What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-12 compared with 2021-08-16 · 72 added, 79 removed, 147 unchanged (51% of the section changed)

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

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.

As of September 30, 2021, we had 1,221 natural gas compressors totaling 288,706 horsepower rented to 78 customers compared to 1,278 natural gas compressors totaling 286,488 horsepower rented to 82 customers at September 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.

Fabrication of compressors involves our purchase of engines, compressors, coolers, and other components, and our assembling of these components on skids for delivery to customer locations.

The major components of our compressors packages are acquired through periodic purchase orders placed with third-party suppliers on an “as needed” basis, which presently require lead times between two to three months with delivery dates scheduled to coincide with our estimated production schedules.

The major components of our compressor packages are acquired through periodic purchase orders placed with third-party suppliers on an “as needed” basis, which presently require lead times between two to three months with delivery dates scheduled to coincide with our estimated production schedules.

Although we do not have formal continuing supply contracts with any major supplier, we believe we have adequate alternative sources available.

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

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.

While commodity prices have stabilized during late 2020 and through the first nine 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.

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This significant drop in economic activity caused global demand for crude oil to drastically decline.

Given the current economic and industry backdrop, we still expect compressor sales to be low for the remainder of 2021, as exploration and production companies have significantly reduced their capital expenditures budgets.

In regards to our costs, we implemented various cost cutting measures with respect to operating expenses and capital expenditures during the second quarter of 2020.

Our operating expense reductions included reductions in our headcount from both layoffs and attrition, wage freezes, centralization of certain processes for better cost control, and the enlistment of our suppliers in our cost cutting efforts.

These cost cutting measures helped our financial performance and liquidity during 2020, and we expect these cost cutting measures to continue to benefit our financial performance through the remainder of 2021.

In addition, as we have done during prior downturns, we significantly reduced our capital expenditures budget.

While oil and natural gas prices have recovered from these historic lows, we still expect compressor sales to be low for the remainder of 2021, as exploration and production companies have elected to rent compression units rather than allocating capital dollars to purchase new compression.

Finally, in keeping with current commercial precautions and practices in our industry, we have implemented guidelines to mitigate health risks to our employees and customers during this outbreak.

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Results of Operations

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,

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

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

Three months ended September 30,

(in thousands)

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Total $ 18,245 $ 15,765

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.

Total revenue increased 15.7% to $18.2 million for the three months ended September 30, 2021 compared to $15.8 million for the three months ended September 30, 2020.

This increase was primarily a result of higher rental revenue (9.0% increase) during 2021 as well as higher sales revenue (175% increase).

Rental revenue increased to $16.2 million for the three months ended September 30, 2021 compared to $14.9 million for the same period in 2020.

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

As of September 30, 2021, we had 2,275 compressor packages in our fleet, down from 2,339 units at September 30, 2020 due to the retirement of 122 units during the fourth quarter of 2020.

The Company's total unit horsepower increased to 452,283 horsepower at September 30, 2021 compared to 449,133 horsepower at September 30, 2020, due to the addition to the Company's fleet of 21 high horsepower compressors with 8,400 horsepower over the past 12 months.

As of September 30, 2021, we had 1,221 natural gas compressors with a total of 288,706 horsepower rented to 78 customers, compared to 1,278 natural gas compressors with a total of 286,488 horsepower rented to 82 customers as of September 30, 2020.

As a result, our total rented horsepower as of September 30, 2021 increased by 0.8% over the last twelve months.

Our rental fleet had unit utilization as of September 30, 2021, and 2020, respectively, of 53.7% and 54.6%, and our horsepower utilization for the same period ends remained steady at 63.8%.

While our total rented units declined during the period, our total rented horsepower increased by 0.8% contrasted against a 4.5% 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 not recovered in line with recent commodity price increases.

Sales revenue increased to $1.5 million for the three months ended September 30, 2021 compared to $536,000 for the three months ended September 30, 2020.

This increase is mostly attributable to increased parts sales during the third 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.

Cost of rentals increased to $8.8 million during the three months ended September 30, 2021 compared to $6.8 million during the three months ended September 30, 2020.

While rental revenues increased 9.0%, this 30.6% 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.

Cost of sales increased 56.8% to $1.6 million during the three months ended September 30, 2021 compared to $1.0 million during the three months ended September 30, 2020.

This increase was primarily due to higher parts sales during the period.

Selling, general, and administrative ("SG&A") expenses increased 8.5% to $2.7 million for the three months ended September 30, 2021 compared $2.5 million during the same period in 2020.

This increase in SG&A expenses was primarily attributable to an increase in estimated executive bonus compensation expense and increased health insurance costs partially offset by decreased stock compensation expenses.

Depreciation and amortization expense increased marginally to $6.4 million for the three months ended September 30, 2021 compared to $6.3 million for the three months ended September 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.

We recorded an income tax benefit of approximately $212,000 for the three months ended September 30, 2021 compared to an income tax benefit of $167,000 for the three months ended September 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.

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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,

Nine months ended September 30, 2021, compared to the nine months ended September 30, 2020.

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

Nine months ended September 30,

(in thousands)

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Total $ 54,391 $ 51,060

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.

