KGS 10-Q
Kodiak Gas Services, Inc. (KGS)
Table of Contents
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
(Address of principal executive offices) |
(Zip Code) | |
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer |
☒ | Smaller reporting company | ||||
| Emerging growth company | ||||||
Table of Contents
Table of Contents
| Page | ||||||
| PART I. |
1 | |||||
| Item 1. |
1 | |||||
| 1 | ||||||
| 2 | ||||||
| 3 | ||||||
| 4 | ||||||
| Notes to Unaudited Condensed Consolidated Financial Statements |
5 | |||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
20 | ||||
| Item 3. |
39 | |||||
| Item 4. |
39 | |||||
| PART II. |
40 | |||||
| Item 1. |
40 | |||||
| Item 1A. |
40 | |||||
| Item 2. |
41 | |||||
| Item 3. |
41 | |||||
| Item 4. |
41 | |||||
| Item 5. |
41 | |||||
| Item 6. |
42 | |||||
| 43 | ||||||
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) contains, and our officers and representatives may from time to time make, “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Forward-looking statements can be identified by words such as: “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “project,” “estimate,” “expect,” “strategy,” “future,” “likely,” “may,” “should,” “will” and similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding:
| • | Expected operating results, such as revenue growth and earnings; |
| • | Anticipated levels of capital expenditures and uses of capital; |
| • | Current or future volatility in the credit markets and future market conditions; |
| • | Expectations of the effect on our financial condition of claims, litigation, environmental costs, contingent liabilities and governmental and regulatory investigations and proceedings; |
| • | Production and capacity forecasts for the natural gas and oil industry; |
| • | Strategy for customer retention, growth, fleet maintenance, market position, financial results; and |
| • | The amount and timing of future dividend payments; |
| • | Our interest rate hedges; and |
| • | Strategy for risk management. |
Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
| • | A reduction in the demand for natural gas and oil; |
| • | The loss of, or the deterioration of the financial condition of, any of our key customers; |
| • | Nonpayment and nonperformance by our customers, suppliers or vendors; |
| • | Competitive pressures that may cause us to lose market share; |
| • | The structure of our Compression Operations contracts and the failure of our customers to continue to contract for services after expiration of the primary term; |
| • | Our ability to make acquisitions on economically acceptable terms; |
| • | Our ability to fund purchases of additional compression equipment; |
| • | A downturn in the economic environment, as well as inflationary pressures; |
| • | Tax legislation and administrative initiatives or challenges to our tax positions; |
| • | The loss of key management, operational personnel or qualified technical personnel; |
| • | Our dependence on a limited number of suppliers; |
| • | The cost of compliance with existing governmental regulations and proposed governmental regulations, including climate change legislation and regulatory initiatives and stakeholder pressures, including ESG scrutiny; |
| • | The inherent risks associated with our operations, such as equipment defects and malfunctions; |
| • | Our reliance on third-party components for use in our IT systems; |
| • | Legal and reputational risks and expenses relating to the privacy, use and security of employee and client information; |
| • | Threats of cyber-attacks or terrorism; |
| • | Our credit agreement contains features that may limit our ability to operate our business and fund future growth and also increases our exposure to risk during adverse economic conditions; |
Table of Contents
| • | Volatility in interest rates; |
| • | Our ability to access the capital and credit markets or borrow on affordable terms to obtain additional capital that we may require; |
| • | The effectiveness of our disclosure controls and procedures; and |
| • | Such other factors as discussed throughout the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of our final prospectus filed with the U.S Securities and Exchange Commission (the “SEC”) on June 30, 2023 pursuant to Rule 424(b)(4) and the “throughout Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of such prospectus and and Part II, Item 1A. Risk Factors of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2023. |
Any forward-looking statement made by us in this Report is based only on information currently available to us and speaks only as of the date on which it is made. Except as may be required by applicable law, we undertake no obligation to publicly update any forward-looking statement whether as a result of new information, future developments or otherwise.
Table of Contents
Item 1. |
Financial Statements. |
As of June 30, 2023 |
As of December 31, 2022 |
|||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | $ | ||||||
| Accounts receivable, net |
||||||||
| Inventories, net |
||||||||
| Fair value of derivative instruments |
— | |||||||
| Contract assets |
||||||||
| Prepaid expenses and other current assets |
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| |
|
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|
|||||
| Total current assets |
||||||||
| Property, plant and equipment, net |
||||||||
| Operating lease right-of-use |
||||||||
| Goodwill |
||||||||
| Identifiable intangible assets, net |
||||||||
| Fair value of derivative instruments |
||||||||
| Other assets |
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| |
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| Total assets |
$ | $ | ||||||
| |
|
|
|
|||||
| Liabilities and Stockholders’ Equity |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | $ | ||||||
| Accrued liabilities |
||||||||
| Contract liabilities |
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| |
|
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|
|||||
| Total current liabilities |
||||||||
| Long-term debt, net of unamortized debt issuance cost |
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| Operating lease liabilities |
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| Deferred tax liabilities |
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| Other liabilities |
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| |
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| Total liabilities |
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| |
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|
| Commitments and contingencies (Note 13) |
||||||||
| Stockholders’ Equity: |
||||||||
| Common stock, par value $ shares |
||||||||
| Additional paid-in capital |
— | |||||||
| Retained earnings |
||||||||
| |
|
|
|
|||||
| Total stockholders’ equity |
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| |
|
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|
|||||
| Total liabilities and stockholders’ equity |
$ | |
$ | |||||
| |
|
|
|
|||||
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Revenues: |
||||||||||||||||
| Compression O perations |
$ | $ | $ | $ | ||||||||||||
| Other S ervices |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total revenues |
||||||||||||||||
| Operating expenses: |
||||||||||||||||
| Cost of operations (exclusive of depreciation and amortization shown below): |
||||||||||||||||
| Compression O perations |
||||||||||||||||
| Other S ervices |
||||||||||||||||
| Depreciation and amortization |
||||||||||||||||
| Selling, general and administrative expenses |
||||||||||||||||
| Gain on sale of fixed assets |
( |
) | — | ( |
) | ( |
) | |||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total operating expenses |
