What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-08-16 compared with 2021-05-14 · 89 added, 56 removed, 137 unchanged (51% of the section changed)

13 unchanged sentences

Rental amounts are billed monthly in advance and include maintenance of our rented compressors.

As of March 31, 2021, we had 1,265 natural gas compressors totaling 287,914 horsepower rented to 80 customers compared to 1,383 natural gas compressors totaling 298,143 horsepower rented to 92 customers at March 31, 2020.

As of June 30, 2021, we had 1,245 natural gas compressors totaling 287,365 horsepower rented to 79 customers compared to 1,273 natural gas compressors totaling 284,373 horsepower rented to 84 customers at June 30, 2020.

We also fabricate natural gas compressors for sale to our customers, designing compressors to meet unique specifications dictated by well pressures, production characteristics, and particular applications for which compression is sought.

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While this is a response to market conditions and trends, it also provides us with the opportunity to compete as a full-line compression provider.

Industry Update

We typically experience a decline in demand during periods of low crude oil and natural gas prices.

During the first quarter of 2020, we saw a substantial decline in the prices for oil and natural gas.

Activity levels of exploration and production companies have been and will be dependent not only on commodity prices, but also on their ability to generate sufficient operational cash flow to fund their activities.

While commodity prices have stabilized during late 2020 and through the first six months of 2021, activity levels of exploration and production companies have been and will be dependent not only on commodity prices, but also on their ability to generate sufficient operational cash flow to fund their activities.

Generally, though, we feel that production activities (in which we are involved) will fare better than drilling activity.

Recent Events

This is reflected in both the stability of our rental revenues, which is driven by production activities, and the volatility of our compressor sales, which tends to fluctuate with drilling activity.

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus known as COVID-19 due to the risks it imposes on the international community as the virus spreads globally.

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Results of Operations

Three months ended March 31, 2021, compared to the three months ended March 31, 2020.

The table below shows our revenues and percentage of total revenues of each of our product lines for the three months ended March 31, 2021 and 2020.

Three months ended March 31,

Three months ended June 30, 2021, compared to the three months ended June 30, 2020.

The table below shows our revenues and percentage of total revenues of each of our product lines for the three months ended June 30, 2021 and 2020.

Three months ended June 30,

(in thousands)

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Total $ 17,749 $ 17,405

Total revenue increased 2.8% to $18.4 million for the three months ended March 31, 2021 compared to $17.9 million for the three months ended March 31, 2020.

This increase was primarily a result of higher sales revenue (87% increase) during 2021 mainly due to higher compressor sales offset by lower rental revenue (4.7% decrease).

Rental revenue decreased to $15.3 million for the three months ended March 31, 2021 compared to $16.1 million for the same period in 2020.

This decrease during the first quarter of 2021 was attributable to decline in our rented units due to a significant drop in oil prices resulting from the COVID-19 pandemic and crude oil demand reduction.

As of March 31, 2021, we had 2,238 compressor packages in our fleet, down from 2,316 units at March 31, 2020 due to the retirement of 122 units during the fourth quarter of 2020.

The Company's total unit horsepower increased by 1.0% to 441,911 horsepower at March 31, 2021 compared to 437,750 horsepower at March 31, 2020, which reflects the addition to the Company's fleet of 18 high horsepower compressors with 13,880 horsepower over the past 12 months.

As of March 31, 2021, we had 1,265 natural gas compressors with a total of 287,914 horsepower rented to 80 customers, compared to 1,383 natural gas compressors with a total of 298,143 horsepower rented to 92 customers as of March 31, 2020.

As a result, our total rented horsepower as of March 31, 2021 decreased by 3.4% over the prior twelve months.

Our rental fleet had unit utilization as of March 31, 2021, and 2020, respectively, of 56.5% and 59.7%, and our horsepower utilization for the same periods, respectively, was 65.2% and 68.1%.

While both our total rented horsepower and total rented units declined during the period, our total rented horsepower only declined by 3.4% contrasted against an 8.5% decline in total rented units.

