##### 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, 2006
 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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
 o þ




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##### 



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 (Loss)
    
    
    
    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
    
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    
    37Item 4. Controls and Procedures
    
    
    
    37PART II. OTHER INFORMATION
    
    
    
    37Item 1. Legal Proceedings
    
    
    
    37Item 1A. Risk Factors
    
    
    
    37Item 4. Submission of Matters to A Vote of Security Holders
    
    
    
    37Item 6: Exhibits
    
    
    
    38SIGNATURES
    
    
    
    39First Amendment to Limited Partnership Credit AgreementCertification 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 SHEETS
 June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    55,437
    
    
    $
    48,233Accounts receivable, net of allowance of $4,368 and $4,751, respectively
    
    
    255,373
    
    
    
    243,672Inventory, net
    
    
    285,446
    
    
    
    251,069Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    111,267
    
    
    
    99,166Prepaid taxes
    
    
    6,958
    
    
    
    8,194Current deferred income taxes
    
    
    18,908
    
    
    
    13,842Assets held for sale
    
    
    2,020
    
    
    
    2,020Other current assets
    
    
    55,788
    
    
    
    38,189Total current assets
    
    
    791,197
    
    
    
    704,385Property, plant and equipment, net
    
    
    1,836,975
    
    
    
    1,823,100Goodwill, net
    
    
    181,098
    
    
    
    184,364Intangible and other assets
    
    
    59,710
    
    
    
    60,406Investments in non-consolidated affiliates
    
    
    90,486
    
    
    
    90,741Total assets
    
    $
    2,959,466
    
    
    $
    2,862,996LIABILITIES AND COMMON STOCKHOLDERS EQUITYCurrent liabilities:Short-term debt
    
    $
    12,383
    
    
    $
    4,080Current maturities of long-term debt
    
    
    954
    
    
    
    1,309Accounts payable, trade
    
    
    100,196
    
    
    
    92,980Accrued liabilities
    
    
    138,615
    
    
    
    128,805Advance billings
    
    
    132,619
    
    
    
    89,513Liabilities held for sale
    
    
    878
    
    
    
    878Billings on uncompleted contracts in excess of costs and estimated earnings
    
    
    60,881
    
    
    
    35,126Total current liabilities
    
    
    446,526
    
    
    
    352,691Long-term debt
    
    
    1,411,114
    
    
    
    1,473,559Other liabilities
    
    
    46,121
    
    
    
    38,976Deferred income taxes
    
    
    86,036
    
    
    
    76,115Total liabilities
    
    
    1,989,797
    
    
    
    1,941,341Commitments and contingencies (Note 8)Minority interest
    
    
    12,084
    
    
    
    11,873Common stockholders equity:Common stock, $.001 par value; 200,000,000 shares authorized; 102,705,537
and 102,392,918 shares issued, respectively
    
    
    103
    
    
    
    102Additional paid-in capital
    
    
    1,092,139
    
    
    
    1,097,766Deferred employee compensation  restricted stock grants
    
    
    
    
    
    
    (13,249
    )Accumulated other comprehensive income
    
    
    11,278
    
    
    
    15,214Accumulated deficit
    
    
    (141,965
    )
    
    
    (186,088
    )Treasury stock386,696 and 366,091 common shares, at cost, respectively
    
    
    (3,970
    )
    
    
    (3,963
    )Total common stockholders equity
    
    
    957,585
    
    
    
    909,782Total liabilities and common stockholders equity
    
    $
    2,959,466
    
    
    $
    2,862,996
  3




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##### Table of Contents



HANOVER COMPRESSOR COMPANY
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues and other income:U.S. rentals
    
    $
    93,073
    
    
    $
    87,691
    
    
    $
    184,716
    
    
    $
    174,845International rentals
    
    
    67,520
    
    
    
    55,521
    
    
    
    130,026
    
    
    
    109,436Parts, service and used equipment
    
    
    55,737
    
    
    
    50,531
    
    
    
    105,008
    
    
    
    83,968Compressor and accessory fabrication
    
    
    70,128
    
    
    
    41,092
    
    
    
    124,819
    
    
    
    73,616Production and processing equipment fabrication
    
    
    103,653
    
    
    
    104,297
    
    
    
    182,272
    
    
    
    193,868Equity in income of non-consolidated affiliates
    
    
    5,230
    
    
    
    5,158
    
    
    
    11,078
    
    
    
    9,732Gain on sale of business and other income
    
    
    10,330
    
    
    
    492
    
    
    
    40,549
    
    
    
    943405,671
    
    
    
    344,782
    
    
    
    778,468
    
    
    
    646,408Expenses:U.S. rentals
    
    
    36,729
    
    
    
    32,984
    
    
    
    74,820
    
    
    
    67,060International rentals
    
    
    23,691
    
    
    
    17,144
    
    
    
