##### 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 MARCH 31, 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
    
    76-0625124(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)12001 North Houston Rosslyn, Houston, Texas
    
    77086(Address of principal executive offices)
    
    (Zip Code)
 (281) 447-8787
(Registrants telephone number, including area code)
 þ o
  o þ o
 o þ




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##### 



TABLE OF CONTENTS
 PART 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

7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

21Item 3. Quantitative and Qualitative Disclosures About Market Risk

31Item 4. Controls and Procedures

31PART II. OTHER INFORMATION

31Item 1. Legal Proceedings

31Item 1A. Risk Factors

31Item 6: Exhibits

31SIGNATURES

32EXHIBIT INDEX

33Certification 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
  March 31,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    49,157
    
    
    $
    48,233Accounts receivable, net of allowance of $4,874 and $4,751
    
    
    275,890
    
    
    
    243,672Inventory, net
    
    
    269,312
    
    
    
    251,069Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    99,881
    
    
    
    99,166Prepaid taxes
    
    
    9,866
    
    
    
    8,194Current deferred income taxes
    
    
    16,729
    
    
    
    13,842Assets held for sale
    
    
    3,985
    
    
    
    2,020Other current assets
    
    
    46,136
    
    
    
    38,189Total current assets
    
    
    770,956
    
    
    
    704,385Property, plant and equipment, net
    
    
    1,816,690
    
    
    
    1,823,100Goodwill, net
    
    
    181,226
    
    
    
    184,364Intangible and other assets
    
    
    63,550
    
    
    
    60,406Investments in non-consolidated affiliates
    
    
    92,589
    
    
    
    90,741Assets held for sale, non-current
    
    
    5,485
    
    
    
    Total assets
    
    $
    2,930,496
    
    
    $
    2,862,996LIABILITIES AND COMMON STOCKHOLDERS EQUITYCurrent liabilities:Short-term debt
    
    $
    4,229
    
    
    $
    4,080Current maturities of long-term debt
    
    
    1,364
    
    
    
    1,309Accounts payable, trade
    
    
    98,412
    
    
    
    92,980Accrued liabilities
    
    
    122,901
    
    
    
    128,805Advance billings
    
    
    124,433
    
    
    
    89,513Liabilities held for sale
    
    
    878
    
    
    
    878Billings on uncompleted contracts in excess of costs and estimated earnings
    
    
    31,936
    
    
    
    35,126Total current liabilities
    
    
    384,153
    
    
    
    352,691Long-term debt
    
    
    1,472,849
    
    
    
    1,473,559Other liabilities
    
    
    45,432
    
    
    
    38,976Deferred income taxes
    
    
    80,081
    
    
    
    76,115Total liabilities
    
    
    1,982,515
    
    
    
    1,941,341Commitments
and contingencies (Note 8)Minority interest
    
    
    11,991
    
    
    
    11,873Common stockholders equity:Common stock, $.001 par value; 200,000,000 shares authorized; 102,455,513
and 102,392,918 shares issued, respectively
    
    
    102
    
    
    
    102Additional paid-in capital
    
    
    1,087,966
    
    
    
    1,097,766Deferred
employee compensation  restricted stock grants
    
    
    
    
    
    
    (13,249
    )Accumulated other comprehensive income
    
    
    15,561
    
    
    
    15,214Accumulated deficit
    
    
    (163,669
    )
    
    
    (186,088
    )Treasury stock303,397 and 366,091 common shares, at cost, respectively
    
    
    (3,970
    )
    
    
    (3,963
    )Total common stockholders equity
    
    
    935,990
    
    
    
    909,782Total liabilities and common stockholders equity
    
    $
    2,930,496
    
    
    $
    2,862,996
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HANOVER COMPRESSOR COMPANY
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
   Three Months EndedMarch 31,2006
    
    
    2005Revenues and other income:U.S. rentals
    
    $
    91,643
    
    
    $
    87,154International rentals
    
    
    62,506
    
    
    