This illustrates the strong demand for our high horsepower units while the demand for our smaller and medium horsepower units has decreased with recent lower commodity prices.

Sales revenue increased to $2.7 million for the three months ended March 31, 2021 compared to $1.5 million for the three months ended March 31, 2020.

This increase is mostly attributable to increased compressor sales and, to a lesser extent, increased parts sales during the first quarter of 2021 compared to the same period in 2020.

These increased sales reflect marginally improving industry activity levels due to recently stabilized commodity prices and easing of capital constraints on exploration and production companies.

Sales are subject to fluctuations in timing of industry activity related to capital projects and, as such, can vary substantially between periods.

Cost of rentals decreased to $7.2 million during the three months ended March 31, 2021 compared to $7.9 million during the three months ended March 31, 2020.

While rental revenues declined 4.7%, this 9.4% decline in costs of rentals is due to additional cost containment efforts related to the industry downturn.

Cost of sales increased 50.4% to $2.6 million during the three months ended March 31, 2021 compared to $1.7 million during the three months ended March 31, 2020.

This increase was primarily due to higher compressor sales and, to a lesser degree, higher parts sales during the period.

This increase was partially offset by lower labor efficiency due to much lower activity levels at our fabrication facilities partially offset by lower payroll and benefits expenses.

Selling, general, and administrative ("SG&A") expenses increased 22.5% to $2.6 million for the three months ended March 31, 2021 compared $2.2 million during the same period in 2020.

This increase in SG&A expenses was primarily attributable to an increase in our deferred compensation liability which resulted in increased SG&A expense.

In the first quarter of 2020 we had a decrease in the liability resulting in a recognized gain, thus reducing our SG&A expense.

These changes

increased SG&A by approximately $468,000.

This increase was partially offset by lower professional fees and various other expenses.

Depreciation and amortization expense increased marginally to $6.3 million for the three months ended March 31, 2021 compared to $6.2 million for the three months ended March 31, 2020.

This increase was the result of larger horsepower units being added to the fleet partially offset by unit retirements in the fourth quarter of 2020.

We recorded an income tax expense of approximately $125,000 for the three months ended March 31, 2021 compared to an income tax benefit of $4.5 million for the three months ended March 31, 2020.

For interim periods, our income tax benefit (expense) is computed based upon our estimated annual effective tax rate and any discrete items that impact the interim periods with the period ended March 31, 2020 being significantly impacted by prior year amended returns related to the CARES Act.

Total revenue increased 2.0% to $17.7 million for the three months ended June 30, 2021 compared to $17.4 million for the three months ended June 30, 2020.

This increase was primarily a result of higher rental revenue (3.2% increase) during 2021 offset by lower sales revenue (22% decrease).

Rental revenue increased to $15.6 million for the three months ended June 30, 2021 compared to $15.1 million for the same period in 2020.

This increase during the second quarter of 2021 was attributable to higher horse power compression rentals as these units carry a higher revenue rate than our lower horse power units.

As of June 30, 2021, we had 2,257 compressor packages in our fleet, down from 2,335 units at June 30, 2020 due to the retirement of 122 units during the fourth quarter of 2020.

The Company's total unit horsepower remained flat at 446,803 horsepower at June 30, 2021 compared to 446,805 horsepower at June 30, 2020, which reflects the addition to the Company's fleet of 16 high horsepower compressors with 7,780 horsepower over the past 12 months.

As of June 30, 2021, we had 1,245 natural gas compressors with a total of 287,365 horsepower rented to 79 customers, compared to 1,273 natural gas compressors with a total of 284,373 horsepower rented to 84 customers as of June 30, 2020.

As a result, our total rented horsepower as of June 30, 2021 increased by 1.1% over the last twelve months.

Our rental fleet had unit utilization as of June 30, 2021, and 2020, respectively, of 55.2% and 54.5%, and our horsepower utilization for the same periods, respectively, was 64.3% and 63.6%.

While our total rented units declined during the period, our total rented horsepower increased by 1.1% contrasted against an 2.2% decline in total rented units.