    45,023
    
    
    
    34,646Parts, service and used equipment
    
    
    45,061
    
    
    
    36,215
    
    
    
    86,123
    
    
    
    61,275Compressor and accessory fabrication
    
    
    58,482
    
    
    
    36,587
    
    
    
    105,175
    
    
    
    66,204Production and processing equipment fabrication
    
    
    89,203
    
    
    
    92,429
    
    
    
    158,166
    
    
    
    171,554Selling, general and administrative
    
    
    49,783
    
    
    
    43,909
    
    
    
    97,838
    
    
    
    86,067Foreign currency translation
    
    
    (2,236
    )
    
    
    4,955
    
    
    
    (3,733
    )
    
    
    5,226Other
    
    
    1,204
    
    
    
    274
    
    
    
    1,204
    
    
    
    393Debt extinguishment costs
    
    
    
    
    
    
    
    
    
    
    5,902
    
    
    
    Depreciation and amortization
    
    
    43,077
    
    
    
    45,469
    
    
    
    85,045
    
    
    
    90,922Interest expense
    
    
    29,287
    
    
    
    34,662
    
    
    
    60,927
    
    
    
    70,602374,281
    
    
    
    344,628
    
    
    
    716,490
    
    
    
    653,949Income (loss) from continuing operations before
income taxes and minority interest
    
    
    31,390
    
    
    
    154
    
    
    
    61,978
    
    
    
    (7,541
    )Provision for income taxes
    
    
    9,546
    
    
    
    6,102
    
    
    
    17,993
    
    
    
    10,643Income (loss) from continuing operations before
minority interest
    
    
    21,844
    
    
    
    (5,948
    )
    
    
    43,985
    
    
    
    (18,184
    )Minority interest, net of taxes
    
    
    (93
    )
    
    
    
    
    
    
    (93
    )
    
    
    Income (loss) from continuing operations
    
    
    21,751
    
    
    
    (5,948
    )
    
    
    43,892
    
    
    
    (18,184
    )Loss from discontinued operations, net of tax
    
    
    (63
    )
    
    
    (221
    )
    
    
    (202
    )
    
    
    (492
    )Gain (loss) from sales of discontinued operations,
net of tax
    
    
    16
    
    
    
    (247
    )
    
    
    63
    
    
    
    (204
    )Income (loss) before cumulative effect of
accounting changes
    
    
    21,704
    
    
    
    (6,416
    )
    
    
    43,753
    
    
    
    (18,880
    )Cumulative effect of accounting changes, net of tax
    
    
    
    
    
    
    
    
    
    
    370
    
    
    
    Net income (loss)
    
    $
    21,704
    
    
    $
    (6,416
    )
    
    $
    44,123
    
    
    $
    (18,880
    )Basic income (loss) per common share:Income (loss) from continuing operations
    
    $
    0.21
    
    
    $
    (0.07
    )
    
    $
    0.44
    
    
    $
    (0.21
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.01
    )Cumulative effect of accounting changes, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    0.21
    
    
    $
    (0.07
    )
    
    $
    0.44
    
    
    $
    (0.22
    )Diluted income (loss) per common share:Income (loss) from continuing operations
    
    $
    0.21
    
    
    $
    (0.07
    )
    
    $
    0.43
    
    
    $
    (0.21
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.01
    )Cumulative effect of accounting changes, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    0.21
    
    
    $
    (0.07
    )
    
    $
    0.43
    
    
    $
    (0.22
    )Weighted average common and equivalent shares
outstanding:Basic
    
    
    101,017
    
    
    
    85,797
    
    
    
    100,888
    
    
    
    85,744Diluted
    
    
    112,052
    
    
    
    85,797
    
    
    
    111,740
    
    
    
    85,744
  4




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##### Table of Contents



HANOVER COMPRESSOR COMPANY
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    

    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    21,704
    
    
    $
    (6,416
    )
    
    $
    44,123
    
    
    $
    (18,880
    )Other comprehensive income (loss):Change in fair value of derivative
financial instruments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    608Foreign currency translation adjustment
    
    
    (4,283
    )
    
    
    (1,095
    )
    
    
    (3,936
    )
    
    
    (4,057
    )Comprehensive income (loss)
    
    $
    17,421
    
    
    $
    (7,511
    )
    
    $
    40,187
    
    
    $
    (22,329
    )
  5




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##### Table of Contents



HANOVER COMPRESSOR COMPANY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
   Six Months EndedJune 30,2006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    44,123
    
    
    $
    (18,880
    )Adjustments:Depreciation and amortization
    
    
    85,045
    
    
    
    90,922Loss from discontinued operations, net of tax
    
    
    139
    
    
    
    696Cumulative effect of accounting changes, net of tax
    
    
    (370
    )
    
    
    Minority interests
    
    
    93
    
    
    
