What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-08-14 compared with 2024-05-15 · 99 added, 61 removed, 134 unchanged (54% of the section changed)

8 unchanged sentences

Please read Item 1A, Risk Factors, in our Annual Report, as it contains important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements.

We rent, operate and maintain, as well as sell natural gas compressors and related equipment.

We also design, fabricate and manufacture compressor units both for sale and rental to our customers.

Some fabrication work is done in-house with an increasing amount done by third-party contractors.

We design, rent, sell, service and maintain natural gas compressors for oil and natural gas production and plant facilities, generally using equipment from third-party fabricators and OEM suppliers along with limited in-house assembly.

Some assembly work is done in-house with an increasing amount done by third-party contractors.

Our primary focus is on the rental of natural gas compressors.

2 unchanged sentences

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

As of March 31, 2024, we had 1,245 natural gas compressors totaling 444,220 horsepower rented t o 80 customers compared to 1,245 natural gas compressors totaling 335,314 horsepower rented to 74 customers at March 31, 2023.

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.

As of June 30, 2024, we had 1,242 natural gas compressors totaling 454,568 horsepower rented t o 73 customers compared to 1,249 natural gas compressors totaling 372,596 horsepower rented to 75 customers at June 30, 2023.

The decline in the number of rented units and customers as of June 30, 2024 from the previous year is consistent with our strategy to move more toward rental of high horsepower compression units.

We also design natural gas compressors for sale to our customers 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.

1 unchanged sentence

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

Finally due to supply chain disruptions as a result of the COVID-19 pandemic, the Russian invasion of the Ukraine and the increased rate of inflation, we continue to experience cost increases and sporadic unavailability of many of our parts needed to fabricate and maintain our rental fleet.

Finally due to supply chain disruptions and the increased rate of inflation over recent years, we continue to experience cost increases and sporadic unavailability of many of our parts needed to fabricate and maintain our rental fleet.

While we have a robust supplier network, pricing pressure from our customers and competitors may present challenges in increasing our rental rates to offset these increased costs which 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.

We also use third-party contractors for fabrication and these companies may experience the same risks.

We primarily use third-party contractors for fabrication and these companies may experience the same risks.

In December 2023, we decided to cease fabrication of new compressor units for sale or rental to customers at our Midland, Texas facility.

We continue to maintain new unit compressor fabrication capability at our Tulsa, Oklahoma facility as well as having relationships with multiple outsourced compressor fabrication providers.

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

We use finished CiP component products in the fabrication of compressor units for sale or rental by us or sell the finished component products to other compressor fabricators.

We continue to maintain limited new unit compressor assembly capability at our Tulsa, Oklahoma facility as well as having relationships with multiple outsourced compressor fabrication providers.

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

We use finished CiP component products in the assembly of compressor units for sale or rental by us or sell the finished component products to other compressor fabricators.

Although we have significantly de-emphasized our flare product line, we continue to hold a limited inventory of flare stacks and related ignition and control devices for onshore and offshore incineration of gas compounds such as hydrogen sulfide, carbon dioxide, natural gas and liquefied petroleum gases.

19 unchanged sentences

While prices largely recovered in 2021 and then stabilized more recently, activity levels of exploration and production companies have been and will continue to be dependent not only on commodity prices, but also on their ability to generate sufficient operational cash flow to fund their activities.

Generally, we feel that the level of demand for our compressor services is more closely tied to production activities, which are likely to fare better than drilling activity in periods of declining commodity prices.

Generally, we believe that the level of demand for our compressor services is more closely tied to production activities, which are likely to fare better than drilling activity in periods of declining commodity prices.

For fiscal year 2024, our forecasted capital expenditures will be directly dependent upon our customers’ compression requirements and our capital availability, while maintaining prudent levels of debt.

We believe that cash on hand, cash flows from operations and borrowings under our revolving credit facility will be sufficient to satisfy our capital and liquidity requirements through 2024.

If we require additional capital to fund any significant unanticipated expenditures, including any material acquisitions of other businesses, joint ventures or other opportunities, this additional capital could exceed our current resources, might not be available to us when we need it, or might not be on acceptable terms.

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.

