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June 30, 2010

December 31, 2009

U.S. dollar

June 30,

December 31,

2010

2009

(Unaudited)

Assets

Current Assets:

Cash and cash equivalents

46,861

38,790

Accounts receivable (net of allowance s of $4,651 and $5,640 in 2010 and 2009, respectively)

230,303

155,968

Inventories

163,755

177,574

Other current assets

76,635

65,553

Total current assets

517,554

437,885

Property, Plant and Equipment (net of accumulated depreciation of $683,438 and $733,152 in 2010 and 2009, respectively)

417,883

513,487

&nb sp;

Other Assets:

Goodwill

33,368

35,903

Other intangible assets, net

18,833

19,584

Deferred income taxes

51,623

54,458

Other

4,237

7,000

< font style="font-family:inherit;font-size:9pt;background-color:transparent;">Total other assets

108,061

116,945

Total Assets

1,043,498

1,068,317

Liabilities and Stockholders' Equity

Current Liabilities:

Notes payable and bank overdrafts

42,513

54,069

Long-term debt due within one year

369,901

&n bsp;

142,007

Accounts payable

147,824

101,719

Accrued salaries and wages

57,478

57,569

Accrued warranty

29,352

28,820

Other accrued liabilities

40,059

30,806

Total current liabilities

687,127

414,990

Long-Term Debt

4,079

337,089

&nbs p;

Other Liabilities:

Long-term pension liability

67,663

72,400

Postretirement benefits other than pensions

41,047

Deferred income taxes

32,703

33,708

Other

14,806

14,489

Total other liabilities

156,219

161,644

Total liabilities

847,425< /div>

913,723

Stockholders' Equity:

Preferred stock, par value $.01 per share, authorized 4,500,000 shares, no shares issued or outstanding

—

Common stock, par value $.01 per share, authorized shares 75,000,000 in 2010 and 2009; issued and outstanding 48,399,906 in 2010 and 48,384,205 in 2009

484

Additional paid-in capital

335,145

334,873

Accumulated deficit

(243,565

)

(298,845

)

Accumulated other comprehensive income

30,789

55,422

Total Sauer-Danfoss Inc. stockholders' equity

122,853

91,934

Noncontrolling interest

73,220

62,6 60

Total stockholders' equity

196,073

154,594

Total Liabilities and Stockholders' Equity

1,043,498

&n bsp;

1,068,317

See accompanying notes to consolidated financial statements.

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Sauer-Danfoss Inc. and Subsidiaries

Consolidated Statement of Stockholders' Equity and Comprehensive Income (Loss)

(D ollars in thousands, except per share data)

—


	Number of Shares Outstanding	Common Stock			Additional Paid-in Capital			Accumulated Deficit				Accumulated Other Comprehensive Income			Noncontrolling Interest			Total
December 31, 2009	48,384,205	$	484		$	334,873		$	(298,845	)		$	55,422		$	62,660		$	154,594
Comprehensive income:
Net income	—	< font style="font-family:inherit;font-size:8pt;background-color:transparent;">—			—			55,280				—			20,856
Pension adjustments, net of tax	—	—			—			—				1,319			—
Unrealized losses on hedging activities, net of tax	—			—			—			(2,596		)		—
Currency translation	—	—			—			—				(23,356		)	426
Total comprehensive income																		51,929
Performance units vested	5,201	—			—			—				—			—			—
Restricted stock grant	10,500	—			—			—				—			—			—
Minimum tax withholding settlement	—	—			(24		)	—			< div style="overflow:hidden;font-size:10pt;width:7.33333332px">	—			—			(24		)
Restricted stock compensation	—	—			296			—				—			—			296
< div style="padding-left:19.999999950000003px;text-align:left;font-size:8pt;">Noncontrolling interest distribution	—	—			—			—				—			(10,722		)	(10,722		)
June 30, 2010 (Unaudited)	48,399,906	$	484		$	335,145		$	(243,565	)		$	30,789		$	73,220		$	196,073

See accompanying notes to consolidated financial statements.

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Sauer-Danfoss Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)


	Six Months Ended June 30,
	2010				2009
Cash Flows from Operating Activities:
Net income (loss)	$	76,136			$	(190,969	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	49,825				53,815
Loss on sale of business and asset disposals	2,304				8,585
Impairment charge	—				50,841
Change in deferred income taxes	2,693				48,610
Changes in operating assets and liabilities
Accounts receivable, net	(99,396		)		65,842
Inventories	(858		)		88,493
Prepaid and other current assets	(8,548		)		6,585
Accounts payable	62,186			(63,391		)
Accrued liabilities	16,881				(8,952		)
Other	3,515				(6,927		)
Net cash provided by operating activities	104,738				52,532

Cash Flows from Investing Activities:
Purchases of property, plant and equipment	(8,702		)		(29,789		)
Proceeds from sales of property, plant and equipment	4,859				6,194
Net cash used in investing activities	(3,843		< div style="text-align:left;padding-left:0px;font-size:10pt;width:6.4666666555px">)		(23,595		)

Cash Flows from Financing Activities:
Net repayments on notes payable and bank overdrafts	(4,117		)		< div style="text-align:right;font-size:10pt;width:92.86666644450001px">(15,299		)
Net repayments on revolving credit facility	(85,671		)		(102,940		)
Repayments of long-term debt	(745		)		(160,078		)
Borrowings of long-term debt	—				304,862
Payment of debt financing costs	—				(8,575		)
Payments of prepayment penalties	—				(8,064		)
Settlement of interest rate swaps	—				(2,000		)
Cash dividends	—				(8,689		)
Distributions to noncontrolling interest	(10,722		)		(1,795		)
Net cash provided by (used in) financing activities	(101,255		)		(2,578		)

Effect of Ex change Rate Changes on Cash	8,431				(2,595		)
				;
Cash and Cash Equivalents:
Net increase during the period	8,071				23,764
Beginning balance	38,790				23,145
Ending balance	$	46,861			$	46,909

Supplemental Cash Flow Disclosures:
Interest paid	$	30,826< /font>			$	11,280
Income taxes paid	$	7,018			$	8,571

See accompanying notes to consolidated financial statements.

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Sauer-Danfoss Inc. and Subsidiaries

Notes To Consolidated Financial Statements

(Dollars in thousands, except per share data)

(Unaudited)

1) Summary of Significant Accounting Policies —

;

Basis of Presentation and Principles of Consolidation —

The consolidated financial statements of Sauer-Danfoss Inc. and subsidiaries (the Company) included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and represent the consolidation of all companies in which the Company has a controlling f inancial ownership interest or a majority of the interest in earnings or losses. Certain information and disclosures normally included in comprehensive financial statements, prepared in accordance with U.S. generally accepted accounting principles (GAAP), have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the financial statements reflect all adjustments necessary to present fairly the Company's consolidated financial position, results of operations and cash flows for the periods presented. It is suggested that these interim financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's latest annual report on Form 10-K as filed with the Securities and Exchange Commission on March 4, 2010 and as amended on April 28, 2010.

Use of Estimates —

In prepar ing the consolidated financial statements in conformity with U.S. generally accepted accounting principles, management must make decisions that impact the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures, including disclosures of contingent assets and liabilities. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. Estimates are used in determining, among other items, incentive accruals, inventory valuation, warranty reserves, allowance for doubtful accounts, pension and postretirement accruals, useful lives for intangible assets, and future cash flows associated with impairment testing for goodwill and other long-lived assets. These estimates and assumptions are based on management's best estimates and judgments. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that management believes to be reasonable u nder the circumstances, including the current economic environment, adjusting such estimates and assumptions when facts and circumstances dictate. A number of these factors include, among others, the economic conditions, restricted credit markets, foreign currency, and higher commodity costs, all of which impact such estimates and assumptions. As future events and their effects cannot be determined with precision, actual amounts could differ significantly from those estimated at the time the consolidated financial statements are prepared. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

2) Basic and Diluted Per Share Data —

Basic net income (loss) per common share is based on the weighted average number of shares of common stock outstanding for the period less restricted stock shares issued in connection with the Company's long-term incentive plans and subject to risk of forfeiture. Diluted net income per common share assumes that outstanding common shares were increased by shares issuable upon (i) vesting of restricted stock shares, and (ii) granting of shares under the long-term incentive plans, after it becomes certain that the performance requirements needed to be met in accordance with the incentive plans will be achieved. Shares granted under the long-term incentive plans have an exercise price of zero. Diluted net loss per share for 2009 excludes the dilutive effect of restricted stock and performance units as these shares are anti-dilutive.