    53,915Parts, service and used equipment
    
    
    49,271
    
    
    
    33,437Compressor and accessory fabrication
    
    
    54,691
    
    
    
    32,524Production and processing equipment fabrication
    
    
    78,619
    
    
    
    89,571Equity in income of non-consolidated affiliates
    
    
    5,848
    
    
    
    4,574Gain on sale
of business and other income
    
    
    30,219
    
    
    
    451372,797
    
    
    
    301,626Expenses:U.S. rentals
    
    
    38,091
    
    
    
    34,076International rentals
    
    
    21,332
    
    
    
    17,502Parts, service and used equipment
    
    
    41,062
    
    
    
    25,060Compressor and accessory fabrication
    
    
    46,693
    
    
    
    29,617Production and processing equipment fabrication
    
    
    68,963
    
    
    
    79,125Selling, general and administrative
    
    
    48,055
    
    
    
    42,158Foreign currency translation
    
    
    (1,497
    )
    
    
    271Other
    
    
    
    
    
    
    119Debt extinguishment costs
    
    
    5,902
    
    
    
    Depreciation and amortization
    
    
    41,968
    
    
    
    45,453Interest expense
    
    
    31,640
    
    
    
    35,940342,209
    
    
    
    309,321Income (loss) from continuing operations before income taxes
    
    
    30,588
    
    
    
    (7,695
    )Provision for income taxes
    
    
    8,447
    
    
    
    4,541Income (loss) from continuing operations
    
    
    22,141
    
    
    
    (12,236
    )Loss from discontinued operations, net of tax
    
    
    (139
    )
    
    
    (271
    )Gain from sales  of discontinued operations, net of tax
    
    
    47
    
    
    
    43Income (loss) before cumulative effect of accounting changes
    
    
    22,049
    
    
    
    (12,464
    )Cumulative effect of accounting changes, net of tax
    
    
    370
    
    
    
    Net income (loss)
    
    $
    22,419
    
    
    $
    (12,464
    )Basic income (loss) per common share:Income (loss) from continuing operations
    
    $
    0.22
    
    
    $
    (0.15
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    Cumulative effect of accounting changes, net of tax
    
    
    
    
    
    
    Net income (loss)
    
    $
    0.22
    
    
    $
    (0.15
    )Diluted income (loss) per common share:Income (loss) from continuing operations
    
    $
    0.22
    
    
    $
    (0.15
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    Cumulative effect of accounting changes, net of tax
    
    
    
    
    
    
    Net income (loss)
    
    $
    0.22
    
    
    $
    (0.15
    )Weighted average common and equivalent shares outstanding:Basic
    
    
    100,759
    
    
    
    85,691Diluted
    
    
    111,428
    
    
    
    85,691
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HANOVER COMPRESSOR COMPANY
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
   Three Months EndedMarch 31,2006
    
    
    2005Net income (loss)
    
    $
    22,419
    
    
    $
    (12,464
    )Other comprehensive income (loss):Change in fair value of derivative financial instruments, net of tax
    
    
    
    
    
    
    608Foreign currency translation adjustment
    
    
    347
    
    
    
    (2,962
    )Comprehensive income (loss)
    
    $
    22,766
    
    
    $
    (14,818
    )
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HANOVER COMPRESSOR COMPANY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
   Three Months EndedMarch 31,2006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    22,419
    
    
    $
    (12,464
    )Adjustments:Depreciation and amortization
    
    
    41,968
    
    
    
    45,453Loss from discontinued operations, net of tax
    
    
    92
    
    
    
    228Cumulative effect of accounting changes, net of tax
    
    
    (370
    )
    
    
    Bad debt expense
    
    
    527
    
    
    
    528Gain on sale of property, plant and equipment
    
    
    (698
    )
    
    
    (375
    )Equity in income of non-consolidated affiliates, net of dividends received
    
    
    (1,848
    )
    