    Bad debt expense
    
    
    2,249
    
    
    
    1,000Gain on sale of property, plant and equipment
    
    
    (10,594
    )
    
    
    (1,499
    )Equity in income of non-consolidated affiliates, net of dividends received
    
    
    255
    
    
    
    3,851Loss on derivative instruments
    
    
    
    
    
    
    416(Gain) loss on remeasurement of intercompany balances
    
    
    (1,539
    )
    
    
    8,917Net realized gain on trading securities
    
    
    (1,491
    )
    
    
    Zero coupon subordinated notes accreted interest paid by refinancing
    
    
    (86,084
    )
    
    
    Gain on sale of business
    
    
    (28,476
    )
    
    
    Stock compensation expense
    
    
    4,117
    
    
    
    2,223Pay-in-kind interest on zero coupon subordinated notes
    
    
    6,282
    
    
    
    11,356Sales of (purchase of) trading securities, net
    
    
    1,491
    
    
    
    Deferred income taxes
    
    
    7,175
    
    
    
    3,267Changes in assets and liabilities, excluding business combinations:Accounts receivable and notes
    
    
    (8,588
    )
    
    
    (13,235
    )Inventory
    
    
    (37,156
    )
    
    
    (18,576
    )Costs and estimated earnings versus billings on uncompleted contracts
    
    
    14,681
    
    
    
    (26,882
    )Prepaid and other current assets
    
    
    (15,175
    )
    
    
    (7,395
    )Accounts payable and other liabilities
    
    
    9,678
    
    
    
    (1,615
    )Advance billings
    
    
    42,519
    
    
    
    (3,992
    )Other
    
    
    (3,639
    )
    
    
    (1,576
    )Net cash provided by continuing operations
    
    
    24,735
    
    
    
    28,998Net cash used in discontinued operations
    
    
    (139
    )
    
    
    (239
    )Net cash provided by operating activities
    
    
    24,596
    
    
    
    28,759Cash flows from investing activities:Capital expenditures
    
    
    (119,289
    )
    
    
    (54,104
    )Proceeds from sale of property, plant and equipment
    
    
    19,621
    
    
    
    8,973Proceeds from sale of business
    
    
    52,125
    
    
    
    Cash used for business acquisitions
    
    
    
    
    
    
    (3,426
    )Cash used to acquire investments in and advances to non-consolidated affiliates
    
    
    
    
    
    
    (500
    )Net cash used in continuing operations
    
    
    (47,543
    )
    
    
    (49,057
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    50Net cash used in investing activities
    
    
    (47,543
    )
    
    
    (49,007
    )Cash flows from financing activities:Borrowings on revolving credit facilities
    
    
    110,500
    
    
    
    102,500Repayments on revolving credit facilities
    
    
    (88,500
    )
    
    
    (32,500
    )Proceeds from issuance of senior notes
    
    
    150,000
    
    
    
    Payments for debt issue costs
    
    
    (3,832
    )
    
    
    Proceeds from warrant conversions and stock options exercised
    
    
    3,834
    
    
    
    3,241Proceeds (repayments) of other debt, net
    
    
    7,526
    
    
    
    (808
    )Repayment of zero coupon subordinated notes principal
    
    
    (150,000
    )
    
    
    
 6




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##### Table of Contents



Six Months EndedJune 30,2006
    
    
    2005Payments of 2000B equipment lease obligations
    
    
    
    
    
    
    (57,589
    )Net cash provided by continuing operations
    
    
    29,528
    
    
    
    14,844Net cash used in discontinued operations
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    29,528
    
    
    
    14,844Effect of exchange rate changes on cash and equivalents
    
    
    623
    
    
    
    (952
    )Net increase (decrease) in cash and cash equivalents
    
    
    7,204
    
    
    
    (6,356
    )Cash and cash equivalents at beginning of period
    
    
    48,233
    
    
    
    38,076Cash and cash equivalents at end of period
    
    $
    55,437
    
    
    $
    31,720
  7




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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
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Weighted average common shares outstandingused in basic
income (loss) per common share
    
    
    101,017
    
    
    
    85,797
    
    
    
    100,888
    
    
    
    85,744Net dilutive potential common stock issuable:On exercise of options and vesting of restricted stock
    
    
    1,452
    
    
    
    *
    *
    
    
    1,269
    
    
    
    *
    *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
    
    
    9,583
    
    
    
    *
    *
    
    
    9,583
    
    
    
    *
    *Weighted average common shares and dilutive potential
common shares used in diluted income (loss) per common
share
    
    
    112,052
    
    
    
    85,797
    
    
    
    111,740
    
    
    
    85,744
 
 **
    
    Excluded from diluted income (loss) per common share as the effect would have been anti-dilutive.  8




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net dilutive potential common shares issuable:On exercise of options and vesting of restricted stock
    
    
    
    
    