Table of C ontents

The reconciliation of basic net income per common share to diluted net income per common share is shown in the following table for the three and six-month periods ended June 30, 2010 and 2009:


		June 30, 2010							June 30, 2009
		Net Income		Shares	EPS				Net loss				Shares			EPS
	Three Months
	Basic net income (loss)	$	34,555	48,387,593	$	0.71			$	(121,826	)		48,338,295			$	(2.52	)
	Effect of dilutive securities:
	Restricted stock	—		188	—				—				—			—
	Performance units	—		85,121	—				—				—	< /div>		—
< /div>	Diluted net income (loss)	$	34,555	48,472,902	0.71		&n bsp;	$	(121,826	)		48,338,295			$	(2.52	)

	Six Months
	Basic net income (loss)	$	55,280	48,370,764	1.14				$	(200,232	)		48,324,802			$	(4.14	)
	Effect of dilutive securities:
	Restricted stock	—		6,917	—				—				—			—
	Performance units	—		85,121	—				—				—			—
	Diluted net income (loss)	$	55,280	48,462,802	1.14				$	(200,232	)		48,324,802			$	(4.14	)

3) Restructuring —

In September 2009 the Company announced its plans to close the Lawrence, Kansas plant, and transfer the majority of the production lines to the Ames, Iowa and Freeport, Illinois locations to reduce costs and increase efficiencies. Costs related to the Lawrence plant closing are included in the Work Function segment and totaled $1,566 and $3,400 in the three and six months ended June 30, 2010, respectively. Cumulativ e costs incurred through June 30, 2010 were $7,099. The project is substantially complete. Total project cost is expected to be approximately $7,500.

In December 2008 the Company decided to close the Hillsboro, Oregon plant and transfer the production lines to the Easley, South Carolina location. In 2009 the Company decided to exit the electric drives activities related to electric motors and generators. The Company incurred restructuring costs for these two projects of $1,050 and $5,020 in the three and six months ended June 30, 2009, respectively, which are included in the Controls segment. The restructuring was completed in 2009 at a total incurred cost of $9,711.

The restructuring costs incurred during the three and six months ended June 30, 2010 and 2009 are reported in the income statement as detailed in the following table:


	Cost of Sales		Selling, General and Administrative Expenses		Loss (Gain) on Asset Disposals			Total
Charges for the three months ended June 30, 2010	$	1,131	$	187	$	248		$	1,566
Charges for the three months ended June 30, 2009	680		402		(32		)	1,050

Charges for the six months ended June 30, 2010	2,658		446		296			3,400
Charges for the six months ended June 30, 2009	1,457		1,452		2,111			5,020

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The following table summarizes the restructuring charges incurred and the activity in the accrued liability during the six months ended June 30, 2010.

< /font>

—


	Employee Termination Costs			Building and Lease Cancellation Cost			Accelerated Depreciation and Loss on Asset Disposals			Equipment Moving Costs				Excess Capacity			Other			Total
Balance as of December 31, 2009	$	851		$	555		$	—		$	—			$	—		$	—		$	1,406
Charges to expense	—			—			388			293				617			536			1,834
Payments made / Fixed asset write-offs	(302		)	(139		)	(388		)	(293		)	< /div>	(617		)	(536		)	(2,275		)
Balance as of March 31, 2010	549			416					—			—				—			965
Charges to expense	—			—			405			332				713			116			1,566
Payments made / Fixed asset write-offs	(204		)	(139		)	(405		)	(332		)		(713		)	(116		)	(1,909		)
Balance as of June 30, 2010 (1)	$	345		$	277		$	—		$	—			$	—		$	—		$	622
Cumulative charges incurred	2,900			2,162			5,744			1,454				1,330			3,220			16,810
Cumulative charges expected to be incurred	2,900			2,400			5,744			1,501				1,350			3,306			17,201

________________________________________

(1) The remaining $345 of accrued employee termination costs and $277 of accrued lease costs relating to future lease payments will be paid in 2010.

4) Inventories —

The composition of inventories is as follows:


	June 30, 2010				December 31, 2009
Raw materials	$	82,308			$	89,063
Work in progress	44,865				44,176
Finished goods and parts	54,747				64,263
LIFO allowance	(18,165		)		(19,928		)
Total	$	163,755		< /div>	$	177,574

5) Fair Value and Derivative Financial Instruments —

The Company holds certain assets and liabilities that are required to be measured at fair value on a recurring basis. These include the Company's derivative instruments, related to both foreign currency and interest rates, which are recognized at fair value. All derivative instruments are designated as a nd qualify for hedge accounting treatment. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is the Company's policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. The foreign currency exchange contracts are valued using an income approach based on the present value of the forward rate less the contract rate multiplied by the notional amount of the contract. The fair values of the foreign currency exchange and interest rate contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, the Company has categorized these contracts as Level 2 in the fair value hierarchy.

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The following table shows the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis:

< td style="vertical-align:bottom;background-color:#cceeff;padding:0px;">

Liabilities:


	Balance Sheet Classification	June 30, 2010		December 31, 2009
Assets:
Foreign currency exchange contracts	Other current assets	$	—	$	791


Foreign currency exchange contracts	Other accrued liabilities	$	2,923	$	322

The Company uses derivative financial instruments to manage risk and not for trading or other speculative purposes.

The Company enters into forward contracts to hedge the value of the U.S. dollar or euro cash flow at locations that do not have the U.S. dollar or euro as their functional currency but conduct certain transactions in U.S. dollars or euros. The objective of all outstanding forward contracts is to hedge forecasted transactions in U.S. dollars or euros through the cash settlement date. The Company enters forward contracts that mature from two to eighteen months after the contract date. The Company had foreign currency forward contracts outstanding in notional amounts as follows:

Interest rate swaps, designated as cash flow hedges, were used by the Company to establish fixed interest rates on outstanding borrowings. The interest rate swaps were settled in 2009.

Changes in the fair value of derivative financial instruments are recognized in income or in stockholders' equity as a component of other comprehensive income depending on whether the transaction related to the hedged risk has occurred. Changes in fair values of derivatives that are accounted for as cash flow hedges are recorded in other comprehensive income. The amount of gain (loss), net of tax, recorded as a component of accumulated other comprehensive income was:


	June 30, 2010			December 31, 2009

Foreign currency exchange contracts	$	(2,388	)	$	208

At June 30, 2010 the Company expects to reclassify $2,388 of loss, net of tax, on derivative instruments from accumulated other comprehensive income to the income statement during the next twelve months due to the actual fulfillment of forecasted transactions.

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The following table summarizes the amount of gain (loss) reclassified from accumulated other comprehensive income into the consolidated statement of operations for the three and six months ended June 30, 2010 and 2009:


Statement of Operations Classification	June 30, 2010			June 30, 2009
Three months ended
Net Sales	$	(194	)	$	(1,249	)
Other, net	(276		)	678
	$	(4 70	)	$	(571	)
Six months ended
Net Sales	$	473		$	(2,053	)
Other, net	(560		)	210
Interest expense, net	—			(151		)
	$	(87	)	$	(1,994	)

The Company formally assesses at a hedge's inception, and on an ongoing basis, whether the derivatives that are used in the hedging transaction have been highly effective in offsetting changes in the cash flows of the hedged items and whether those derivatives are expected to remain highly effective. When it is determined that a derivative has ceased to be highly effective as a hedge, the Company discontinues hedge accounting prospectively. When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction wil l occur by the end of the originally expected period, but it is probable that the transaction will occur within the two months following the forecasted period, the gain or loss on the derivative remains in accumulated other comprehensive income and is reclassified to net earnings when the forecasted transaction affects net earnings. However, if it is probable that a forecasted transaction will not occur within two months after the forecasted period, the gains and losses that were accumulated in other comprehensive income will be recognized immediately in net earnings. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company carries the derivative at its fair value on the consolidated balance sheet, recognizing future changes in the fair value in other income or expense, net. All derivative contracts qualified for hedge accounting in 2010. As of June 30, 2009, the Company had derivative contracts with notional amounts of $3,300 that no longer qualified for hedge accounting as the sales were not expected to occur in the month originally specified. For the three and six months ended June 30, 2009, $190 of income was recognized in other, net related to changes in the fair value of derivative contracts that were no longer deemed highly effective. The $190 of income is included in the $678 and $210 in the table above, for the three and six month periods ended June 30, 2009, respectively. The sales related to the derivative contracts no longer deemed highly effective were expected to occur within two months following the originally specified period and therefore $472 of losses remained classified in accumulated other comprehensive income until the forecasted sales occurred later in 2009.