    
    7,675Loss on derivative instruments
    
    
    
    
    
    
    416Net realized gain on trading securities
    
    
    (534
    )
    
    
    Zero coupon
subordinated notes accreted interest paid by refinancing
    
    
    (86,084
    )
    
    
    (Gain) loss on remeasurement of intercompany balances
    
    
    524
    
    
    
    (3,518
    )Gain on sale of business
    
    
    (28,368
    )
    
    
    Stock compensation expense
    
    
    2,003
    
    
    
    1,055Pay-in-kind
interest accreted on zero coupon subordinated notes
    
    
    6,282
    
    
    
    5,526Sales of (purchases of) trading securities, net
    
    
    534
    
    
    
    Deferred income taxes
    
    
    2,105
    
    
    
    291Changes in assets and liabilities, excluding business combinations:Accounts receivable and notes
    
    
    (31,155
    )
    
    
    (3,753
    )Inventory
    
    
    (20,188
    )
    
    
    (13,510
    )Costs and estimated earnings versus billings on uncompleted contracts
    
    
    (3,421
    )
    
    
    (7,429
    )Prepaid and other current assets
    
    
    (9,363
    )
    
    
    (2,528
    )Accounts payable and other liabilities
    
    
    (3,614
    )
    
    
    (18,279
    )Advance billings
    
    
    34,605
    
    
    
    3,972Other
    
    
    (2,832
    )
    
    
    1,689Net cash
provided by (used in) continuing operations
    
    
    (77,416
    )
    
    
    4,977Net cash used in discontinued operations
    
    
    (92
    )
    
    
    (113
    )Net cash
provided by (used in) operating activities
    
    
    (77,508
    )
    
    
    4,864Cash flows from investing activities:Capital expenditures
    
    
    (57,765
    )
    
    
    (26,222
    )Proceeds from sale of property, plant and equipment
    
    
    4,950
    
    
    
    2,153Proceeds from sale of business
    
    
    51,500
    
    
    
    Net cash used in continuing operations
    
    
    (1,315
    )
    
    
    (24,069
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    50Net cash used in investing activities
    
    
    (1,315
    )
    
    
    (24,019
    )Cash flows from financing activities:Borrowings on revolving credit facilities
    
    
    110,500
    
    
    
    85,500Repayments on revolving credit facilities
    
    
    (29,000
    )
    
    
    (8,500
    )Proceeds from issuance of senior notes
    
    
    150,000
    
    
    
    Payments for debt issue costs
    
    
    (3,906
    )
    
    
    Proceeds (repayments) of other debt, net
    
    
    398
    
    
    
    Repayment of
zero coupon subordinated notes principal
    
    
    (150,000
    )
    
    
    (683
    )Proceeds from stock options exercised
    
    
    1,775
    
    
    
    548Payments of 2000B equipment lease obligations
    
    
    
    
    
    
    (57,589
    )Net cash provided by continuing operations
    
    
    79,767
    
    
    
    19,276Net cash used in discontinued operations
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    79,767
    
    
    
    19,276Effect of exchange rate changes on cash and equivalents
    
    
    (20
    )
    
    
    (610
    )Net increase (decrease) in cash and cash equivalents
    
    
    924
    
    
    
    (489
    )Cash and cash equivalents at beginning of period
    
    
    48,233
    
    
    
    38,076Cash and cash equivalents at end of period
    
    $
    49,157
    
    
    $
    37,587
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HANOVER COMPRESSOR COMPANY
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. BASIS OF PRESENTATION
  Earnings Per Common Share
   Three Months EndedMarch 31,2006
    
    
    2005Weighted average common shares outstandingused in
basic income (loss) per common share
    
    
    100,759
    
    
    
    85,691Net dilutive potential common stock issuable:On exercise of options and vesting of restricted stock
    
    
    1,086
    
    
    
    **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
    
    
    
    **Weighted average common shares and dilutive potential
common shares used in dilutive income (loss) per
common share
    
    
    111,428
    
    
    