||||||||||||||||
| |
|
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|
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|
|||||||||
| Income from operations |
||||||||||||||||
| Other income (expenses): |
||||||||||||||||
| Interest expense, net |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Realized gain on derivatives |
— | — | ||||||||||||||
| Unrealized (loss) gain on derivatives |
( |
) | ( |
) | ( |
) | ||||||||||
| Other income (expense) |
( |
) | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total other expenses |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Income before income taxes |
||||||||||||||||
| Income tax expense |
||||||||||||||||
| |
|
|
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|
|
|
|
|||||||||
| Net income |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Earnings per share: |
||||||||||||||||
| Basic and diluted earnings per share |
$ | $ | $ | $ | ||||||||||||
| Weighted-average shares outstanding - basic and diluted |
||||||||||||||||
Common Stock |
||||||||||||||||||||
Shares |
Amount |
Additional Paid-In Capital |
Retained Earnings |
Total Stockholders’ Equity |
||||||||||||||||
| Balance, January 1, 2022 |
$ | $ | $ | $ | ||||||||||||||||
| Equity compensation |
— | — | ( |
) | ||||||||||||||||
| Net income, as restated |
— | — | — | |||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance, March 31, 202 2, as restated |
$ | $ | $ | $ | ||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Distribution to parent |
— | — | ( |
) | — | ( |
) | |||||||||||||
| Net income |
— | — | — | |||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance, June 30, 2022 |
$ | $ | $ | $ | ||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance, January 1, 2023 |
$ | $ | $ | $ | ||||||||||||||||
| Equity compensation |
— | — | ( |
) | ||||||||||||||||
| Net loss |
— | — | — | ( |
) | ( |
) | |||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance, March 31, 2023 |
$ | $ | $ | $ | ||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Distribution to parent |
( |
) | ( |
) | ( |
) | ||||||||||||||
| Equity compensation |
— | — | ||||||||||||||||||
| Net income |
— | — | — | |||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance, June 30, 2023 |
$ | $ | — | $ | $ | |||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
For the Six Months Ended June 30, |
||||||||
2023 |
2022 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization expense |
||||||||
| Stock-based compensation expense |
||||||||
| Amortization of debt issuance costs |
||||||||
| Non-cash lease expense |
||||||||
| Provision for credit losses |
||||||||
| Inventory reserve |
||||||||
| Gain on sale of fixed assets |
( |
) | ( |
) | ||||
| Unrealized loss (gain) on derivatives |
( |
) | ||||||
| Deferred tax provision |
||||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable, net |
( |
) | ( |
) | ||||
| Inventories |
( |
) | ( |
) | ||||
| Contract assets |
( |
) | ( |
) | ||||
| Prepaid expenses and other current assets |
( |
) | ( |
) | ||||
| Accounts payable |
||||||||
| Accrued and other liabilities |
( |
) | ||||||
| Contract liabilities |
||||||||
| |
|
|
|
|||||
| Net cash provided by operating activities |
||||||||
| |
|
|
|
|||||
| Cash flows from investing activities: |
||||||||
| Purchase of capital assets |
( |
) | ( |
) | ||||
| Proceeds from sale of capital assets |
||||||||
| Investment in fund |
( |
) | ( |
) | ||||
| Other |
||||||||
| |
|
|
|
|||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Cash flows from financing activities: |
||||||||
| Borrowings on debt instruments |
||||||||
| Payments on debt instruments |
( |
) | ( |
) | ||||
| Payment of debt issuance cost |
( |
) | ( |
) | ||||
| Distributions to parent |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Net cash (used in) provided by financing activities |
( |
) | ||||||
| |
|
|
|
|||||
| Net increase (decrease) in cash and cash equivalents |
( |
) | ||||||
| Cash and cash equivalents - beginning of period |
||||||||
| |
|
|
|
|||||
| Cash and cash equivalents - end of period |
$ |
$ |
||||||
| |
|
|
|
|||||
| Supplemental cash disclosures: |
||||||||
| Cash paid for interest |
$ |
$ |
||||||
| Cash paid for taxes |
$ |
$ |
||||||
| Supplemental disclosure of non-cash investing activities: |
||||||||
| Change in accrued capital expenditures |
$ |
$ |
||||||
For the three months ended March 31, 2022 |
As Previously Reported |
Restatement Adjustments |
As Restated |
|||||||||
Unrealized gain on derivatives |
$ |
$ |
$ |
|||||||||
Income Tax Expense |
||||||||||||
Net Income |
||||||||||||
Basic and diluted earnings per share |
$ |
$ |
$ |
|||||||||
As of March 31, 2022 |
As Previously Reported |
Restatement Adjustments |
As Restated |
|||||||||
Retained Earnings |
$ |
$ |
$ |
|||||||||
Total stockholder’s equity |
$ |
$ |
$ |
|||||||||
For the three months ended March 31, 2022 |
As Previously Reported |
Restatement Adjustments |
As Restated |
|||||||||
Net income |
$ |
$ |
$ |
|||||||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
||||||||||||
Unrealized loss (gain) on derivatives |
( |
) |
( |
) |
( |
) | ||||||
Deferred tax provision |
||||||||||||
Changes in Operating assets and liabilities |
||||||||||||
Prepaid Expenses and other current assets |
( |
) |
( |
) | ||||||||
Accrued and other liabilities |
( |
) |
||||||||||
Net cash provided by operating activities |
$ |
$ |
$ |
|||||||||
Three Months Ended June 30, |
||||||||
2023 |
2022 |
|||||||
Services provided over time: |
||||||||
Compression O perations |
$ | $ | ||||||
Other S ervices |
||||||||
Total services provided over time |
||||||||
Services provided or goods transferred at a point in time: |
||||||||
Compression O perations |
||||||||
Other S ervices |
||||||||
Total services provided or goods transferred at a point in time |
||||||||
Total revenue |
$ | $ | ||||||
Six Months Ended June 30, |
||||||||
2023 |
2022 |
|||||||
Services provided over time: |
||||||||
Compression O perations |
$ | $ | ||||||
Other S ervices |
||||||||
Total services provided over time |
||||||||
Services provided or goods transferred at a point in time: |
||||||||
Compression O perations |
||||||||
Other S ervices |
||||||||
Total services provided or goods transferred at a point in time |
||||||||
Total revenue |
$ | $ | ||||||
Remainder of 2023 |
2024 |
2025 |
2026 |
2027 and thereafter |
Total |
|||||||||||||||||||
Remaining performance obligations |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
As of June 30, |
As of December 31, |
|||||||
2023 |
2022 |
|||||||
Accounts receivable |
$ | $ | ||||||
Allowance for credit losses |
||||||||
Accounts receivable, net |
$ | |
$ | |||||
As of June 30, |
As of December 31, |
|||||||
2023 |
2022 |
|||||||
Non-serialized parts |
$ | $ | ||||||
Serialized parts |
||||||||
Total inventories |
$ | |
$ | |||||
As of June 30, |
As of December 31, |
|||||||||||
2023 |
2022 |
|||||||||||
Compression equipment |
$ | $ | ||||||||||
Trailers and vehicles |
||||||||||||
Field equipment |
||||||||||||
Technology hardware and software |
||||||||||||
Leasehold improvements |
||||||||||||
Shipping containers |
||||||||||||
Furniture and fixtures |
||||||||||||
Capital lease |
||||||||||||
Total property and equipment, gross |
||||||||||||
Less: accumulated depreciation |
( |
) | ( |
) | ||||||||
Property, plant and equipment, net |
$ | |
$ | |||||||||
As of June 30, 2023 |
||||||||||||||||
Original Cost |
Accumulated Amortization |
Net Amount |
Remaining Weighted Average Amortization Period (years) |
|||||||||||||
Trade name |
$ |
$ |
( |
) | $ |
|||||||||||
Customer relationships |
( |
) | ||||||||||||||
Total identifiable intangible assets |
$ |
$ |
( |
) | $ |
|||||||||||