In addition, any portion of the hedge that is deemed ineffective due to the absolute value of the cumulative change in the derivative being greater than the cumulative change in the hedged item is recorded immediately in other income or expense, net on the consolidated statement of operations. Except for the hedge ineffectiveness discussed above, there was no other significant hedge ineffectiveness in the three or six months ended June 30, 2010 or 2009.

6) Related Person Transactions —

In November 2009 the Company entered into an unsecured Credit Agreement (Danfoss Agreement) with Danfoss A/S, the Company's majority stockholder, which permits the Company to borrow up to $690,000. On May 14, 2010 the credit available under the Danfoss Agreement was reduced to $540,00 0 at the request of the Company. The credit available was further reduced to $500,000 on August 2, 2010 at the request of the Company as the additional credit availability is not needed. The Company's borrowings under the Agreement will be due and payable in full on April 29, 2011. The Company is actively pursuing financing options to replace or extend the Danfoss Agreement before it expires. The balance outstanding under the Agreement was $368,652 and $473,239 at June 30, 2010 and December 31, 2009, respectively. The Company incurred interest expense of $14,971 and $31,178 related to the Danfoss Agreement during the three and six months ended June 30, 2010. The interest expense a mounts include $274 of debt financing cost that was expensed in the second quarter when the credit available under the Danfoss Agreement was reduced. The Danfoss Agreement contains no financial covenants but it does contain a number of affirmative and negative covenants that, among other things, require the Company to obtain the consent of Danfoss A/S prior to engaging in certain types of transactions. The Agreement was approved by the Company's Board of Directors on November 9, 2009 upon the recommendation of a special committee of the Board comprised exclusively of

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independent directors.

The Company has a tax sharing agreement with Danfoss A/S whereby subsidiaries in Denmark file a joint tax return with Danfoss A/S as required under the laws of Denmark. The Company has elected to provide for taxes on a separate entity basis for U.S. GAAP. The difference in the amount of cash received or paid under these two methods will be recorded as a capital contribution or dividend distribution when the cash is received or paid. Danfoss A/S used approximately $14,000 of the Comp any's net operating loss (NOL) carryforwards generated in Denmark on the 2009 tax return and will remit this amount to the Company in November 2010 at which time it will be recorded as a capital contribution. For the six months ended June 30, 2010 the Company is generating taxable income in Denmark and is expected to remit the related tax amount of approximately $2,500 to Danfoss A/S in 2011 when the tax payment will be made. If the Company were to file a stand-alone tax return in Denmark due to a change in the structure of the relationship with Danfoss A/S the NOLs generated by the Company in 2009 would no longer be available to offset future income generated by the Company.

The Company loans excess cash to Agri-Fab, Inc., a noncontrolling interest partner in Hydro-Gear Limited Partnership, a U.S. limited partnership. The principal balance receivable from Agri-Fab, Inc. was $4,000 and $4,500 at June 30, 2010 and December 31, 2009, respectively, and is included in other current assets. The Company recorded interest revenue of $89 and $149 during the three and six months ended June 30, 2010, respectively. The loan was not outstanding during the six months ended June 30, 2009.

7) Accrued Warranty Costs —

The Company warrants its various products over differing periods depending upon the type of product and application. Consequently, the Company records warranty liabilities for the estimated costs that may be incurred under its basic warranty based on past trends of actual warranty claims compared to the actual sales levels to which those claims apply. These liabilities are accrued at the time the sales of the products are recorded.

In addition to its normal warranty liability, the Company, from time to time in the normal course of business, incurs costs to repair or replace defective products with a specific customer or group of customers. The Company refers to these as field recalls and in these instances, the Company records a specific provision for the expected costs it will incur to repair or replace these products utilizing information from customers and internal information regarding the specific cost of materials and labor. Due to the sporadic and infrequent nature of field recalls, and the potential for a range of costs associated with field recalls, the Company cannot accurately estimate these costs at the time the products are sold. Therefore, these costs are recorded at the time information becomes known to the Company. As the field recalls are carried out, the Company relieves the specific liability related to that field recall. Thes e specific field recall liabilities are reviewed on a quarterly basis. In December 2009 the Company became aware of a new field recall for which the number of units and cost per unit to repair are still uncertain as no loss estimate within this range is more likely than another. The Company had determined that the range of probable loss for this field recall is from $8,000 to $26,000. The Company accrued $8,000 for this field recall in 2009 and continues to work with customers to analyze this accrual.

During the three months ended June 30, 2010 the Company recognized $2,000 of expense for a field recall. The total claims are estimated to be $5,000 with $3,000 cov ered by insurance. The insurance recovery is included in other current assets on the consolidated balance sheet at June 30, 2010 and was received in July 2010.

The following table presents the changes in the Company's accrued warranty liability:


	Six Months Ended June 30,
	2010			2009
Balance, beginning of period	$	28,820		$	25,491
Payments	(7,840		)	(9,551		)
Accruals for warranties	7,029			3,133
Revisions to existing warranties	3,457			—
Currency impact	(2,114		)	(128		)
Balance, end of period	$	29,352		$	18,945

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8) Pension and Postretirement Benefits Other than Pensions —

Pension Benefits

The Company has noncontributory defined benefit plans covering a significant number of its employees. The benefits under these plans are based primarily on years of service and compensation levels. Pension expense for the three and six months ended June 30, 2010 and 2009 for the defined benefit plans consists of the following components:


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010				2009
Service cost	$	851		$	1,068		$	1,799			$	2,110
Interest cost	3,108			3,346			6,359				6,626
Expected return on plan assets	(2,628		)	(2,786		)	(5,357	)		(5,521		)
Amortization of prior service cost	(64		)	(71		)	(137		)		(140		)
Amortization of net loss	745			711			1,425				1,493
Pension settlement charge	—			—			1,541				—
Net periodic pension expense	$	2,012		$	2,268		$	5,630			$	4,568

A former executive of the Company received a lump sum distribution during the six months ended June 30, 2010. As a result of this distribution, the Company recorded a non-cash pension settlement charge of $1,541.

Postretirement Benefits

The Company provides health benefits for certain retired employees and certain dependents when the employee becomes eligible for these benefits by satisfying plan provisions that include certain age and service requirements.

The components of the postretirement benefit expense o f the Company-sponsored plans for the three and six months ended June 30, 2010 and 2009 are as follows:


	Three Months Ended June 30,					Six Months Ended June 30,
	2010			2009		2010		2009
Service cost	$	54	< font style="font-family:inherit;font-size:10pt;">	$	56	$	108	$	113
Interest cost	661			614		1,323		1,227
Net deferral and amortization	235			271		470		542
Postretirement benefit expense	$	< font style="font-family:inherit;font-size:10pt;background-color:transparent;">950		$	941	$	1,901	$	< div style="text-align:right;font-size:10pt;width:94.79999976800002px">1,882

9) Income Taxes —

During the three and six-month periods ended June 30, 2010 the Company realized tax benefits of approximately $10,200 and $14,700, respectively, related to net operating losses in the U.S. and Denmark, offset by a corresponding reversal of the valuation allowances established against these tax benefits. The valuation allowances on the remaining net deferred tax assets in the U.S. and Denmark will remain until such time as the Company's analysis indicates a three-year cumulative profit or other positive evidence i ndicates that it is more likely than not that these deferred tax assets will be utilized in the future.

The Company recognized valuation allowances on deferred tax assets of approximately $78,500 for the three and six months ended June 30, 2009. The valuation allowances relate to net operating losses generated in 2009, as well as $58,600 of deferred tax assets on the balance sheet as of December 31, 2008.