    85,691
 
 **
    
    Excluded from diluted income (loss) per common share as the effect would have been anti-dilutive.   Three Months EndedMarch 31,2006
    
    
    2005Net dilutive potential common shares issuable:On exercise of options and vesting of restricted stock
    
    
    
    
    
    
    2,977On exercise of options-exercise price greater than average market value at end of period
    
    
    134
    
    
    
    771On exercise of warrants
    
    
    
    
    
    
    4On conversion of convertible subordinated notes due 2029
    
    
    4,825
    
    
    
    4,825On conversion of convertible senior notes due 2008
    
    
    4,370
    
    
    
    4,370On conversion of convertible senior notes due 2014
    
    
    
    
    
    
    9,5839,329
    
    
    
    22,530
 Reclassifications
  7




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##### Table of Contents



2. STOCK OPTIONS AND STOCK-BASED COMPENSATION
        Three Months EndedMarch 31, 2005Net loss, before stock-based compensation for employees, prior period
    
    $
    (12,464
    )Add: Stock-based compensation expense for employees previously
determined under intrinsic value method, net of tax effect
    
    
    1,055Deduct: Stock-based compensation expense for employees determined
under the fair value based method, net of tax effect
    
    
    (1,696
    )Net loss, after effect of stock-based compensation for employees
    
    $
    (13,105
    )Net loss per share:Basic and
Diluted as reported for prior period
    
    $
    (0.15
    )Basic and Diluted after effect of stock-based compensation for employees
    
    $
    (0.15
    )
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Incentive Plans
  Stock Options
     WeightedAverageWeighted
    
    
    RemainingAverage Exercise
    
    
    Contractual
    
    
    AggregateShares
    
    
    Price per Share
    
    

Life
(in years)
    
    
    Intrinsic ValueOutstanding at December 31, 2005
    
    
    3,021
    
    
    $
    11.77Granted
    
    
    
    
    
    $
    Exercised
    
    
    (190
    )
    
    $
    9.36Forfeited
    
    
    (51
    )
    
    $
    11.91Outstanding at March 31, 2006
    
    
    2,780
    
    
    $
    11.92
    
    
    
    5.2
    
    
    $
    18,613Exercisable at March 31, 2006
    
    
    1,907
    
    
    $
    11.83
    
    
    
    3.9
    
    
    $
    12,950
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Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageContractual
    
    
    Exercise
    
    
    
    
    
    
    ExerciseRange of exercise prices
    
    Shares
    
    

Life
(in years)
    
    
    Price
    
    
    Shares
    
    
    Price$5.01-7.50
    
    
    18
    
    
    
    0.1
    
    
    $
    5.70
    
    
    
    18
    
    
    $
    5.70$7.51-10.00
    
    
    1,032
    
    
    
    2.7
    
    
    $
    9.76
    
    
    
    981
    
    
    $
    9.76$10.01-12.50
    
    
    1,010
    
    
    
    7.6
    
    
    $
    11.75
    
    
    
    338
    
    
    $
    11.71$12.51-15.00
    
    
    586
    
    
    
    5.7
    
    
    $
    14.45
    
    
    
    438
    
    
    $
    14.45$15.01-17.50
    
    
    75
    
    
    
    6.0
    
    
    $
    17.25
    
    
    
    75
    
    
    $
    17.25$17.51-20.00
    
    
    21
    
    
    
    5.9
    
    
    $
    18.95
    
    
    
    19
    
    
    $
    18.95$22.51-25.00
    
    
    38
    
    
    
    5.5
    
    
    $
    25.00
    
    
    
    38
    
    
    $
    25.002,780
    
    
    
    
    
    
    
    
    
    
    
    1,907
  Weighted-AverageGrant DateShares
    
    Fair ValueUnvested stock options:Unvested at December 31, 2005
    
    
    914
    
    
    $
    5.31Granted
    
    
    