As of December 31, 2022 |
||||||||||||||||
Original Cost |
Accumulated Amortization |
Net Amount |
Remaining Weighted Average Amortization Period (years) |
|||||||||||||
Trade name |
$ | $ | ( |
) | $ | |||||||||||
Customer relationships |
( |
) | ||||||||||||||
Total identifiable intangible assets |
$ | $ | ( |
) | $ | |||||||||||
Amount |
||||
Years ending December 31, |
||||
Remainder of 2023 |
$ | |||
2024 |
||||
2025 |
||||
2026 |
||||
2027 |
||||
Thereafter |
||||
Total |
$ | |||
As of June 30, |
As of December 31, |
|||||||
2023 |
2022 |
|||||||
ABL Facility |
$ | $ | ||||||
Term loan |
||||||||
Total debt outstanding |
||||||||
Less: unamortized debt issuance cost |
( |
) | ( |
) | ||||
Long-term debt, net of unamortized debt issuance cost |
$ | |
$ | |||||
Amount |
||||
| Years ended December 31, |
||||
| Remainder of 2023 |
$ | |||
| 2024 |
||||
| 2025 |
||||
| 2026 |
||||
| 2027 |
||||
| Thereafter |
||||
| |
|
|||
| Total |
$ | |||
| |
|
|||
Notional Amount |
Maturities |
|||
$ |
||||
$ |
||||
$ |
||||
$ |
||||
$ |
||||
$ |
||||
$ |
||||
$ |
||||
$ |
||||
$ |
||||
$ |
||||
As on June 30, 2023 |
||||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
Current assets: |
||||||||||||||||
Interest rate swaps |
$ | — | $ | — | $ | — | $ | — | ||||||||
Total current assets |
$ | — | $ | — | $ | — | $ | — | ||||||||
Non-current assets: |
||||||||||||||||
Interest rate swaps |
$ | — | $ | $ | — | $ | ||||||||||
Total non-current assets |
$ | — | $ | $ | — | $ | ||||||||||
Total |
$ | — | $ | $ | — | $ | ||||||||||
As of December 31, 2022 |
||||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
Current assets: |
||||||||||||||||
Interest rate swaps |
$ | — | $ | $ | — | $ | ||||||||||
Total current assets |
$ | — | $ | $ | — | $ | ||||||||||
Non-current assets: |
||||||||||||||||
Interest rate swaps |
$ | — | $ | $ | — | $ | ||||||||||
Interest rate collars |
— | — | ||||||||||||||
Total non-current assets |
$ | — | $ | $ | — | $ | ||||||||||
Total |
$ | — | $ | $ | — | $ | ||||||||||
Derivative Instruments Not Designated as Hedging Instrument |
Location of Gain (Loss) Recognized |
Three Months Ended June 30, |
||||||||
2023 |
2022 |
|||||||||
Interest rate swaps |
Unrealized (loss) gain on derivatives | $ | $ | ( |
) | |||||
Interest rate collars |
Unrealized (loss) gain on derivatives | ( |
) | |||||||
Total unrealized loss on derivative |
( |
) | ( |
) | ||||||
Interest rate swaps |
Realized gain on derivatives | — | ||||||||
Interest rate collars |
Realized gain on derivatives | — | ||||||||
Total realized gain on derivatives |
— | |||||||||
Total |
$ | $ | ( |
) | ||||||
Derivative Instruments Not Designated as Hedging Instrument |
Location of Gain (Loss) Recognized |
Six Months Ended June 30, |
||||||||
2023 |
2022 |
|||||||||
Interest rate swaps |
Unrealized (loss) gain on derivatives | $ | ( |
) | $ | |||||
Interest rate collars |
Unrealized (loss) gain on derivatives | ( |
) | |||||||
Total unrealized (loss) gain on derivative |
( |
) | ||||||||
Interest rate swaps |
Realized gain on derivatives | — | ||||||||
Interest rate collars |
Realized gain on derivatives | — | ||||||||
Total realized gain on derivatives |
— | |||||||||
Total |
$ | $ | ||||||||
Derivative Instruments Not Designated as Hedging Instrument |
Location of Gain Recognized |
Three Months Ended March 31, |
||||||||||||||
As Previously Reported |
Restatement Adjustments |
As Restated |
||||||||||||||
Interest rate swaps |
Unrealized gain on derivatives |
$ |
$ |
$ |
||||||||||||
Interest rate collars |
Unrealized gain on derivatives |
|||||||||||||||
Total |
$ |
$ |
$ |
|||||||||||||
As on June 30, 2023 |
||||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
Debt |
$ | — | $ | — | $ | $ | ||||||||||
Contingent Consideration |
— | — | ||||||||||||||
Total |
$ | — | $ | — | $ | $ | ||||||||||
As of December 31, 2022 |
||||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
Debt |
$ | — | $ | — | $ | $ | ||||||||||
Contingent Consideration |
— | — | ||||||||||||||
Total |
$ | — | $ | — | $ | $ | ||||||||||
RSUs |
PSUs |
|||||||||||||||
Number of RSUs |
Weighted- Average Price |
Number of PSUs |
Weighted- Average Price |
|||||||||||||
| Outstanding at December 31, 2022 |
||||||||||||||||
| Granted |
$ | $ | ||||||||||||||
| Vested or exercised |
||||||||||||||||
| Forfeited |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Outstanding at June 30, 2023 |
$ | $ | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Restricted stock awards expected to vest |
$ | $ | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
As of June 30, 2023 |
As of December 31, 2022 |
|||||||
| Prepaid insurance |
$ | $ | ||||||
| Prepaid rent |
||||||||
| Deferred IPO issuance costs |
||||||||
| Other |
||||||||
| |
|
|
|
|||||
| Total prepaid expenses and other current assets |
$ | $ | ||||||
| |
|
|
|
|||||
As of June 30, 2023 |
As of December 31, 2022 |
|||||||
| Sales tax liability |
$ | $ | ||||||
| Accrued interest |
||||||||
| Accrued bonus |
||||||||
| Accrued taxes |
||||||||
| Accrued payroll |
||||||||
| Accrued legal fee |
||||||||
| Lease liabilities - current portion |
||||||||
| Contingent consideration |
||||||||
| Accrued accounts payable |
||||||||
| Accrued insurance |
||||||||
| Other |
||||||||
| |
|
|
|
|||||
| Total accrued liabilities |
$ | $ | ||||||
| |
|
|
|
|||||
Compression Operations |
Other Services |
Total |
||||||||||
| Three Months Ended June 30, 2023 |
||||||||||||
| Revenue |
$ | $ | $ | |||||||||
| Gross margin |
||||||||||||
| Total assets |
||||||||||||
| Capital expenditures |
— | |||||||||||
| Three Months Ended June 30, 2022 |
||||||||||||
| Revenue |
$ | $ | $ | |||||||||
| Gross margin |
||||||||||||
| Total assets |
||||||||||||
| Capital expenditures |
— | |||||||||||
Compression Operations |
Other Services |
Total |
||||||||||
| Six Months Ended June 30, 2023 |
||||||||||||
| Revenue |
$ | $ | $ | |||||||||
| Gross margin |
||||||||||||
| Total assets |
||||||||||||
| Capital expenditures |
— | |||||||||||
| Six Months Ended June 30, 2022 |
||||||||||||
| Revenue |
$ | $ | $ | |||||||||
| Gross margin |
||||||||||||
| Total assets |
||||||||||||
| Capital expenditures |
— | |||||||||||
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Total gross margin |
$ | $ | $ | $ | ||||||||||||
| Selling, general and administrative expenses |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Gain on sale of fixed assets |
— | |||||||||||||||
| Interest expense, net |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Realized gain on derivatives |
— | — | ||||||||||||||
| Unrealized (loss) gain on derivatives |
( |
) | ( |
) | ( |
) | ||||||||||
| Other (expense) income |
( |
) | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Income before income taxes |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Table of Contents
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Report. The following discussion includes forward-looking statements that involve certain risks and uncertainties. For further information on items that could impact our future operating performance or financial condition, see the sections entitled “Risk Factors” in the IPO Prospectus and “Cautionary Statement Regarding Forward-Looking Statements” elsewhere in this Report. We assume no obligation to update any of these forward-looking statements, except as required by law. Unless otherwise indicated or the context otherwise requires, the historical financial information in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” reflects only the historical financial results of Kodiak Gas Services, Inc. and its consolidated subsidiaries and references to the “Company,” “we,” “our,” or “us” are to Kodiak Gas Services, Inc. and its consolidated subsidiaries.