    
    2,566
    
    
    
    
    
    
    
    2,770On exercise of options-exercise price greater than
average market value at end of period
    
    
    48
    
    
    
    1,326
    
    
    
    58
    
    
    
    911On exercise of warrants
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    9,5839,243
    
    
    
    22,674
    
    
    
    9,253
    
    
    
    22,463
 Reclassifications
  2. STOCK OPTIONS AND STOCK-BASED COMPENSATION
      9




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##### Table of Contents



Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2005
    
    
    June 30, 2005Net loss, before stock-based compensation for employees
    
    $
    (6,416
    )
    
    $
    (18,880
    )Add back: Stock-based compensation expense for
employees previously determined under intrinsic value
method, net of tax effect
    
    
    1,168
    
    
    
    2,223Deduct: Stock-based employee compensation expense for
employees determined under the fair value method, net
of tax
    
    
    (1,853
    )
    
    
    (3,549
    )Net loss, after effect of stock-based compensation for
employees
    
    $
    (7,101
    )
    
    $
    (20,206
    )Net loss per share:Basic as reported for prior period
    
    $
    (0.07
    )
    
    $
    (0.22
    )Basic after effect of stock-based compensation for
employees
    
    $
    (0.08
    )
    
    $
    (0.24
    )Diluted as reported for prior period
    
    $
    (0.07
    )
    
    $
    (0.22
    )Diluted after effect of stock-based compensation for
employees
    
    $
    (0.08
    )
    
    $
    (0.24
    )
 Incentive Plans
   Stock Options
  10




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##### Table of Contents



WeightedAverageWeighted
    
    
    RemainingAverage Exercise
    
    
    Contractual
    
    
    AggregateShares
    
    
    Price per Share
    
    
    Life (in years)
    
    
    Intrinsic ValueOutstanding at December 31, 2005
    
    
    3,021
    
    
    $
    11.77Granted
    
    
    
    
    
    $
    Exercised
    
    
    (375
    )
    
    $
    10.22Forfeited
    
    
    (82
    )
    
    $
    12.36Outstanding at June 30, 2006
    
    
    2,564
    
    
    $
    11.97
    
    
    
    5.0
    
    
    $
    17,685Exercisable at June 30, 2006
    
    
    1,863
    
    
    $
    12.09
    
    
    
    3.8
    
    
    $
    12,690
  Options Outstanding

    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageContractual
    
    Exercise
    
    
    
    
    
    ExerciseRange of exercise prices
    
    Shares
    
    Life (in years)
    
    Price
    
    Shares
    
    Price$7.51-10.00
    
    
    945
    
    
    
    2.4
    
    
    $
    9.76
    
    
    
    895
    
    
    $
    9.76$10.01-12.50
    
    
    964
    
    
    
    7.3
    
    
    $
    11.76
    
    
    
    320
    
    
    $
    11.71$12.51-15.00
    
    
    524
    
    
    
    5.4
    
    
    $
    14.44
    
    
    
    517
    
    
    $
    14.46$15.01-17.50
    
    
    75
    
    
    
    5.7
    
    
    $
    17.25
    
    
    
    75
    
    
    $
    17.25$17.51-20.00
    
    
    21
    
    
    
    5.6
    
    
    $
    18.95
    
    
    
    21
    
    
    $
    18.95$22.51-25.00
    
    
    35
    
    
    
    4.7
    
    
    $
    25.00
    
    
    
    35
    
    
    $
    25.002,564
    
    
    
    
    
    
    
    
    
    
    
    1,863
  Weighted-AverageGrant DateShares
    
    Fair ValueUnvested stock options:Unvested at December 31, 2005
    
    
    914
    
    
    $
    5.31Granted
    
    
    
    
    
    $
    Vested
    
    
    (159
    )
    
    $
    6.59Forfeited
    
    
    (54
    )
    
    $
    5.30Unvested at June 30, 2006
    
    
    701
    
    
    $
    5.05
  11




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##### Table of Contents



Restricted Stock Awards
    Weighted-AverageGrant DateShares
    
    Fair ValueUnvested restricted stock awards:Unvested at December 31, 2005
    
    
    1,280
    
    
    $
    11.80Granted
    
    
    
    
    
    $
    Vested
    
    
    (41
    )
    
    $
    14.94Forfeited
    
    
    (94
    )
    
    $
    11.57Change in expected vesting of performance awards
    
    
    41
    
    
    $
    11.39Unvested at June 30, 2006
    
    
    1,186
    
    
    $
    11.70
  3. INVENTORY
  June 30,
    
    
    December 31,2006
    
    
    2005Parts and supplies
    
    $
    140,651
    
    
    $
    135,310Work in progress
    
    
    130,938
    
    
    
    105,405Finished goods
    
    
    13,857
    
    
    
