What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-16 compared with 2021-11-12 · 50 added, 94 removed, 125 unchanged (54% of the section changed)

13 unchanged sentences

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

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.

As of March 31, 2022, we had 1,276 natural gas compressors totaling 306,834 horsepower rented to 79 customers compared to 1,265 natural gas compressors totaling 287,914 horsepower rented to 80 customers at March 31, 2021.

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 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.

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 three to six 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.

In the past, we have not experienced any sudden and dramatic increases in the prices of the major components for our compressors;

however, the occurrence of such an event could have a material adverse effect on the results of our operations and financial condition, particularly if we were unable to increase our rental rates and sales prices proportionate to any such component price increases.

Recent inflationary pressures have created price increases in both major and minor components for our compressors as well as longer than normal lead times for such components.

To date, we have been able to increase our rental rates and sales prices proportionally;

however, if cost increases continue and we are no longer able to increase our rental rates and sales prices such an event could have a material adverse effect on the results of our operations and financial condition.

We also manufacture a proprietary line of compressor frames, cylinders and parts, known as our CiP (Cylinder-in-Plane) product line.

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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 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.

Commodity prices stabilized during 2021 with a sharp increase through the first three months of 2022.

Historically, activity levels of exploration and production companies have been dependent on commodity prices.

However, recent capital market focus on cash returns from exploration and production companies has restricted capital spending below levels that have historically been observed during higher commodity price environments.

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

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.

In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

The effects of the COVID-19 outbreak, including actions taken by businesses and governments to contain the spread of the virus, resulted in a significant, rapid decline in global and U.S.

economic conditions.

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

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.

To date, our field operations have continued largely uninterrupted as the U.S.

Department of Homeland Security designated our industry as part of our country’s critical infrastructure.

Remote work and work process adjustments related to COVID-19 have not impacted our ability to maintain our service operations or caused us to incur significant additional costs.

In addition, we have not experienced any supply chain issues in connection with the COVID-19 outbreak.

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 capital allocations.

As such, we still expect compressor sales to be low for the remainder of 2022, as exploration and production companies have elected to rent compression units rather than allocating capital dollars to purchase new compression.

Results of Operations

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,

Three months ended March 31, 2022, compared to the three months ended March 31, 2021.

The table below shows our revenues and percentage of total revenues of each of our product lines for the three months ended March 31, 2022 and 2021.

Three months ended March 31,

(in thousands)

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Total $ 20,336 $ 18,397

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.

Total revenue increased 10.5% to $20.3 million for the three months ended March 31, 2022 compared to $18.4 million for the three months ended March 31, 2021.

This increase was primarily a result of higher rental revenue (11.7% increase) during 2022 as well as higher sales revenue (7% 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.

Rental revenue increased to $17.1 million for the three months ended March 31, 2022 compared to $15.3 million for the same period in 2021.

This increase during the first quarter of 2022 was attributable to an increase in high horsepower compression rentals as these units carry a higher revenue rate than our lower horsepower units.

As of March 31, 2022, we had 2,033 compressor packages in our fleet, down from 2,238 units at March 31, 2021 due to the retirement of units during the fourth quarter of 2021.

The Company's total unit horsepower decreased to 421,422 horsepower at March 31, 2022 compared to 441,911 horsepower at March 31, 2021, due to the aforementioned unit retirements in the fourth quarter of 2021 partially offset by the addition to the Company's fleet of 27 high horsepower compressors with 10,900 horsepower over the past 12 months.

As of March 31, 2022, we had 1,276 natural gas compressors with a total of 306,834 horsepower rented to 79 customers, compared to 1,265 natural gas compressors with a total of 287,914 horsepower rented to 80 customers as of March 31, 2021.

As a result, our total rented horsepower as of March 31, 2022 increased by 6.6% over the last twelve months.

Our rental fleet had unit utilization as of March 31, 2022, and 2021, respectively, of 62.8% and 56.5%, and our horsepower utilization for the same period ends increased to 72.8% from 65.2%.