Overview
We are a leading operator of contract compression infrastructure in the U.S. Our compression operations are critical to our customers’ ability to reliably produce natural gas and oil to support growing global energy demand. We are a market leader in the Permian Basin, which is the largest producing natural gas and oil basin in the U.S. We operate our large horsepower compression units under stable, fixed-revenue contracts with blue-chip upstream and midstream customers. Our compression assets have long useful lives consistent with the expected production lives of the key regions where we operate. We believe our partnership-focused business model positions us as the preferred contract compression operator for our customers and creates long-standing relationships. We strategically invest in the training, development, and retention of our highly skilled and dedicated employees and believe their expertise and commitment to excellence enhances and differentiates our business model. Furthermore, we maintain an intense focus on being one of the most sustainable and responsible operators of contract compression infrastructure.
We manage our business through two operating segments: Compression Operations and Other Services. Compression Operations consists of operating Company-owned and customer-owned compression infrastructure for our customers, pursuant to fixed-revenue contracts to enable the production, gathering and transportation of natural gas and oil. Other Services consists of a full range of contract services to support the needs of our customers, including station construction, maintenance and overhaul and other ancillary time and material based offerings. Our Other Services offerings are often cross-sold with Compression Operations.
Trends and Outlook
We provide contract compression infrastructure for customers in the oil and gas industry. Our assets are specifically utilized in natural gas compression applications in the Permian Basin, Eagle Ford Shale and other U.S. regions. Our customers are dependent on these applications to produce natural gas and oil and transport it to end markets. Our assets are central to meeting growing global natural gas and oil demand. Furthermore, the long-life nature of our assets and our fixed-revenue contracts help to protect our business from the impact of industry and broader macroeconomic cycles.
Unconventional resources, large-scale centralized gathering and multi-well pad operations require more horsepower than conventional resources, driving demand for our large horsepower compression units. Upstream and midstream companies have increasingly prioritized capital discipline and return of capital to stockholders. We believe that our customers will increasingly continue to outsource their compression infrastructure needs to reduce capital expenditures outside of their core business and benefit from our technical skill and expertise.
We believe that the industry is facing uncertainties and continued pressures from regulators and shifting sentiments from investors and other stakeholders, primarily related to broader adoption of emission reduction targets and other sustainability initiatives. Many energy companies, including some of our customers, have announced significant GHG emission reduction initiatives. We expect to partially benefit from this trend as 96% of our current fleet is capable of operating in the most stringent emissions regulatory environments in the U.S., which require emissions of 0.5g/bhp-hr NOx or less. A growing number of our customers are evaluating potential opportunities in electric compression infrastructure and we are well positioned to support them in these strategic initiatives.
Eighty-four percent of our compression assets are strategically deployed in the Permian Basin and Eagle Ford Shale, which the United States Energy Information Administration (“EIA”) expects to maintain significant production volumes through at least 2050. We believe these two regions have the largest and lowest-cost unconventional resources in the U.S. exhibiting strong recent growth of natural gas and crude oil production from the two regions of 13% and 12%, respectively, on an average annual basis from 2017 to 2022. Additionally, there are significant U.S. liquefied natural gas (“LNG”) export projects in development, and overall LNG export capacity is expected to meaningfully grow over the next decade, in particular
20
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along the U.S. Gulf Coast with liquefaction capacity expected to grow 41% from 14.5 MTPA in 2022 to 20.5 MTPA in 2025 from projects that have declared final investment decisions as of June 30, 2023. We expect this to translate into Permian Basin and Eagle Ford Shale natural gas production growth, requiring substantial additional compression horsepower. We believe these regions will play an increasingly important role in global energy security as the world continues to require reliable and growing natural gas and oil production to support increasing global energy demand.
Ultimately, the extent to which our business will be impacted by the factors described above, as well as future developments beyond our control, cannot be predicted with reasonable certainty. However, we continue to believe in the long-term demand for our compression operations given the necessity of compression in gathering, processing and transportation of natural gas and centralized gas lift of oil.
The foregoing market data and certain other statistical information is based on the EIA’s Annual Energy Outlook 2023, released on March 16, 2023 (the “EIA Report”). Although we believe the EIA Report is reliable as of its date, we have not independently verified the accuracy or completeness of the information contained therein. Some data is also based on our good faith estimates and our management’s understanding of industry conditions. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section entitled “Risk Factors” in the IPO Prospectus. Those and other factors could cause results to differ materially from those expressed in these publications.
How We Evaluate Our Operations
Revenue-Generating Horsepower
Revenue-generating horsepower growth is the primary driver of our revenue growth, and it is the base measure for evaluating our efficiency of capital deployed. Revenue-generating horsepower includes compression units that are operating under contract and generating revenue and compression units which are available to be deployed and for which we have a signed contract or are subject to a firm commitment from our customer.
Horsepower Utilization
We calculate horsepower utilization as (i) revenue-generating horsepower divided by (ii) fleet horsepower. The primary reason for tracking and analyzing our horsepower utilization is to determine the percentage of our fleet that is currently generating revenue for future cash flow generation and the efficiency of our capital deployed.
Revenue-Generating Horsepower per Revenue-Generating Compression Unit
We calculate revenue-generating horsepower per revenue-generating compression unit as (i) total revenue-generating horsepower divided by (ii) total revenue-generating compression units. The primary reason for tracking and analyzing our revenue-generating horsepower per revenue-generating compression unit is to determine our expected operational and financial performance.
Revenue
One of our measures of financial performance is the amount of revenue generated quarterly and annually as revenue is an indicator of our overall business growth. We measure our revenue under two operating segments, Compression Operations and Other Services. We consider our Compression Operations revenue to be our core operations and it will continue to be the largest revenue source for the Company.
Adjusted Gross Margin
We track Adjusted Gross Margin on an absolute dollar basis and as a percentage of revenue. We define Adjusted Gross Margin as revenue less cost of operations, exclusive of depreciation and amortization expense. We believe that Adjusted Gross Margin is useful to external users as a supplemental measure of our operating profitability. Adjusted Gross Margin is impacted primarily by the pricing trends for service operations and cost of operations, including labor rates for service technicians, volume and per compression unit costs for lubricant oils, quantity and pricing of routine preventative maintenance on compression units and property tax rates on compression units.