10) Sale of Business —

In December 2008 the Company signed a sales agreement to sell its alternating current (AC) motor business related to the material handling market. The closing of this transaction occurred in the second quarter of 2009 when the transfer of the machinery and inventory covered by the purchase agreement was completed. In 2008 the machinery and inventory were written down to the level of proceeds expected to be re ceived upon the transfer of the assets.

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Additional expenses of $4,050 and $5,569 were recognized during the three and six months ended June 30, 2009, respectively. The expense in 2009 relates to the write-off of a customer relationship intangible asset, employee retention costs, and additional write-downs to machinery and inventory balances due to revisions of the sales agreement during the sec ond quarter of 2009. During the three and six months ended June 30, 2010 the Company recognized additional expense of $3,130 and $3,317, respectively. The expense recognized in 2010 relates to a write-down of carrying value of a building and an additional write-down of inventory. The inventory was held on consignment and the purchaser revised their estimates of future inventory purchases from the Company.

As part of the sales agreement the Company is receiving a commission payment based on the level of AC motor sales made by the purchaser. The Company recognized commission income of $267 and $433 in the three and six months ended June 30, 2010, respectively, which is included in Other, net on the consolidated statement of operations. The impact of this sale is reported in the Controls segment.

11) Impairment —

Goodwill is required to be tested for impairment annually and if an event occurs or conditions change that would more likely than not reduce the fair value of a reporting unit below its carrying value. T here were no triggering events in the six months ended June 30, 2010 that required an analysis of goodwill or long-lived assets. In the first quarter of 2009 the Company considered the declines in market value which occurred during that period to represent a triggering event and therefore was required to analyze the fair value, compared to carrying value, of its reporting units at March 31, 2009. The Company determined that the implied fair value of goodwill in the valves reporting unit was less than its carrying value. A goodwill impairment charge of $50,841 was recorded in the three months ended March 31, 2009. There were no additional triggering events in the three months ended June 30, 2009 that required an analysis of goodwill or long-lived assets.

Refer to Note 6 in the Notes to the Consolidated Financial Statements in the Company's 2009 annual report filed on Form 10-K for information on the methodology used for testing for goodwill impairment and estimating fair value.

12) Segment and Geographic Information —

The Company's operating segments are organized around its product lines of Propel, Work Function and Controls. Propel products include hydrostatic transmissions and related products that transmit power from the engine to the wheel to propel a vehicle. Work Function products include steering motors as well as gear pumps and motors that transmit power for the work functions of the vehicle. Controls products include electrohydraulic controls, microprocessors and valves that control and direct the power of a vehicle. Segment costs in Global Services relate to internal global service departments and include costs such as consulting for special projects, tax and accounting fees paid to outside third parties, certain insurance premiums, and amortization of intangible assets from certain business combinations.

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The following table presents the significant items by operating segment for the results of operations for the three and six-month periods ended June 30, 2010 and 2009:

Three months ended

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		Propel			Work Function				Controls				Global Services				Total
	June 30, 2010
	Trade sales	$	241,329		$	94,393			$	96,504			$	—	&nbs p;		$	432,226

	Segment income (loss)	56,466			7,371				12,064				(7,020		)		68,881
	Interest expense, net																(15,064		)
	Income before income taxes																53,817
	Depreciation and amortiza tion	11,795			6,854				5,168				570				24,387
	Capital expenditures	2,331			2,350				227				730				5,638

	June 30, 2009
	Trade sales	$	154,995		$	63,154			$	59,262			$	—			277,411

	Segment income (loss)	1,617			(20,856		)		(15,233		)		(5,613		)		(40,085		)
	Interest expense, net																(13,406		)
	Loss on early retirement of debt															&nb sp;	(3,348		)
	Loss before income taxes																(56,839		)
	Depreciation and amortization	12,917			7,797				6,023				666				27,403
Capital expenditures	8,746			2,909				1,253				86				12,994

Six months ended


	Propel			Work Fun ction			Controls			Global Services			Total
June 30, 2010
Trade sales	$	455,709		$	183,300		$	179,987		$	—		$	818,996
				&nbs p;
Segment income (loss)	101,387			11,445			22,174			(16,709		)	118,297
Interest expense, net													(31,617		)
Income before income taxes													86,680
Depreciation and amortization	23,701			14,102			10,891			1,131			49,825
Capital expenditures	3,895			2,869			1,185			753		< /font>	8,702

June 30, 2009
Trade sales	$	342,782		$	145,839		$	138,485		$	—		$	627,106

Segment income (loss)	19,068			(35,811		)	(79,644		)	(11,609		)	(107,996		)
Interest expense, net													(19,123		)
Loss on early retirement of debt													(10,705		)
Loss before income taxes													(137,824		)
Depreciation and amortization	25,344			15,224			11,975			1,272			53,815
Capital expenditures	14,740		< /td>	11,386			3,214			449			29,789

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A summary of the Company's net sales and long-lived assets by geographic area is presented below:


		Net Sales (1)									Long-Lived Assets (2)
		Three Months Ended June 30,				Six Months Ended June 30,					June 30,
		2010		2009		2010		2009			2010		2009
	United States	$	169,451	$	102,322	$	328,776	$	247,987	& nbsp;	$	114,879	$	174,374
	Germany	37,814		27,358		73,136		66,835			57,016		75,478
< div style="overflow:hidden;font-size:10pt;width:49.999999880000004px">	Italy	22,453		14,264		43,148		33,997			12,330		18,231
	Denmark (3)	4,874		3,710		9,788		8,866			116,315		179,424
	Other countries	197,634		129,757		364,148		269,421			173,781		206,422
	Total	$	432,226	$	277,411	$	818,996	$	627,106		$	474,321	$	653,929

________________________________________

(1) Net sales are attributed to countries based on location of customer.

(2) Long-lived assets include property, plant and equipment net of accumulated depreciation, goodwill, intangible assets net of accumulated amortization, and certain other long-lived assets.

(3) Majority of this country's sales are shipped outside of the home country where the product is produced.

No single customer accounted for 10 percent or more of total consolidated sales in any period presented.

13) Subsequent Events —

The Company has evaluated subsequent events to ensure that this Form 10-Q includes appropriate disclosure of events recognized in the financial statements as of June 30, 2010, and events that occurred subsequent to June 30, 2010 but were not recognized in the financial statements. The Company determined that there were no subsequent events that require adjustment of, or disclosure in, the consolidated financial statements for the period ended June 30, 2010.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Sauer-Danfoss Inc. and Subsidiaries (the Company)

This Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as other portions of this quarterly report, contain certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. All statements regarding future performance, growth, sales and earnings projections, conditions or developments are forward-looking statements. Words such as “anticipates,” “in the opinion,” “believes,” “intends,” “expects,” “may,” “will,” “should,” “co uld,” “plans,” “forecasts,” “estimates,” “predicts,” “projects,” “potential,” “continue,” and similar expressions may be intended to identify forward-looking statements.

