
 Summary of Business Line Results
 U.S. Rentals
 Six months endedJune 30,
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)Revenue
    
    $
    199,198
    
    
    $
    184,716
    
    
    
    8
    %Operating expense
    
    
    79,135
    
    
    
    74,820
    
    
    
    6
    %Gross profit
    
    $
    120,063
    
    
    $
    109,896
    
    
    
    9
    %Gross margin
    
    
    60
    %
    
    
    59
    %
    
    
    1
    %
  International Rentals
 Six months endedJune 30,
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)Revenue
    
    $
    136,936
    
    
    $
    130,026
    
    
    
    5
    %Operating expense
    
    
    50,980
    
    
    
    45,023
    
    
    
    13
    %Gross profit
    
    $
    85,956
    
    
    $
    85,003
    
    
    
    1
    %Gross margin
    
    
    63
    %
    
    
    65
    %
    
    
    (2
    )%
  30




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##### Table of Contents



Parts, Service and Used Equipment
 Six months endedJune 30,
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)Revenue
    
    $
    154,004
    
    
    $
    105,008
    
    
    
    47
    %Operating expense
    
    
    122,881
    
    
    
    86,123
    
    
    
    43
    %Gross profit
    
    $
    31,123
    
    
    $
    18,885
    
    
    
    65
    %Gross margin
    
    
    20
    %
    
    
    18
    %
    
    
    2
    %
   Compressor and Accessory Fabrication
 Six months endedJune 30,
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)Revenue
    
    $
    218,216
    
    
    $
    124,819
    
    
    
    75
    %Operating expense
    
    
    169,261
    
    
    
    105,175
    
    
    
    61
    %Gross profit
    
    $
    48,955
    
    
    $
    19,644
    
    
    
    149
    %Gross margin
    
    
    22
    %
    
    
    16
    %
    
    
    6
    %
  Production and Processing Equipment Fabrication
 Six months endedJune 30,
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)Revenue
    
    $
    255,833
    
    
    $
    182,272
    
    
    
    40
    %Operating expense
    
    
    215,874
    
    
    
    158,166
    
    
    
    36
    %Gross profit
    
    $
    39,959
    
    
    $
    24,106
    
    
    
    66
    %Gross margin
    
    
    16
    %
    
    
    13
    %
    
    
    3
    %
  31




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##### Table of Contents



Gain on sale of business and other income
  Expenses
       Six Months EndedJune 30,2007
    
    
    2006Canada
    
    $
    14
    
    
    $
    (1,017
    )Argentina
    
    
    (29
    )
    
    
    (948
    )Venezuela
    
    
    (14
    )
    
    
    576Italy
    
    
    389
    
    
    
    4,254All other countries
    
    
    (371
    )
    
    
    868Exchange gain/(loss)
    
    $
    (11
    )
    
    $
    3,733
  32




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##### Table of Contents



Income Taxes
   Cumulative Effect of Accounting Change, Net of Tax
  LIQUIDITY AND CAPITAL RESOURCES
   Six Months EndedJune 30,2007
    
    
    2006Net cash provided by (used in) continuing operations:Operating activities
    
    $
    42,827
    
    
    $
    24,735Investing activities
    
    
    (124,069
    )
    
    
    (47,543
    )Financing activities
    
    
    60,774
    
    
    
    29,528Effect of exchange rate changes on cash and cash equivalents
    
    
    966
    
    
    
    623Net cash used in discontinued operations
    
    
    
    
    
    
    (139
    )Net change in cash and cash equivalents
    
    $
    (19,502
    )
    