This illustrates the growing demand for our high horsepower units while the demand for our smaller and medium horsepower units has decreased with recent lower commodity prices.

Sales revenue decreased to $1.6 million for the three months ended June 30, 2021 compared to $2.0 million for the three months ended June 30, 2020.

This decrease is mostly attributable to decreased compressor sales partially offset by increased parts sales during the second quarter of 2021 compared to the same period in 2020.

Sales are subject to fluctuations in timing of industry activity related to our customers' capital projects and, as such, can vary substantially between periods.

Cost of rentals increased to $9.1 million during the three months ended June 30, 2021 compared to $6.6 million during the three months ended June 30, 2020.

While rental revenues increased 3.2%, this 37.0% increase in costs of rentals is primarily due to labor and parts expenses related to a significant increase in repair and maintenance work on our rental fleet as well as increased costs related to newly set units which experience higher upfront costs than typical run rates.

While repair and maintenance expenses are customary in our business, the timing of such expenses can fluctuate between periods resulting in periods with larger than normal expenses.

Cost of sales decreased 4.5% to $1.8 million during the three months ended June 30, 2021 compared to $1.9 million during the three months ended June 30, 2020.

This decrease was primarily due to lower compressor sales partially offset by higher parts sales during the period.

Selling, general, and administrative ("SG&A") expenses decreased 2.1% to $2.6 million for the three months ended June 30, 2021 compared $2.7 million during the same period in 2020.

This decrease in SG&A expenses was primarily attributable to a decrease in restricted stock compensation expense partially offset by increased health insurance expenses.

Depreciation and amortization expense was unchanged at $6.3 million for the three months ended June 30, 2021 compared to $6.3 million for the three months ended June 30, 2020.

This was the result of larger horsepower units being added to the fleet partially offset by unit retirements in the fourth quarter of 2020.

We recorded an income tax benefit of approximately $339,000 for the three months ended June 30, 2021 compared to an income tax (expense) of $(57,000) for the three months ended June 30, 2020.

For interim periods, our income tax benefit (expense) is computed based upon our estimated annual effective tax rate and any discrete items that impact the interim periods.

Our estimated annual effective tax rate differs from the U.S.

federal statutory rate of 21%.

Six months ended June 30, 2021, compared to the six months ended June 30, 2020.

The table below shows our revenues and percentage of total revenues of each of our product lines for the six months ended June 30, 2021 and 2020.

Six months ended June 30,

(in thousands)

Rental $ 30,954 85.6 % $ 31,231 88.5 %

Sales 4,284 11.9 % 3,458 9.8 %

Service and Maintenance 908 2.5 % 606 1.7 %

Total $ 36,146 $ 35,295

Total revenue increased 2.4% to $36.1 million for the six months ended June 30, 2021 compared to $35.3 million during the nine months ended June 30, 2020.

This increase was primarily a result of higher sales revenue (23.9% increase) during the first six months of 2021 mainly due to higher parts sales offset by lower rental revenue (0.9% decrease).

Rental revenue decreased to $31.0 million for the six months ended June 30, 2021 compared to $31.2 million during the six months ended June 30, 2020.

This decrease during the first six months of 2021 was attributable to well shut-ins and unit returns due to a significant drop in oil prices resulting from the COVID-19 pandemic and crude oil demand destruction, partially offset by a greater number of large horsepower units being rented.

As of June 30, 2021, we had 2,257 compressor packages in our fleet, down from 2,335 units at June 30, 2020.

The Company's total unit horsepower remained unchanged at 446,803 horsepower at June 30, 2021 compared to 446,805 horsepower at June 30, 2020, which reflects the addition to the Company's fleet of 16 high horsepower compressors with 7,780 horsepower over the past 12 months, partially offset by the retirement of 122 low horsepower units during the fourth quarter of 2020.

As a result, our total rented horsepower as of June 30, 2021 increased by 1.1% over the last twelve months.

Our rental fleet had unit utilization as of June 30, 2021, and 2020, respectively, of 55.2% and 54.5%, while our horsepower utilization for the same periods, respectively, was 64.3% and 63.6%.