Commodity prices stabilized somewhat during 2021 and increased in the first half of 2022 and declined in the second half of 2022 but have remained relatively stable since that time.

Crude oil prices have remained relatively stable since 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 believe that production activities (in which we are involved) will fare better than drilling activity.

Generally, though, we believe that production activities (in which we are involved) will fare better than drilling activity, which tend to decline during times of lower crude oil and natural gas prices.

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 customers' capital allocations.

2 unchanged sentences

Results of Operations

Three months ended March 31, 2024, compared to the three months ended March 31, 2023.

The table below shows our revenues and percentage of total revenues of each of our product lines for the three months ended March 31, 2024 and 2023.

Three months ended March 31,

Three months ended June 30, 2024, compared to the three months ended June 30, 2023.

The table below shows our revenues and percentage of total revenues of each of our product lines for the three months ended June 30, 2024 and 2023.

Three months ended June 30,

(in thousands)

3 unchanged sentences

Total $ 38,491 $ 26,957

Total revenue increased 38.6% to $36.9 million for the three months ended March 31, 2024 compared to $26.6 million for the three months ended March 31, 2023.

Total revenue increased 42.8% to $38.5 million for the three months ended June 30, 2024 compared to $27.0 million for the three months ended June 30, 2023.

This increase was primarily a result of higher rental revenue (44.9% increase) during 2024.

Rental revenue increased to $33.7 million for the three months ended March 31, 2024 compared to $22.7 million for the same period in 2023.

This increase during the first quarter of 2024 was attributable to an increase in high horsepower compression rentals and rate increases.

As of March 31, 2024, we had 1,894 compressor packages in our fleet, up from 1,875 units at March 31, 2023 due to the additional of high horsepower units during 2023 partially offset by the retirement of units during the fourth quarter of 2023 and th e disposition of a small number of compressors from the fleet during this year.

The Company's total unit horsepower increased to 542,256 horsepower at March 31, 2024 compared to 433,013 horsepower at March 31, 2023, due to additions to the Company's fleet of 78 high horsepower compressors over the past 12 months.

As of March 31, 2024, we had 1,245 natural gas compressors with a total of 444,220 horsepower rented to 80 customers, compared to 1,245 natural gas compressors with a total of 335,314 horsepower rented to 74 customers as of March 31, 2023.

As a result of the addition of high horsepower units during 2023 and these units being rented to customers, our total rented horsepower as of March 31, 2024 increased by 32.5% over the last twelve months.

Our rental fleet had unit utilization as of March 31, 2024, and 2023, respectively, of 65.7% and 66.4%, and our horsepower utilization for the same dates increased to 81.9% from 77.4%.

Our total rented horsepower increased by 32.5% contrasted against a flat number of total rented units.

Rental revenue increased to $34.9 million for the three months ended June 30, 2024 compared to $24.1 million for the same period in 2023.

This increase during the second quarter of 2024 was attributable to an increase rented horsepower, especially high horsepower compression, as well as selective rental rate increases.

As of June 30, 2024, we had 1,899 compressor packages in our fleet, down from 1,911 units at June 30, 2023 due to the retirement of units during the fourth quarter of 2023 and the disposition of a small number of compressor units, partially offset by the of new fleet additions over the last twelve months.

The Company's total unit horsepower increased to 552,599 horsepower at June 30, 2024 compared to 473,884 horsepower at June 30, 2023, due to additions to the Company's fleet of 55 high horsepower compressors over the past 12 months.

As of June 30, 2024, we had 1,242 natural gas compressors with a total of 454,568 horsepower rented to 73 customers, compared to 1,249 natural gas compressors with a total of 372,596 horsepower rented to 75 customers as of June 30, 2023.

As a result of the addition of high horsepower units during 2023 and these units being rented to customers, our total rented horsepower as of June 30, 2024 increased by 22.0% over the last twelve months.

Our rental fleet had unit utilization as of June 30, 2024, and 2023, respectively, of 65.4% and 65.4%, and our horsepower utilization for the same dates increased to 82.3% from 78.6%.

Our total rented horsepower increased by 22.0% contrasted against a small decrease in the number of total rented units.

This illustrates the growing demand for our high horsepower units while the demand for our smaller and medium horsepower units has remained relatively constant over this time period.