    10,354$
    285,446
    
    
    $
    251,069
  12




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##### Table of Contents



4. PROPERTY, PLANT AND EQUIPMENT
  June 30,
    
    
    December 31,2006
    
    
    2005Compression equipment, facilities and other rental assets
    
    $
    2,507,762
    
    
    $
    2,441,119Land and buildings
    
    
    91,899
    
    
    
    87,604Transportation and shop equipment
    
    
    74,271
    
    
    
    77,507Other
    
    
    54,842
    
    
    
    53,8242,728,774
    
    
    
    2,660,054Accumulated depreciation
    
    
    (891,799
    )
    
    
    (836,954
    )$
    1,836,975
    
    
    $
    1,823,100
  5. INVESTMENTS IN NON-CONSOLIDATED AFFILIATES
   OwnershipInterest
    
    Location
    
    Type of BusinessPIGAP II
    
    
    30.0
    %
    
    Venezuela
    
    Gas Compression PlantEl Furrial
    
    
    33.3
    %
    
    Venezuela
    
    Gas Compression PlantSimco/Harwat Consortium
    
    
    35.5
    %
    
    Venezuela
    
    Water Injection Plant
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Revenues
    
    $
    51,168
    
    
    $
    50,757
    
    
    $
    99,748
    
    
    $
    96,304Operating income
    
    
    26,137
    
    
    
    26,853
    
    
    
    51,686
    
    
    
    48,811Net income
    
    
    9,600
    
    
    
    12,256
    
    
    
    21,147
    
    
    
    27,142
 13




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##### Table of Contents



6. DEBT
  June 30,
    
    
    December 31,2006
    
    
    2005Bank credit facility due November 2010
    
    $
    70,000
    
    
    $
    48,0004.75% 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 1/2% senior notes due 2013**
    
    
    150,000
    
    
    
    9.0% 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
    
    
    
    250,000Zero coupon subordinated notes, interest at 11.0%*
    
    
    
    
    
    
    229,8037.25% convertible subordinated notes due 2029*
    
    
    86,250
    
    
    
    86,250Fair value adjustment  fixed to floating interest rate swaps
    
    
    (14,150
    )
    
    
    (9,686
    )Other, interest at various rates, collateralized by equipment and
other assets, net of unamortized discount
    
    
    1,218
    
    
    
    1,7511,412,068
    
    
    
    1,474,868Less-current maturities
    
    
    (954
    )
    
    
    (1,309
    )Long-term debt
    
    $
    1,411,114
    
    
    $
    1,473,559
 
 *
    
    Securities issued by Hanover (parent company).**
    
    Securities issued by Hanover (parent company) and guaranteed by
Hanover Compression Limited Partnership (HCLP).   1 2 1 2
 14




---



##### Table of Contents



7 1 /2 % Senior Notes due 2013
 1 2
  7. ACCOUNTING FOR DERIVATIVES
   Fair Value ofFixed Rate to be
    
    Notional
    
    Swap atFloating Rate to be Paid
    
    Maturity Date
    
    Received
    
    Amount
    
    June 30, 2006Six Month LIBOR +4.72%
    
    December 15, 2010
    
    
    8.625
    %
    
    $
    100,000
    
    
    $
    (7,210
    )Six Month LIBOR +4.64%
    
    December 15, 2010
    
    
    8.625
    %
    
    $
    100,000
    
    
    $
    (6,940
    )
   15




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##### Table of Contents



8. COMMITMENTS AND CONTINGENCIES
  Maximum PotentialUndiscountedPayments as ofTerm
    
    
    June 30, 2006Indebtedness of non-consolidated affiliates:Simco/Harwat Consortium (1)
    
    
    2009
    
    
    $
    6,613El Furrial (1)
    
    
    2013
    
    
    
    30,020Other:Performance guarantees through letters of credit (2)
    
    
    2006-2010
    
    
    
    129,978Standby letters of credit
    
    
    2006-2007
    
    
    
    13,715Commercial letters of credit
    
    
    2006-2007
    
    
    
    15,949Bid bonds and performance bonds (2)
    
    
    2006-2011
    
    
    
    136,858$
    333,133
 
 (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.      16




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##### Table of Contents



9. RELATED-PARTY TRANSACTIONS
  10. RECENT ACCOUNTING PRONOUNCEMENTS
    17




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##### Table of Contents



Accounting for Stock Issued to Employees,
    Accounting for Income
Taxes
 11. REPORTABLE SEGMENTS
  18




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##### Table of Contents



Production andParts,
    
    Compressor
    
    Processingservice and
    
    and
    
    SurfaceU.S.
    