While both our unit utilization and horsepower utilization increased over the last twelve months, the decreases in rental revenues for the six months ended June 30, 2021was due to the fact that the six month period ended June 30, 2020 was buoyed by rental rates realized during the first quarter of 2020 that had minimal impact from the COVID-19 pandemic.

Sales revenue increased to $4.3 million for the six months ended June 30, 2021 compared to $3.5 million for the same period in 2020.

This increase is mostly attributable to an increase in parts sales partially offset by a decrease in compressor sales.

The reduction in compressor sales reflect significantly reduced industry activity levels due to the COVID-19 pandemic, lower commodity prices and severe capital constraints on exploration and production companies.

Sales are subject to fluctuations in timing of industry activity related to capital projects and, as such, can vary substantially between periods.

Cost of rentals increased 11.8% to $16.2 million during the six months ended June 30, 2021 compared to $14.5 million during the six months ended June 30, 2020.

This increase was primarily due to labor and parts expenses related to a significant increase in repair and maintenance work on our rental fleet.

While repair and maintenance expenses are customary in our business, the timing of such expenses can fluctuate between periods resulting in periods with larger than normal expenses.

Cost of sales increased 22.0% to $4.4 million during the six months ended June 30, 2021 compared to $3.6 million during the six months ended June 30, 2020.

This increase during the first six months of 2021 was primarily due to an increase in parts sales.

This increase during the first six months of 2021 also reflects lower labor efficiency due to much lower activity levels at our fabrication facilities that was partially offset by lower payroll and benefits expenses.

Selling, general, and administrative expenses increased 8.9% to $5.3 million for the six months ended June 30, 2021 compared to $4.8 million for the same period in 2020.

SG&A expenses during the first six months of 2021 were impacted by an unrealized loss ($305,000) on deferred compensation, while these expenses were impacted by a small unrealized gain ($42,000) on deferred compensation during the first six months of 2020.

In addition, officer and director cash long-term incentive expenses increased approximately $255,000 during the first six months of 2021.

These increases were partially offset by a reduction in professional fees ($240,000) and restricted stock expense ($152,000).

Depreciation and amortization expense increased 0.7% to $12.6 million for the six months ended June 30, 2021 compared to $12.5 million for the six months ended June 30, 2020.

This increase was the result of larger horsepower units being added to the fleet.

We added 42 units (approximately 12,804 horsepower) to our fleet over the past 12 months.

Sixteen of those units were 400 horsepower or larger, representing 61% of the horsepower added.

We recorded an income tax benefit of $213,000 for the six months ended June 30, 2021 compared to an income tax benefit of $4.5 million for the six months ended June 30, 2020.

For interim periods, our income tax benefit (expense) is computed based upon our estimated annual effective tax rate and any discrete items that impact the interim periods with the period ended June 30, 2020 being significantly impacted by prior year amended returns related to the CARES Act.

Non-GAAP Financial Measures

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The following table reconciles our net (loss) income, the most directly comparable GAAP financial measure, to Adjusted EBITDA:

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2021 2020 2021 2020

(in thousands)

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Adjusted EBITDA $ 4,505 $ 7,094 $ 11,009 $ 13,379

For the three months ended March 31, 2021, Adjusted EBITDA increased $219,000 due primarily to increased sales margins compared to the three months ended March 31, 2020.

For the three months ended June 30, 2021, Adjusted EBITDA decreased $2.6 million (36.5%) due primarily to a $2.5 million increase in costs of rentals compared to the three months ended June 30, 2020.

For the six months ended June 30, 2021, Adjusted EBITDA decreased $2.4 million (17.7%) due primarily to a $1.7 million increase in costs of rentals as well as increased cash SG&A expenses when compared to the six months ended June 30, 2020.

Liquidity and Capital Resources

Our working capital positions as of March 31, 2021 and December 31, 2020 are set forth below:

March 31, December 31,

Our working capital positions as of June 30, 2021 and December 31, 2020 are set forth below:

June 30, December 31,

(in thousands)

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Total working capital $ 57,855 $ 61,857

For the three months ended March 31, 2021, we invested $5.0 million in rental and property and other equipment.