Sales revenue decreased (16.3)% to $2.5 million for the three months ended March 31, 2024 compared to $3.0 million for the three months ended March 31, 2023.

This decrease is primarily attributable to lower compressor sales during the first quarter of 2024 compared to the same period in 2023.

Sales revenue increased 42.3% to $2.3 million for the three months ended June 30, 2024 compared to $1.6 million for the three months ended June 30, 2023.

This increase is primarily attributable to higher parts sales during the second quarter of 2024 compared to the same period in 2023.

Sales are subject to fluctuations in timing of industry activity related to our customers' capital projects and, as such, can vary substantially between periods and due in part to this, we have decided to shift the focus of our business away from sales of new compressor packages to renting our owned units to our customers.

Aftermarket service revenue decreased 26.0% to $0.7 million for the three months ended March 31, 2024 compared to $0.9 million for the three months ended March 31, 2023.

This decrease is primarily attributable to lower revenue from commissioning of new units during the three months ended March 31, 2024 compared to the same quarter in the previous year.

Cost of rentals increased t o $13.1 million during the three months ended March 31, 2024 compared to $11.6 million during the three months ended March 31, 2023.

This 12.6% increase in costs of rentals is primarily due to more rented horsepower during the first quarter of 2024.

Cost of sales decreased 32.7% to $2.2 million during the three months ended March 31, 2024 compared to $3.2 million during the three months ended March 31, 2023.

This decrease was primarily due to lower sales activity.

Selling, general, and administrative ("SG&A") expenses increased 3.1% to $4.7 million for the three months ended March 31, 2024 compared $4.6 million during the same period in 2023.

SG&A increased due to higher consulting and health insurance expenses partially offset by lower legal fees.

Depreciation and amortization expense increased to $7.1 million for the three months ended March 31, 2024 compared to $6.2 million for the three months ended March 31, 2023, due to depreciation expense for high horsepower units acquired during 2023.

We recorded an income tax expense of approximately $1.5 million for the three months ended March 31, 2024 compared to an income tax expense of $0.2 million for the three months ended March 31, 2023.

Aftermarket service revenue increased 3.0% to $1.3 million for the three months ended June 30, 2024 compared to $1.3 million for the three months ended June 30, 2023.

This increase is primarily attributable to slightly more revenue from commissioning of new units during the three months ended June 30, 2024 compared to the same quarter in the previous year.

Cost of rentals increased t o $14.2 million during the three months ended June 30, 2024 compared to $11.3 million during the three months ended June 30, 2023.

This 25.4% increase in costs of rentals is primarily due to more rented horsepower during the second quarter of 2024.

Cost of sales increased 19.9% to $2.2 million during the three months ended June 30, 2024 compared to $1.9 million during the three months ended June 30, 2023.

This increase was primarily due to higher sales activity.

Selling, general, and administrative ("SG&A") expenses decreased 1.4% to $4.8 million for the three months ended June 30, 2024 compared $4.9 million during the same period in 2023.

SG&A decreased due to lower stock compensation expense and legal fees largely offset by higher salaries, commissions, consulting expenses and public company costs.

Depreciation and amortization expense increased to $7.7 million for the three months ended June 30, 2024 compared to $6.4 million for the three months ended June 30, 2023, due to depreciation expense for high horsepower units acquired during 2023 and 2024.

Interest expense increased to $2.9 million for the three months ended June 30, 2024 compared to $0.2 million for the three months ended June 30, 2023, due to higher balances outstanding on our credit facility.

We recorded an income tax expense of approximately $1.3 million for the three months ended June 30, 2024 compared to an income tax expense of $0.2 million for the three months ended June 30, 2023.

For interim periods, our income tax 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% primarily as a result of certain expenses not being deductible for income tax purposes.

Six months ended June 30, 2024, compared to the six months ended June 30, 2023.

The table below shows our revenues and percentage of total revenues of each of our product lines for the six months ended June 30, 2024 and 2023.