    $
    7,204
   33




---



##### Table of Contents



34




---



##### Table of Contents



35




---



##### Table of Contents



StandardMoodys
    
    & PoorsOutlook
    
    Positive
    
    PositiveSenior implied rating
    
    B1
    
    BB-Liquidity rating
    
    SGL-3
    
    2001A equipment lease notes, interest at 8.5%, due September 2008
    
    Ba3, LGD3
    
    B+2001B equipment lease notes, interest at 8.75%, due September 2011
    
    Ba3, LGD3
    
    B+4.75% convertible senior notes due 2008
    
    B3, LGD5
    
    B4.75% convertible senior notes due 2014
    
    B3, LGD5
    
    B8.625% senior notes due 2010
    
    B2, LFD4
    
    B9.0% senior notes due 2014
    
    B2, LFD4
    
    B7.5% senior notes due 2013
    
    B2, LFD4
    
    B
  Derivative Financial Instruments.
  Fair Value ofFixed Rate to be
    
    
    
    
    
    Swap atFloating Rate to be Paid
    
    Maturity Date
    
    Received
    
    Notional Amount
    
    June 30, 2007Six Month LIBOR +4.72%
    
    December 15, 2010
    
    
    8.625
    %
    
    $
    100,000
    
    
    $
    (5,125
    )Six Month LIBOR +4.64%
    
    December 15, 2010
    
    
    8.625
    %
    
    $
    100,000
    
    
    $
    (4,890
    )
   36




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##### Table of Contents



International Operations:
  Six Months EndedJune 30,2007
    
    
    2006Canada
    
    $
    14
    
    
    $
    (1,017
    )Argentina
    
    
    (29
    )
    
    
    (948
    )Venezuela
    
    
    (14
    )
    
    
    576Italy
    
    
    389
    
    
    
    4,254All other countries
    
    
    (371
    )
    
    
    868Exchange gain/(loss)
    
    $
    (11
    )
    
    $
    3,733
       37




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##### Table of Contents



NEW ACCOUNTING PRONOUNCEMENTS
    Accounting for Income
Taxes
   38




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 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 1A. Risk Factors
  
 Item 6:
  2.1
    
    Amendment No. 1 to Agreement and Plan of Merger (incorporated by reference to Exhibit 2.1 of
the Current Report on Form 8-K filed on June 25, 2007)10.1
    
    Hanover Compressor Company Merger Severance Benefits Plan*
 39




---



##### Table of Contents



10.2
    
    Form of Award Notice Time Vested Restricted Stock (incorporated by reference to the Current
Report on Form 8-K filed on May 14, 2007)10.3
    
    Form of Award Notice Time Vested Restricted Stock Units (stock settled) (incorporated by
reference to the Current Report on Form 8-K filed on May 14, 2007)10.4
    
    Schedule of Compensation for Non-Employee Directors (incorporated by reference to the Current
Report on Form 8-K filed on May 14, 2007)31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002*31.2
    
    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 *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**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**
 
 *
    
    Filed herewith.**
    
    Furnished herewith. 40




---



##### Table of Contents



SIGNATURES
    By:
    
    /s/ JOHN E. JACKSON

John E. JacksonPresident and Chief Executive OfficerDate:
    
    August 1, 2007By:
    
    /s/ LEE E. BECKELMANLee E. BeckelmanSenior Vice President and Chief Financial Officer
 41




---



##### Table of Contents



EXHIBIT INDEX
 2.1
    
    Amendment No. 1 to Agreement and Plan of Merger (incorporated by reference to Exhibit 2.1 of
the Current Report on Form 8-K filed on June 25, 2007)10.1
    
    Hanover Compressor Company Merger Severance Benefits Plan*10.2
    
    Form of Award Notice Time Vested Restricted Stock (incorporated by reference to the Current
Report on Form 8-K filed on May 14, 2007)10.3
    
    Form of Award Notice Time Vested Restricted Stock Units (stock settled) (incorporated by
reference to the Current Report on Form 8-K filed on May 14, 2007)10.4
    
    Schedule of Compensation for Non-Employee Directors (incorporated by reference to the Current
Report on Form 8-K filed on May 14, 2007)31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002*31.2
    
    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002*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**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**
 
 *
    
    Filed herewith.**
    
    Furnished herewith. 42