    
    
    $
    Vested
    
    
    (2
    )
    
    $
    5.45Forfeited
    
    
    (39
    )
    
    $
    5.27Unvested at March 31, 2006
    
    
    873
    
    
    $
    5.31
  Restricted Stock Awards
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Weighted-AverageGrant DateShares
    
    Fair ValueUnvested restricted stock awards:Unvested at December 31, 2005
    
    
    1,280
    
    
    $
    11.80Granted
    
    
    
    
    
    $
    Vested
    
    
    (4
    )
    
    $
    12.74Forfeited
    
    
    (64
    )
    
    $
    11.60Change in expected vesting of performance awards
    
    
    8
    
    
    $
    11.39Unvested at March 31, 2006
    
    
    1,220
    
    
    $
    11.81
  3. INVENTORY
  March 31,
    
    
    December 31,2006
    
    
    2005Parts and supplies
    
    $
    139,850
    
    
    $
    135,310Work in progress
    
    
    118,808
    
    
    
    105,405Finished goods
    
    
    10,654
    
    
    
    10,354$
    269,312
    
    
    $
    251,069
  4. PROPERTY, PLANT AND EQUIPMENT
  March 31,
    
    
    December 31,2006
    
    
    2005Compression equipment, facilities and other rental assets
    
    $
    2,457,864
    
    
    $
    2,441,119Land and buildings
    
    
    87,861
    
    
    
    87,604Transportation and shop equipment
    
    
    74,236
    
    
    
    77,507Other
    
    
    53,042
    
    
    
    53,8242,673,003
    
    
    
    2,660,054Accumulated depreciation
    
    
    (856,313
    )
    
    
    (836,954
    )$
    1,816,690
    
    
    $
    1,823,100
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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 March 31,2006
    
    
    2005Revenues
    
    $
    48,580
    
    
    $
    45,547Operating income
    
    
    25,549
    
    
    
    21,958Net income
    
    
    19,209
    
    
    
    14,886
 12




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##### Table of Contents



6. DEBT
  March 31,
    
    
    December 31,2006
    
    
    2005Bellelifactored receivables
    
    $
    1,331
    
    
    $
    1,129Bellelirevolving credit facility
    
    
    2,898
    
    
    
    2,951Short-term debt
    
    $
    4,229
    
    
    $
    4,080
   March 31,
    
    
    December 31,2006
    
    
    2005Bank credit facility due November 2010
    
    $
    129,500
    
    
    $
    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%, due March 2007*
    
    
    
    
    
    
    229,8037.25% convertible subordinated notes due 2029*
    
    
    86,250
    
    
    
    86,250Fair value adjustment  fixed to floating interest rate swaps
    
    
    (12,369
    )
    
    
    (9,686
    )Other, interest at various rates, collateralized by equipment and
other assets, net of unamortized discount
    
    
    2,082
    
    
    
    1,7511,474,213
    
    
    
    1,474,868Lesscurrent maturities
    
    
    (1,364
    )
    
    
    (1,309
    )Long-term debt
    
    $
    1,472,849
    
    
    $
    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
 13




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##### Table of Contents



1 2
 7 1/2% Senior Notes due 2013
 1 2
  7. ACCOUNTING FOR DERIVATIVES
   Fair Value ofSwap atFixed Rate to
    
    Notional
    
    March 31,Floating Rate to be Paid
    
    Maturity Date
    
    Received
    
    Amount
    
    2006Six Month LIBOR +4.72%
    
    December 15, 2010
    
    
    8.625
    %
    
    $
    100,000
    
    
    $
    (6,306
    )Six Month LIBOR +4.64%
    
    December 15, 2010
    
    
    8.625
    %
    
    $
    100,000
    
    
    $
    (6,063
    )
  14




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##### Table of Contents



8. COMMITMENTS AND CONTINGENCIES
  MaximumPotentialUndiscountedPayments as ofTerm
    
    
    March 31, 2006Indebtedness of non-consolidated affiliates:Simco/Harwat Consortium (1)
    