Six months ended June 30,

(in thousands)

Rental $ 68,660 91.1 % $ 46,828 87.4 %

Sales 4,773 6.3 % 4,587 8.6 %

Aftermarket services 1,965 2.6 % 2,162 4.0 %

Total $ 75,398 $ 53,577

Total revenue increased 40.7% to $75.4 million for the six months ended June 30, 2024 compared to $53.6 million during the six months ended June 30, 2023.

This increase was primarily a result of higher rental revenue (46.6% increase) slightly offset by lower aftermarket service revenue during the first six months of 2024 (9.1% decrease).

Rental revenue increased to $68.7 million for the six months ended June 30, 2024 compared to $46.8 million during the six months ended June 30, 2023.

This increase during the first six months of 2024 was attributable to an increase in rented compression horsepower and rental rate increases.

Sales revenue increased to $4.8 million for the six months ended June 30, 2024 compared to $4.6 million for the same period in 2023.

This increase is mostly attributable to higher sales of compressor packages in 2024 compared to 2023.

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

Aftermarket service revenue decreased (9.1)% to $2.0 million for the six months ended June 30, 2024 compared to $2.2 million for the six months ended June 30, 2023.

This decrease is primarily attributable to lower volume of service call-out work performed during the six months ended June 30, 2024 compared to the same period in the previous year.

Cost of rentals increased 18.9% to $27.3 million during the six months ended June 30, 2024 compared to $23.0 million during the six months ended June 30, 2023.

This increase was primarily due to increase in rental compression horsepower in service.

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 13.4% to $4.4 million during the six months ended June 30, 2024 compared to $5.1 million during the six months ended June 30, 2023.

This decrease during the first six months of 2024 was primarily due to lower fabrication costs attributable to our fabrication shops and lower costs of parts sold.

Selling, general, and administrative expenses increased 0.8% to $9.5 million for the six months ended June 30, 2024 compared to $9.4 million for the same period in 2023.

SG&A expenses during the first six months of 2024 were impacted by higher consulting expenses, commissions and public company costs partially offset by lower severance expenses and legal fees during 2024.

Depreciation and amortization expense increased 17.6% to $14.8 million for the six months ended June 30, 2024 compared to $12.6 million for the six months ended June 30, 2023.

This increase was the result of units placed into service during 2023 & 2024.

Interest expense increased to $5.9 million for the six months ended June 30, 2024 from $0.2 million for the six months ended June 30, 2023, due to higher balances outstanding on our credit facility.

We recorded an income tax expense of $2.8 million for the six months ended June 30, 2024 and $0.4 million for the six months ended June 30, 2023.

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

Non-GAAP Financial Measures

14 unchanged sentences

There are other material limitations to using Adjusted EBITDA as a measure of performance, including the inability to analyze the impact of certain recurring items that materially affect our net income or loss, and the lack of comparability of results of operations of different companies.

Please read the table below under “Reconciliation” to see how Adjusted EBITDA reconciles to our net (loss) income, for the three months ended and the nine months ended March 31, 2024 and 2023, the most directly comparable GAAP financial measure.

Please read the table below under “Reconciliation” to see how Adjusted EBITDA

reconciles to our net (loss) income, for the three months ended and the six months ended June 30, 2024 and 2023, the most directly comparable GAAP financial measure.

Reconciliation

The following table reconciles our net 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,

2024 2023 2024 2023

(in thousands)

Net income (loss) $ 5,098 $ 370

$ 4,250 $ 504 $ 9,348 $ 874

Interest expense 2,932 185 5,867 185

3 unchanged sentences

Severance expenses 33 612 33 1,224

Impairment Expense — 779 — 779

Retirement of rental equipment — — 5 —

Adjusted EBITDA $ 16,456 $ 9,877 $ 33,334 $ 17,658

For the three months ended March 31, 2024, Adjusted EBITDA increased $9.1 million, or 116.8%, due primarily to an $11.0 million i ncrease in rental revenues partially offset by a $1.5 million increase in costs of rentals.

For the three months ended June 30, 2024, Adjusted EBITDA increased $6.6 million, or 66.6%, due primarily to a $10.8 million i ncrease in rental revenues partially offset by a $2.9 million increase in costs of rentals.

For the six months ended June 30, 2024, Adjusted EBITDA increased $15.7 million, or 88.8%, due primarily to a $21.8 million increase in rental revenues partially offset by a $4.4 million increase in costs of rentals.