Adjusted Gross Margin should not be considered an alternative to, or more meaningful than, gross margin or any other measure of financial performance presented in accordance with GAAP. Moreover, Adjusted Gross Margin as presented may not be comparable to similarly titled measures of other
21
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companies. To compensate for the limitations of Adjusted Gross Margin as a measure of our performance, we believe that it is important to consider gross margin determined under GAAP, as well as Adjusted Gross Margin, to evaluate our operating profitability. See “—Non-GAAP Financial Measures.”
Adjusted EBITDA
We track Adjusted EBITDA on an absolute dollar basis and as a percentage of revenue. We define Adjusted EBITDA as net income before interest expense, net plus, (i) tax expense (benefit); (ii) depreciation and amortization; (iii) unrealized loss (gain) on derivatives; (iv) equity compensation expense; (v) transaction expenses; (vi) loss (gain) on sale of assets; and (vii) impairment of compression equipment. Adjusted EBITDA is used as a supplemental financial measure by our management and external users of our financial statements, such as investors, commercial banks and other financial institutions, to assess:
| • | the financial performance of our assets without regard to the impact of financing methods, capital structure or historical cost basis of our assets; |
| • | the viability of capital expenditure projects and the overall rates of return on alternative investment opportunities; |
| • | the ability of our assets to generate cash sufficient to make debt payments and pay dividends; and |
| • | our operating performance as compared to those of other companies in our industry without regard to the impact of financing methods and capital structure. |
We believe that Adjusted EBITDA provides useful information to investors because, when viewed with our GAAP results and the accompanying reconciliation, they provide a more complete understanding of our performance than GAAP results alone. We also believe that external users of our financial statements benefit from having access to the same financial measures that management uses in evaluating the results of our business.
Adjusted EBITDA should not be considered an alternative to, or more meaningful than, revenues, net income, operating income, cash flows from operating activities or any other measure of financial performance presented in accordance with GAAP as measures of operating performance and liquidity. Moreover, our Adjusted EBITDA as presented may not be comparable to similarly titled measures of other companies. See “—Non-GAAP Financial Measures.”
Sources of Our Revenues
Compression Operations
Compression Operations revenue consists of operating company-owned and customer-owned compression infrastructure for our customers, pursuant to fixed-revenue contracts to enable the production, gathering and transportation of natural gas and oil. Additionally, revenue from these fixed-revenue contracts can include mobilization and demobilization charges that are directly reimbursable by our customers.
Other Services
Other Services revenue consists of a full range of contract services to support the needs of our customers including station construction, maintenance and overhaul, and other ancillary time and material based offerings.
Principal Components of our Cost Structure
Compression Operations
Compression Operations expenses consist of direct and indirect expenses related to operating compression infrastructure assets, such as labor, supplies, machinery, freight, and crane expenses.
Other Services
Other Services expenses consist of compressor station construction and other ancillary expenses to support the needs of customers, including parts, labor, and materials.
22
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Depreciation and Amortization
Depreciation expense consists primarily of depreciation on property, plant and equipment purchased and leasehold improvements. Amortization expense consists primarily of amortization of intangible assets related to trade name and customer relationships.
Selling, General and Administrative Expense
Selling, General and Administrative expenses primarily consist of compensation and benefits-related costs associated with our finance, legal, human resources, information technology, administrative, and sales and marketing functions. Selling, General, and Administrative costs also consist of third-party professional service fees for external legal, accounting and other consulting services, rent and lease charges, insurance costs, and software expense.
Long-lived Asset Impairment
Long-lived assets, including property, plant, and equipment, and other finite-lived identifiable intangible assets, are reviewed for impairment whenever events or changes in circumstances, including the removal of compression units from the active fleet, indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the asset. Impairment losses are recognized in the period in which the impairment occurs and represent the excess of the asset carrying value over its fair value. There were no indicators that the carrying amount may not be recoverable for the six months ended June 30, 2023 and 2022.
Interest Expense, Net
Interest expense, net relates to interest incurred on outstanding borrowings under our ABL Facility (as defined below), the Term Loan (as defined below), the impact of interest rate swaps, and amortization of debt issuance cost, net of interest income earned on cash balances.
Unrealized Gain (Loss) on Derivatives
Unrealized gain (loss) on derivatives results from changes in the mark-to-market valuation of derivative instruments related to interest rate swaps whereby we have exchanged variable interest rates for fixed interest rates and entered into interest rate collars which represent a simultaneous purchase of a cap rate with the sale of a floor rate. Derivative instruments are used to manage our exposure to fluctuations in the variable interest rate of the ABL Facility and the Term Loan and thereby mitigate the risks and costs associated with financing activities. We have not designated any derivative instruments as hedge for accounting purposes and we do not enter into such instruments for speculative trading purposes. Gains and losses on derivatives are presented in the other income and expense section of the consolidated statements of operations as unrealized gain or loss on derivatives.
Operational Highlights
The following table summarizes certain horsepower and horsepower utilization percentages for our fleet for the periods presented.
| As of June 30, | Percentage Change |
|||||||||||
| 2023 | 2022 | |||||||||||
| Operating Data (at period end): |
||||||||||||
| Fleet horsepower(1) |
3,180,906 | 3,084,406 | 3.1 | % | ||||||||
| Revenue-generating horsepower(2) |
3,177,286 | 3,074,613 | 3.3 | % | ||||||||
| Fleet compression units |
3,038 | 2,994 | 1.5 | % | ||||||||
| Revenue-generating compression units |
3,023 | 2,987 | 1.2 | % | ||||||||
| Revenue-generating horsepower per revenue-generating compression unit(3) |
1,051 | 1,029 | 2.1 | % | ||||||||
| Horsepower utilization(4) |
99.9 | % | 99.7 | % | 0.2 | % | ||||||
| (1) | Fleet horsepower includes revenue-generating horsepower and idle horsepower, which is compression units that do not have a signed contract or are not subject to a firm commitment from our customer and are no longer generating revenue. Fleet horsepower excludes 32,340 and 60,025 of non-marketable or obsolete horsepower as of June 30, 2023 and 2022, respectively. |
23
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| (2) | Revenue-generating horsepower includes compression units that are operating under contract and generating revenue and compression units which are available to be deployed and for which we have a signed contract or are subject to a firm commitment from our customer. |
| (3) | Calculated as (i) revenue-generating horsepower divided by (ii) revenue-generating compression units at period end. |
| (4) | Horsepower utilization is calculated as (i) revenue-generating horsepower divided by (ii) fleet horsepower. |
Horsepower
The 3.1% and 3.3% increase in fleet horsepower and revenue-generating horsepower, respectively, were primarily attributable to an increase in the purchase and deployment of new compression units through organic growth with our existing customer base as well as select new customers in the key regions in which we operate. The 2.1% increase in revenue-generating horsepower per revenue-generating compression unit was due to the purchase and deployment of new, large horsepower units.
24
Table of Contents
Financial Results of Operations
Three months ended June 30, 2023 compared to the three months ended June 30, 2022
The following table presents selected financial and operating information for the periods presented (in thousands):
| For the Three Months Ended June 30, | % Change | |||||||||||
| 2023 | 2022 | |||||||||||
| Revenues: |
||||||||||||
| Compression Operations |
$ | 181,619 | $ | 162,808 | 11.6 | % | ||||||
| Other Services |
21,687 | 14,343 | 51.2 | % | ||||||||
|
|
|
|
|
|
|
|||||||
| Total revenues |
203,306 | 177,151 | 14.8 | % | ||||||||
| Operating expenses: |
||||||||||||
| Cost of operations (exclusive of depreciation and amortization shown below) |
||||||||||||
| Compression Operations |
65,017 | 58,336 | 11.5 | % | ||||||||
| Other Services |
18,099 | 11,774 | 53.7 | % | ||||||||
| Depreciation and amortization |
45,430 | 43,397 | 4.7 | % | ||||||||
| Selling, general and administrative expenses |
13,438 | 11,740 | 14.5 | % | ||||||||
| Loss (gain) on sale of fixed assets |
(738 | ) | — | nm | ||||||||
|
|
|
|
|
|
|
|||||||
| Total operating expenses |
141,246 | 125,247 | 12.8 | % | ||||||||
|
|
|
|
|
|
|
|||||||
| Income from operations |
62,060 | 51,904 | ||||||||||
| Other income (expenses): |
||||||||||||
| Interest expense, net |
(60,964 | ) | (36,829 | ) | 65.5 | % | ||||||
| Realized gain on derivatives |
25,835 | — | nm | |||||||||
| Unrealized (loss) gain on derivatives |
(3,595 | ) | (3,386 | ) | 6.2 | % | ||||||
| Other (expense) income |
32 | (7 | ) | 557.1 | % | |||||||
|
|
|
|
|
|
|
|||||||
| Total other expense |
(38,692 | ) | (40,222 | ) | (3.8 | )% | ||||||
|
|
|
|
|
|
|
|||||||
| Income before income taxes |
23,368 | 11,682 | ||||||||||
| Income tax expense |
5,851 | 2,781 | 110.4 | % | ||||||||
|
|
|
|
|
|
|
|||||||
| Net income |
$ | 17,517 | $ | 8,901 | 96.8 | % | ||||||
|
|
|
|
|
|
|
|||||||
Revenues and Sources of Income
Compression Operations
Compression Operations revenue increased $18.8 million (11.6%) for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. $20.0 million of the increase was the result of an increase in average revenue-generating horsepower as a result of increased demand for our compression operations (consistent with increased operating activity in the oil and gas industry) and due to an increase in average revenue per revenue-generating horsepower per month. This was partially offset by a $1.2 million decrease in freight and crane charges that are directly reimbursable by our customers.
Other Services
Other Services revenue increased $7.3 million (51.2%) for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. This increase was primarily due to a $4.9 million increase in revenue from station construction services driven primarily by progress on new stations and a $2.4 million increase in revenue from parts and service, driven by increased customer demand.
Operating Costs and Other Expenses
Compression Operations
Compression Operations expenses increased $6.7 million (11.5%) for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. This was primarily due to a $2.7 million increase in direct expenses, driven by increases in pricing and volume of fluids and parts to support increased activity, a $3.8 million increase in direct labor expenses related to increased headcount and salaries, a $1.1 million increase in indirect expenses; partially offset by a $0.9 million decrease in freight and crane charges that are directly reimbursable by our customers.
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Table of Contents
Other Services
Other Services expense increased $6.3 million (53.7%) for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. This was primarily due to a $4.4 million increase in expenses from station construction services driven primarily by progress on new stations and a $1.9 million increase in expenses from parts and service costs.
Depreciation and Amortization
Depreciation and Amortization increased $2.0 million (4.7%) for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. This was primarily due to an increase in compression equipment purchased, which resulted in increased depreciation associated with that equipment.
Selling, General and Administrative Expense
Selling, General and Administrative expenses increased $1.7 million (14.5%) for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. This was primarily due to a $1.1 million increase in professional fees mainly related to transaction costs and a $0.6 million increase in other overhead expenses, primarily as a result of insurance, advertising, entertainment and office expenses.
Interest Expense, Net
Interest expense increased $24.2 million (65.5%) for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. This increase is primarily due (i) to the full period impact of an increase in borrowings under the ABL Facility and Term Loan, of which $825 million of which was related to the May 2022 recapitalization (as discussed in Note 9 (“Debt and Credit Facilities”) to the Condensed Consolidated Financial Statements included elsewhere in this Report) and (ii) increased effective interest rates on the ABL Facility and Term Loan.
Realized Gain on Derivatives
On June 29, 2023, the Company terminated its interest rate swaps and collars attributable to the Term Loan, resulting in the realization of $25.8 million in gains resulting from changes in the market value of such swaps and collars since their inception due to an increase in LIBOR rates. No such gains were realized in the three months ended June 30, 2022.
Unrealized (Loss) Gain on Derivatives
Unrealized (loss) gain on derivatives decreased $0.2 million (6.2%) for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. This is primarily related to a $24.8 million unrealized loss on settlement of the interest rate swaps and collars from the term loan; offset by a $21.2 million unrealized gain on the change in market value of our interest rate swaps and collars during the three months ended June 30, 2023 due to an increase in the long-term SOFR yield curve, as compared to a $3.4 million unrealized loss on the change in market value of our interest rate swaps and collars during the three months ended June 30, 2022 due to an decrease in the long-term SOFR and LIBOR yield curves.
Income tax expense
Income tax expense increased by $3.1 million (110.4%) for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. This was primarily due to an increase in pre-tax income of $11.7 million for the three months ended June 30, 2023 compared to pre-tax income for the three months ended June 30, 2022.
26
Table of Contents
Financial Results of Operations
Six months ended June 30, 2023 compared to the six months ended June 30, 2022
The following table presents selected financial and operating information for the periods presented (in thousands):
| For the Six Months Ended June 30, | % Change | |||||||||||
| 2023 | 2022 | |||||||||||
| Revenues: |
||||||||||||
| Compression Operations |
$ | 359,316 | $ | 320,303 | 12.2 | % | ||||||
| Other Services |
34,102 | 25,189 | 35.4 | % | ||||||||
|
|
|
|
|
|
|
|||||||
| Total revenues |
393,418 | 345,492 | 13.9 | % | ||||||||
| Operating expenses: |
||||||||||||
| Cost of operations (exclusive of depreciation and amortization shown below) |
||||||||||||
| Compression Operations |
127,787 | 111,273 | 14.8 | % | ||||||||
| Other Services |
27,087 | 20,601 | 31.5 | % | ||||||||
| Depreciation and amortization |
90,327 | 85,802 | 5.3 | % | ||||||||
| Selling, general and administrative expenses |
26,523 | 21,570 | 23.0 | % | ||||||||
| Loss (gain) on sale of fixed assets |
(721 | ) | (7 | ) | nm | |||||||
|
|
|
|
|
|
|
|||||||
| Total operating expenses |
271,003 | 239,239 | 13.3 | % | ||||||||
|
|
|
|
|
|
|
|||||||
| Income from operations |
122,415 | 106,253 | 15.2 | % | ||||||||
| Other income (expenses): |
||||||||||||
| Interest expense, net |
(119,687 | ) | (62,469 | ) | 91.6 | % | ||||||
| Realized gain on derivatives |
25,835 | — | nm | |||||||||
| Unrealized (loss) gain on derivatives |
(21,529 | ) | 32,822 | (165.6 | )% | |||||||
| Other income |
1 | 9 | (88.9 | )% | ||||||||
|
|
|
|
|
|
|
|||||||
| Total other expense |
(115,380 | ) | (29,638 | ) | 289.3 | % | ||||||
|
|
|
|
|
|
|
|||||||
| Income before income taxes |
7,035 | 76,615 | (90.8 | )% | ||||||||
| Income tax expense |
1,861 | 18,159 | (89.8 | )% | ||||||||
|
|
|
|
|
|
|
|||||||
| Net income |
$ | 5,174 | $ | 58,456 | (91.1 | )% | ||||||
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Revenues and Sources of Income
Compression Operations
Compression Operations revenue increased $39.0 million (12.2%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. $39.2 million of the increase was the result of an increase in average revenue-generating horsepower as a result of increased demand for our compression operations (consistent with increased operating activity in the oil and gas industry) and due to an increase in average revenue per revenue-generating horsepower per month. This was partially offset by a $0.2 million decrease in freight and crane charges that are directly reimbursable by our customers.