Actual future results may differ materially from those described in the forward-looking statements due to a variety of factors. Readers should bear in mind that past experience may not be a good guide to anticipating actual future results. During the first two quarters of 2010, various sectors of the worldwide economy began to emerge from the global recession and credit crisis that affected the economies in the U.S., Europe, and Asia-Pacific during 2009 and into 2010. It is not clear, however, wheth er the worldwide economy, or even specific economic sectors within the worldwide economy, will make significant strides toward recovery or will continue to suffer from the recession and credit crisis, weakness in the housing and residential construction markets, weakness in the commercial and public-sector construction markets, job losses, and uncertainty surrounding the effects of government fiscal stimulus plans, interest rates, and crude oil prices. A new downturn in the Company's business segments could adversely affect the Company's revenues and results of operations. Other factors affecting forward-looking statements include, but are not limited to, the following: specific economic conditions in the agriculture, construction, road building, turf care, material handling and specialty vehicle markets and the impact of such conditions on the Company's customers in such markets; the cyclical nature of some of the Company's businesses; the ability of the Company to win new programs and maintain existing pr ograms with its original equipment manufacturer (OEM) customers; the highly competitive nature of the markets for the Company's products as well as pricing pressures that may result from such competitive conditions; the continued operation and viability of the Company's significant customers; the Company's execution of internal performance plans; difficulties or delays in manufacturing; the effectiveness of the Company's cost-reduction and productivity improvement efforts; competing technologies and difficulties entering new markets, both domestic and foreign; changes in the Company's product mix; future levels of indebtedness and capital spending; the ability and willingness of Danfoss A/S, the Company's majority stockholder, to lend money to the Company at sufficient levels and on terms favorable enough to enable the Company to meet its capital needs; the Company's ability to access the capital markets or traditional credit sources to supplement or replace the Company's borrowings from Danfoss A/S if the n eed should arise; the Company's ability over time to reduce the relative level of debt compared to equity on its balance sheet; claims, including, without limitation, warranty claims, field recall claims, product liability claims, charges or dispute resolutions; the ability of suppliers to provide materials as needed and the Company's ability to recover any price increases for materials in product pricing; the Company's ability to attract and retain key technical and other personnel; labor relations; the failure of customers to make timely payment, especially in light of the recent credit crisis; any inadequacy of the Company's intellectual property protection or the potential for third-party claims of infringement; global economic factors, including currency exchange rate; credit market disruptions and significant changes in capital market liquidity and funding costs affecting the Company and its customers; general economic conditions, including interest rates, the rate of inflation, and commercial and cons umer confidence; sovereign debt crises, in Europe or elsewhere, and the reaction of other nations to such crises; energy prices; the impact of new or changed tax and other legislation and regulations in jurisdictions in which the Company and its affiliates operate; actions by the U.S. Federal Reserve Board and the central banks of other nations; actions by other regulatory agencies, including those taken in response to the global credit crisis; actions by rating agencies; changes in accounting standards; worldwide political stability; the effects of terrorist activities and resulting political or economic instability; natural catastrophes; U.S. military action overseas; and the effect of acquisitions, divestitures, restructurings, product withdrawals, and other unusual events.

The Company cautions the reader that this list of cautionary statements and risk factors is not exhaustive. The Company expressly disclaims any obligation or undertaking to release publicly any updates or changes to these forward-looking statements to reflect future events or circumstances. The foregoing risks and uncertainties are further described in Item1A (Risk Factors) in the Company's latest annual report on Form 10-K filed with the SEC, which should be reviewed in considering the forward-looking statements contained in this quarterly report.

About the Company

Sauer-Danfoss Inc. and subsidiaries (the Company) is a worldwide leader in the design, manufacture, and sale of engineered hydraulic and electronic systems and components that generate, transmit and control power in mobile equipment. The

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Company's products are used by original equipment manufacturers (OEMs) of mobile eq uipment, including construction, road building, agricultural, turf care, material handling, and specialty equipment. The Company designs, manufactures and markets its products in the Americas, Europe and the Asia-Pacific regions, and markets its products throughout the rest of the world either directly or through distributors.

Executive Summary — Three Months Ended June 30, 2010

The nature of the Company's operations as a global producer and supplier in the fluid power industry mean s the Company is impacted by changes in the local economies, including currency exchange rate fluctuations. In order to gain a better understanding of the Company's base results, a financial statement user needs to understand the impact of those currency exchange rate fluctuations. The following table summarizes the Company's second quarter 2010 and 2009 results from operations, separately identifying the impact of currency fluctuations. This analysis is more consistent with how the Company internally evaluates its results.

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49.3


(in millions)		Three Months Ended June 30, 2009			Currency Fluctuation				Underlying Change				Three Months Ended June 30, 2010
Net sales		$	277.4		$	(3.4	)		$	158.2			$	432.2
Gross profit		30.8			(1.6		)		102.9				132.1
% of Sales	< font style="font-family:inherit;font-size:10pt;">	11.1		%									30.6< /font>		%

Selling, general and administrative		51.3			(0.9		)		(1.1		)
Research & development		15.0			(0.3		)	(2.6		)		12.1
Loss on sale of business and asset disposals		5.0			0.2				(1.9		)		3.3
Total operating costs		71.3			(1.0		)		(5.6		)		64.7
Operating income (loss)		$	(40.5	)	$	(0.6	)		$	108.5			$	67.4
% of Sales		(14.6		)%									15.6		%

Net sales for the second quarter 2010 increased 57 percent over the second quarter 2009, excluding the effects of currency and the 2009 divestiture of the electric drives business. Excluding the impacts of currency and divestitures, sales increased 68 percent in Asia Pacific, 64 percent in the Americas, and 46 percent in Europe. Sales in the Controls segment were up 63 percent, followed by increases of 57 percent in the Propel segment and 52 percent in the Work Function segment.

Gross profit increased 334 percent due to higher sales volumes, fixed cost reductions of $6.1 million, and procurement savings of $4.1 million. In 2009 gross profit was negatively affected by severance costs of $4.2 million and $0.7 million of costs associated with the closure of the Hillsboro, Oregon location. Partially offsetting the positive impact of increased sales and cost reductions in 2010 were restructuring costs of $1.1 million associated with the closure of the Lawrence, Kansas facility. Field recall costs increased $5.2 million, partially offset by $3.0 million reimbursed by insurance.

Included in 2009 operating costs was $3.9 million of severance costs, as well as a $4.1 million loss on sale of business related to th e alternating current (AC) motor business to the material handling market. The positive impact of these items was partially offset in 2010 by incentive plan costs of $4.4 million, $0.7 million in costs related to a stock tender offer initiated by Danfoss Acquisition, Inc. and an additional $3.1 million of costs to write down the remaining inventory and the building used in the AC motor business.

Following is a discussion of the Company's operating results by market, region, and business segment.

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Operating Results - Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009

Sales Growth by Market

The following table summarizes the Company's sales growth by market. The table and following discussion is on a comparable basis, which excludes the effects of currency fluctuations.


	Americas				Asia-Pacific						Europe				Total
	$ Change		% Change		$ Change			% Change		&nb sp;	$ Change		% Change		$ Change		% Change

Agriculture/Turf Care	$	30.5	41	%	$	—		—	%		$	9.3	20	%	$	39.8	33	%
Construction/Road Building	17.6		124		24.5			175			18.9		106		61.0		133
Specialty	8.4		104		(4.8		)	(48	)		16.3		41		19.9		34
Distribution	18.4		70		9.5			48			9.6		51		37.5		58

Agriculture/Turf Care

Sales into the agriculture/turf care market showed a strong increase in the Americas and Europe in the second quarter of 2010 compared to the same period in 2009, while Asia-Pacific remained co nsistent with 2009. The agricultural market in the Americas was strong, particularly in South America, where the Brazilian market continues to gain momentum. In Europe, many customers have ceased inventory reduction efforts and sales are more in line with market demand. Sales in the turf care market improved due to growing consumer confidence. The Asia-Pacific region contributes less than 5 percent of the sales in the agriculture/turf care market, therefore any change in the Asia-Pacific region does not significantly impact the total market.

Construction/Road Building

The construction/road building markets experienced strong sales increases in all regions during the second quarter of 2010 compared to the second quarter of 2009. The Asia-Pacific region had the strongest sales growth at 175 percent, which was partially due to customers' inventory reduction efforts in 2009. Other factors driving the increased sales in the Asia-Pacific region included a strong demand for mixers in China, as well as favorable road building markets and increased demand for rollers. Sales in the Americas and Europe also showed strong improvement as customers are no longer working to reduce inventory levels and production is on pace with increasing demand. The construction market experienced greater sales growth than the road building market in the Americas as state and local governments continue to limit spending due to budget constraints.

Specialty

Specialty vehicles are comprised of a variety of markets including forestry, material handling, marine, waste management, railway and waste recycling. Sales in the Americas increased significantly compared to the second quarter of 2009 due to a strong market for aerial lifts. Sales in Europe increased due to the recovery of the forestry and mining markets, as well as increased demand for telehandlers. Sales in China continue to suffer from a saturated railway market.

Distribution

Products related to all of the above markets are also sold to distributors, who then serve smaller OEMs.

Business Segment Results

The following discussion of operating results by segment relates to information as presented in Note 12 in the Notes to the Consolidated Financial Statements. Segment income is defined as the respective segment's portion of t he total Company's net income, excluding net interest expense, loss on early retirement of debt, income taxes, and noncontrolling interest. Propel products include hydrostatic transmissions and related products that transmit power from the engine to the wheel to propel a vehicle. Work Function products include steering motors as well as gear pumps and motors that transmit power for the work functions of the vehicle. Controls products include electrohydraulic controls, microprocessors and valves that control and direct the power of a vehicle.

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The following table provides a summary of each segment's sales and segment income, separately identifying the impact of currency fluctuations.


(in millions)	Three Months Ended June 30, 200 9			Currency Fluctuation			Underlying Change			Three Months Ended June 30, 2010
Net sales
Propel	$	155.0		$	(1.4	)	$	87.7		$	241.3
Work Function	63.2			(1.8		)	33.0			94.4
Co ntrols	59.2			(0.2		)	37.5			96.5

Segment income (loss)
Propel	$	1.6		$	(0.7	)	$	55.6		$	56.5
Work Function	(20.9		)	—			28.3			7.4
Controls	(15.2		)	(0.2		)	27.5			12.1
Global Services and other expenses, net	(5.6		)	0.3			(1.7		)	(7.0		)

Propel Segment

The Propel segment experienced a 57 percent increase in sales, excluding the effects of currency fluctuations, during the second quarter 2010 compared to 2009. Segment income increased by $55.6 million during the quarter when compared to the same period in 2009. The Propel segment experienced a 17 percentage point increase in gross profit margin during the three months ended June 30, 2010 compared to the three months ended June 30, 2009, mainly due to higher sales volume in relation to fixed production costs, as well as procurement savings of $2.1 million and fixed cost reductions of $2.4 million. Also contributing to the increase in segment income was the fact that $4.5 million of severance costs were recognized during the second quarter of 2009. This was partially offset by $1.3 million of annual incentive plan costs recognized during the second quarter of 2010.

Work Function Segment

Sales in the Work Function segment increased 52 percent during the second quarter of 2010 when compared with the same period in 2009, excluding the effects of currency fluctuations. Gross profit margin increased 18 percentage points during the three months ended June 30, 2010 compared to the same period in 2009, mainly due to higher sales volume in relation to fixed production costs. Segment in come increased $28.3 million largely due to fixed cost reductions and efficiency gains, as well as a $4.0 million reduction in operating expenses. Offsetting the positive impact of these items during the second quarter of 2010 were costs of $1.6 million associated with the closure of the Lawrence, Kansas facility, as well as annual incentive plan costs of $0.5 million.

Controls Segment

Net sales in the Controls segment increased 63 percent during the second quarter of 2010 compared with the same period in 2009, excluding the effects of currency fluctuations. Segment income increased $27.5 million during the second quarter of 2010 primarily due to higher sales volume, procurement savings of $1.3 million, and a $7.8 million reduction in operating costs. Included in 2009 results were costs of $4.1 million related to the sale of the alternating current (AC) motor product line, restructuring costs of $1.1 million related to the closure of the Hillsboro, Oregon facility and the exit o f the electric drives business, and severance costs of $0.6 million. Offsetting the positive impact of these items in 2010 were additional costs of $3.1 million related to the exit from the AC motor product line and annual incentive plan costs of $0.7 million. Field recall costs of $4.9 million were recognized in 2010, partially offset by insurance reimbursement of $3.0 million.

Global Services and other expenses, net

Segment costs in Global Services and other expenses, net, relate to internal global service departments. Global services include such costs as consulting for special projects, tax and accounting fees paid to outside third parties, internal audit, certain insurance premiums, and the amortization of intangible assets from certain business combinations. Global services and other expenses increased $1.7 million, excluding the impacts of currency. Contributing to the increase were costs of $0.7 million related to a stock tender offer initiated by Danfoss Acquisition, Inc., and $1.9 million in incentive plan costs.

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Income Taxes

The Company's effective tax rate was 15.4 percent for the second quarter of 2010. The usage of tax benefits related to net ope rating losses and the corresponding reversal of valuation allowances of approximately $10.2 million positively impacted the effective tax rate for the second quarter of 2010. In comparison, the Company recorded $61.6 million of tax expense for the second quarter of 2009 recognizing tax expense on a pre-tax loss due to recording a $13.0 million and a $65.5 million valuation allowance on the net deferred tax assets in Denmark and the U.S., respectively. The Company's effective tax rate can also vary significantly from quarter to quarter due to the mix of earnings between countries.

Executive Summary — Six Months Ended June 30, 2010

The following table summarizes the Company's results from operations, separately identifying the impact of currency fluctuations for the six months ended June 30, 2010 and 2009. This analysis is more consistent with how the Company internally evaluates its results.


(in millions)		Six Months Ended June 30, 2009			Currency Fluctuation		Underlying Change			Six Months Ended June 30, 2010
Net sales		$	627.1		$	12.2	$	179.7		$	819.0
Gross profit		88.8			3.7		152.1			244.6
% of Sales	< /td>	14.2		%						29.9		%

Selling, general and administrative		107.7			1.3		(5.9		)	103.1
Research & development		31.8			0.3		(7.5		)	24.6
Impairment charge		50.8			—		(50.8		)	—
Loss on sale of business and asset disposals		8.6			—		(6.3		)	2.3
Total operating costs		198.9			1.6		(70.5		)	130.0
Operating income (loss)		$	(110.1	)	$	2.1	$	222.6		$	114.6
% of Sales		(17.6		)%						14.0		%

Net sales for the six months ended June 30, 2010 increased 29 percent over the six months ended June 30, 2009, excluding the effects of currency, and 30 percent excluding the effects of currency and the 2009 divestiture of the electric drives business. Excluding the impacts of currency and divestitures, sales increased 48 percent in Asia Pacific, 34 percent in the Americas, and 20 percent in Europe. Sales in the Propel segment were up 32 percent, followed by increases of 31 percent in the Controls segment and 23 percent in the Work Function segment.

Gross profit increased 171 percent due to higher sales volumes, procurement savings of $9.8 million, and fixed cost reductions of $13.5 million. In 2009 gross profit was negatively affected by severance costs of $8.2 million and restructuring charges of $1.5 million related to the closure of the Hillsboro, Oregon facility and the exit from the electric drives business. Partially offsetting the positive impact of increased sales and cost reductions in 2010 was $2.7 million of restructuring costs related to the closure of the Lawrence, Kansas facility. Field recall costs increased $5.5 million, partially offset by $3.0 million reimbursed by insurance.

Operating costs decreased from 2009 when the Company incurred a goodwill impairment ch arge of $50.8 million, $5.6 million related to the loss on sale of the alternating current (AC) motor business associated with the material handling market, restructuring costs of $3.6 million related to the closure of the Hillsboro location and the exit from the electric drives business, and severance costs of $9.2 million. In addition, in 2010 the Company recognized a $1.0 million gain on the sale of equipment. The reduction in operating expenses related to these items in 2009 were partially offset in 2010 by a $1.5 million pension settlement with a former executive, $3.7 million in costs related to a stock tender offer initiated by Danfoss Acquisition, Inc., $9.6 million in incentive plan costs, additional costs of $3.3 million related to the exit from the AC motor product line, and $0.7 million of restructuring costs related to the closure of the Lawrence facility.

Following is a discussion of the Company's operating results by market, region, and business segment.

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Operating Results - Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

Sales Growth by Market

The following table summarizes the Company's sales growth by market. The table and following discussion is on a comparable basis, which excludes the effects of currency fluctuations.


	Americas				Asia-Pacific					Europe					Total
	$ Change		% Change		$ Change			% Change		$ Change		% Change			$ Change		% Change

Agriculture/Turf Care	$	32.2	18	%	$	(0.5	)	(7	)%	$	0.4	—	%	&nb sp;	$	32.1	11	%
Construction/Road Building	29.4		104		34.9			140		29.7		80			94.0		104
Specialty	9.4		49		(11.0		)	(53	)	8.7		9			7.1		5
Distribution	19.0		32		16.7			50		10.8		< div style="text-align:right;font-size:10pt;width:50.8666665445px">25			46.5		34

Agriculture/Turf Care

Sales into the agriculture/turf care market showed a strong increase i n the Americas during the six months ended June 30, 2010, while sales in Europe remained level and the Asia-Pacific region experienced a slight decrease compared to the same period in 2009. The agricultural market in the Americas showed improvement due to improving commodity prices, as well as a strong Brazilian market. Sales in the turf care market improved due to growing consumer confidence. The Asia-Pacific region contributes less than 5 percent of the sales in the agriculture/turf care market, therefore any change in the Asia-Pacific region does not significantly impact the total market.

Construction/Road Building

The construction/road building markets experienced strong sales increases in all regions during the six months ended June 30, 2010 compared to the same period in 2009. The Asia-Pacific region had the strongest sales growth at 140 percent. This was due to strong demand for transit mixers in China, as well as favorable road building markets and increased demand for rollers. In addition, 2009 sales were negatively impacted by customers' inventory reduction efforts. Sales in the Americas and Europe also showed strong improvement as customers are no longer working to reduce inventory levels and equipment production corresponds with increased demand.

Specialty

Specialty vehicles are comprised of a variety of markets including forestry, material handling, marine, waste management, railway and waste recycling. Sales in the Americas benefited from a strong market for aerial lifts. Sales in Europe increased due to the recovery of the forestry and mining markets, as well as increased demand for telehandlers. Sales in China continue to suffer from a saturated railway market.

Distribution

Products related to all of the above markets are also sold to distributors, who then serve smaller OEMs.

Business Segment Results

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The following table provides a summary of each segment's sales and segment income, separately identifying the impact of currency fluctuations.


(in millions)	Six Months Ended June 30, 2009			Currency Fluctuation		Underlying Change			Six Months Ended June 30, 2010
Net sales
Propel	$	342.8		$	3.2	$	109.7		$	455.7
Work Function	145.8			3.5		34.0			183.3
Controls	138.5			5.5		36.0			180.0

Segment income (loss)
Propel	$	19.1		$	0.4	$	81.9		$	101.4
Work Function	(35.8		)	0.9		46.3			11.4
Controls	(79.6		)	0.7		101.1			22.2
Global Services and other expenses, net	(11.6		)	0.1		(5.2		)	(16.7		)

Propel Segment

The Propel segment experienced a 32 percent increase in sales, excluding the effects of currency fluctuations, during the six months ended June 30, 2010 compared to 2009, as worldwide economic conditions are beginning to improve. Segment income increased 429 percent during the six months ended June 30, 2010 compared to the same period in 2009. The Propel segment experienced a 12 percentage point increase in gross profit margin during the six months ended June 30, 2010 compared to the six months ended June 30, 2009, mainly due to fixed production costs in relation to a higher level of production, as well as procurement savings of $5.6 million and fixed cost reductions of $6.2 million. Also contributing to the increase in segment income was a reduction in operating expenses of $3.6 million, as well as a $0.5 million gain on sale of equipment. During the first six months of 2009, the Company reported a loss on sale of equipment of $0.7 million. Operating expenses decre ased due to $7.2 million of severance costs recognized during the six months ended June 30, 2009, offset by $2.6 million of annual incentive plan costs recognized during the six months ended June 30, 2010.

Work Function Segment

Sales in the Work Function segment increased by 23 percent during the six months ended June 30, 2010 when compared with the same period in 2009, excluding the effects of currency fluctuations. Gross profit margin increased 14 percentage points during the six months ended June 30, 2010 compared to the same period in 2009, mainly due to higher sales volume in relation to fixed production costs. Segment income increased $46.3 million due to fixed cost reductions and efficiency gains, as well as a $9.7 million reduction in operating expenses. Severance costs of $1.2 million were recognized in 2009. Costs of $3.4 million associated with the closure of the Lawrence, Kansas facility, and annual incentive plan costs of $1.2 million were recognized during the six months ended June 30, 2010.

Controls Segment

Net sales in the Controls segment increased 26 percent during the six months ended June 30, 2010 compared with the same period in 2009, excluding the effects of currency fluctuations. Sales increased 31 percent excluding the effects of both currency and the 2009 divestiture of the electric drives business. Segment income increased $101.1 million during the six months ended June 30, 2010 due to higher sales volume and cost reductions, as well as a goodwill impairment charge of $50.8 million related to the valves reporting unit that was recognized during the same period in 2009. In addition, costs of $5.6 million related to the sale of the alternating current (AC) product line, restructuring costs of $5.0 million related to the closure of the Hillsboro, Oregon facility and the exit of the electric drives business, and severance costs of $2.2 million were recognized in 2009. Partially offsetting the reduced costs related to these items in 2010 were restructuring costs of $3.3 million related to the exit from the electric drives business and annual incentive plan costs of $1.6 million. Field recall costs increased $4.6 million from 2009, partially offset by $3.0 million which will be reimbursed by insurance.

Global Services and other expenses, net

Global services and other expenses increased $5.2 million, excluding the impacts of currency, due to costs of $1.5 million related to a pension settlement with a former executive, $3.7 million in costs related to a stock tender offer initiated by Danfoss

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Acquisition, Inc., and $4.2 million in incentive plan costs. Partially offsetting the negative impact of these items was an increase in gain on foreign currency translation of $0.6 million during the six months ended June 30, 2010 compared to 2009. In addition there was $1.7 million of severance costs incurred in the six months ended June 30, 2009.

Order Backlog

The following table shows the Company's order backlog at June 30, 2010 and 2009 and orders written in the six-month periods ended June 30, 2010 and 2009, separately identifying the impact of currency fluctuations.


(in millions)	2009		Currency Fluctuation		Underlying Change			2010
Backlog at June 30	$	408.4	$	(23.5	)	$	248.2		$	633.1
Orders written	297.5		14.0			660.0			971.5

Total order backlog at June 30, 2010 was $633.1 million, compared to $408.4 million at June 30, 2009. On a comparable basis, excluding the impact of currency fluctuation, order backlog increased 61 percent. Backlog information can vary as customers alter their sales order patterns.

New sales orders written during the six-month periods ended June 30, 2010 were $971.5 million, an increase of 222 percent compared to 2009, excluding the impact of currency fluctuations. The increase in backlog and order entry is due to the global economic recovery.

Income Taxes

The Company's effective tax rate for the first six months of 2010 was 12.2 percent. The usage of tax benefits related to net operating losses and the corresponding reversal of valuation allowances of approximately $14.7 million positively impacted the effective tax rate for the first six months of 2010. In comparison, the Company recorded $53.1 million of tax expense for the first six months of 2009 recognizing tax expense on a pre-tax loss due to recording a $13.0 million and a $65.5 million valuation allowance on the net deferred tax assets in Denm ark and the U.S., respectively. The effective tax rate for the first six months of 2009 was also negatively impacted by a non-deductible goodwill impairment of $50.8 million. The Company's effective tax rate can also vary significantly from quarter to quarter due to the mix of earnings between countries.

Market Risk

The Company is exposed to various market risks, including changes in foreign currency exchange rates, interest rates, and material purchase prices.

Foreign currency changes

The Company has operations and sells its products in many different countries of the world and therefore, conducts its business in various currencies. The Company's financial statements, which are presented in U.S. dollars, can be impacted by foreign exchange fluctuations through both translation exposure and transaction risk. Translation exposure is when the financial statements of the Company, for a particular period or as of a certain date, may be affected by changes in the exchange rates that are used to translate the financial sta tements of the Company's operations from foreign currencies into U.S. dollars. Transaction risk is the potential expense or income due to the Company receiving its sale proceeds or holding its assets in a currency different from that in which it pays its expenses and holds its liabilities. Foreign currency transaction related income of $2.9 million was recognized during the six-month period ended June 30, 2010, compared to income of $2.3 million for the same period in 2009.

Fluctuations of currencies against the U.S. dollar can be substantial and therefore significantly impact comparisons with prior periods. The U.S. dollar strengthened compared to other currencies between December 31, 2009 and June 30, 2010. The Company enters into forward contracts to minimize the impact of currency fluctuations on cash flows related to forecasted sales denominated in currencies other than the functional currency of the selling location. The forecasted sales represent sales to both external and internal pa rties. Any effects of the forward contracts related to sales to internal parties are eliminated in the consolidation process until the related inventory has been sold to an external party. The forward contracts qualify for hedge accounting and therefore are subject to effectiveness testing at the inception of the contract and throughout the life of the contract. The fair value of forward contracts outstanding at June 30, 2010 was a net liability of $2.9 million.

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Liquidity and Capital Resources

The Company's principal sources of liquidity have been cash flow from operations and from its various credit facilities. The Company historically has accessed diverse funding sources, including short-term and long-term unsecured bank lines of credit in the United States, Europe, and Asia.

The Company has a Credit Agreement (Danfoss Agreement) with Danfoss A/S that is unsecured and permits the Company to borrow up to $540 million. In August 2010 the credit availability was reduced to $500 million at the request of the Company, which will reduce the commitment fee expense incurred as the additional credit is not needed. The Company's borrowings under the Agreement will be due and payable in full on April 29, 2011. The Danfoss Agreement contains no financial covenants but it does contain a number of affirmative and negative covenants that, among other things, require the Company to obtain the consent of Danfoss A/S prior to engaging in certain types of transactions. The Agreement was approved by the Company's Board of Directors on November 9, 2009 upon the recommendation of a special committee of the Board comprise d exclusively of independent directors.

The Company expects to have sufficient sources of liquidity to meet its funding needs for the foreseeable future, recognizing that prior to April 29, 2011 the Company will need to either extend its current Credit Agreement with Danfoss A/S or obtain an alternative source of funding from either Danfoss A/S or a third party. The Company is actively pursuing financing options to replace or extend the Danfoss Agreement before it expires. However, unexpected events or circumstances, such as a return to reduced operating cash flows or prolonged or increased weakness in the global economy, could negatively impact the Company's liquidity to an extent that may require the Company to seek alternative sources of cash prior to April 29, 2011.

Cash Flow from Operations

Cash provided by operations was $104.7 million during the six months ended June 30, 2010 compared to $52.5 million for the six months ended June 30, 2009. The increase was primarily due to the increase in net income, as well as a $62.2 million increase in accounts payable balances. Operating cash flow was negatively impacted by a $99.4 million increase in accounts receivable balances due to higher sales volume.

Cash Used in Investing Activities

Capital expenditures in the six months ended June 30, 2010 were $8.7 million compared to $29.8 million in the six months ended June 30, 2009. The decrease in 2010 is the result of management's focus on conserving cash in light of the recent global economic downturn.

Cash Used in Fina ncing Activities

Net repayment of borrowings used approximately $90.5 million of cash in the six months ended June 30, 2010, while net borrowings provided $26.5 million during the six months ended June 30, 2009. During the first six months of 2009 the Company paid $8.6 million in debt origination fees related to the Danfoss Credit Agreement, and $10.1 million in debt extinguishment and interest rate swap settlement costs. The Company paid fourth quarter dividends of $8.7 million in the first quarter of 2009, while no dividends were paid in 2010.

Other Matters

Critical Accounting Estimates

In preparing its most recent annual report on Form 10-K, the Company disclosed information about critical accounting estimates the Company makes in applying its accounting policies. The Company has made no changes to the methods of application or the assumptions used in applying these policies from what was disclosed in its most recent annual report on Form 10-K.

Outlook

Improved market conditions are expected to result in 2010 sales levels that are 20 to 30 percent higher than sales in 2009. Management continues to foc us on realizing reduced cost levels from the actions taken in 2009 and generating cash while responding to increased market demand.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Information disclosing market risk is set forth in the Company's most recent annual report filed on Form 10-K (Item 7A), and is incorporated herein by reference. There has been no material change in this information.

Item 4. Controls and Procedures

As required by Rule 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934 (Exchange Act) the Company's management carried out an evaluation, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of June 30, 2010. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2010, the Company's disclosure controls and procedures were effective to ensure that (a) information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (b) such information is accumulated and communicated to the Company's management, including the Chief Execut ive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There was no change in the Company's internal control over financial reporting during the three months ended June 30, 2010 that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

The Company was named as a defendant in four putative stockholder class action complaints (collectively, the Lawsuits) challenging the cash tender offer by Danfoss Acquisition Inc. (Danfoss Acquisition), a wholly owned subsidiary of Danfoss A/ S (Danfoss), to purchase all of the outstanding shares of Company common stock not presently held, directly or indirectly, by Danfoss (the Tender Offer). Three of the Lawsuits were filed on December 23, 2009, two in the Court of Chancery of the State of Delaware by Kenneth R. Loiselle and Laurie Forrest, respectively, and the other (the Freise Lawsuit) in the Iowa District Court for Story County by John and Michelle Freise. The two Delaware lawsuits have been consolidated into a single proceeding (the Delaware Lawsuit). The fourth Lawsuit was filed on February 10, 2010, in the Iowa District Court for Story County by Scott Crouthamel. The Tender Offer expired on April 29, 2010. Because a condition of the Tender Offer was not satisfied, no shares were purchased thereunder. All of the Lawsuits have been dismissed without prejudice. The plaintiffs in the Delaware Lawsuit and the Freise Lawsuit have applied to the Delaware court for an award of $0.8 million in legal fees. The Company believes that this fee request is unwarranted and intends to vigorously oppose it.

From time to time, the Company is involved in other legal matters in the ordinary course of its business. The Company intends to defend itself vigorously against all such claims. It is the Company's policy to accrue for amounts related to lawsuits brought against it if it is probable that a liability has been incurred and an amount can be reasonably estimated. Although the outcome of such matters cannot be predicted with certainty and no assurances can be given with respect to such matters, the Company believes that the outcome of those ordinary-course matters in which it is currently involved will not have a materially adverse effect on its results of operations, liquidity, or financial position.

Item 6. Exhibits.


Exhibit No.			Description of Document

31.1			Certification by the Chief Executive Officer Pursuant to Rule 13a-14(a).
31.2			Certification by the Chief Financial Officer Pursuant to Rule 13a-14(a).
32.1			Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.
32.2			Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

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SIGNATURES

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


	Sauer-Danfoss Inc.

	By	/s/ Kenneth D. McCuskey
	Kenneth D. McCuskey
	Vice President and Chief Accounting Officer, Secretary

Date: August 5, 2010

EX-31.1 2 exhibit3112010q2.htm CEO CERTIFICATION WebFilings | EDGAR view

Exhibit 31.1

Certification

I, Sven Ruder, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sauer-Danfoss Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13 a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our co nclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date: August 5, 2010	/s/ Sven Ruder
	Sven Ruder
	President and Chief Executive Officer

EX-31.2 3 exhibit3122010q2.htm CFO CERTIFICATION WebFilings | EDGAR view

Exhibit 31.2

Certification

I, Jesper V. Christensen, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sauer-Danfoss Inc.;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(c) Evaluated the effectiveness of the regist rant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reportin g which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date: August 5, 2010		/s/ Jesper V. Christensen
		Jesper V. Christensen
		Executive Vice President and Chief Financial Officer, Treasurer

EX-32.1 4 exhibit3212010q2.htm CEO CERTIFICATION WebFilings | EDGAR view

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sauer-Danfoss Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sven Ruder, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: August 5, 2010	/s/ Sven Ruder
	Sven Ruder
	President and Chief Executive Officer

EX-32.2 5 exhibit3222010q2.htm CFO CERTIFICATION WebFilings | EDGAR view

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sauer-Danfoss Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jesper V. Christensen, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: August 5, 2010	/s/ Jesper V. Christensen
	Jesper V. Christensen
	Executive Vice President and Chief Financial Officer, Treasurer

-----END PRIVACY-ENHANCED MESSAGE-----


Delaware		36-3482074
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)


2800 East 13th Street, Ames, Iowa		50010
Krokamp 35, Neumûnster, Germany		24539
(Address of principal executive offices)		(Zip Code)


Large accelerated filer £		Accelerated filer x

Non-accelerated filer £		Smaller reporting company £
(Do not check if a smaller reporting company)


	(Mark One)
	x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


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


PART I		FINANCIAL INFORMATION

Item 1.		Financial Statements (Unaudited):

		Consolidated Statements of Operations: Three and Six Months Ended June 30, 2010 and 2009

		Consolidated Balance Sheets: As of June 30, 2010 and December 31, 2009

		Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss): Six Months Ended June 30, 2010

		Consolidated Statements of Cash Flows: Six Months Ended June 30, 2010 and 2009

		Notes to Consolidated Financial Statements

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

Item 3.		Quantitative and Qualitative Disclosures About Market Risks

Item 4.		Controls and Procedures

PART II		OTHER INFORMATION

Item 1.		Legal Proceedings

Item 6.		Exhibits

SIGNATURES

CERTIFICATIONS