During the first quarter of 2021, we added $4.5 million in new equipment to our rental fleet and $0.5 million mostly in vehicles as well as various other machinery and equipment.

For the six months ended June 30, 2021, we invested $12.6 million in rental and property and other equipment.

During the second quarter of 2021, we added $12.0 million in new equipment to our rental fleet and $617,000 mostly in vehicles as well as various other machinery and equipment.

Our investment in rental equipment, property and other equipment also includes any changes to work-in-process related to our rental fleet jobs at the beginning of the period compared to the end of the period.

Our rental work-in-process decreased by $1.0 million during the three months ended March 31, 2021.

Our rental work-in-process increased by $569,000 during the six months ended June 30, 2021.

We financed our investment in rental equipment, property and other equipment with cash flow from operations and cash on hand.

At March 31, 2021, we had cash and cash equivalents of $30.7 million compared to $28.9 million at December 31, 2020.

Our cash flows from operating activities of $7.4 million were partially offset by capital expenditures of $5.0 million during the three months ended March 31, 2021.

We had working capital of $63.2 million at March 31, 2021 compared to $61.9 million at December 31, 2020.

At June 30, 2021, we had cash and cash equivalents of $26.2 million compared to $28.9 million at December 31, 2020.

Our cash flows from operating activities of $12.8 million were partially offset by capital expenditures of $12.6 million during the six months ended June 30, 2021.

We had working capital of $57.9 million at June 30, 2021 compared to $61.9 million at December 31, 2020.

On December 31, 2020, we had outstanding debt of $417,000, which was all related to our line of credit.

We generated cash flows from operating activities of $7.4 million during the first three months of 2021 compared to cash flows provided by operating activities of $8.3 million for the first three months of 2020.

The decline in cash flows from operating activities was primarily driven by lower cash receipts on accounts receivable during the first three months of 2021 as well as higher SG&A expenses.

These increases were partially offset by slightly higher rental and sales margins.

For the remainder of 2021, given the state of the economy and our industry during the COVID-19 pandemic, our plan is to continue to keep our expenses low.

The cost cutting measures that were implemented during the second quarter of 2020 will provide a continuing positive impact over the remainder of this year.

We generated cash flows from operating activities of $12.8 million during the first six months of 2021 compared to cash flows provided by operating activities of $14.8 million for the first six months of 2020.

The decline in cash flows from operating activities was primarily driven by higher costs of rentals during the first six months of 2021 as well as higher SG&A expenses.

These increases were partially offset by slightly higher sales margins.

For the remainder of 2021, given the state of the economy and our industry during the COVID-19 pandemic, our plan is to continue to manage our operating expenses and capital expenditures.

For the remainder of 2021, our forecasted capital expenditures are not anticipated to exceed our internally generated cash flows and our cash on hand.

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The maturity date of the Credit Agreement is May 11, 2026.

For further information, see Part II Item 5 - Other Information .

Critical Accounting Policies and Practices

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From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations.

As of March 31, 2021, the off-balance sheet arrangements and transactions that we have entered into include operating lease agreements and purchase agreements.

As of June 30, 2021, the off-balance sheet arrangements and transactions that we have entered into include operating lease agreements and purchase agreements.

We do not believe that these arrangements are reasonably likely to materially affect our liquidity or availability of capital resources.

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Those risks include, among other things, the loss of market share through competition or otherwise;

the introduction of competing technologies by other companies;

introduction of competing technologies by other companies;

a prolonged, substantial reduction in oil and natural gas prices, which could cause a decline in the demand for our products and services;

and new governmental safety, health and environmental regulations, which could require us to make significant capital expenditures.

The forward-looking statements included in this Form 10-Q are only made as of the date of this report, and we undertake no obligation to publicly update such

forward-looking statements to reflect subsequent events or circumstances.

The forward-looking statements included in this Form 10-Q are only made as of the date of this report, and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

A discussion of these and other risk factors is included in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC.

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis