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Item 2. Management’s Discussion and Analysis

2024-11-14 compared with 2024-08-14 · 222 added, 155 removed, 78 unchanged (83% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion and analysis of our financial condition and results of operations are based on, and should be read in conjunction with, our condensed consolidated financial statements and the related notes included elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC (the "Annual Report").

This report and our Annual Report, as amended, contain certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, and information pertaining to us, our industry and the oil and natural gas industry that is based on the beliefs of our management, as well as assumptions made by and information currently available to our management.

All statements, other than statements of historical facts contained in this report as well as our Annual Report, including statements regarding our future financial position, growth strategy, budgets, projected costs, plans and objectives of management for future operations, are forward-looking statements.

We use the words “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue,” “intend,” “plan,” “budget” and other similar words to identify forward-looking statements.

You should read statements that contain these words carefully and should not place undue reliance on these statements because they discuss future expectations, contain projections of results of operations or of our financial condition and/or state other “forward-looking” information.

We do not undertake any obligation to update or revise publicly any forward-looking statements.

Although we believe our expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations or assumptions will prove to have been correct.

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 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.

The discussion and analysis of the financial condition and results of operations of Natural Gas Services Group, Inc.

(the “Company”, “NGS”, “Natural Gas Services Group”, “we,” “us” or “our”) are based on, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the related notes included elsewhere in this report and in the Annual Report.

All dollar amounts presented in the tables that follow are in thousands unless otherwise indicated.

References to “quarters” represent the three months ended September 30, 2024 or 2023, as applicable.

Certain variances that represent results that are not meaningful are indicated as “NM.”

We rent, design, sell, service and maintain natural gas compressors for oil and natural gas production and processing 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.

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

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.

These major components of our compressors are acquired through periodic purchase orders placed with third-party suppliers on an “as needed” basis, which presently requires a minimum three to twelve month lead time 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.

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 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 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.

customer support for our compressor and flare sales businesses, we stock varying levels of replacement parts at our Midland, Texas facility and at field service locations.

We also provide an exchange and rebuild program for screw compressors and maintain an inventory of new and used compressors to facilitate this business.

We provide aftermarket services to our non-rental customers under written maintenance contracts or on an as-required basis in the absence of a service contract.

The oil and natural gas equipment rental and services industry is cyclical in nature.

The most critical factor in assessing the outlook for the industry is the worldwide supply and demand for oil and natural gas and the corresponding changes in commodity prices.

As demand and prices increase, oil and natural gas producers typically increase their capital expenditures for drilling, development and production activities, although recent equity capital constraints and demands from institutional investors to keep spending within operating cash flow have meaningfully restrained capital expenditure budgets of domestic exploration and production companies.

Generally, increased capital expenditures result in greater revenues and profits for service and equipment companies.

Generally, higher commodity prices lead to higher capital expenditures by oil and natural gas producers and higher levels of production.

In general, we expect our overall business activity and revenues to track the level of activity in the oil and natural gas industry, specifically production levels, with changes in crude oil and condensate production and consumption levels and prices affecting our business more than changes in domestic natural gas production and consumption levels and prices.

In recent years we have increased our rental and sales in unconventional oil shale plays, which are more dependent on crude oil prices.

With this shift towards oil production, the demand for overall compression services and products is driven by two general factors;

an increased focus by producers on artificial lift applications, e.g., production enhancement with compression assisted gas lift;

and declining reservoir pressure in maturing natural gas producing fields, especially non-conventional production.

These latter types of applications have historically been serviced by wellhead size compressors, and continue to be, but there has also been an economic move by our customers towards centralized drilling and production facilities, which have increased the market need for single and multiple larger horsepower compressor packages.

We recognized this need and shifted our focus towards designing, fabricating and renting gas compressor packages that range from 400 horsepower up to 2,500 horsepower.

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.

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

In recent years, our level of activity has become more largely driven by the price of crude oil as opposed to natural gas.

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

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 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 available on acceptable terms.

Industry Update

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, 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.

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

Accordingly, we have chosen to deemphasize the new unit fabrication portion of our business and instead focus our efforts on our rental business.

Recent Developments

Amended and Restated Credit Agreement Amendments

In June of 2024, we entered into two amendments to our senior secured revolving credit agreement (“Amended and Restated Credit Agreement”).

The amendments provided for the following:

(i) an increase the potential aggregate commitment of the existing credit facility to $350.0 million, (ii) a revision to the leverage ratio covenant to be lesser than or equal to (a) 3.50 to 1.00 for the fiscal quarters ending on or prior to December 31, 2024, (b) 3.75 to 1.00 for the fiscal quarters ending on March 31, 2025 and June 30, 2025, (c) 3.50 to 1.00 for the fiscal quarters ending September 30, 2025, December 31, 2025 and March 31, 2026 and (d) 3.25 to 1.00 for the fiscal quarter ending June 30, 2026 and for each fiscal quarter thereafter and (iii) the addition of Zions Bancorporation, N.A.

(dba Amegy Bank) as a new lender to the facility.

Operational Highlights

As of September 30, 2024, our total fleet of 1,909 natural gas compressors included 304 large (400 horsepower and greater), 476 medium (201 to 399 horsepower) and 1,129 small (less than 200 horsepower) units.

The large, medium and small units represented approximately 57%, 18% and 25%, respectively of our approximately 580,000 total available horsepower.

As of September 30, 2024, we had 1,229 natural gas compressors totaling 475,534 horsepower rented t o 69 customers compared to 1,233 natural gas compressors totaling 400,727 horsepower rented to 78 customers at September 30, 2023.

The increase of approximately 75,000 in rented horsepower, or 19%, partially offset by the effects of a minimal decline in the number of rented units as of September 30, 2024 from the previous year is consistent with our strategy to move more toward rental of high horsepower compression units.

Approximately 74% of our units are generating revenue from production in the Permian Basin in West Texas and New Mexico.

Components of Results of Operations

The following discussion describes the components of our primary items of revenue and expense reflected in our results of operations.

We generate revenue from renting compressors to our customers.

These contracts, which all qualify as operating leases under ASC Topic 842, Leases (“ASC 842”), may also include a fee for servicing the compressor during the rental contract.

Our rental contracts typically range from six to 60 months.

Our revenue is recognized over time, with monthly payments over the term of the contract.

After the terms of the contract have expired, a customer may renew its contract or continue renting on a monthly basis thereafter.

We generate revenue by the sale of custom/fabricated compressors and parts, as well as exchange/rebuilding customer owned compressors and sale of used rental equipment.

Our sales revenue is recognized in accordance with ASC Topic 606, Revenues from Customers (“ASC 606”).

Aftermarket Services .

We provide routine or call-out services on customer owned equipment as well as commissioning of new units for customers.

Revenue is recognized after services in the contract are rendered.

Cost of Revenues

The primary costs associated with providing our compressor fleet to our customers includes routine maintenance and repairs, fluids, primarily motor oils, and labor and related support costs for our field service facilities and employees that are geographically dispersed throughout our operating regions.

Costs of sales include purchases of engines, compressors, coolers and other component materials as well as direct and indirect labor attributable to the assembly of equipment to meet the unique specifications of our customers.

In addition, our costs of sales include overhead and related support costs attributable to our assembly facility.

Aftermarket Services .

The primary costs associated with our aftermarket services are labor, support costs, materials and supplies.

Selling, General and Administrative Expenses

Our selling, general and administrative (“SG&A”) expenses include salaries and benefits and other costs of departments serving administrative functions, such as executives, finance and accounting, sales and marketing, human resources, information technology, health, safety and environmental and investor relations.

In addition, SG&A includes non-personnel costs, such as professional fees and other supporting corporate expenses including public company compliance costs.

Depreciation and Amortization

These costs primarily reflect the depreciation of our rental compressor fleet as well as the depreciation and amortization of our facilities, vehicles and other equipment, and the amortization of finance leases and intangible assets.

Interest Expense

Interest expense primarily reflects the costs of borrowing, including commitment fees and the amortization of debt issue costs, under our Amended and Restated Credit Agreement, net of amounts capitalized attributable to certain capital projects.

Also included is interest expense on our financing leases.

Other Income (Expense)

Primarily reflects non-operating items of income and loss including non-cash gains and losses attributable to our corporate-owned life insurance (“COLI”) policies related to our deferred compensation plan.

Results of Operations

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)

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

The table below presents our revenues and percentage of total revenues of each of our product and service offerings for the three months ended September 30, 2024 and 2023.

Three months ended September 30,

Rental $ 37,350 91.8 % $ 27,705 88.3 %

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Total $ 40,686 $ 31,369

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.

Total revenue increased 29.7% for the three months ended September 30, 2024 compared to the three months ended September 30, 2023.

This increase was primarily a result of higher rental revenue (34.8% increase) during 2024.

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 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.

Rental revenue increased for the three months ended September 30, 2024 compared to the same period in 2023.

This increase during the third quarter of 2024 was attributable to an increase in rented horsepower, with a greater emphasis on high horsepower compression which generates higher per unit revenues, as well as selective rental rate increases.

As of September 30, 2024, we had 1,909 compressor packages in our fleet, down from 1,947 units at September 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 new fleet additions over the last twelve months.

Our total unit horsepower increased to 579,699 horsepower at September 30, 2024 compared to 509,198 horsepower at September 30, 2023, due to additions to our fleet of high horsepower compressors over the past 12 months.

As of September 30, 2024, we had 1,229 natural gas compressors with a total of 475,534 horsepower rented to 69 customers, compared to 1,233 natural gas compressors with a total of 400,727 horsepower rented to 78 customers as of September 30, 2023.

As a result of the addition of high horsepower units during 2023 and 2024 and these units being rented to customers, our total rented horsepower as of September 30, 2024 increased by 18.7% over the

last twelve months.

Our rental fleet had unit utilization as of September 30, 2024, and 2023, respectively, of 64.4% and 63.3%, and our horsepower utilization for the same dates increased to 82.0% from 78.7%.

Our total rented horsepower increased by 18.7% contrasted with a relatively minor decrease in the number of total rented units.

This reflects 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 increased 30.4% for the three months ended September 30, 2024 compared to the three months ended September 30, 2023.

This increase is primarily attributable to higher parts sales during the third 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 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.

Aftermarket service revenue decreased 33.7% for the three months ended September 30, 2024 compared to the three months ended September 30, 2023.

This decrease is primarily attributable to the variability in demand during the three months ended September 30, 2024 compared to the same quarter in the previous year.

Cost of Rentals

Three months ended September 30,

2024 2023 Change % Change

Cost of rentals $ 14,442 $ 13,462 $ 980 7 %

Percent of rental revenues 39 % 49 %

Cost of rentals increased during the three months ended September 30, 2024 compared to the three months ended September 30, 2023, but decreased as a percentage of rental revenue.

The absolute dollar increase is due primarily due to the effects of supporting a larger quantity of rented horsepower during the 2024 period while the decline in cost as a percent of total revenues reflects the higher average margins realized on the expanding deployment of our large (400 horsepower and greater) units.

Cost of Sales

Three months ended September 30,

2024 2023 Change % Change

Cost of sales $ 2,028 $ 1,505 $ 523 35 %

Percent of sales revenues 110 % 107 %

Cost of sales increased during the three months ended September 30, 2024 compared to the three months ended September 30, 2023.

The absolute dollar increase was generally commensurate with higher sales activity in the 2024 period while the increase as a percent of sales revenue reflects a higher level of costs at our fabrication facilities that are not otherwise subject to capitalization.

Cost of Aftermarket Services

Three months ended September 30,

2024 2023 Change % Change

Cost of aftermarket services $ 1,324 $ 1,846 $ (522) (28) %

Percent of aftermarket services revenues 89 % 82 %

Cost of aftermarket services decreased during the three months ended September 30, 2024 compared to the three months ended September 30, 2023.

The decrease is generally commensurate with the decline in aftermarket service revenue in the 2024 period.

Selling, General and Administrative Expenses

Three months ended September 30,

2024 2023 Change % Change

Selling, general and administrative expenses $ 5,213 $ 2,845 $ 2,368 83 %

Percent of total revenues 13 % 9 %

SG&A expenses increased during the three months ended September 30, 2024 compared to the same period in 2023.

The increase was due primarily to higher salaries and commissions of $0.9 million and higher stock-based compensation expense of $0.3 million consistent with the growth in the scale of our operations as well as higher consulting expenses of $0.5 million and higher public company costs of $0.3 million.

Depreciation and Amortization

Three months ended September 30,

2024 2023 Change % Change

Depreciation and amortization $ 8,086 $ 6,807 $ 1,279 19 %

Percent of total revenues 20 % 22 %

Depreciation and amortization expense increased for the three months ended September 30, 2024 compared to the three months ended September 30, 2023, due primarily to depreciation expense associated with the high horsepower units placed in service during 2023 and thus far in 2024.

Interest Expense

Three months ended September 30,

2024 2023 Change % Change

Interest expense $ 3,045 $ 1,600 $ 1,445 90 %

Weighted-average interest rates 8.90 % 8.73 %

Weighted-average outstanding borrowings $ 163,000 $ 114,006

Interest expense increased for the three months ended September 30, 2024 compared to the three months ended September 30, 2023, due primarily to approximately $49 million of higher average borrowings outstanding under our Amended and Restated Credit Agreement during the 2024 period as well as the effect of higher average interest rates.

In addition, the increase was impacted by the effect of $0.2 million of lower capitalized interest.

Other Income (Expense), net

Three months ended September 30,

2024 2023 Change % Change

Other income (expense), net $ (15) $ (87) $ 72 NM

Other income (expense), net increased due primarily to higher unrealized losses attributable to our COLI policies related to our deferred compensation plan .

Income Tax Expense

Three months ended September 30,

2024 2023 Change % Change

Income tax expense $ 1,383 $ 1,046 $ 337 32 %

Effective income tax rate 21.6 % 32.5 %

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.

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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)

Nine months ended September 30, 2024, compared to the nine months ended September 30, 2023.

The table below presents our revenues and percentage of total revenues of each of our product and service offerings for the nine months ended September 30, 2024 and 2023.

Nine months ended September 30,

Rental $ 106,010 91.3 % $ 74,533 87.7 %

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Total $ 116,084 $ 84,946

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.

Total revenue increased 36.7% for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

This increase was primarily a result of higher rental revenue (42.2% increase) slightly offset by lower aftermarket service revenue during the first nine months of 2024 (21.6% decrease).

Rental revenue increased for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

This increase during the first nine months of 2024 was attributable to an increase in rented compression horsepower with a greater emphasis on high horsepower compression, which generates higher per unit revenues and selective rental rate increases.

Sales revenue increased for the nine months ended September 30, 2024 compared to 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.

Aftermarket service revenue decreased 21.6% for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

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

Cost of Rentals

Nine months ended September 30,

2024 2023 Change % Change

Cost of rentals $ 41,784 $ 36,450 $ 5,334 15 %

Percent of rental revenues 39 % 49 %

Cost of rentals increased during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 but decreased as a percentage of rental revenue .

This absolute dollar increase was due primarily to a higher level of rental compression horsepower in service during the 2024 period partially offset by the impact of higher maintenance costs during the 2023 period.

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.

The substantial decline in cost as a percent of total revenues reflects the higher average margins realized on the expanding deployment of our large (400 horsepower and greater) units.

Cost of Sales

Nine months ended September 30,

2024 2023 Change % Change

Cost of sales $ 6,457 $ 6,618 $ (161) (2) %

Percent of sales revenues 98 % 110 %

Cost of sales decreased during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

Despite higher sales revenues during the 2024 period, the decrease in cost of sales was due primarily to the beneficial impact of the discontinuation of assembly activities at our Midland, Texas facility in December of 2023.

Cost of Aftermarket Services

Nine months ended September 30,

2024 2023 Change % Change

Cost of aftermarket services $ 2,836 $ 3,424 $ (588) (17) %

Percent of aftermarket services revenues 82 % 78 %

Cost of aftermarket services decreased during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

The decrease is generally commensurate with the decline in aftermarket service revenue in the 2024 period.

Selling, General and Administrative Expenses

Nine months ended September 30,

2024 2023 Change % Change

Selling, general and administrative expenses $ 14,706 $ 12,267 $ 2,439 20 %

Percent of total revenues 13 % 14 %

SG&A expenses increased for the nine months ended September 30, 2024 compared to the same period in 2023.

SG&A expenses increased during the nine months of 2024 on an absolute dollar basis while continuing a steady decline as a percent of revenues.

As our revenues have increased commensurate with our growth, excluding the third quarter of 2023, SG&A expenses as a percent of revenues have consistently declined.

The absolute dollar increase was primarily impacted by higher salaries and commissions of $1.1 million, higher consulting expenses of $1.0 million, and higher public company costs of $0.6 million partially offset by lower stock-based compensation expense of $0.7 million and lower legal fees of $0.4 million.

Depreciation and Amortization

Nine months ended September 30,

2024 2023 Change % Change

Depreciation and amortization $ 22,878 $ 19,390 $ 3,488 18 %

Percent of total revenues 20 % 23 %

Depreciation and amortization expense increased for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

This increase was the result of units placed into service during 2023 and thus far in 2024.

Interest Expense

Nine months ended September 30,

2024 2023 Change % Change

Interest expense $ 8,912 $ 1,785 $ 7,127 399 %

Weighted-average interest rates 8.97 % 8.33 %

Weighted-average outstanding borrowings $ 167,000 $ 78,503

Interest expense increased for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, due primarily to approximately $88 million of higher average borrowings outstanding under our Amended and Restated Credit Agreement during the 2024 period as well as the effects of higher average interest rates.

In addition, the increase was impacted by the effect of $0.5 million of lower capitalized interest.

Other income (Expense), net

Nine months ended September 30,

2024 2023 Change % Change

Other income (expense), net $ 148 $ 254 $ (106) NM

Other income (expense), net decreased due primarily to higher unrealized losses attributable to our COLI policies related to our deferred compensation plan .

Income Tax Expense

Nine months ended September 30,

2024 2023 Change % Change

Income tax expense $ 4,156 $ 1,442 $ 2,714 188 %

Effective income tax rate 22.4 % 32.1 %

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.

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

federal statutory rate of 21% primarily as a result of certain expenses not being deductible for income tax purposes .

Non-GAAP Financial Measures

Our definition and use of Adjusted EBITDA

“Adjusted EBITDA” is a non-GAAP financial measure that we define as earnings (net (loss) income) before interest, taxes, depreciation and amortization, as well as non-cash stock compensation, severance expenses, impairment expenses, an increase in inventory allowance and inventory write-offs, and retirement of rental equipment.

This term, as used and defined by us, may not be comparable to similarly titled measures employed by other companies and is not a measure of performance calculated in accordance with GAAP.

“Adjusted EBITDA” is a non-GAAP financial measure that we define as net income before interest, taxes, depreciation and amortization, as well as non-cash stock compensation, severance expenses, impairment expenses, adjustments to our inventory allowance and inventory write-offs, and retirement of rental equipment.

This term, as used and defined by us, may not be comparable to similarly titled measures employed by other companies and is not a measure of performance calculated in accordance with generally accepted accounting principles in the United States of America (“GAAP”).

Adjusted EBITDA should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP.

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• 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.

Some of these limitations are:

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 GAAP.

Some of these limitations are as follows:

• Adjusted EBITDA does not reflect our cash expenditures, future requirements for capital expenditures, or contractual commitments;

• Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

• Adjusted EBITDA does not reflect the cash requirements necessary to service interest or principal payments on our debts;

• Adjusted EBITDA does not reflect the cash requirements necessary to service interest or principal payments on our debt and finance leases;

• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any capital expenditures for such replacements.

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 six months ended June 30, 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 income, for the three months ended and the nine months ended September 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 June 30, Six months ended June 30,

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

2024 2023 2024 2023

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Severance expenses — — 33 1,224

Impairment Expense — 779 — 779

Impairments 136 — 136 779

Retirement of rental equipment — — 5 —

Adjusted EBITDA $ 18,186 $ 11,833 $ 51,520 $ 29,491

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.

For the three months ended September 30, 2024, Adjusted EBITDA increased $6.4 million, or 53.7%, due primarily to a $9.6 million i ncrease in rental revenues partially offset by a $2.4 million increase in SG&A and a $1.0 million increase in costs of rentals.

For the nine months ended September 30, 2024, Adjusted EBITDA increased $22.0 million, or 74.7%, due primarily to a $31.5 million increase in rental revenues partially offset by a $2.4 million increase in SG&A expenses and a $5.3 million increase in costs of rentals.

Liquidity and Capital Resources

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

June 30, December 31,

Our working capital positions were as follows as of the dates presented:

September 30, December 31,

(in thousands)

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Total working capital $ 25,469 $ 43,558

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.