Other Services
Other Services revenue increased $8.9 million (35.4%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This increase was primarily due to a $5.5 million increase in revenue from station construction services driven primarily by progress on new stations and $3.4 million from parts and service.
Operating Costs and Other Expenses
Compression Operations
Compression Operations expenses increased $16.5 million (14.8%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This was primarily due to a $7.0 million increase in direct expenses, driven by increases in pricing and volume of fluids and parts to support increased activity, a $6.8 million increase in direct labor expenses related to increased headcount and salaries, a $2.9 million increase in indirect expenses; partially offset by a $0.2 million decrease in freight and crane charges that are directly reimbursable by our customers.
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Other Services
Other Services expense increased $6.5 million (31.5%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This was primarily due to a $3.9 million increase in expenses from station construction services driven primarily by progress on new stations and $2.6 million from parts and service costs, driven by increased customer demand.
Depreciation and Amortization
Depreciation and Amortization increased $4.5 million (5.3%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This was primarily due to an increase in compression equipment purchased, which resulted in increased depreciation associated with that equipment.
Selling, General and Administrative Expense
Selling, General and Administrative expenses increased $5.0 million (23.0%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This was primarily due to a $2.3 million increase in labor and benefit expenses (including $0.3 million of equity compensation), a $1.5 million increase in other overhead expenses, primarily as a result of increased travel, advertising, entertainment and office expenses and insurance, and a $1.2 million increase in professional fees mainly associated with transaction costs.
Interest Expense, Net
Interest expense increased $57.2 million (91.6%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This is primarily due to (i) an increase in borrowings under the ABL Facility and Term Loan, of which $825 million was related to the May 2022 recapitalization (as discussed in Note 9 (“Debt and Credit Facilities”) to the Condensed Consolidated Financial Statements included elsewhere in this Report) and (ii) increased effective interest rates on the ABL Facility and Term Loan.
Realized Gain on Derivatives
On June 29, 2023, the Company terminated its interest rate swaps and collars attributable to the Term Loan, resulting in the realization of $25.8 million in gains resulting from changes in the market value of such swaps and collars since their inception due to an increase in LIBOR rates. No such gains were realized in the six months ended June 30, 2022.
Unrealized (Loss) Gain on Derivatives
Unrealized (loss) gain on derivatives decreased $54.4 million (-165.6%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This is primarily related to a $24.8 million unrealized loss on the settlement of the interest rate swaps and collars from the Term Loan; offset by a $21.2 million unrealized gain on the change in market value of our existing interest rate swaps and collars during the six months ended June 30, 2023 due to an increase in the long-term SOFR yield curve, as compared to a $32.8 million unrealized gain on the change in market value of our interest rate swaps and collars during the six months ended June 30, 2022 due to an increase in the long-term SOFR and LIBOR yield curves.
Income tax expense
Income tax expense decreased by $16.3 million (-89.8%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This was primarily due to a decrease in pre-tax income of $69.6 million for the six months ended June 30, 2023 compared to pre-tax income for the six months ended June 30, 2022.
Liquidity and Capital Resources
Overview
Our ability to fund operations, finance capital expenditures, service our debt, and pay dividends depends on the levels of our operating cash flows and access to the capital and credit markets. Our primary sources of liquidity are cash flows generated from our operations and our borrowing availability under the ABL Facility. Our cash flow is affected by numerous factors including prices and demand for our infrastructure compression assets, conditions in the financial markets and other factors. We believe cash generated by operating activities will be sufficient to service our debt, fund working capital, fund our estimated capital expenditures and, as our board of directors may determine from time to time in its discretion, pay dividends.
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Cash Requirements
Capital Expenditures
The compression infrastructure business is capital intensive, requiring significant investment to expand, maintain, and upgrade existing operations. Our capital requirements have consisted primarily of, and we anticipate that our capital requirements will continue to consist primarily of, the following:
| • | Growth Capital Expenditures: (1) capital expenditures made to expand the operating capacity or operating income capacity of assets by acquisition of additional compression units, (2) capital expenditures made to maintain the operating capacity or operating income capacity of assets by acquisition of replacement compression units and (3) capital expenditures not related to our compression units—such as trucks, wash trailers, crane trucks, leasehold improvements, technology hardware and software and related implementation expenditures, furniture and fixtures, and other general items that are typically capitalized to operate the business that have a useful life beyond one year. We make capital expenditures not related to our compression units (as described in clause (3) above) if and when necessary to support the operations of our revenue generating horsepower. |
| • | Maintenance Capital Expenditures: periodic capital expenditures incurred at predetermined operating intervals to maintain consistent and reliable operating capacity of our assets over the near term. Such maintenance capital expenditures typically involve overhauls of significant components of our compression units, such as the engine and compressor, pistons, rings, heads, and bearings. These maintenance capital expenditures are predictable and the majority of these expenditures are tied to a detailed, unit-by-unit schedule based on hours of operation or age. We utilize a disciplined and systematic asset management program whereby we perform major unit overhauls and engine replacements on a defined schedule based on hours of operation. As a result, our maintenance capital expenditures may vary considerably from year to year based on when such assets were added to the fleet. Maintenance capital expenditures along with regularly scheduled preventive maintenance expenses are typically sufficient to sustain operating capacity of our assets over the full expected useful life of the compression units. Maintenance capital expenditures do not include expenditures to replace compression units when they reach the end of their useful lives. |
The majority of our growth capital expenditures are related to the acquisition cost of new compression units. Maintenance capital expenditures are related to overhauls of significant components of our compression equipment, such as the engine and compressor, which return the components to a like-new condition, but do not modify the application for which the compression equipment was designed.
For the six months ended June 30, 2023, growth capital expenditures were $68.3 million and maintenance capital expenditures were $15.7 million. For the six months ended June 30, 2022, growth capital expenditures were $126.6 million and maintenance capital expenditures were $17.4 million. The decrease in growth capital expenditures was primarily related to the timing of new compressor equipment purchases to support organic growth. The decrease in maintenance capital expenditures was primarily a result of a decrease in scheduled unit overhauls that occurred based on the age and operating hours of such units.
