UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q



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

For the quarterly period ended ~~June~~September 30, 2012



	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 Number 1-14097

SAUER-DANFOSS INC.

(Exact name of registrant as specified in its charter)



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



2800 East 13th Street, Ames, Iowa		50010
(Address of principal executive offices)		(Zip Code)

(515) 239-6000

(Registrant's telephone number, including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer £		Accelerated filer x

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes £ No x

As of ~~August~~October 124, 2012, 48,457,461 shares of Sauer-Danfoss Inc. common stock, $.01 par value, were outstanding.

Table of Contents

PART I		FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited):
		Consolidated Statements of Operations: Three and Six Months Ended June 30, 2012 and 2011
		Consolidated Statements of Operations: Three and Nine Months Ended September 30, 2012 and 2011
		Consolidated Statements of Comprehensive Income: Three and Six Months Ended June 30, 2012 and 2011
		Consolidated Statements of Comprehensive Income: Three and Nine Months Ended September 30, 2012 and 2011
		Consolidated Balance Sheets: As of June 30, 2012 and December 31, 2011
		Consolidated Balance Sheets: As of September 30, 2012 and December 31, 2011
		Consolidated Statement of Stockholders' Equity: Six Months Ended June 30, 2012
		Consolidated Statement of Stockholders' Equity: Nine Months Ended September 30, 2012
		Consolidated Statements of Cash Flows: Six Months Ended June 30, 2012 and 2011
		Consolidated Statements of Cash Flows: Nine Months Ended September 30, 2012 and 2011
		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 6.		Exhibits
SIGNATURES
CERTIFICATIONS

Table of Contents

Sauer-Danfoss Inc. and Subsidiaries

Consolidated Statements of Operations

(Dollars in thousands, except per share data)

(Unaudited)

	Three Months EndedJune 30,						Six Months EndedJune 30,
	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Net sales	$	~~518~~410,~~787~~307		$	~~563~~483,~~317~~297		$	1,~~092~~503,~~780~~087		$	1,~~128~~611,~~059~~356
Cost of sales	~~346~~277,~~766~~594			~~372~~328,~~734~~482			~~730~~1,~~529~~008,123			~~748~~1,~~217~~076,699
Gross profit	~~172~~132,~~021~~713			~~190~~154,~~583~~815			~~362~~494,~~251~~964			~~379~~534,~~842~~657
Selling, general and administrative	5856,~~960~~772			5754,~~663~~790			~~119~~175,~~005~~777			~~111~~166,~~919~~709
Research and development	1615,~~367~~180			1516,~~555~~176			3247,~~663~~843			2945,~~650~~826
Other	~~(29~~138		)	49(88		)	~~(17~~121		)	(~~261~~349		)
Total operating expenses	7572,~~298~~090			7370,~~267~~878			~~151~~223,~~651~~741			~~141~~212,~~308~~186
Income from operations	9660,~~723~~623			~~117~~83,~~316~~937			~~210~~271,~~600~~223			~~238~~322,~~534~~471
Nonoperating income (expense):
Interest expense, net	(43,~~047~~592		)	(5,~~774~~479		)	(812,~~418~~010		)	(1117,~~875~~354		)
Loss on early retirement of debt	—(1,254		)	(~~899~~277		)	—(1,254		)	(~~899~~1,176		)
Other, net	~~776~~1,689			~~362~~1,270			12,~~208~~897			(42,~~137~~867		)
Nonoperating expenses, net	(3,~~271~~157		)	(64,~~311~~486		)	(710,~~210~~367		)	(1621,~~911~~397		)
Income before income taxes	9357,~~452~~466			~~111~~79,~~005~~451			~~203~~260,~~390~~856			~~221~~301,~~623~~074
Income tax expense	(2713,~~765~~559		)	(2519,~~052~~944		)	(5973,~~704~~263		)	(5171,~~135~~079		)
Net income	6543,~~687~~907			8559,~~953~~507			~~143~~187,~~686~~593			~~170~~229,~~488~~995
Net income attributable to noncontrolling interest, net of tax	(93,~~279~~274		)	(112,~~078~~510		)	(2225,~~484~~758		)	(2527,~~059~~569		)
Net income attributable to Sauer-Danfoss Inc.	$	5640,~~408~~633		$	7456,~~875~~997		$	~~121~~161,~~202~~835		$	~~145~~202,~~429~~426
Net income per common share, basic	$	1.17		$	1.55		$	2.50		$	3.00
Net income per common share, basic and diluted	$	0.84		$	1.18		$	3.34		$	4.18
Net income per common share, diluted	$	1.16		$	1.54		$	2.50		$	3.00
Weighted average basic shares outstanding	48,416,895			48,405,860			48,411,854			48,400,778
Weighted average basic shares outstanding	48,410,917			48,399,816			48,409,305			48,398,196
Weighted average diluted shares outstanding	48,480,407			48,478,192			48,480,603			48,478,933
Weighted average diluted shares outstanding	48,480,667			48,480,360			48,480,702			48,479,310

See accompanying notes to consolidated financial statements.

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Sauer-Danfoss Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Dollars in thousands)

(Unaudited)

Three Months EndedJune 30,

Six Months EndedJune 30,

Three months ended September 30,

Nine months ended September 30,

2012

2011

2012

2011

Net income

6543,~~687~~907

8559,~~953~~507

~~143~~187,~~686~~593

~~170~~229,~~488~~995

Other comprehensive income (loss), net of tax:

Foreign currency translation adjustments

~~(35~~22,~~734~~384

)

8(33,~~375~~523

)

~~(21,574~~810

)

30(3,~~498~~025

)

Pension and postretirement plan adjustments

~~1,362~~(10

)

~~994~~13,202

1,~~839~~829

~~943~~14,145

Unrealized gains (losses) on hedging activities

(1,~~443~~462

)

1(3,~~039~~934

)

~~288~~1,750

2(1,~~492~~442

)

Other comprehensive income (loss)

~~(35~~23,~~815~~836

)

10(24,~~408~~255

)

~~(19~~4,~~447~~389

)

339,~~933~~678

Comprehensive income

2967,~~872~~743

9635,~~361~~252

~~124~~191,~~239~~982

~~204~~239,~~421~~673

Comprehensive income attributable to noncontrolling interest

(114,~~120~~498

)

(123,~~168~~577

)

(2126,~~850~~348

)

(2629,~~366~~943

)

Comprehensive income attributable to Sauer-Danfoss Inc.

1863,~~752~~245

8431,~~193~~675

~~102~~165,~~389~~634

~~178~~209,~~055~~730

See accompanying notes to consolidated financial statements.

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Sauer-Danfoss Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

(Unaudited)

	June 30,			December 31,
	September 30,			December 31,
	2012			2011
Assets
Current Assets:
Cash and cash equivalents	$	7783,~~773~~081		$	72,560
Cash deposited with related persons	~~286~~338,~~014~~566			178,727
Accounts receivable (net of allowances of $4,331 and $4,361 in 2012 and 2011, respectively)	276,529			215,978
Accounts receivable (net of allowances of $4,525 and $4,361 in 2012 and 2011, respectively)	226,814			215,978
Inventories	~~183~~185,~~283~~341			217,710
Other current assets	8685,~~637~~185			75,868
Total current assets	~~910~~918,~~236~~987			760,843
Property, Plant and Equipment (net of accumulated depreciation of $792,960 and $779,449 in 2012 and 2011, respectively)	333,031			367,844
Property, Plant and Equipment (net of accumulated depreciation of $821,572 and $779,449 in 2012 and 2011, respectively)	331,958			367,844
Other Assets:
Goodwill	3334,~~817~~882			34,474
Other intangible assets, net	1615,~~090~~988			16,883
Deferred income taxes	8892,~~235~~195			90,512
Other	7,~~797~~644			7,700
Total other assets	~~145~~150,~~939~~709			149,569
Total Assets	$	1,~~389~~401,~~206~~654		$	1,278,256
Liabilities and Stockholders' Equity
Current Liabilities:
Long-term debt due within one year	$	~~889~~948		$	955
Accounts payable	~~183~~165,~~383~~064			177,996
Accrued salaries and wages	6873,~~874~~551			67,140
Accrued warranty	2624,~~390~~975			29,863
Other accrued liabilities	9491,~~378~~139			52,237
Total current liabilities	~~373~~355,~~914~~677			328,191
Long-Term Debt	~~196~~178,~~858~~158			199,502
Other Liabilities:
Long-term pension liability	73,~~900~~185			79,717
Postretirement benefits other than pensions	31,~~350~~488			31,488
Deferred income taxes	34,~~816~~591			35,184
Other	2324,~~157~~631			26,348
Total other liabilities	163,~~223~~895			172,737
Total liabilities	~~733~~697,~~995~~730			700,430
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 2012 and 2011; issued and outstanding 48,451,417 in 2012 and 48,432,860 in 2011	485			484
Common stock, par value $.01 per share, authorized shares 75,000,000 in 2012 and 2011; issued and outstanding 48,457,461 in 2012 and 48,432,860 in 2011	485			484
Additional paid-in capital	335,~~357~~371			335,337
Retained earnings	~~231~~255,~~715~~388			144,424
Accumulated other comprehensive income (loss)	(11,640		)	7,173
Accumulated other comprehensive income	10,972			7,173
Total Sauer-Danfoss Inc. stockholders' equity	~~555~~602,~~917~~216			487,418
Noncontrolling interest	99101,~~294~~708			90,408
Total stockholders' equity	~~655~~703,~~211~~924			577,826
Total Liabilities and Stockholders' Equity	$	1,~~389~~401,~~206~~654		$	1,278,256

See accompanying notes to consolidated financial statements.