For the nine months ended September 30, 2024, we invested $57.4 million in rental equipment and other equipment by adding approximately $54.7 million in new equipment to our rental fleet and less than $2.7 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 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.

Our rental work-in-process increased by $3.5 million during the nine months ended September 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 provided by operating activities 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 flows provided by operating activities 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 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.

At September 30, 2024 we had approximately $131.1 million available for borrowing under the Amended and Restated Credit Agreement, subject to borrowing base determination.

At September 30, 2024, we had cash and cash equivalents of $0.4 million compared to $2.7 million at December 31, 2023.

Our cash flows provided by operating activities of $57.0 million were offset by capital expenditures of $57.4 million during the nine months ended September 30, 2024.

We had working capital of $25.5 million at September 30, 2024 compared to $43.6 million at December 31, 2023.

We generated cash flows provided by operating activities of $57.0 million during the first nine months of 2024 compared to cash flows provided by operating activities of $25.7 million for the first nine months of 2023.

For the remainder of fiscal year 2024 and into 2025, our forecasted capital expenditures will continue to 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 provided by operating activities and borrowings under our Amended and Restated Credit Agreement, as necessary, will be sufficient to satisfy our capital and liquidity requirements for the next twelve months.

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 available resources, might not be available to us when we need it, or might not be available on acceptable terms.

Business Strategy

Our long-term intentions to grow our revenue and profitability are based on the following business strategies:

• Optimize existing utilized fleet.

We believe there are opportunities to modestly improve the profitability of our existing utilized rental fleet through targeted price increases, particularly in geographic areas that have experienced high rates of cost inflation, along with operational efficiencies by using improved data collection and analysis to optimize our costs in labor, parts, and maintenance costs.

• Expand rental fleet .

We intend to prudently increase the size of our rental fleet mainly through pre-contracted agreements with our customers.

We believe our future growth in this part of our strategy will be primarily driven through our placement of larger horsepower, centralized wellhead natural gas compressors for unconventional oil production, with select increases in medium horsepower units to meet customer demand beyond our inventory..

• Improve asset utilization.

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We also have a significant amount of capital tied up in non-cash assets (including working capital and fixed assets) that we believe can be monetized and invested back in the fleet at or above target levels of return on invested capital.

• Expand rental fleet .

We intend to prudently increase the size of our rental fleet mainly through pre-contracted agreements with our customers.

• Optimize existing utilized fleet.

• Execute accretive mergers and acquisitions.

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Critical Accounting Policies and Practices

Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States.

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States.

Our Condensed Consolidated Financial Statements are prepared in accordance with GAAP.

Actual results could differ significantly from those estimates under different assumptions and conditions.

Management has determined that our critical accounting policies are those that relate to revenue recognition, estimating the allowance for doubtful accounts, accounting for income taxes, accounting for long-lived assets and accounting for inventory.

There have been no changes in the critical accounting policies disclosed in the Company's Form 10-K for the year ended December 31, 2023.

Management has determined that our critical accounting policies are those that relate to revenue recognition, estimating the allowance for credit losses, accounting for income taxes, accounting for long-lived assets and accounting for inventory.

There have been no changes in the critical accounting policies disclosed in our Form 10-K for the year ended December 31, 2023.

Recently Issued Accounting Pronouncements

Please read Note 2, Summary of Significant Accounting Policies, Recently Issued Accounting Pronouncements in our condensed consolidated financial statements in this report.

Please read Note 2, Summary of Significant Accounting Policies, Recently Issued Accounting Pronouncements in our Condensed Consolidated Financial Statements included in this report.

Off-Balance Sheet Arrangements

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

As of September 30, 2024, the off-balance sheet arrangements and transactions that we have entered into include purchase agreements for certain compressor unit components that are fully anticipated consistent with our capital expenditure plans.

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

Special Note Regarding Forward-Looking Statements

Except for historical information contained herein, the statements in this report are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

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, (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.

A discussion of these and other risk factors is included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC.

Quantitative and Qualitative Disclosures about Market Risk

There have been no changes in the market risks disclosed in the Company's Form 10-K for the year ended December 31, 2023.

There have been no changes in the market risks disclosed in our Form 10-K for the year ended December 31, 2023.

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