    
    2006
    
    
    $
    7,571El Furrial (1)
    
    
    2013
    
    
    
    31,001Other:Performance guarantees through letters of credit (2)
    
    
    2006-2010
    
    
    
    122,872Standby letters of credit
    
    
    2006-2007
    
    
    
    20,350Commercial letters of credit
    
    
    2006
    
    
    
    2,269Bid bonds and performance bonds (2)
    
    
    2006-2011
    
    
    
    124,130$
    308,193
 
 (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.      15




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9. NEW ACCOUNTING PRONOUNCEMENTS
    Accounting for Stock Issued to Employees,
  16




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##### Table of Contents



10. RELATED PARTY TRANSACTIONS
  11. REPORTABLE SEGMENTS
   17




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##### Table of Contents



Production andPart,
    
    Compressor
    
    Processingservice and
    
    and
    
    SurfaceU.S.
    
    International
    
    used
    
    accessory
    
    equipment
    
    
    
    
    
    OtherRental
    
    rentals
    
    equipment
    
    fabrication
    
    fabrication
    
    Belleli
    
    income
    
    Total(in thousands)March 31, 2006:Revenue from
external customers
    
    $
    91,643
    
    
    $
    62,506
    
    
    $
    49,271
    
    
    $
    54,691
    
    
    $
    36,348
    
    
    $
    42,271
    
    
    $
    36,067
    
    
    $
    372,797Gross profit
    
    
    53,552
    
    
    
    41,174
    
    
    
    8,209
    
    
    
    7,998
    
    
    
    5,884
    
    
    
    3,772
    
    
    
    36,067
    
    
    
    156,656March 31, 2005:Revenue from
external
customers
    
    $
    87,154
    
    
    $
    53,915
    
    
    $
    33,437
    
    
    $
    32,524
    
    
    $
    45,136
    
    
    $
    44,435
    
    
    $
    5,025
    
    
    $
    301,626Gross profit
    
    
    53,078
    
    
    
    36,413
    
    
    
    8,377
    
    
    
    2,907
    
    
    
    6,673
    
    
    
    3,773
    
    
    
    5,025
    
    
    
    116,246
 12. ASSETS HELD FOR SALE AND DISPOSITIONS
     18




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##### Table of Contents



Three Months EndedMarch 31,2006
    
    
    2005Revenues and other:U.S. rentals
    
    $
    15
    
    
    $
    315
    
    
    
    3Expenses:U.S. rentals
    
    
    72
    
    
    
    164Selling, general and administrative
    
    
    82
    
    
    
    104Foreign currency translation
    
    
    
    
    
    
    5Other
    
    
    
    
    
    
    1154
    
    
    
    274Loss from discontinued operations before income taxes
    
    
    (139
    )
    
    
    (271
    )Provision for income taxes
    
    
    
    
    
    
    Loss from discontinued operations
    
    $
    (139
    )
    
    $
    (271
    )
  ProductionNon-
    
    
    & ProcessingOilfield
    
    
    SurfacePower
    
    
    EquipmentGeneration
    
    
    Fabrication
    
    
    TotalCurrent assets
    
    $
    2,020
    
    
    $
    1,965
    
    
    $
    3,985Property, plant and equipment
    
    
    
    
    
    
    5,485
    
    
    
    5,485Assets held for sale
    
    
    2,020
    
    
    
    7,450
    
    
    
    9,470Current liabilities
    
    
    878
    
    
    
    
    
    
    
    878Liabilities held for sale
    
    
    878
    
    
    
    
    
    
    
    878Net assets held for sale
    
    $
    1,142
    
    
    $
    7,450
    
    
    $
    8,592
  ProductionNon-
    
    
    & ProcessingOilfield
    
    
    SurfacePower
    
    
    EquipmentGeneration
    
    
    Fabrication
    
    
    TotalCurrent assets
    
    $
    2,020
    
    
    $
    
    
    