    International
    
    used
    
    accessory
    
    equipment
    
    
    
    
    
    Otherrentals
    
    rentals
    
    equipment
    
    fabrication
    
    fabrication
    
    Belleli
    
    income
    
    Total(in thousands)June 30, 2006:Revenue from
external
customers
    
    $
    93,073
    
    
    $
    67,520
    
    
    $
    55,737
    
    
    $
    70,128
    
    
    $
    46,868
    
    
    $
    56,785
    
    
    $
    15,560
    
    
    $
    405,671Gross profit
    
    
    56,344
    
    
    
    43,829
    
    
    
    10,676
    
    
    
    11,646
    
    
    
    8,532
    
    
    
    5,918
    
    
    
    15,560
    
    
    
    152,505June 30, 2005:Revenue from
external
customers
    
    $
    87,691
    
    
    $
    55,521
    
    
    $
    50,531
    
    
    $
    41,092
    
    
    $
    56,495
    
    
    $
    47,802
    
    
    $
    5,650
    
    
    $
    344,782Gross profit
    
    
    54,707
    
    
    
    38,377
    
    
    
    14,316
    
    
    
    4,505
    
    
    
    8,105
    
    
    
    3,763
    
    
    
    5,650
    
    
    
    129,423
  Production andParts,
    
    Compressor
    
    Processingservice and
    
    and
    
    SurfaceU.S.
    
    International
    
    used
    
    accessory
    
    equipment
    
    
    
    
    
    Otherrentals
    
    rentals
    
    equipment
    
    fabrication
    
    fabrication
    
    Belleli
    
    income
    
    Total(in thousands)June 30, 2006:Revenue from
external
customers
    
    $
    184,716
    
    
    $
    130,026
    
    
    $
    105,008
    
    
    $
    124,819
    
    
    $
    83,216
    
    
    $
    99,056
    
    
    $
    51,627
    
    
    $
    778,468Gross profit
    
    
    109,896
    
    
    
    85,003
    
    
    
    18,885
    
    
    
    19,644
    
    
    
    14,416
    
    
    
    9,690
    
    
    
    51,627
    
    
    
    309,161June 30, 2005:Revenue from
external
customers
    
    $
    174,845
    
    
    $
    109,436
    
    
    $
    83,968
    
    
    $
    73,616
    
    
    $
    101,631
    
    
    $
    92,237
    
    
    $
    10,675
    
    
    $
    646,408Gross profit
    
    
    107,785
    
    
    
    74,790
    
    
    
    22,693
    
    
    
    7,412
    
    
    
    14,778
    
    
    
    7,536
    
    
    
    10,675
    
    
    
    245,669
 12. ASSETS HELD FOR SALE AND DISPOSITIONS
  19




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues and other:U.S. rentals
    
    $
    
    
    
    $
    67
    
    
    $
    15
    
    
    $
    70Other
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    72
    
    
    
    15
    
    
    
    75Expenses:U.S. rentals
    
    
    62
    
    
    
    219
    
    
    
    134
    
    
    
    383Selling, general and administrative
    
    
    1
    
    
    
    75
    
    
    
    83
    
    
    
    179Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Other
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    63
    
    
    
    293
    
    
    
    217
    
    
    
    567Loss from discontinued operations before income taxes
    
    
    (63
    )
    
    
    (221
    )
    
    
    (202
    )
    
    
    (492
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from discontinued operations
    
    $
    (63
    )
    
    $
    (221
    )
    
    $
    (202
    )
    
    $
    (492
    )
  June 30,
    
    
    December 31,2006
    
    
    2005Current asset
    
    $
    2,020
    
    
    $
    2,020Current liabilities
    
    
    (878
    )
    
    
    (878
    )Net assets held for sale
    
    $
    1,142
    
    
    $
    1,142
 20




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##### Table of Contents



13. INCOME TAXES
     21




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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;
    
    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, and
    
    refinancing existing or incurring additional indebtedness to fund our business;
 
    
    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.
   22




---



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GENERAL
   OVERVIEW
     Industry Conditions
  23




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##### Table of Contents



U.S. Tax Position
  RESULTS OF OPERATIONS
 THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THREE MONTHS ENDED JUNE 30, 2005
 Summary of Business Line Results
 U.S. Rentals
 Three months endedJune 30,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)Revenue
    
    $
    93,073
    
    
    $
    87,691
    
    
    
    6
    %Operating expense
    
    
    36,729
    
    
    
    32,984
    
    
    
    11
    %Gross profit
    
    $
    56,344
    
    
    $
    54,707
    
    
    
    3
    %Gross margin
    
    
    61
    %
    
    
    62
    %
    
    
    (1
    )%
  International Rentals
 Three months endedJune 30,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)Revenue
    
    $
    67,520
    
    
    $
    55,521
    
    
    
    22
    %Operating expense
    
    
    23,691
    
    
    
    17,144
    
    
    
    38
    %Gross profit
    
    $
    43,829
    
    
    $
    38,377
    
    
    