Liquidity and Capital Resources

Our working capital positions as of March 31, 2024 and December 31, 2023 are set forth below:

March 31, December 31,

Our working capital positions as of June 30, 2024 and December 31, 2023 are set forth below:

June 30, December 31,

(in thousands)

11 unchanged sentences

Total working capital $ 40,257 $ 43,558

For the three months ended March 31, 2024, we invested $10.9 million in rental equipment and other equipment by adding approximately $10.9 million in new equipment to our rental fleet and less than $0.1 million primarily in other machinery and equipment.

For the six months ended June 30, 2024, we invested $28.3 million in rental equipment and other equipment by adding approximately $28.2 million in new equipment to our rental fleet and less than $0.1 million primarily in other machinery and equipment.

Our investment in rental equipment 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 $7.6 million during the three months ended March 31, 2024.

We financed our investment in rental equipment, property and other equipment with cash flow from operations, and borrowings under our Amended and Restated Credit Facility.

Our rental work-in-process decreased by $2.2 million during the six months ended June 30, 2024.

We financed our investment in rental equipment, property and other

equipment with cash flow from operations, and borrowings under our Amended and Restated Credit Facility.

We anticipate that our cash flows from operations as well as our borrowing capacity under our Amended and Restated Credit Agreement will provide adequate liquidity for our planned capital expenditures during the remainder of 2024.

For any new capital expenditures in 2024 and beyond that exceeds our cash flow from operations and our borrowing base under our Amended and Restated Credit Agreement, we anticipate that we would need to negotiate an expansion of our borrowing capacity under our Amended and Restated Credit Agreement or raise money in the capital markets through sales of equity or

debt securities.

While we control the timing and extent of our capital expenditures, there is no assurance that any such borrowing expansion would be granted.

At March 31, 2024 we had approximately $46.1 million available for borrowing under the Amended and Restated Credit Agreement, subject to borrowing base determination.

At March 31, 2024, we had cash and cash equivalents of $5.2 million compared to $2.7 million at December 31, 2023.

Our cash flows from operating activities of $5.6 million were offset by capital expenditures of $10.9 million during the three months ended March 31, 2024.

We had working capital of $54.4 million at March 31, 2024 compared to $43.6 million at December 31, 2023.

We generated cash flows from operating activities of $5.6 million during the first three months of 2024 compared to cash flows provided by operating activities of $18.2 million for the first three months of 2023.

At June 30, 2024 we had approximately $119.7 million available for borrowing under the Amended and Restated Credit Agreement, subject to borrowing base determination.

At June 30, 2024, we had cash and cash equivalents of $3.6 million compared to $2.7 million at December 31, 2023.

Our cash flows from operating activities of $31.1 million were offset by capital expenditures of $28.3 million during the six months ended June 30, 2024.

We had working capital of $40.3 million at June 30, 2024 compared to $43.6 million at December 31, 2023.

We generated cash flows from operating activities of $31.1 million during the first six months of 2024 compared to cash flows provided by operating activities of $22.6 million for the first six months of 2023.

Business Strategy

22 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 March 31, 2024, the off-balance sheet arrangements and transactions that we have entered into include purchase agreements.

As of June 30, 2024, 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.

2 unchanged sentences

Forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results.

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

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.

Those risks include, among other things, (i) achieving increased utilization of assets, including rental fleet utilization and unlocking other non-cash balance sheet assets;

(ii) failure of projected organic growth due to adverse changes in the oil and gas industry, including depressed oil and gas prices, oppressive environmental regulations and competition;

(iii) inability to finance capital expenditures;

(iv) adverse changes in customer, employee or supplier relationships;

(v) adverse regional and national economic and financial market conditions, including in our key operating areas;

(vi) impacts of world events, including pandemics;

the financial condition of the Company’s customers and failure of significant customers to perform their contractual obligations;

(vii) the Company’s ability to economically develop and deploy new technologies and services, including technology to comply with health and environmental laws and regulations;

(viii) failure to achieve accretive financial results in connection with any acquisitions the Company may make (ix) the loss of market share through competition or otherwise, including the introduction of competing technologies by other companies;

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

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.

3 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