Our total rented horsepower increased by 6.6% contrasted against a 0.9% increase 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 revenue increased to $2.9 million for the three months ended March 31, 2022 compared to $2.7 million for the three months ended March 31, 2021.

This increase is mostly attributable to increased compressor sales during the first quarter of 2022 compared to the same period in 2021.

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 $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.

Cost of rentals increased to $9.2 million during the three months ended March 31, 2022 compared to $7.2 million during the three months ended March 31, 2021.

While rental revenues increased 11.7%, this 29.0% increase in costs of rentals is primarily due to inflationary pressures on labor and parts as well as 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 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 $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.

Cost of sales decreased 24.0% to $2.0 million during the three months ended March 31, 2022 compared to $2.6 million during the three months ended March 31, 2021.

This decrease was primarily due to a reduction in unabsorbed costs during the period.

Selling, general, and administrative ("SG&A") expenses decreased 5.5% to $2.5 million for the three months ended March 31, 2022 compared $2.6 million during the same period in 2021.

This decrease in SG&A expenses was primarily attributable to a decrease in stock compensation expense and a decrease in non-cash charges related to our deferred compensation program.

Depreciation and amortization expense decreased to $6.1 million for the three months ended March 31, 2022 compared to $6.3 million for the three months ended March 31, 2021.

This was the result of a reduction in our rental fleet due to unit retirements in the fourth quarter of 2021.

We recorded an income tax benefit of approximately $11,000 for the three months ended March 31, 2022 compared to an income tax expense of $(125,000) for the three months ended March 31, 2021.

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.

1 unchanged sentence

federal statutory rate of 21%.

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)

Rental $ 47,149 86.7 % $ 46,092 90.3 %

Sales 5,756 10.6 % 3,994 7.8 %

Service and Maintenance 1,486 2.7 % 974 1.9 %

Total $ 54,391 $ 51,060

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 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 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 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 0.8% 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.

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

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

2021 2020 2021 2020

Three months ended March 31,

(in thousands)

5 unchanged sentences

Adjusted EBITDA $ 6,834 $ 6,503

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.

For the three months ended March 31, 2022, Adjusted EBITDA increased $0.3 million (5.1%) due primarily to a $1.9 million increase in total revenues and a $0.6 million reduction in costs of sales partially offset by a $2.1 million increase in costs of rentals.

Liquidity and Capital Resources

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

September 30, December 31,

Our working capital positions as of March 31, 2022 and December 31, 2021 are set forth below:

March 31, December 31,

(in thousands)

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Total working capital $ 40,175 $ 44,825

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.

For the three months ended March 31, 2022, we invested $8.2 million in rental and property and other equipment.

During the three months ended March 31, 2022, we added $8.1 million in new equipment to our rental fleet and $0.1 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 $1.6 million during the three months ended March 31, 2022.

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

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 $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.

We anticipate that our cash flows from operations as well as our borrowing capacity under our New Credit Agreement will provide ample liquidity for our planned capital expenditures during the remainder of 2022 and beyond.

At March 31, 2022, we had cash and cash equivalents of $16.4 million compared to $22.9 million at December 31, 2021.

Our cash flows from operating activities of $5.0 million were offset by capital expenditures of $8.2 million during the three months ended March 31, 2022.

We had working capital of $40.2 million at March 31, 2022 compared to $44.8 million at December 31, 2021.

We generated cash flows from operating activities of $5.0 million during the first three months of 2022 compared to cash flows provided by operating activities of $7.4 million for the first three months of 2021.

The decline in cash flows from operating activities was primarily driven by higher costs of rentals during the first three months of 2022.

These increases were partially offset by slightly higher sales margins.

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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.

As of March 31, 2022, we did not have any borrowings outstanding under the Credit Agreement.

Critical Accounting Policies and Practices

4 unchanged sentences

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

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

As of March 31, 2022, 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.

4 unchanged sentences

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;

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.

4 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