    14
    %Gross margin
    
    
    65
    %
    
    
    69
    %
    
    
    (4
    )%
  24




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##### Table of Contents



Parts, Service and Used Equipment
 Three months endedJune 30,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)Revenue
    
    $
    55,737
    
    
    $
    50,531
    
    
    
    10
    %Operating expense
    
    
    45,061
    
    
    
    36,215
    
    
    
    24
    %Gross profit
    
    $
    10,676
    
    
    $
    14,316
    
    
    
    (25
    )%Gross margin
    
    
    19
    %
    
    
    28
    %
    
    
    (9
    )%
  Compression and Accessory Fabrication
 Three months endedJune 30,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)Revenue
    
    $
    70,128
    
    
    $
    41,092
    
    
    
    71
    %Operating expense
    
    
    58,482
    
    
    
    36,587
    
    
    
    60
    %Gross profit
    
    $
    11,646
    
    
    $
    4,505
    
    
    
    159
    %Gross margin
    
    
    17
    %
    
    
    11
    %
    
    
    6
    %
  Production and Processing Equipment Fabrication
 Three months endedJune 30,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)Revenue
    
    $
    103,653
    
    
    $
    104,297
    
    
    
    (1
    )%Operating expense
    
    
    89,203
    
    
    
    92,429
    
    
    
    (3
    )%Gross profit
    
    $
    14,450
    
    
    $
    11,868
    
    
    
    22
    %Gross margin
    
    
    14
    %
    
    
    11
    %
    
    
    3
    %
  25




---



##### Table of Contents



Gain on sale of business and other income
  Expenses
    1 2
   Three Months EndedJune 30,2006
    
    
    2005Canada
    
    $
    (927
    )
    
    $
    422Argentina
    
    
    (845
    )
    
    
    78Venezuela
    
    
    295
    
    
    
    140Italy
    
    
    3,136
    
    
    
    (5,698
    )All other countries
    
    
    577
    
    
    
    103Exchange gain (loss)
    
    $
    2,236
    
    
    $
    (4,955
    )
  26




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##### Table of Contents



Income Taxes
   SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30, 2005
 Summary of Business Line Results
 U.S. Rentals
 Six months endedJune 30,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)Revenue
    
    $
    184,716
    
    
    $
    174,845
    
    
    
    6
    %Operating expense
    
    
    74,820
    
    
    
    67,060
    
    
    
    12
    %Gross profit
    
    $
    109,896
    
    
    $
    107,785
    
    
    
    2
    %Gross margin
    
    
    59
    %
    
    
    62
    %
    
    
    (3
    )%
  International Rentals
 Six months endedJune 30,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)Revenue
    
    $
    130,026
    
    
    $
    109,436
    
    
    
    19
    %Operating expense
    
    
    45,023
    
    
    
    34,646
    
    
    
    30
    %Gross profit
    
    $
    85,003
    
    
    $
    74,790
    
    
    
    14
    %Gross margin
    
    
    65
    %
    
    
    68
    %
    
    
    (3
    )%
 27




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##### Table of Contents



Parts, Service and Used Equipment
 Six months endedJune 30,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)Revenue
    
    $
    105,008
    
    
    $
    83,968
    
    
    
    25
    %Operating expense
    
    
    86,123
    
    
    
    61,275
    
    
    
    41
    %Gross profit
    
    $
    18,885
    
    
    $
    22,693
    
    
    
    (17
    )%Gross margin
    
    
    18
    %
    
    
    27
    %
    
    
    (9
    )%
  Compression and Accessory Fabrication
 Six months endedJune 30,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)Revenue
    
    $
    124,819
    
    
    $
    73,616
    
    
    
    70
    %Operating expense
    
    
    105,175
    
    
    
    66,204
    
    
    
    59
    %Gross profit
    
    $
    19,644
    
    
    $
    7,412
    
    
    
    165
    %Gross margin
    
    
    16
    %
    
    
    10
    %
    
    
    6
    %
  28




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##### Table of Contents



Production and Processing Equipment Fabrication
 Six months endedJune 30,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)Revenue
    
    $
    182,272
    
    
    $
    193,868
    
    
    
    (6
    )%Operating expense
    
    
    158,166
    
    
    
    171,554
    
    
    
    (8
    )%Gross profit
    
    $
    24,106
    
    
    $
    22,314
    
    
    
    8
    %Gross margin
    
    
    13
    %
    
    
    12
    %
    
    
    1
    %
  Gain on sale of business and other income
  Expenses
     1 2
  29




---



##### Table of Contents



Six Months EndedJune 30,2006
    
    
    2005Canada
    
    $
    (1,017
    )
    
    $
    195Argentina
    
    
    (948
    )
    
    
    474Venezuela
    
    
    576
    
    
    
    3,149Italy
    
    
    4,254
    
    
    
    (8,892
    )All other countries
    
    
    868
    
    
    
    (152
    )Exchange gain/(loss)
    
    $
    3,733
    
    
    $
    (5,226
    )
  Income Taxes
   Cumulative Effect of Accounting Change, Net of Tax
  LIQUIDITY AND CAPITAL RESOURCES
  30




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##### Table of Contents



Six Months EndedJune 30,2006
    
    
    2005Net cash provided by (used in) continuing operations:Operating activities
    
    $
    24,735
    
    
    $
    28,998Investing activities
    
    
    (47,543
    )
    
    
    (49,057
    )Financing activities
    
    
    29,528
    
    
    
    14,844Effect of exchange rate changes on cash and cash equivalents
    
    
    623
    
    
    
    (952
    )Net cash used in discontinued operations
    
    
    (139
    )
    
    
    (189
    )Net change in cash and cash equivalents
    
    $
    7,204
    
    
    $
    (6,356
    )
        31




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##### Table of Contents



1 2
    1 2 1 2
 32




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##### Table of Contents



StandardMoodys
    
    & PoorsOutlook
    
    Positive
    
    StableSenior implied rating
    
    B1
    
    BB-Liquidity rating
    
    SGL-3
    
    2001A equipment lease notes, interest at 8.5%, due September 2008
    
    B2
    
    B+2001B equipment lease notes, interest at 8.75%, 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
    
    B7 1/2% senior notes due 2013
    
    B3
    
    B7.25% convertible subordinated notes due 2029*
    
    Caa1
    
    B-
 
 *
    
    Rating is on the Mandatorily Redeemable Convertible Preferred Securities issued by Hanover
Compressor Capital Trust, a trust that we sponsored. 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 VIE 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.  Derivative Financial Instruments.
  Fair Value ofFixed Rate to be
    
    
    
    
    
    Swap atFloating Rate to be Paid
    
    Maturity Date
    
    Received
    
    Notional Amount
    
    June 30, 2006Six Month LIBOR +4.72%
    
    December 15, 2010
    
    
    8.625
    %
    
    $
    100,000
    
    
    $
    (7,210
    )Six Month LIBOR +4.64%
    
    December 15, 2010
    
    
    8.625
    %
    
    $
    100,000
    
    
    $
    (6,940
    )
 33




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##### Table of Contents



International Operations
      Six Months EndedJune 30,2006
    
    
    2005Canada
    
    $
    (1,017
    )
    
    $
    195Argentina
    
    
    (948
    )
    
    
    474Venezuela
    
    
    576
    
    
    
    3,149Italy
    
    
    4,254
    
    
    
    (8,892
    )All other countries
    
    
    868
    
    
    
    (152
    )Exchange gain/(loss)
    
    $
    3,733
    
    
    $
    (5,226
    )
   34




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##### Table of Contents



NEW ACCOUNTING PRONOUNCEMENTS
    35




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##### Table of Contents



Accounting for Stock Issued to Employees,
    Accounting for Income Taxes
 36




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##### 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
 There have been no material changes in our risk factors that were previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005.
 
 Item 4. Submission of Matters to a Vote of Security Holders
   Term Ending 2007
    
    For
    
    WithheldI. Jon Brumley
    
    
    86,168,210
    
    
    
    327,626Ted Collins, Jr.
    
    
    82,723,974
    
    
    
    3,771,862Margaret K. Dorman
    
    
    86,295,976
    
    
    
    199,860Robert R. Furgason
    
    
    86,051,536
    
    
    
    444,300Victor E. Grijalva
    
    
    86,157,326
    
    
    
    338,510Gordon T. Hall
    
    
    86,300,289
    
    
    
    195,547John E. Jackson
    
    
    86,264,465
    
    
    
    231,371Stephen M. Pazuk
    
    
    86,164,146
    
    
    
    331,690L. Ali Sheikh
    
    
    86,308,898
    
    
    
    186,938
  For
    
    Against
    
    Abstaining86,381,457
    
    
    35,181
    
    
    
    79,198
 37




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##### Table of Contents



For
    
    Against
    
    Abstaining70,385,624
    
    
    5,414,953
    
    
    
    917,321
 
 Item 6:
  10.1
    
    First Amendment to the Hanover Compressor Company and Hanover Compression Limited Partnership Credit Agreement dated November 21, 2005.*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.
 38




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##### Table of Contents



SIGNATURES
   Date:
    
    August 1, 2006By:
    
    /s/ JOHN E. JACKSONJohn E. JacksonPresident and Chief Executive OfficerDate:
    
    August 1, 2006By:
    
    /s/ LEE E. BECKELMANLee E. BeckelmanSenior Vice President and Chief Financial Officer
 39




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##### Table of Contents



EXHIBIT INDEX
 10.1
    
    First Amendment to the Hanover Compressor Company and Hanover Compression Limited Partnership Credit Agreement dated November 21, 2005.*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.