Total revenue increased 6.5% to $54.4 million for the nine months ended September 30, 2021 compared to $51.1 million during the nine months ended September 30, 2020.

This increase was primarily a result of higher sales revenue (44.1% increase) during the first nine months of 2021 mainly due to higher parts sales as well as higher rental revenue (2.3% increase).

Rental revenue increased to $47.1 million for the nine months ended September 30, 2021 compared to $46.1 million during the nine months ended September 30, 2020.

This increase during the first nine 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 that negatively impacted the nine months ended September 30, 2020.

In addition, rental revenues were positively impacted by increases in higher horsepower rentals.

Sales revenue increased to $5.8 million for the nine months ended September 30, 2021 compared to $4.0 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.

The reduction in compressor sales reflects a shift in capital concentration from our customers as more customers have elected to rent compression units rather than allocating capital dollars towards buying new compressors.

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.

Cost of rentals increased 17.8% to $25.1 million during the nine months ended September 30, 2021 compared to $21.3 million during the nine months ended September 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 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 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.

Cost of sales increased 29.6% to $6.0 million during the nine months ended September 30, 2021 compared to $4.6 million during the nine months ended September 30, 2020.

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

This increase during the first nine 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 8.8% to $8.0 million for the nine months ended September 30, 2021 compared to $7.3 million for the same period in 2020.

SG&A expenses during the first nine months of 2021 were impacted by an increase in expected executive bonus compensation expense and officer and director cash long-term incentive expenses.

These increases were partially offset by a reduction in professional fees and restricted stock expense.

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.

Depreciation and amortization expense increased 0.8% to $19.0 million for the nine months ended September 30, 2021 compared to $18.9 million for the nine months ended September 30, 2020.

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

We added 51 units (approximately 14,060 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.

Twenty-one of those units were 400 horsepower or larger, representing 60% of the horsepower added.

We recorded an income tax benefit of $425,000 for the nine months ended September 30, 2021 compared to an income tax benefit of $4.7 million for the nine months ended September 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 September 30, 2020 being significantly impacted by prior year amended returns related to the CARES Act.

Non-GAAP Financial Measures

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• it helps investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure and asset base from our operating structure;

• it is used by our management for various purposes, including as a measure of operating performance, in presentations to our Board of Directors, as a basis for strategic planning and forecasting, and as a component for setting incentive compensation.

• it is used by our management for various purposes, including as a measure of operating performance, in presentations to our Board of Directors, and as a basis for strategic planning and forecasting.

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under generally accepted accounting principles.

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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 June 30, Six months ended June 30,

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

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Adjusted EBITDA $ 5,363 $ 6,154 $ 16,372 $ 19,533

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.

For the three months ended September 30, 2021, Adjusted EBITDA decreased $0.8 million (12.9%) due primarily to a $2.1 million increase in costs of rentals compared to the three months ended September 30, 2020.

This decrease was partially offset by increased revenues.

For the nine months ended September 30, 2021, Adjusted EBITDA decreased $3.2 million (16.2%) due primarily to a $3.8 million increase in costs of rentals when compared to the nine months ended September 30, 2020.

Liquidity and Capital Resources

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

June 30, December 31,

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

September 30, December 31,

(in thousands)

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Total working capital $ 54,121 $ 61,857

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 increased by $569,000 during the six months ended June 30, 2021.

For the nine months ended September 30, 2021, we invested $19.1 million in rental and property and other equipment.

During the nine months ended September 30, 2021, we added $17.9 million in new equipment to our rental fleet and $1.2 million 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 increased by $33,000 during the nine months ended September 30, 2021.

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

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.

At September 30, 2021, we had cash and cash equivalents of $24.4 million compared to $28.9 million at December 31, 2020.

Our cash flows from operating activities of $20.0 million were partially offset by capital expenditures of $19.1 million during the nine months ended September 30, 2021.

We had working capital of $54.1 million at September 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 $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.

We generated cash flows from operating activities of $20.0 million during the first nine months of 2021 compared to cash flows provided by operating activities of $27.9 million for the first nine months of 2020.

The decline in cash flows from operating activities was primarily driven by higher costs of rentals during the first nine 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 overall plan is to continue monitoring and holding expenses in line with the anticipated level of activity, fabricate rental fleet equipment only in direct response to market requirements, emphasize marketing of our idle gas compressor units and limit bank borrowing in line with market conditions.

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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Bank Borrowings

We have a senior secured revolving credit agreement the ("Credit Agreement") with Texas Capital Bank, National Association.

(the "Lender") with an initial commitment of $20 million, and an accordion feature that would increase the maximum commitment to $30 million, subject to collateral availability.

We have a senior secured revolving credit agreement the ("Credit Agreement") with Texas Capital Bank, National Association (the "Lender") with an initial commitment of $20 million, and an accordion feature that would increase the maximum commitment to $30 million, subject to collateral availability.

We also have a right to request from the Lender, on an uncommitted basis, an increase of up to $30 million on the aggregate commitment;

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

As of September 30, 2021, we did not have any borrowings outstanding under the Credit Agreement.

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

As of September 30, 2021, the off-balance sheet arrangements and transactions that we have entered into include 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;

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;

the 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.

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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