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Sauer-Danfoss Inc. and Subsidiaries

Consolidated Statement of Stockholders' Equity

(Dollars in thousands, except per share data)

(Unaudited)

	Number ofSharesOutstanding	CommonStock		AdditionalPaid-inCapital			Retained Earnings			AccumulatedOtherComprehensiveIncome ~~(Loss)~~			NoncontrollingInterest			Total
December 31, 2011	48,432,860	$	484	$	335,337		$	144,424		$	7,173		$	90,408		$	577,826
Comprehensive income:
Net income	—	—		—			~~121~~161,~~202~~835			—			2225,~~484~~758			~~143~~187,~~686~~593
Other comprehensive loss	—	—		—			—			(18,813		)	(634		)	(19,447		)
Other comprehensive income	—	—		—			—			3,799			590			4,389
Performance units vested	511,~~057~~101	—		—			—			—			—			—
Restricted stock grant	13,500	1		(1		)	—			—			—			—
Minimum tax withholding settlement	—	—		(~~114~~205		)	—			—			—			(~~114~~205		)
Restricted stock compensation	—	—		~~135~~240			—			—			—			~~135~~240
Noncontrolling interest distribution	—	—		—			—			—			(1215,~~964~~048		)	(1215,~~964~~048		)
Cash dividends declared ($.70 per share)	—	—		—			(33,911		)	—			—			(33,911		)
Cash dividends declared ($1.05 per share)	—	—		—			(50,871		)	—			—			(50,871		)
June 30, 2012	48,451,417	$	485	$	335,357		$	231,715		$	(11,640	)	$	99,294		$	655,211
September 30, 2012	48,457,461	$	485	$	335,371		$	255,388		$	10,972		$	101,708		$	703,924

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,
	Nine months ended September 30,
	2012			2011
Cash Flows from Operating Activities:
Net income	$	~~143~~187,~~686~~593		$	~~170~~229,~~488~~995
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	4160,~~212~~682			4567,~~312~~106
Loss on early retirement of debt	—451			~~899~~1,176
Change in deferred income taxes	~~4,541~~(565		)	1431,~~832~~544
Other	~~118~~361			(~~261~~349		)
Changes in operating assets and liabilities
Accounts receivable, net	(6610,~~007~~566		)	(5022,~~483~~906		)
Inventories	2932,~~231~~044			(1425,~~963~~013		)
Other current assets	(139,~~488~~655		)	(93,~~531~~247		)
Accounts payable	9(12,~~618~~709		)	5(1,~~810~~263		)
Accrued liabilities	1821,~~363~~603			57,~~969~~342
Other	(~~332~~4,594		)	1(7,~~085~~635		)
Net cash provided by operating activities	~~166~~264,~~942~~645			~~169~~283,~~157~~244
Cash Flows from Investing Activities:
Purchases of property, plant and equipment	(1223,~~707~~188		)	(1422,~~052~~839		)
Proceeds from sale of property, plant and equipment	~~209~~1,275			1,~~159~~203
Advances to related persons	(~~114~~160,~~921~~405		)	(4139,~~242~~295		)
Net cash used in investing activities	(~~127~~182,~~419~~318		)	(17160,~~135~~931		)
Cash Flows from Financing Activities:
Net repayments on notes payable and bank overdrafts	—			(2730,~~988~~800		)
Net repayments on revolving credit facility	—			(51,026		)
Repayments of long-term debt	(~~600~~20,727		)	(~~605~~1,438		)
Cash dividends	(16,953		)	—
Borrowings of long-term debt	—			—
Distributions to noncontrolling interest partners	(12,964		)	(10,135		)
Payment of prepayment penalty	(803		)	—
Net cash used in financing activities	(30,517		)	(89,754		)
Cash dividends	(33,911		)	—
Effect of Exchange Rate Changes on Cash	(3,793		)	4,490
Distributions to noncontrolling interest partners	(15,004		)	(12,040		)
Net cash used in financing activities	(70,445		)	(95,304		)
Effect of Exchange Rate Changes on Cash	(1,361		)	(4,144		)
Cash and Cash Equivalents:
Net increase during the period	510,~~213~~521			6622,~~758~~865
Beginning balance	72,560			44,039
Ending balance	$	7783,~~773~~081		$	~~110~~66,~~797~~904
Supplemental Cash Flow Disclosures:
Interest paid	$	813,~~959~~345		$	1116,~~089~~441
Income taxes paid	$	3959,~~613~~840		$	3445,~~497~~323

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 financial 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 1, 2012.

Use of Estimates —

In preparing the consolidated financial statements in conformity with U.S. GAAP, 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, inventory valuation, warranty reserves, allowance for doubtful accounts, valuation allowances on deferred tax assets, pension and postretirement accruals, employee incentive 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 under 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.

Recently Adopted Accounting Principles —

In May 2011 the Financial Accounting Standards Board (FASB) issued new accounting guidance that amends some fair value measurement principles and disclosure requirements. The new guidance states that the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets and prohibits the grouping of financial instruments for purposes of determining their fair values when the unit of account is specified in other guidance. The Company adopted this guidance as of January 1, 2012 with no impact on the consolidated financial statements.

In June 2011 the FASB amended requirements for the presentation of other comprehensive income (OCI), requiring all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted this guidance in the first quarter of 2012. Upon adoption, certain prior period amounts have been reclassified to conform to the current period financial statement presentation. These reclassifications have no impact on previously reported financial position, results of operations or cash flows.

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In September 2011 the FASB issued amendments to the guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is more likely than not greater than its carrying amount, the two-step goodwill impairment test is not required. Annual impairment tests are performed by the Company in the fourth quarter of each year. The adoption of this updated authoritative guidance is not expected to have an impact on the consolidated financial statements.

2) Basic and Diluted Per Share Data —

Basic net income 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 deferred under the long-term incentive plan. Restricted stock and shares under the long-term incentive plans have an exercise price of zero.

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~~nine-month periods ended ~~June~~September 30, 2012 and 2011:

	June 30, 2012						June 30, 2011
	September 30, 2012						September 30, 2011
	Net Income		Shares	EPS			Net Income		Shares	EPS
Three Months
Basic net income	$	5640,~~408~~633	48,~~410~~416,~~917~~895	$	10.1784		$	7456,~~875~~997	48,~~399~~405,~~816~~860	$	1.5518
Effect of dilutive securities:
Restricted stock	—		1618,~~349~~746	—			—		11,~~283~~706	—
Performance units	—		5344,~~401~~766	~~(0.01~~—		)	—		6960,~~261~~626	~~(0.01~~—		)
Diluted net income	$	5640,~~408~~633	48,480,~~667~~407	$	10.1684		$	7456,~~875~~997	48,~~480~~478,~~360~~192	$	1.5418
Six Months
Nine Months
Basic net income	$	~~121~~161,~~202~~835	48,~~409~~411,~~305~~854	$	23.5034		$	~~145~~202,~~429~~426	48,~~398~~400,~~196~~778	$	34.0018
Effect of dilutive securities:
Restricted stock	—		1617,~~384~~177	—			—		10,~~233~~730	—
Performance units	—		5551,~~013~~572	—			—		7067,~~881~~425	—
Diluted net income	$	~~121~~161,~~202~~835	48,480,~~702~~603	$	23.5034		$	~~145~~202,~~429~~426	48,~~479~~478,~~310~~933	$	34.0018

3) Restructuring —

In 2011 the Company announced its plans to restructure its European sales organization to establish a distributor organization to serve smaller customers. Costs related to the reorganization are included in the Global Services segment and totaled $~~507~~162 and $~~746~~908 in the three and ~~six~~nine months ended ~~June~~September 30, 2012, respectively, which are included in selling, general and administrative expenses.

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The following table summarizes the restructuring charges incurred and the activity in the accrued liability during the ~~six~~nine months ended ~~June~~ September 30, 2012.

	EmployeeTerminationCosts			Professional Fees			Accelerated Depreciation			Total
Balance as of December 31, 2011	$	4,180		$	483		$	—		$	4,663
Charges to Expense	—			239			—			239
Payments made / Other	—			(722		)	—			(722		)
Balance as of March 31, 2012	$	4,180		$	—		$	—		$	4,180
Charges to Expense	—			460			47			507
Payments made / Other	—			(460		)	(47		)	(507		)
Balance as of June 30, 2012 (1)	$	4,180		$	—		$	—		$	4,180
Balance as of June 30, 2012	$	4,180		$	—		$	—		$	4,180
Cumulative charges incurred	$	4,180		$	1,182		$	47		$	5,409
Charges to Expense	5			81			76			162
Payments made / Other	(96		)	(81		)	(76		)	(253		)
Balance as of September 30, 2012 (1)	$	4,089		$	—		$	—		$	4,089
Cumulative charges incurred	$	4,185		$	1,263		$	123		$	5,571

(1) The $4,~~180~~089 of accrued employee termination costs are expected to be paid through 2013.

4) Inventories —

The composition of inventories is as follows:

	June 30, 2012			December 31, 2011
	September 30, 2012			December 31, 2011
Raw materials	$	9088,~~180~~574		$	101,069
Work in progress	4342,~~511~~514			50,455
Finished goods and parts	7277,~~068~~154			87,846
LIFO allowance	(22,~~476~~901		)	(21,660		)
Total	$	~~183~~185,~~283~~341		$	217,710

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 foreign currency forward contracts, as well as foreign exchange swaps. The Company uses derivative financial instruments to manage risk and not for trading or other speculative purposes.

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 fair values of the Company's derivatives 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 presents the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis:

	Balance SheetClassification	~~June~~September 30, 2012		December 31, 2011
Assets:
Foreign exchange swaps (not designated as hedging instruments)	Other current assets	$	244	$	494
Forward contracts (designated as hedging instruments)	Other current assets	$	459	$	—
Foreign exchange swaps (not designated as hedging instruments)	Other current assets	—		494
Total assets		$	459	$	494
Liabilities:
Forward contracts (designated as hedging instruments)	Other accrued liabilities	$	31,~~177~~853	$	3,809
Forward contracts (designated as hedging instruments)	Other liabilities	452		129
Foreign exchange swaps (not designated as hedging instruments)	Other accrued liabilities	154		—
Total liabilities		$	3,629	$	3,938
Forward contracts (designated as hedging instruments)	Other liabilities	—		129
Total liabilities		$	2,007	$	3,938

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 into forward contracts with maturity dates of up to eighteen months after the contract date. All forward contracts are designated as and qualify for hedge accounting treatment.

The Company had foreign currency forward contracts outstanding in notional amounts as follows:

	June 30, 2012	December 31, 2011
	September 30, 2012	December 31, 2011
U.S. dollar	5846,~~320~~170	50,550
Euro	1513,~~600~~650	8,250

Changes in the fair value of forward contracts designated as hedging instruments are recognized as a component of net income or accumulated other comprehensive income depending on whether the transaction related to the hedged risk has occurred and whether the contract qualifies as highly effective. Changes in fair values of derivatives that are accounted for as cash flow hedges are recorded in accumulated other comprehensive income. The amount of loss, net of tax, recorded as a component of accumulated other comprehensive income related to forward contracts was $~~2,433~~971 and $2,721 at ~~June~~September 30, 2012 and December 31, 2011, respectively. At ~~June~~September 30, 2012 the Company expects to reclassify $~~2,070~~971 of loss, net of tax, on forward contracts from accumulated other comprehensive income to net income during the next twelve months due to the actual fulfillment of forecasted transactions.

The following table summarizes the amount of gain (loss) reclassified from accumulated other comprehensive income into net income for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011:

Statement of Operations Classification	~~June~~September 30, 2012			~~June~~September 30, 2011
Three months ended
Net Sales	$	(~~631~~1,157	)	$	~~133~~475
Other, net	(101		)	22(491		)
	$	(~~641~~1,158	)	$	~~155~~(16	)
Six months ended
Nine months ended
Net Sales	$	(12,~~138~~295	)	$	~~(25~~450	)
Other, net	~~157~~156			~~233~~(257		)
	$	(~~981~~2,139	)	$	~~208~~193

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, net on the consolidated statements of operations. There was no significant hedge ineffectiveness in the three and six months

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The Company uses foreign exchange swaps to hedge intercompany financing activities between group companies with different functional currencies. The Company does not designate these foreign exchange swaps as hedging instruments. Accordingly, the gain or loss associated with changes in the fair value of these contracts is immediately recorded in other, net on the consolidated statements of operations.

The following table summarizes the amount of ~~gain (~~loss) related to foreign exchange swaps recognized in the statements of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011:

Statement of Operations Classification	~~June~~September 30, 2012			~~June~~September 30, 2011
Three months ended
Other, net	$	~~339~~(403	)	$	~~481~~(887	)
Six months ended
Nine months ended
Other, net	$	(~~242~~645	)	$	~~168~~(719	)

6) Related Person Transactions —

At ~~June~~ September 30, 2012 the Company ~~can~~had ~~borrow~~two upterm toloans of approximately $~~300~~180,000 ($140,000 and 29,000 euro) outstanding under a term loan ~~and revolving credit~~ facility with Danfoss A/S, the Company's majority stockholder. ~~Two~~The outstanding term loans ofat December 31, 2011 were approximately $200,000 ($140,000 and 45,000 euro) ~~were outstanding at June 30, 2012 and December 31, 2011~~. ~~There~~In ~~were~~September no2012 ~~principal~~the ~~amounts~~Company ~~outstanding~~paid ~~under~~down the ~~revolving~~term ~~credit~~loan ~~facility~~by atapproximately ~~June 30~~$20,000 ~~2012 or December 31~~(16,000 ~~2011~~euro). The Company incurred interest expense of $4,~~498~~126 and $913,~~106~~232 for the three and ~~six~~nine months ended ~~June~~September 30, 2012, respectively, and $54,~~768~~690 and $1116,~~554~~244 for the three and ~~six~~nine months ended ~~June~~September 30, 2011, respectively, related to the debt with Danfoss A/S.

In ~~June~~July ~~2011~~2012 upon the request of the Company, the borrowing capacity of the revolving credit facility ~~was~~with ~~reduced to approximately $150~~Danfoss A/S,~~000~~ ~~($125,000 and 20,000 euro). As a result of~~ the ~~reductions~~Company's inmajority ~~borrowing~~stockholder, ~~capacity~~was ~~the~~permanently ~~Company~~reduced ~~recognized~~to $~~899~~0. In ofJune ~~loss~~2011 ~~on early retirement of debt in the three~~ and ~~six~~September ~~months ended June 30,~~ 2011 ~~due~~upon to the ~~write-off~~request of ~~unamortized~~the ~~deferred~~Company, ~~financing costs. In September 2011~~ the borrowing capacity ~~was~~of ~~further~~the ~~reduced~~revolving tocredit ~~approximately~~facility ~~$100,000~~was ~~($75,000~~also ~~and 20,000 euro)~~reduced.

InAs ~~August~~a ~~2011~~result of the ~~Company~~reductions ~~entered~~in ~~into~~borrowing ancapacity ~~Agreement~~and ~~with~~term ~~Danfoss~~loan ~~A/S,~~reductions the Company's ~~majority~~recognized ~~stockholder,~~loss toon ~~loan~~early ~~excess~~retirement ~~cash~~of todebt ~~Danfoss~~of ~~A/S~~$1,254 atduring the ~~EURIBOR~~three orand ~~LIBOR~~nine ~~rate~~months ~~plus~~ended ~~0.25%. The~~September 30, ~~cash~~2012, ~~deposited~~consisting ~~with~~of ~~Danfoss~~a ~~A/S~~prepayment ~~was~~penalty of $~~271,003~~803 and $~~168,450,~~451 atfor ~~June 30,~~the ~~2012~~write-off ~~and~~off ~~December~~unamortized ~~31,~~deferred ~~2011,~~financing ~~respectively~~costs. The Company ~~had~~recognized ~~four~~$277 ~~deposits~~and ~~of cash with Danfoss A/S at June 30~~$1,176 ~~2012 with a weighted average interest rate~~ of ~~0.60%~~loss ~~and~~on ~~terms~~early ~~ranging~~retirement ~~from 6 to 28 days. The Company recorded interest income~~ of ~~$371 and~~debt ~~$722~~in ~~during~~ the three and ~~six~~nine months ended ~~June~~September 30, ~~2012~~2011, respectively, ~~related~~due to ~~this~~the ~~agreement~~write-off of unamortized deferred financing costs.

In ~~October~~ ~~2010~~August 2011 the Company entered into an Agreement with ~~Daikin~~Danfoss ~~Industries Ltd.~~A/S, ~~a noncontrolling interest owner in an entity consolidated by~~ the Company's majority stockholder, to loan excess cash orto ~~borrow~~Danfoss ~~funds~~A/S onat athe ~~daily~~EURIBOR ~~basis~~or asLIBOR ~~needed~~rate plus 0.25%. The cash deposited with ~~Daikin~~Danfoss A/S was $15319,~~011~~518 and $10168,~~277~~450, at ~~June~~September 30, 2012 and December 31, 2011, respectively. ~~Interest~~The isCompany ~~earned~~had ~~based~~four ondeposits ~~short~~of ~~term~~cash ~~financing~~with ~~rates~~Danfoss A/S at September 30, 2012 with a weighted average interest rate of 0.40% and ~~was~~terms ranging from 7 to 34 days. The Company recorded interest income of $16292 and $271,014 during the three and ~~six~~nine months ended ~~June~~September 30, 2012, respectively, and $8193 ~~and $10~~ during the three and ~~six~~nine months ended ~~June~~September 30, 2011, ~~respectively,~~ related to this agreement.

~~7) Accrued~~In October ~~Warranty~~2010 ~~Costs~~the —Company entered into an Agreement with Daikin Industries Ltd., a noncontrolling interest owner in an entity consolidated by the Company, to loan excess cash or borrow funds on a daily basis as needed. The cash deposited with Daikin was $19,048 and $10,277 at September 30, 2012 and December 31, 2011, respectively. Interest is earned based on short term financing rates and was $20 and $47 during the three and nine months ended September 30, 2012, respectively, and $9 and $19 during the three and nine months ended September 30, 2011, respectively, related to this agreement.

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.

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~~specific~~7) Accrued ~~cost~~Warranty ofCosts 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. These specific field recall liabilities are reviewed on a quarterly basis.—

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. These specific field recall liabilities are reviewed on a quarterly basis.

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

	Six Months Ended June 30,
	Nine months ended September 30,
	2012			2011
Balance, beginning of period	$	29,863		$	28,183
Payments	(811,~~179~~564		)	(612,~~455~~078		)
Accruals for warranties	56,~~309~~768			59,~~796~~406
Currency impact	(~~603~~92		)	~~1,306~~503
Balance, end of period	$	2624,~~390~~975		$	2826,~~830~~014

8) Pension and Postretirement Benefits Other than Pensions —

Pension Benefits

The Company has 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~~nine months ended ~~June~~September 30, 2012 and 2011 for the defined benefit plans consists of the following components:

	Three Months Ended June 30,						Six Months Ended June 30,
	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Service cost	$	~~883~~1,060		$	~~947~~974		$	23,~~081~~141		$	12,~~957~~931
Interest cost	13,~~939~~186			3,~~301~~279			69,~~269~~455			69,~~556~~835
Expected return on plan assets	(13,~~680~~066		)	(3,~~293~~232		)	(69,~~036~~102		)	(69,~~457~~689		)
Amortization of prior service cost	(62		)	(7172		)	(~~136~~198		)	(~~138~~210		)
Amortization of net loss	1,~~217~~375			~~912~~984			24,~~742~~117			12,~~967~~951
Net periodic pension expense	$	2,~~297~~493		$	1,~~796~~933		$	47,~~920~~413		$	35,~~885~~818

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 of the Company-sponsored plans for the three and six months ended June 30, 2012 and 2011 are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Service cost	$	44		$	46		$	94		$	96
Interest cost	284			679			634			1,329
Amortization of prior service cost	(390		)	(32		)	(765		)	(64		)
Amortization of net loss	378			445			903			927
Postretirement benefit expense	$	316		$	1,138		$	866		$	2,288

During the third quarter of 2011, the Company amended its U.S. retiree health care plans to change the method by which postretirement health care is provided for certain eligible Medicare age retirees and / or spouses. Beginning January 1, 2012, the Company provides its eligible Medicare age retirees and / or spouses postretirement health care in the form of a defined contribution benefit, together with access to a third party health care exchange designed specifically for Medicare age participants. Postretirement health care was previously provided to this group through the Company's standard group health plan. The plan amendment reduced the accumulated postretirement benefit

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~~obligation~~Postretirement ~~by approximately $19,500 which is being recognized as part of net periodic postretirement benefit cost over the average life expectancy of retired eligible employees.~~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 of the Company-sponsored plans for the three and nine months ended September 30, 2012 and 2011 are as follows:



	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Service cost	$	47		$	48		$	141		$	144
Interest cost	316			665			950			1,994
Amortization of prior service cost	(382		)	(32		)	(1,147		)	(96		)
Amortization of net loss	452			464			1,355			1,391
Postretirement benefit expense	$	433		$	1,145		$	1,299		$	3,433

9) Other Comprehensive Income —

The following table shows the tax and exchange rate effects of amounts allocated to each component of other comprehensive income (loss) for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011.

	Change in Period			Tax (Expense) Benefit			Effect of Exchange Rates			Net Change
Three Months Ended June 30, 2012
Three Months Ended September 30, 2012
Foreign currency translation	$	~~(35~~22,~~734~~384	)	$	—		$	—		$	~~(35~~22,~~734~~384	)
Pension and postretirement plan adjustment	1,~~149~~377			(~~430~~736		)	~~643~~(651		)	~~1,362~~(10		)
Unrealized gains on hedging activities	(21,~~021~~870		)	~~430~~(337		)	~~148~~(71		)	(1,~~443~~462		)
Other comprehensive income (loss)	$	~~(36~~25,~~606~~631	)	—(1,073		)	$	~~791~~(722	)	$	~~(35~~23,~~815~~836	)
Three Months Ended June 30, 2011
Three Months Ended September 30, 2011
Foreign currency translation	$	8(33,~~375~~523	)	$	—		$	—		$	8(33,~~375~~523	)
Pension and postretirement plan adjustment	120,~~685~~219			(~~630~~7,553		)	~~(61~~536		)	~~994~~13,202
Unrealized gains on hedging activities	1(4,~~194~~635		)	~~(136~~514		)	~~(19~~187		)	1(3,~~039~~934		)
Other comprehensive income (loss)	$	11(17,~~254~~939	)	$	(~~766~~7,039	)	$	~~(80~~723	)	$	10(24,~~408~~255	)
Six Months Ended June 30, 2012
Nine Months Ended September 30, 2012
Foreign currency translation	$	~~(21,574~~810	)	$	—		$	—		$	~~(21,574~~810	)
Pension and postretirement plan adjustment	24,~~757~~134			(1,~~032~~768		)	~~114~~(537		)	1,~~839~~829
Unrealized gains on hedging activities	~~210~~2,080			28(309		)	50(21		)	~~288~~1,750
Other comprehensive income (loss)	$	~~(18~~7,~~607~~024	)	$	(12,~~004~~077	)	$	~~164~~(558	)	$	~~(19~~4,~~447~~389	)
Six Months Ended June 30, 2011
Nine Months Ended September 30, 2011
Foreign currency translation	$	30(3,~~498~~025	)	$	—		$	—		$	30(3,~~498~~025	)
Pension and postretirement plan adjustment	222,~~687~~906			(18,~~007~~560		)	(~~737~~201		)	~~943~~14,145
Unrealized gains on hedging activities	2(1,~~824~~811		)	~~(310~~204		)	~~(22~~165		)	2(1,~~492~~442		)
Other comprehensive income (loss)	$	3618,~~009~~070		$	(18,~~317~~356	)	$	(~~759~~36	)	$	339,~~933~~678

The changes in accumulated other comprehensive income (loss), excluding non-controlling interest, for the six months ended June 30, 2012 is as follows:

	Foreign CurrencyTranslation			Pension/PostretirementPlanAdjustment			HedgingActivities			AccumulatedOtherComprehensiveIncome (Loss)
Balance as of January 1, 2012	$	82,955		$	(73,061	)	$	(2,721	)	$	7,173
Current period other comprehensive income (loss)	(20,940		)	1,839			288			(18,813		)
Balance as of June 30, 2012	$	62,015		$	(71,222	)	$	(2,433	)	$	(11,640	)

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The changes in accumulated other comprehensive income (loss), excluding non-controlling interest, for the nine months ended September 30, 2012 is as follows:



	Foreign Currency Translation		Pension/ Postretirement Plan Adjustment			Hedging Activities			Accumulated Other Comprehensive Income
Balance as of January 1, 2012	$	82,955	$	(73,061	)	$	(2,721	)	$	7,173
Current period other comprehensive income	220		1,829			1,750			3,799
Balance as of September 30, 2012	$	83,175	$	(71,232	)	$	(971	)	$	10,972

10) Segment and Geographic Information —

The Company's reportable segments are organized around its various product lines of Propel, Work Function, Controls and Stand-Alone Businesses. Propel products include hydrostatic transmissions and related products that transmit the power from the engine to the wheel to propel a vehicle. Work Function products include steering motors 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. Stand-Alone Businesses, an aggregation of two operating segments, includes open circuit gear pumps and motors, cartridge valves and hydraulic integrated circuits, directional control valves, inverters, and light duty hydrostatic transmissions that transmit, control and direct the power of a vehicle and are marketed under their own names and operate as stand-alone businesses. 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.

The following table presents the significant items by reportable segment for the results of operations for the three and ~~six~~nine-month periods ended ~~June~~September 30, 2012 and 2011:

Three months ended

	Propel		WorkFunction		Controls		Stand-Alone		GlobalServices			Total
June 30, 2012
September 30, 2012
Net sales	$	~~233~~204,~~373~~759	$	8367,~~075~~361	$	8469,~~899~~668	$	~~117~~68,~~440~~519	$	—		$	~~518~~410,~~787~~307
Segment income (loss)	4942,~~522~~825		138,~~773~~368		2217,~~285~~538		225,~~551~~734		(1012,~~632~~153		)	9762,~~499~~312
Interest expense, net												(43,~~047~~592		)
Income before income taxes												93,452
Loss on early retirement of debt												(1,254		)
Depreciation and amortization	7,931		5,108		3,248		3,879		369			20,535
Income before income taxes												57,466
Capital expenditures	2,163		1,518		1,018		2,065		609			7,373
Depreciation and amortization	7,610		4,801		3,018		3,524		517			19,470
June 30, 2011
Capital expenditures	4,552		1,056		1,477		2,871		525			10,481
Net sales	$	249,960	$	105,776	$	88,663	$	118,918	$	—		$	563,317
September 30, 2011
Segment income (loss)	61,531		19,409		25,576		20,495		(9,333		)	117,678
Net sales	$	235,123	$	89,328	$	82,703	$	76,143	$	—		$	483,297
Interest expense, net												(5,774		)
Segment income (loss)	51,513		13,379		23,303		5,322		(8,310		)	85,207
Loss on early retirement of debt												(899		)
Interest expense, net												(5,479		)
Income before income taxes												111,005
Loss on early retirement of debt												(277		)
Depreciation and amortization	8,543		5,688		3,547		4,503		559			22,840
Income before income taxes												79,451
Capital expenditures	4,245		371		1,239		1,958		721			8,534
Depreciation and amortization	7,945		5,468		3,397		4,424		560			21,794
Capital expenditures	1,962		880		1,298		2,786		1,861			8,787

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~~Six~~Nine months ended

	Propel		WorkFunction		Controls		Stand-Alone		GlobalServices			Total
June 30, 2012
September 30, 2012
Net sales	$	~~489~~694,~~699~~458	$	~~175~~242,~~308~~669	$	~~169~~239,~~467~~135	$	~~258~~326,~~306~~825	$	—		$	1,~~092~~503,~~780~~087
Segment income (loss)	~~104~~147,~~798~~623		3140,~~650~~018		4563,~~593~~131		5056,~~646~~380		(2033,~~879~~032		)	~~211~~274,~~808~~120
Interest expense, net												(812,~~418~~010		)
Income before income taxes												203,390
Loss on early retirement of debt												(1,254		)
Depreciation and amortization	15,793		10,175		6,391		7,867		986			41,212
Income before income taxes												260,856
Capital expenditures	3,508		2,472		1,844		3,812		1,071			12,707
Depreciation and amortization	23,403		14,976		9,409		11,391		1,503			60,682
June 30, 2011
Capital expenditures	8,060		3,528		3,321		6,683		1,596			23,188
Net sales	$	500,190	$	205,482	$	168,002	$	254,385	$	—		$	1,128,059
September 30, 2011
Segment income (loss)	126,651		36,739		48,326		46,413		(23,732		)	234,397
Net sales	$	735,313	$	294,810	$	250,705	$	330,528	$	—		$	1,611,356
Interest expense, net												(11,875		)
Segment income (loss)	178,164		50,118		71,629		51,735		(32,042		)	319,604
Loss on early retirement of debt												(899		)
Interest expense, net												(17,354		)
Income before income taxes												221,623
Loss on early retirement of debt												(1,176		)
Depreciation and amortization	16,980		11,130		7,039		9,035		1,128			45,312
Income before income taxes												301,074
Capital expenditures	7,520		915		1,712		2,952		953			14,052
Depreciation and amortization	24,925		16,598		10,436		13,459		1,688			67,106
Capital expenditures	9,482		1,795		3,010		5,738		2,814			22,839

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 EndedJune 30,

Six Months EndedJune 30,

June 30,

Three months ended September 30,

Nine months ended September 30,

September 30,

2012

2011

2012

2011

2012

2011

United States

~~236~~172,~~925~~969

~~209~~175,~~154~~952

~~490~~663,~~703~~672

~~429~~605,~~434~~386

9897,~~375~~356

~~103~~100,~~179~~642

China

3129,~~876~~908

6039,~~413~~452

70100,~~161~~069

~~133~~172,~~510~~962

1718,~~784~~485

1415,~~187~~016

Germany

4329,~~532~~473

5445,~~094~~837

92122,~~699~~172

~~105~~151,~~567~~404

47,~~054~~217

5652,~~632~~110

Denmark (3)

5,~~108~~057

56,~~559~~413

1015,~~850~~907

1218,~~078~~491

8584,~~715~~865

~~106~~98,~~798~~208

Other countries

~~201~~172,~~346~~900

~~234~~215,~~097~~643

~~428~~601,~~367~~267

~~447~~663,~~470~~113

~~141~~142,~~807~~549

~~185~~166,~~113~~832

Total

~~518~~410,~~787~~307

~~563~~483,~~317~~297

1,~~092~~503,~~780~~087

1,~~128~~611,~~059~~356

390,~~735~~472

~~465~~432,~~909~~808

________________________________________


(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.

One customer accounted for ten percent of total consolidated net sales for the three and ~~six~~nine-month periods ended ~~June~~September 30, 2012. NoOne customer accounted for ten percent of total consolidated net sales for the three ~~and~~months ~~six~~ended ~~month~~September ~~periods~~30, 2011. No customers accounted for ten percent of the total consolidated net sales for the nine months ended ~~June~~September 30, 2011.

11) Subsequent Event —

In July 2012, upon the request of the Company, the borrowing capacity of the revolving credit facility with Danfoss A/S, was reduced to $0. As a result of the reductions in the borrowing capacity the Company will recognize $325 of loss on early retirement of debt due to the write-off of unamortized deferred financing costs in the three months ended September 30, 2012. The was no change to the amount of the term loan outstanding with Danfoss A/S.

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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,” “could,” “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 is never a perfect guide to anticipating actual future results. Risk factors affecting the Company's forward-looking statements include, but are not limited to, the following: general, worldwide economic conditions, the level of interest rates, crude oil prices, commercial and consumer confidence, and currency exchange rates; 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 programs 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-management and productivity improvement efforts; the Company's ability to manage its business effectively in a period of slowing growth in sales and its capacity to make necessary adjustments to changes in demand for its products; competing technologies and difficulties entering new and expanding markets, both domestic and foreign; changes in the Company's product mix; future levels of indebtedness and capital spending; the availability of sufficient levels of cash flow from operations and credit on favorable terms, whether from Danfoss A/S, the Company's majority stockholder, or from the capital markets or traditional credit sources to enable the Company to meet its capital needs; 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 persistence of tight credit markets; any inadequacy of the Company's intellectual property protection or the potential for third-party claims of infringement; credit market disruptions and significant changes in capital market liquidity and funding costs affecting the Company and its customers and suppliers; 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, including regulations affecting retirement and health care benefits provided to Company employees; actions by the U.S. Federal Reserve Board and the central banks of other nations, including heightened capital requirements imposed on Chinese banks; actions by other regulatory agencies, including those taken in response to the global credit crisis; actions by credit rating agencies; changes in accounting standards; worldwide political stability, including developments in the Middle East; the effects of terrorist activities and resulting political or economic instability; natural catastrophes; U.S. and NATO 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 Item 1A (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 Company's products are used by original equipment manufacturers (OEMs) of mobile equipment, 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 region, and markets its products throughout the rest of the world either directly or through distributors.

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Executive Summary — Three Months Ended ~~June~~September 30, 2012

The nature of the Company's operations as a global producer and supplier in the fluid power industry means the Company is impacted by changes in 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~~third quarter 2012 and 2011 results from operations, separately identifying the impact of currency fluctuations. This analysis is more consistent with how the Company internally evaluates its results.

(in millions)	Three Months Ended ~~June~~September 30, 2011			CurrencyFluctuation			UnderlyingChange			Three Months Ended ~~June~~September 30, 2012
Net sales	$483.3	~~563.3~~		$	(2523.36	)	$	(1949.24	)	$	~~518~~410.83
Gross profit	~~190~~154.68			(9.67		)	(912.04		)	~~172~~132.07
% of Sales	3332.80		%							3332.23		%
Selling, general and administrative and Other	5754.7			(34.70		)	56.02			5956.09
Research & development	1516.62			(1.10		)	~~1.8~~—			1615.32
Total operating costs	7370.39			(45.80		)	6.82			7572.31
Income from operations	$	~~117~~83.39		$	(4.87	)	$	(1518.86	)	$	9660.76
% of Sales	2017.84		%							1814.68		%

Net sales for the ~~second~~third quarter 2012 decreased 310 percent compared to the ~~second~~third quarter 2011, excluding the effects of currency. Excluding the impacts of currency, sales ~~increased~~declined 122 percent in the Americas, ~~while~~14 ~~sales decreased 26~~ percent in Asia-Pacific, and 1018 percent in Europe. Sales in the ~~Controls~~Work ~~and~~Function ~~Stand-Alone~~segment ~~Businesses~~declined ~~segments~~17 ~~increased 2~~ percent, ~~while~~followed ~~sales~~by decreases of 10 percent in the ~~Work~~Propel ~~Function~~ and ~~Propel~~Controls segments ~~decreased~~and by5 14 percent ~~and~~in 4the ~~percent,~~Stand-Alone ~~respectively~~Business segment.

Income from operations decreased 1322 percent, excluding the impacts of currency. The reduction was driven by aan 58 percent decrease in gross profit, mainly due to lower sales volume~~. Also~~, ~~contributing~~as towell ~~the~~as ~~reduction~~an ~~was~~11 ~~a 9~~ percent increase in ~~operating~~selling, general and administrative costs. Selling, general and administrative costs were negatively impacted by executive separation costs of $2.1 million recognized during the third quarter 2012.

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

Operating Results - Three Months Ended ~~June~~September 30, 2012 Compared to Three Months Ended ~~June~~September 30, 2011

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	$	178.91		1611	%	$	01.73		1948	%	$	(717.94	)	(1132	)%	$	10(8.70	)	(6	)%
Construction/Road Building	8(3.72		)	24(8	)	(144.5		)	(3113	)	(5.41		)	(1213	)	(1112.28		)	(911	)
Specialty	20.85			112		(2.03		)	(2124	)	(510.21		)	(714	)	(411.49		)	(411	)
Distribution	(09.62		)	(114	)	(106.30		)	(2617	)	(31.45		)	(105	)	(1416.37		)	(1013	)

Agriculture/Turf Care

The agriculture/turf care markets experienced a 6 percent ~~increase~~decrease in sales in the ~~second~~third quarter of 2012 compared to the same period in 2011. Agricultural sales in the Americas remained strong overall and continue to benefit from high commodity prices, ~~while~~as ~~sales~~well inas ~~Brazil continue to be driven by~~ a strong sugar- cane market~~. Sales~~ in ~~the~~Brazil, ~~turf~~while ~~care market showed moderate improvement due to growing consumer confidence. Agriculture and turf care~~ sales in ~~Europe~~South ~~were~~America ~~down~~have ~~due~~been tonegatively ~~the~~impacted ~~overall~~by restrictive trade

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laws in Argentina. Sales in the turf care market continue to show improvement due to growing consumer confidence. Agriculture and turf care sales in Europe were down due to the overall weakening of the European economy. In addition, sales were negatively impacted by the fact that one large customer slowed production during the quarter while implementing a new production line as well as a new business system. 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

Sales in the construction/road building markets declined ~~significantly~~ in ~~the~~all ~~Europe and Asia-Pacific~~ regions induring the ~~second~~third quarter of 2012 compared to the same period in 2011~~, which more than offset the strong sales increase in the Americas~~. The sales decline in the Asia-Pacific region was ~~largely~~driven ~~due~~by to reduced demand for rollers and transit mixers in China as well as customers' focus on reducing inventory levels. Sales in Europe were down due to reduced demand for rollers and pavers as a result of ~~the~~a ~~weakening~~weakened European economy. ~~Sales~~The sales decline in the Americas ~~benefited~~was ~~from~~driven ~~increased~~by ~~demand as a result of renewed investments in aging rental fleets despite~~ depressed ~~residential~~road ~~construction~~building markets ~~and~~due to limited spending by state and local governments 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. Overall sales into the specialty vehicle market decreased 411 percent in the ~~second~~third quarter of 2012 compared to the same period in 2011. Sales in Europe declined due to weakening forestry and mining markets ~~despite~~as ~~continued~~well ~~strong~~as reduced demand for telehandlers and ~~aerial~~truck-mounted ~~lifts~~cranes. Sales in the Asia-Pacific region declined largely due to asuspended ~~saturated~~infrastructure ~~railway~~programs ~~carrier~~in ~~market~~China and ~~suspended~~reduced ~~infrastructure~~demand ~~programs~~for inmarine ~~China~~applications. Sales in the Americas benefited from increased demand for aerial lifts and renewed investments in aging rental fleets.

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 reportable segment relates to information as presented in Note 10 in the Notes to Consolidated Financial Statements. Segment income is defined as the respective segment's portion of the 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 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. Stand-Alone Businesses include open circuit gear pumps and motors, cartridge valves and hydraulic integrated circuits, directional control valves, inverters and light duty hydrostatic transmissions that transmit, control and direct the power of the vehicle, but are marketed under their own names and operate as stand-alone businesses.

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 September 30, 2011			Currency Fluctuation			Underlying Change			Three Months Ended September 30, 2012
Net sales
Propel	$	235.1		$	(7.9	)	$	(22.5	)	$	204.7
Work Function	89.3			(7.0		)	(14.9		)	67.4
Controls	82.7			(4.8		)	(8.2		)	69.7
Stand-Alone Businesses	76.2			(3.9		)	(3.8		)	68.5

Segment income (loss)
Propel	$	51.5		$	(2.7	)	$	(6.0	)	$	42.8
Work Function	13.4			(1.2		)	(3.8		)	8.4
Controls	23.3			(1.5		)	(4.3		)	17.5
Stand-Alone Businesses	5.3			(0.4		)	0.8			5.7
Global Services and other expenses, net	(8.3		)	0.8			(4.7		)	(12.2		)

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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, 2011			CurrencyFluctuation			UnderlyingChange			Three Months Ended June 30, 2012
Net sales
Propel	$	249.9		$	(7.7	)	$	(8.8	)	$	233.4
Work Function	105.8			(8.1		)	(14.6		)	83.1
Controls	88.7			(5.6		)	1.8			84.9
Stand-Alone Businesses	118.9			(3.9		)	2.4			117.4
Segment income (loss)
Propel	$	61.5		$	(2.0	)	$	(10.1	)	$	49.4
Work Function	19.4			(2.1		)	(3.5		)	13.8
Controls	25.6			(1.6		)	(1.7		)	22.3
Stand-Alone Businesses	20.5			(0.4		)	2.5			22.6
Global Services and other expenses, net	(9.3		)	0.8			(2.1		)	(10.6		)

Propel Segment

The Propel segment experienced a 410 percent decrease in sales, excluding the effects of currency fluctuations, during the ~~second~~third quarter 2012 compared to 2011 largely due to weakened economic conditions in China and Europe. Segment income decreased by $106.10 million during the quarter when compared to the same period in 2011, excluding the effects of currency, primarily due to reduced sales volume~~, higher material costs and a change in customer mix~~. Also contributing to the reduction in segment income was a $42.69 million increase in operating costs, partially due to the Company's continued investments in China as part of its long-term growth strategy. Partially offsetting the negative impact of reduced sales volume and increased operating costs in 2012 was a $2.1 million reduction in warranty & field recall costs.

Work Function Segment

The Work Function segment experienced a 1417 percent decrease in sales during the ~~second~~third quarter of 2012 when compared with the same period in 2011, excluding the effects of currency fluctuations. The decrease in sales was largely due to the weakened European economy. Segment income decreased $3.58 million primarily due to reduced sales volume. Partially offsetting the negative impact of reduced sales was a 32 percentage point increase in contribution margin, which was driven by higher margins on export sales from Europe to the United States due to the strengthening of the U.S. dollar.

Controls Segment

Net sales in the Controls segment ~~increased~~decreased 210 percent during the ~~second~~third quarter of 2012 compared with the same period in 2011, excluding the effects of currency fluctuations. Segment income decreased $14.73 million ~~due~~primarily ~~to a 2 percentage point reduction in contribution margin largely~~ due to areduced ~~change~~sales ~~in product and customer mix~~volume, as well as a $1.52 million increase in operating costs.

Stand-Alone Businesses Segment

The Stand-Alone Businesses segment experienced a 25 percent ~~increase~~decrease in sales during the ~~second~~third quarter of 2012 compared with the same period in 2011, excluding the effects of currency fluctuations. Segment income increased $20.58 million ~~primarily~~despite ~~due~~the toreduction ~~increased~~in sales volume, aslargely ~~well~~due asto fixed production cost reductions of $0.9 million as well as reduced operating costs of $0.3 million.

Global Services and other expenses, net

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 $24.17 million, excluding the impacts of currency. The Company incurred ~~restructuring~~executive separation costs of $02.51 million ~~related to the reorganization of the European sales organization~~ during the ~~second~~third quarter of 2012, as well as increased incentive plan costs of $01.81 million during the quarter when compared to the same period in 2011. ~~Partially~~In ~~offsetting~~addition, the ~~negative~~Company ~~impact~~recognized a gain on foreign currency transactions of $0.3 million during the third quarter of 2012 compared to a gain of $0.9 million during the same period in 2011, which is reported as other, net in nonoperating income (expense) on the consolidated statements of operations.

Income Taxes

The Company's effective tax rate was 23.6 percent for the third quarter of 2012 compared to 25.1 percent for the same period in 2011. The decrease in the tax rate is partly attributable to the fact that valuation allowances in Italy of $2.9 million were reversed in the third quarter of 2012. The Company's tax rate can also vary significantly from quarter to quarter due to the mix of earnings between countries.

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~~increased~~Executive ~~costs~~Summary ~~was~~— ~~the~~Nine ~~fact~~Months ~~that~~Ended ~~the~~September ~~Company~~30, ~~recognized a gain on foreign currency transactions of $0.3 million during the second quarter of~~ 2012 ~~compared to a loss of $0.2 million during the same period in 2011, which is reported as other, net in nonoperating income (expense) on the consolidated statements of operations.~~

~~Income~~The ~~Taxes~~following table summarizes the Company's results from operations, separately identifying the impact of currency fluctuations for the nine months ended September 30, 2012 and 2011. This analysis is more consistent with how the Company internally evaluates its results.

The Company's effective tax rate was 29.7 percent for the second quarter of 2012 compared to 22.6 percent for the same period in 2011. The increase in the tax rate is partly attributable to the fact that the valuation allowances in Denmark were reversed during 2011 and, therefore, 2012 Danish earnings are no longer benefited by the reversal of valuation allowances. As most of the valuation allowances have now been reversed, the Company's tax rate is returning to a more normal rate. The Company's tax rate can also vary significantly from quarter to quarter due to the mix of earnings between countries.



(in millions)	Nine Months Ended September 30, 2011			Currency Fluctuation			Underlying Change			Nine Months Ended September 30, 2012
Net sales	$	1,611.4		$	(56.5	)	$	(51.8	)	$	1,503.1
Gross profit	534.7			(23.2		)	(16.5		)	495.0
% of Sales	33.2		%							32.9		%

Selling, general and administrative and Other	166.4			(8.8		)	18.3			175.9
Research & development	45.8			(2.5		)	4.5			47.8
Total operating costs	212.2			(11.3		)	22.8			223.7
Income from operations	$	322.5		$	(11.9	)	$	(39.3	)	$	271.3
% of Sales	20.0		%							18.0		%

~~Executive~~Net ~~Summary~~sales —for ~~Six~~the ~~Months~~nine ~~Ended~~months ~~June~~ended September 30, 2012 declined 3 percent when compared to the same period in 2011, excluding the effects of currency. Excluding the impacts of currency, sales increased 9 percent in the Americas, while sales decreased 24 percent in Asia-Pacific and 7 percent in Europe. Sales in the Stand-Alone Businesses segment were up 2 percent, while sales in the Work Function and Propel segments declined 11 percent and 3 percent, respectively. Sales in the Controls segment remained level when compared to the same period in 2011.

~~The~~Income ~~following~~from ~~table~~operations ~~summarizes~~decreased 12 percent, excluding the ~~Company's~~impacts ~~results~~of ~~from~~currency. Contributing ~~operations~~to the decrease was a 3 percent reduction in gross profit driven by lower sales volume, ~~separately~~partially ~~identifying~~offset by a $2.6 million reduction in warranty & field recall costs. Also contributing to the ~~impact~~reduction ofin ~~currency~~income ~~fluctuations~~from ~~for~~operations was an 11 percent increase in total operating costs compared to the ~~six~~nine months ended ~~June~~September 30, ~~2012 and~~ 2011. ~~This~~Total ~~analysis~~operating iscosts ~~more~~were ~~consistent~~negatively ~~with~~impacted ~~how~~in 2012 by the fact that the Company ~~internally~~recognized ~~evaluates~~executive ~~its~~separation ~~results~~costs of $2.2 million and restructuring costs of $0.9 million related to the reorganization of the European sales organization.

(in millions)	Six Months Ended June 30, 2011			CurrencyFluctuation			UnderlyingChange			Six Months Ended June 30, 2012
Net sales	$	1,128.1		$	(32.9	)	$	(2.4	)	$	1,092.8
Gross profit	379.8			(13.5		)	(4.0		)	362.3
% of Sales	33.7		%							33.2		%
Selling, general and administrative and Other	111.9			(4.9		)	12.0			119.0
Research & development	29.7			(1.4		)	4.4			32.7
Other	(0.3		)	0.1			0.2			—
Total operating costs	141.3			(6.2		)	16.6			151.7
Income from operations	$	238.5		$	(7.3	)	$	(20.6	)	$	210.6
% of Sales	21.1		%							19.3		%

Net sales for the six months ended June 30, 2012 remained level when compared to the same period in 2011, excluding the effects of currency. Excluding the impacts of currency, sales increased 14 percent in the Americas, while sales decreased 28 percent in Asia-Pacific and 3 percent in Europe. Sales in the Controls and Stand-Alone Businesses segments were up 5 percent and 4 percent, respectively. These increases were offset by a 9 percent decrease in the Work Function segment, while sales in the Propel segment remained level compared to the same period in 2011.

The reduction in income from operations was driven by a 12 percent increase in operating costs, excluding the impacts of currency. Total selling, general and administrative costs increased by 11 percent, while research and development costs increased by 15 percent.

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

21Operating Results - Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

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Operating Results - Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

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	$	2937.30	1211	%	$	13.63		1931	%	$	(421.79	)	(311	)%	$	2618.24		73	%
Construction/Road Building	1511.41		2110		(3843.51		)	(3831	)	(27.65		)	(36	)	(2539.75		)	(10	)
Specialty	79.61		1713		(46.37		)	(24	)	(212.4		)	(26	)	0(10.90		)	—(3	)
Distribution	166.49		144		(1824.2		)	(2321	)	(23.04		)	(34	)	(320.87		)	(15	)

Agriculture/Turf Care

Sales into the agriculture/turf care market ~~remained~~showed ~~strong~~a inmodest increase of 3 percent during the ~~six~~nine months ended ~~June~~September 30, 2012 ~~resulting in a 7 percent increase~~ compared to the same period in 2011. Agricultural sales in the Americas continue to benefit from high commodity prices, ~~while~~as ~~sales~~well as a strong sugar cane market in Brazil, ~~continue~~although toSouth beAmerican ~~driven~~sales have been negatively impacted in recent months by arestrictive ~~strong~~trade ~~sugar-cane~~laws ~~market~~in Argentina. Sales in the turf care market ~~showed~~continue ~~moderate~~to show improvement due to growing consumer confidence. Agricultural sales in Europe ~~also~~have ~~benefited~~declined ~~from~~despite continued high commodity prices ~~early in the year, while sales declined in recent months~~ due to a weakening European economy. 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.

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economy. 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

Sales in the construction/road building markets declined ~~significantly~~ in Europe and the Asia-Pacific region during the ~~six~~nine months ended ~~June~~September 30, 2012 compared to the same period in 2011, which more than offset ~~the~~increased ~~strong~~sales ~~increase~~ in the Americas. Sales in Europe ~~experienced~~were down due to a ~~moderate~~weakened ~~decline~~European economy. The sales decline in the Asia-Pacific region was largely due to reduced demand for rollers and transit mixers in China, as well as credit restrictions imposed by the Chinese government. Sales in the Americas benefited from increased demand as a result of renewed investments in aging rental fleets despite depressed residential construction markets and a weak road building market due to limited spending by state and local governments due to budget constraints. ~~Sales in Europe were down due to a weakening European economy.~~

Specialty

Specialty vehicles are comprised of a variety of markets including forestry, material handling, marine, waste management, railway and waste recycling. Overall sales into the specialty vehicle market ~~remained~~experienced ~~level~~a moderate decline during the ~~six~~nine months ended ~~June~~September 30, 2012 compared to the same period in 2011. Sales in the Americas showed a strong increase due to increased demand for aerial lifts driven by renewed investments in aging rental fleets. Sales in the Asia-Pacific region declined largely due to a saturated railway carrier market and suspended infrastructure programs in China, as well as credit restrictions imposed by the Chinese government. Sales in Europe declined ~~slightly~~ due to weakening forestry and mining markets despite continued strong demand for telehandlers and aerial lifts during the first half of the year.

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 10 in the Notes to the Consolidated Financial Statements. Segment income is defined as the respective segment's portion of the total Company's net income, excluding net interest expense, loss on early retirement of debt, income taxes, and noncontrolling interest.

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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~~Nine Months Ended ~~June~~September 30, 2011			CurrencyFluctuation			UnderlyingChange			~~Six~~Nine Months Ended ~~June~~September 30, 2012
Net sales
Propel	$	~~500~~735.23		$	(816.98	)	$	(124.60	)	$	~~489~~694.75
Work Function	~~205~~294.58			(1118.2		)	(1933.09		)	~~175~~242.37
Controls	~~168~~250.07			(712.53		)	9.0.7			~~169~~239.51
Stand-Alone Businesses	~~254~~330.46			(59.32		)	95.24			~~258~~326.38
Segment income (loss)
Propel	$	~~126~~178.72		$	(25.85	)	$	(1925.21	)	$	~~104~~147.76
Work Function	3650.71			(34.35		)	(15.76		)	3140.70
Controls	4871.36			(2.3.8		)	(0.4.7		)	4563.61
Stand-Alone Businesses	4651.47			(01.50		)	45.87			5056.74
Global Services and other expenses, net	(2332.70		)	1.08			1(2.8		)	(2033.90		)

Propel Segment

Sales in the Propel segment ~~remained~~experienced ~~level~~a 3 percent decrease during the ~~six~~nine months ended ~~June~~September 30, 2012 compared to the same period in 2011, excluding the effects of currency fluctuations. Segment income decreased by $1925.21 million, excluding the effects of currency, partially due to a 2 percentage point decrease in contribution margin largely due to a change in customer mix and higher material costs. Also contributing to the reduction in segment income was a $9.9 million increase in operating costs, partially due to the Company's continued investments in China as part of its long-term growth strategy. Sales & marketing costs were the largest increase at $4.2 million, followed by an increase of $2.7 million in research & development costs. Operating costs were favorably impacted by a $1.2 million reduction in incentive plan costs.

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the effects of currency, primarily due to reduced sales volume. Also contributing to the reduction in segment income was a 1 percentage point decrease in contribution margin due to a change in customer mix and higher material costs. Contribution margin was favorably impacted by a $1.6 million reduction in warranty & field recall costs. Total operating costs increased $12.8 million, partially due to the Company's continued investments in China as part of its long-term growth strategy. Operating costs were favorably impacted by a $1.5 million reduction in incentive plan costs.

Work Function Segment

The Work Function segment experienced aan 911 percent decrease in sales during the ~~six~~nine months ended ~~June~~September 30, 2012 compared to the same period in 2011, excluding the effects of currency fluctuations, largely due to weakened economic conditions in Europe. Segment income decreased $15.76 million primarily due to reduced sales volume. Partially offsetting the negative impact of reduced sales was a 42 percentage point increase in contribution margin largely due to improved production efficiency, asand ~~well as~~ higher margins on export sales from Europe to the United States due to the strengthening of the U.S. dollar.

Controls Segment

Net sales in the Controls segment ~~increased~~remained 5level ~~percent~~ during the ~~six~~nine months ended ~~June~~September 30, 2012 compared to the same period in 2011, excluding the effects of currency fluctuations. ~~Increased~~Segment ~~gross~~income ~~profit~~experienced a $4.7 million decrease partially due to a 1 percentage point reduction in contribution margin driven by a change in product and customer mix, which was partially offset by the favorable impact of a $31.37 million ~~increase~~reduction in ~~operating~~warranty and field recall costs,. Also ~~due~~contributing to ~~research~~the &reduction ~~development~~in ~~costs~~segment ~~increasing~~income bywere increased fixed production costs of $1.18 million, ~~and~~as ~~sales~~well &as ~~marketing~~a $4.4 million increase in operating costs. Operating ~~increasing~~costs were favorably impacted by a $1.0.9 million reduction in incentive plan costs.

Stand-Alone Businesses Segment

The Stand-Alone Businesses segment experienced a 42 percent increase in sales during the ~~six~~nine months ended ~~June~~September 30, 2012 compared with the same period in 2011, excluding the effects of currency fluctuations. Segment income increased $45.87 million ~~primarily~~ due to increased sales volume, as well as a reduction in fixed production ~~cost~~costs ~~reductions~~ of $12.6 million. Partially offsetting the positive impact of increased sales and reduced fixed production costs was a $2.52 million increase in operating costs~~, with sales & marketing costs experiencing the largest increase at $1~~.~~4 million.~~

Global Services and other expenses, net

Global services and other expenses ~~decreased~~increased $12.8 million during the nine months ended September 30, 2012 compared with the same period in 2011, excluding the impacts of currency. The Company recognized a gain on foreign currency transactions of $0.58 million during the ~~six~~nine months ended ~~June~~September 30, 2012 compared to a loss of $54.23 million during the same period in 2011, which is reported as other, net in nonoperating income (expense) on the consolidated statements of operations. The positive impact of foreign currency transactions was offset by a $2.6 million increase in incentive plan costs, executive separation costs of $2.1 million, and restructuring costs of $0.9 million related to the reorganization of the European sales organization.

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statements of operations. The positive impact of foreign currency transactions was partially offset by a $1.5 million increase in incentive plan costs, as well as restructuring costs of $0.7 million related to the reorganization of the European sales organization.

Income Taxes

The Company's effective tax rate was 2928.41 percent for the first ~~six~~nine months of 2012 compared to 23.16 percent for the same period in 2011. The increase in the tax rate is partly attributable to the fact that the valuation allowances in Denmark were reversed during 2011 and, therefore, 2012 Danish earnings are no longer benefited by the reversal of valuation allowances. As most of the valuation allowances have now been reversed, the Company's tax rate is returning to a more normal rate. The Company's tax rate can also vary significantly from quarter to quarter due to the mix of earnings between countries.

Order Backlog

The following table shows the Company's order backlog at ~~June~~September 30, 2012 and 2011 and orders written in the ~~six~~nine-month periods ended ~~June~~September 30, 2012 and 2011, separately identifying the impact of currency fluctuations.

(in millions)	2011		CurrencyFluctuation			UnderlyingChange			2012
Backlog at June 30	$	895.1	$	(45.8	)	$	37.9		$	887.2
Backlog at September 30	$	942.3	$	(13.0	)	$	(61.8	)	$	867.5
Orders written	1,~~182~~734.8		(3053.56		)	(99248.26		)	1,~~053~~432.16

Total order backlog at June 30, 2012 was $887.2 million compared to $895.1 million at June 30, 2011. On a comparable basis, excluding the impact of currency fluctuation, order backlog increased 4 percent. Decreases in order backlog in the European and Asia-Pacific regions were more than offset by an increase in the Americas. Backlog levels can vary as customers alter their sales order patterns.23

~~New~~Table ~~sales orders written during the six-month period ended June 30, 2012 were $1,053.1 million, a decrease~~ of ~~8 percent compared to 2011, excluding the impact of currency fluctuations.~~ Contents

Total order backlog at September 30, 2012 was $867.5 million compared to $942.3 million at September 30, 2011. On a comparable basis, excluding the impact of currency fluctuation, order backlog decreased 7 percent. Increased order backlog in the Americas region was more than offset by decreases in the European and Asia-Pacific regions. Backlog levels can vary as customers alter their sales order patterns.

New sales orders written during the nine-month period ended September 30, 2012 were $1,432.6 million, a decrease of 14 percent compared to 2011, excluding the impact of currency fluctuations.

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 statements 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 income of $0.58 million was recognized during the ~~six~~nine months ended ~~June~~September 30, 2012, compared to expense of $54.23 million for the same period in 2011.

Fluctuations of currencies against the U.S. dollar can be substantial and therefore significantly impact comparisons with prior periods. The U.S. dollar ~~strengthened~~remained fairly level compared to other currencies between December 31, 2011 and ~~June~~September 30, 2012. 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 parties. 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~~September 30, 2012 was a net liability of $31.64 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 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 ~~permitted~~includes ~~the~~a ~~Company~~term toloan ~~borrow~~of upapproximately to$180 ~~approximately~~million ($~~300~~140 million atand ~~June~~29 ~~30,~~million ~~2012~~euro) that will mature in September 2015. In ~~The~~September ~~Danfoss~~2012, ~~Agreement~~upon ~~includes~~the arequest of the Company, the term loan ofamount was reduced by approximately $~~200~~20 million (~~$140~~16 million ~~and~~euro). A 45prepayment penalty of $0.8 million ~~euro)~~was ~~that~~incurred ~~will~~as ~~mature~~a inresult ~~September~~of ~~2015~~the term loan reduction. The Credit Agreement also had a revolving credit facility that permitted borrowings of approximately $100 million ($75 million and 20 million euro) at ~~June~~December 3031, ~~2012~~2011. At the Company's request the revolving credit facility was canceled in July 2012. The Company did not expect to borrow against the revolving facility due to its strong cash position and therefore canceled the facility to reduce interest expense related to commitment fees. . 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.

As a result of strong cash flow and a strong balance sheet, the Company announced in March that its Board of Directors had reinstated a quarterly cash dividend. A cash dividend of $0.35 per share was declared in ~~both~~each of the first ~~and~~three ~~second~~ quarters of 2012. The Company had suspended the payment of dividends in March 2009 in response to the recession. The Company expects to continue to generate strong cash flow and therefore plans to pay this level of dividend on a quarterly basis going forward.

As the Company has significant international operations, a portion of the cash on the balance sheet is held in foreign subsidiaries. The repatriation of cash balances from certain foreign subsidiaries could have adverse tax consequences or be subject to capital controls, however, those balances are generally available without legal restrictions to fund local ordinary business operations. With few exceptions, the Company intends to reinvest these earnings permanently and, therefore, U.S. income taxes have not been provided for undistributed earnings of foreign subsidiaries. At June 30, 2012 approximately $237.4 million, or 65 percent, of the cash, cash equivalents and cash deposited with related persons is on the balance sheet of subsidiaries for which U.S. income taxes have not been provided for the undistributed earnings. 24

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As the Company has significant international operations, a portion of the cash on the balance sheet is held in foreign subsidiaries. The repatriation of cash balances from certain foreign subsidiaries could have adverse tax consequences or be subject to capital controls, however, those balances are generally available without legal restrictions to fund local ordinary business operations. With few exceptions, the Company intends to reinvest these earnings permanently and, therefore, U.S. income taxes have not been provided for undistributed earnings of foreign subsidiaries. At September 30, 2012 approximately $139.1 million, or 33 percent, of the cash, cash equivalents and cash deposited with related persons is on the balance sheet of subsidiaries for which U.S. income taxes have not been provided for the undistributed earnings.

The Company expects to have sufficient sources of liquidity to meet its funding needs for the foreseeable future.

Cash Flow from Operations

Cash provided by operations was $~~166~~264.96 million during the ~~six~~nine months ended ~~June~~September 30, 2012 compared to $~~169~~283.2 million for the ~~six~~nine months ended ~~June~~September 30, 2011. Cash flow was negatively impacted by a $2642.84 million reduction in net income, as well as a $1032.31 million reduction in the change in net deferred income tax assets ~~and a $4~~.~~1 million reduction in depreciation and amortization.~~ ~~In addition, changes in other current assets used an additional $4.0 million of cash during the six months ended June 30, 2012 compared to the same period in 2011.~~ The reduced cash flow related to these items was ~~mostly~~partially offset by changes in accrued liabilities, which provided an additional $1214.43 million of cash during the ~~six~~nine months ended ~~June~~September 30, 2012 compared to the same period in 2011. ~~Changes~~In addition, changes in net working capital, consisting of accounts receivable, inventories, and accounts payable, ~~used~~provided $278.28 million of cash during the ~~six~~nine months ended ~~June~~September 30, 2012 ~~compared~~while tousing $5949.62 million during the same period in 2011. The positive trend in net working capital was driven by inventory reduction efforts during the ~~six~~nine months ended ~~June~~September 30, 2012.

Cash Used in Investing Activities

Cash used in investing activities totaled $~~127~~182.43 million for the ~~six~~nine months ended ~~June~~September 30, 2012 compared to $17160.19 million for the ~~six~~nine months ended ~~June~~September 30, 2011. The Company invested $~~114~~160.94 million of excess cash with related persons during the period compared to $4139.23 million during the same period in 2011. The portion of the cash deposited with Danfoss A/S, classified on the consolidated balance sheets as cash deposited with related persons, may be offset against the term loan outstanding under the Danfoss Agreement if Danfoss A/S were not able to repay the cash. Cash deposited with Danfoss A/S exceeds the funds borrowed from Danfoss A/S by $75142.13 million. Capital expenditures during the period were $1223.72 million compared to $1422.18 million during the same period in 2011.

Cash Used in Financing Activities

The Company paid dividends of $1733.09 million during the ~~six~~nine months ended ~~June~~September 30, 2012. ~~This~~Net ~~was~~repayment ~~the~~of ~~first~~borrowings ~~dividend~~used ~~payment~~$20.7 ~~since~~million ~~the~~of ~~Company~~cash ~~suspended~~during the ~~payment~~nine ofmonths ~~dividends~~ended inSeptember 30, ~~March~~2012 ~~2009~~compared into ~~response~~$83.3 tomillion during the ~~recession~~nine months ended September 30, 2011. The Company ~~expects~~makes tovarying ~~continue~~distributions to ~~generate~~its ~~strong~~noncontrolling ~~cash~~interest ~~flow~~partners ~~and~~from ~~therefore~~its ~~plans~~joint toventure ~~pay~~activities ~~this~~depending ~~level~~on the amount of ~~dividend~~undistributed onearnings aof ~~quarterly~~the ~~basis~~business ~~going~~and ~~forward~~the needs of the partners. ~~Net~~Distributions to noncontrolling interest partners totaled $15.0 million during the nine months ended September 30, 2012 compared to $12.0 million during the same period in 2011.

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repayment of borrowings used $0.6 million of cash during the six months ended June 30, 2012 compared to $79.6 million during the six months ended June 30, 2011. The Company makes varying distributions to its noncontrolling interest partners from its joint venture activities depending on the amount of undistributed earnings of the business and the needs of the partners. Distributions totaled $13.0 million during the six months ended June 30, 2012 compared to $10.1 million during the same period in 2011.

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.

Recently Adopted Accounting Principles —

In September 2011 the FASB issued amendments to the guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required. Annual impairment tests are performed by the Company in the fourth quarter of each year. The adoption of this updated authoritative guidance is not expected to have an impact on the consolidated financial statements. 25

Outlook

Due to slowing sales growth in the Americas and market declines in Europe and the Asia-Pacific regions, Company management expects a moderate sales decrease of 5 to 10 percent in 2012 compared to 2011.

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two separate but consecutive statements. The Company adopted this guidance in the first quarter of 2012. Upon adoption, certain prior period amounts have been reclassified to conform to the current period financial statement presentation. These reclassifications have no impact on previously reported financial position, results of operations or cash flows.

Outlook

Due to the further weakening in the global markets, Company management expects a moderate sales decrease of 5 to 10 percent in 2012 compared to 2011. Capital expenditures during 2012 are expected to be $50.0 to $60.0 million.

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~~September 30, 2012. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of ~~June~~September 30, 2012, 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 Executive 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~~September 30, 2012 that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 6. Exhibits.

ExhibitNo.			Description of Document
10.1			Employment Contract dated as of August 30, 2012 by and between Sauer-Danfoss GmbH & Co. OHG and Eric Alstrom.
10.2			Separation Agreement and General Release dated as of August 29, 2012 by and between Sauer-Danfoss GmbH & Co. OHG, Sauer-Danfoss Inc. and Sven Ruder.
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.
101.INS			XBRL Instance Document.*
101.SCH			XBRL Taxonomy Extension Schema Document.*
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document.*
101.LAB			XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document.*

________________________________________

* Submitted electronically herewith.

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Operations for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011, (ii) Consolidated Statements of Comprehensive Income for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011, (iii) Consolidated Balance Sheets at ~~June~~September 30, 2012 and December 31, 2011, (iv) Consolidated Statements of Cash Flows for the ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 and (v) Notes to Consolidated Financial Statements for the ~~six~~nine months ended ~~June~~September 30, 2012.

In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act, shall be deemed not filed for purposes of Section 18 of the Exchange Act or Section 34(b) of the Investment Company Act, and otherwise is not subject to liability under these Sections.

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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~~October 225, 2012

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