NATURAL GAS SERVICES GROUP INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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.” Overview 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. Our primary focus is on the rental of natural gas compressors. Our rental contracts generally provide for initial terms of six to 60 months, with our larger horsepower units having longer initial terms than our small and medium horsepower units. After the initial term of our rental contracts, most of our customers have continued to rent our compressors on a month-to-month basis. Rental amounts are billed monthly in advance and include maintenance of the rented compressors. 16 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. Revenue Rental . 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. Sales . 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 Rental . 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. Sales . 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. 17 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 September 30, 2024, compared to the three months ended September 30, 2023. Revenues 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, 2024 2023 Rental $ 37,350 91.8 % $ 27,705 88.3 % Sales 1,843 4.5 % 1,413 4.5 % Aftermarket service 1,493 3.7 % 2,251 7.2 % Total $ 40,686 $ 31,369 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 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 18 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 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. 19 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. 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. 20 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, 2024 2023 Rental $ 106,010 91.3 % $ 74,533 87.7 % Sales 6,616 5.7 % 6,000 7.1 % Aftermarket services 3,458 3.0 % 4,413 5.2 % Total $ 116,084 $ 84,946 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 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. 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. 21 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 . 22 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 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. However, management believes Adjusted EBITDA is useful to an investor in evaluating our operating performance because: • it is widely used by investors in the energy industry to measure a company’s operating performance without regard to items excluded from the calculation of Adjusted EBITDA, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors; • it helps investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure and asset base from our operating structure; and • 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 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 debt and finance leases; and • 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 income, for the three months ended and the nine months ended September 30, 2024 and 2023, the most directly comparable GAAP financial measure. 23 Reconciliation The following table reconciles our net income, the most directly comparable GAAP financial measure, to Adjusted EBITDA: Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 (in thousands) Net income $ 5,014 $ 2,171 $ 14,362 $ 3,045 Interest expense 3,045 1,600 8,912 1,785 Income tax expense 1,383 1,046 4,156 1,442 Depreciation and amortization 8,086 6,807 22,878 19,390 Non-cash stock compensation expense 522 209 1,038 1,826 Severance expenses — — 33 1,224 Impairments 136 — 136 779 Retirement of rental equipment — — 5 — Adjusted EBITDA $ 18,186 $ 11,833 $ 51,520 $ 29,491 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 were as follows as of the dates presented: September 30, December 31, 2024 2023 (in thousands) Current Assets: Cash and cash equivalents $ 410 $ 2,746 Trade accounts receivable, net 24,809 39,186 Inventory 20,175 21,639 Federal income tax receivable 11,382 11,538 Prepaid expenses and other 2,207 1,162 Total current assets 58,983 76,271 Current Liabilities: Accounts payable 26,473 17,628 Accrued liabilities 7,041 15,085 Total current liabilities 33,514 32,713 Total working capital $ 25,469 $ 43,558 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 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. 24 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 September 30, 2024 we had approximately $131.1 million available for borrowing under the Amended and Restated Credit Agreement, subject to borrowing base determination. Cash flows 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: • 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. We believe we can improve the overall cash flow of the business by increasing utilization of the existing fleet as well as creating investable cash from non-cash assets. We have a significant number of unutilized units—we will review these assets to determine where relatively low-cost capital expenditures can improve the marketability and cash flow potential of the units. 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. • 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. • Execute accretive mergers and acquisitions. We believe there are opportunities in mergers with or acquisitions of competitive rental compression companies or related businesses providing similar services. While there is no certainty as to the probability of any particular deal, we will continue to evaluate potential acquisitions, joint ventures and other opportunities that could enhance value for our shareholders. Critical Accounting Policies and Practices Our Condensed Consolidated Financial Statements are prepared in accordance with GAAP. 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 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 credit losses, accounting for income taxes, accounting for long-lived assets and accounting for inventory. 25 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 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 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. 26 Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no changes in the market risks disclosed in our Form 10-K for the year ended December 31, 2023.