    $
    2,020Property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    Assets held for sale
    
    
    2,020
    
    
    
    
    
    
    
    2,020Current liabilities
    
    
    878
    
    
    
    
    
    
    
    878Liabilities held for sale
    
    
    878
    
    
    
    
    
    
    
    878Net assets held for sale
    
    $
    1,142
    
    
    $
    
    
    
    $
    1,142
 19




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13. INCOME TAXES
   20




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Item
2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Special Note Regarding Forward-Looking Statements
  
    
    our inability to renew our short-term leases of equipment with our customers so as to fully recoup our cost of the equipment;
    
    a prolonged substantial reduction in oil and natural gas prices, which could cause a decline in the demand for our compression and oil and natural gas production and
processing equipment;
    
    reduced profit margins or the loss of market share resulting from competition or the introduction of competing technologies by other companies;
    
    changes in economic or political conditions in the countries in which we do business, including civil uprisings, riots, terrorism, 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.
   21




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GENERAL
   RESULTS OF OPERATIONS
 THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31, 2005
 Overview
     Industry Conditions
  Tax Position
  22




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##### Table of Contents



Summary of Business Line Results
 U.S. Rentals
 Three Months EndedMarch 31,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)Revenue
    
    $
    91,643
    
    
    $
    87,154
    
    
    
    5
    %Operating expense
    
    
    38,091
    
    
    
    34,076
    
    
    
    12
    %Gross profit
    
    $
    53,552
    
    
    $
    53,078
    
    
    
    1
    %Gross margin
    
    
    58
    %
    
    
    61
    %
    
    
    (3
    )%
  International Rentals
 Three Months EndedMarch 31,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)Revenue
    
    $
    62,506
    
    
    $
    53,915
    
    
    
    16
    %Operating expense
    
    
    21,332
    
    
    
    17,502
    
    
    
    22
    %Gross profit
    
    $
    41,174
    
    
    $
    36,413
    
    
    
    13
    %Gross margin
    
    
    66
    %
    
    
    68
    %
    
    
    (2
    )%
  Parts, Service and Used Equipment
 Three Months EndedMarch 31,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)Revenue
    
    $
    49,271
    
    
    $
    33,437
    
    
    
    47
    %Operating expense
    
    
    41,062
    
    
    
    25,060
    
    
    
    64
    %Gross profit
    
    $
    8,209
    
    
    $
    8,377
    
    
    
    (2
    )%Gross margin
    
    
    17
    %
    
    
    25
    %
    
    
    (8
    )%
  23




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##### Table of Contents



Compression and Accessory Fabrication
 Three Months EndedMarch 31,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)Revenue
    
    $
    54,691
    
    
    $
    32,524
    
    
    
    68
    %Operating expense
    
    
    46,693
    
    
    
    29,617
    
    
    
    58
    %Gross profit
    
    $
    7,998
    
    
    $
    2,907
    
    
    
    175
    %Gross margin
    
    
    15
    %
    
    
    9
    %
    
    
    6
    %
  Production and Processing Equipment Fabrication
 Three Months EndedMarch 31,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)Revenue
    
    $
    78,619
    
    
    $
    89,571
    
    
    
    (12
    )%Operating expense
    
    
    68,963
    
    
    
    79,125
    
    
    
    (13
    )%Gross profit
    
    $
    9,656
    
    
    $
    10,446
    
    
    
    (8
    )%Gross margin
    
    
    12
    %
    
    
    12
    %
    
    
    
  Gain
on Sale of business and other income
  Expenses
     24




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##### Table of Contents



Three Months EndedMarch 31,2006
    
    
    2005Argentina
    
    $
    103
    
    
    $
    (396
    )Italy
    
    
    (1,118
    )
    
    
    3,195Venezuela
    
    
    (280
    )
    
    
    (3,009
    )All other countries
    
    
    (202
    )
    
    
    481Exchange (gain) loss
    
    $
    (1,497
    )
    
    $
    271
  Income Taxes
   Cumulative Effect of Accounting Change, Net of Tax
  LIQUIDITY AND CAPITAL RESOURCES
  25




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##### Table of Contents



Three Months EndedMarch 31,2006
    
    
    2005Net cash provided by (used in) continuing operations:Operating activities
    
    $
    (77,416
    )
    
    $
    4,977Investing activities
    
    
    (1,315
    )
    
    
    (24,069
    )Financing activities
    
    
    79,767
    
    
    
    19,276Effect of exchange rate changes on cash and cash equivalents
    
    
    (20
    )
    
    
    (610
    )Net cash (used in) provided by discontinued operations
    
    
    (92
    )
    
    
    (63
    )Net change in cash and cash equivalents
    
    $
    924
    
    
    $
    (489
    )
        1 2
 26




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##### Table of Contents



1 2 1 2
  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 8.8%, due September 2011
    
    B2
    
    B+4.75% convertible senior notes due 2008
    
    B3
    
    B4.75% convertible senior notes due 2014
    
    B3
    
    B8.625% senior notes due 2010
    
    B3
    
    B9.0% senior notes due 2014
    
    B3
    
    B7 1/2% senior notes due 2013
    
    B3
    
    B7.25% convertible subordinated notes due 2029*
    
    Caa1
    
    B-
 27




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##### Table of Contents



*
    
    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 ofSwap atFixed Rate to be
    
    Notional
    
    March 31,Floating Rate to be Paid
    
    Maturity Date
    
    Received
    
    Amount
    
    2006Six Month LIBOR +4.72%
    
    December 15, 2010
    
    
    8.625
    %
    
    $
    100,000
    
    
    $
    (6,306
    )Six Month LIBOR +4.64%
    
    December 15, 2010
    
    
    8.625
    %
    
    $
    100,000
    
    
    $
    (6,063
    )
   International Operations
  28




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Three Months EndedMarch 31,2006
    
    
    2005Argentina
    
    $
    103
    
    
    $
    (396
    )Italy
    
    
    (1,118
    )
    
    
    3,195Venezuela
    
    
    (280
    )
    
    
    (3,009
    )All other countries
    
    
    (202
    )
    
    
    481Exchange (gain) loss
    
    $
    (1,497
    )
    
    $
    271
     29




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NEW ACCOUNTING PRONOUNCEMENTS
    Accounting for Stock Issued to Employees,
    30




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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: Exhibits
 (a)
    
    Exhibits
 4.1
    
    Fourth Supplemental Indenture, dated as of March 31, 2006,
among Hanover Compressor Company, Hanover Compression Limited
Partnership and Wachovia Bank, National Association, as trustee
(incorporated by reference to Exhibit 4.1 to the Form 8-K filed by
Hanover Compressor Company on March 31, 2006).4.2
    
    Form of Note for the 7 1/2% Senior Notes due 2013 (included
in Exhibit 4.1).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. 31




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SIGNATURES
  HANOVER COMPRESSOR COMPANYDate: May 3, 2006By:
    
    /s/ JOHN E. JACKSONJohn E. JacksonPresident and Chief Executive OfficerDate: May 3, 2006By:
    
    /s/ LEE E. BECKELMANLee E. BeckelmanVice President and Chief Financial Officer
 32




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##### Table of Contents



EXHIBIT INDEX
 4.1
    
    Fourth Supplemental Indenture, dated as of March 31, 2006,
among Hanover Compressor Company, Hanover Compression Limited
Partnership and Wachovia Bank, National Association, as trustee
(incorporated by reference to Exhibit 4.1 to the Form 8-K filed by
Hanover Compressor Company on March 31, 2006).4.2
    
    Form of Note for the 7 1/2% Senior Notes due 2013 (included
in Exhibit 4.1).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. 33