Dividends
Our board of directors may elect to declare cash dividends on our common stock, subject to our compliance with applicable law, and depending on, among other things, economic conditions, our financial condition, results of operations, projections, liquidity, earnings, legal requirements, and restrictions in the agreements governing our indebtedness (as further discussed herein). If and to the extent our board of directors were to declare a cash dividend to our stockholders, we expect the dividend to be paid from our Discretionary Cash Flow. The timing, amount and financing of dividends, if any, will be subject to the discretion of our board of directors from time to time.
Over the long-term, we expect to fund any dividends and our budgeted growth capital expenditures using our Discretionary Cash Flow. In the event our Discretionary Cash Flow is insufficient for the purpose of funding any such dividends and our budgeted growth capital expenditures for such period, we may fund such shortfall (i) with additional borrowings under our ABL Facility, which as of June 30, 2023 had $375 million available (subject to the requirement that our availability under the borrowing base under the ABL Facility exceeds the greater of (x) 10% of the total commitments under the facility of $2.2 billion or (y) $200 million or (ii) reduce our growth capital expenditures for such period. Any such additional borrowings under our ABL Facility will result in an increase in our interest expense for such period. Any such reduction in our growth capital expenditures may result in lower growth in our revenue-generating horsepower in future periods.
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Contractual Obligations
Our material contractual obligations as of June 30, 2023 consisted of the following:
| • | Long-term debt of $2.8 billion, which is due in 2028. See Note 19 (“Subsequent Events”) to the Condensed Consolidated Financial Statements included elsewhere in this Report; |
| • | Purchase commitments of $129.2 million are due within 12 months, primarily consisting of commitments to purchase compression units. See Note 13 (“Commitments and Contingencies”) to the Condensed Consolidated Financial Statements included elsewhere in this Report. |
Other Commitments
As of June 30, 2023, other commitments include operating lease payments totaling $58.5 million.
Sources of Cash
Cash Flows
The following table summarizes our cash flows for the six months ended June 30, 2023, and 2022 (in thousands):
| Six Months Ended June 30, | ||||||||||||
| 2023 | 2022 | $ Variance | ||||||||||
| Net cash provided by operating activities |
$ | 117,968 | $ | 127,647 | $ | (9,679 | ) | |||||
| Net cash used in investing activities |
(92,993 | ) | (145,950 | ) | 52,957 | |||||||
| Net cash provided by (used in) financing activities |
(4,035 | ) | 10,135 | (14,170 | ) | |||||||
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| Net increase (decrease) in cash and cash equivalents |
$ | 20,940 | $ | (8,168 | ) | $ | 29,108 | |||||
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Operating Activities
The $9.7 million decrease in net cash provided by operating activities for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to a $53.3 million decrease in net income, adjusted for non-cash items which is mainly related to a $54.4 million increase in unrealized loss on derivative instruments, and a $6.8 million decrease in working capital primarily consisting of an increase in accounts receivable due to an increase in revenue from compression operations, an increase in prepaid expenses and other current assets due to an increase in deferred IPO costs, a decrease in accrued liabilities due to payment made to vendors during the year; partially offset by an increase in accounts payable, contract liabilities.
Investing Activities
The $53.0 million decrease in net cash used in investing activities for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to lower levels of both maintenance and growth capital expenditures.
Financing Activities
The $14.2 million increase in net cash used in financing activities for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to a decrease in borrowings on debt instruments of $721.9 million, an increase in payments on debt instruments of $83.3 million, and an increase in payments of debt issuance cost of $4.6 million. This was offset by a decrease in equity distribution of $795.7 million.
Description of Indebtedness
Asset Based Lending Facility
As of January 1, 2022, a wholly-owned subsidiary of Kodiak had an ABL Facility with unaffiliated secured lenders and JPMorgan Chase Bank, N.A., as administrative agent. On March 22, 2023, wholly-owned subsidiaries of Kodiak entered into the Fourth Amended and Restated ABL Credit Agreement with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (as amended or restated from time to time, the “ABL Credit Agreement”), whereby the total facility (among other things) was increased to $2.2 billion and certain changes were made to our financial covenants and maturity date. The maturity date of the ABL Facility is March 22, 2028. See Note 9 (“Debt and Credit Facilities”) to the Condensed Consolidated Financial Statements included elsewhere in this Report. The ABL Credit Agreement requires that we meet certain financial ratios.
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Commencing with the first fiscal quarter ending after the completion of the IPO, our fixed charge coverage ratio will be replaced by an interest coverage ratio (as defined in the ABL Credit Agreement) that may not be less than 2.50 to 1.00, determined as of the last day of each fiscal quarter.
Commencing with the first fiscal quarter ending after the completion of the IPO but prior to the occurrence of certain issuances of unsecured debt (for purposes of this description, an “Unsecured Debt Issuance”), our Leverage Ratio (as defined in the ABL Credit Agreement), determined quarterly as of the last day of each fiscal quarter, may not exceed (i) 5.25 to 1.00 for the fiscal quarters ending September 30, 2023 and December 31, 2023, (ii) 5.00 to 1.00 for the fiscal quarter ending March 31, 2024, (iii) 4.75 to 1.00 for the fiscal quarter ending June 30, 2024 and (iv) 4.50 to 1.00 for each fiscal quarter ending on or after September 30, 2024.
Commencing with the first fiscal quarter ending after both the completion of the IPO and the occurrence of an unsecured debt issuance, (a) our Leverage Ratio, determined quarterly as of the last day of each fiscal quarter, may not exceed (x) 5.75 to 1.00 for the first four fiscal quarters ending after the occurrence of the unsecured debt issuance and (y) 5.25 to 1.00 for each fiscal quarter ending thereafter; and (b) our Secured Leverage Ratio (as defined in the ABL Credit Agreement), determined quarterly as of the last day of each fiscal quarter, may not exceed (x) 3.50 to 1.00 for the first four fiscal quarters ending after the occurrence of the unsecured debt issuance and (y) 3.00 to 1.00 for each fiscal quarter ending thereafter.
All obligations under the ABL Facility are collateralized by essentially all the assets of the Company. We were in compliance with all covenants as of June 30, 2023 and December 31, 2022.
The ABL Credit Agreement also restricts the Company’s ability to: incur additional indebtedness and guarantee indebtedness; pay dividends or make other distributions or repurchase or redeem equity interests; prepay, redeem or repurchase certain debt; issue certain preferred units or similar equity securities; make loans and investments; sell, transfer or otherwise dispose of assets; incur liens; enter into transactions with affiliates; enter into agreements restricting the Company’s restricted subsidiaries’ ability to pay dividends; enter into certain swap agreements; amend certain organizational documents; enter into sale and leaseback transactions; and consolidate, merge or sell all or substantially all of the Company’s assets.
The applicable interest rate under the ABL Facility is (i) in the case of SOFR-based borrowings, the Term SOFR or Daily Simple SOFR rate then in effect (subject to a floor of 0%) plus 0.10% plus a spread that depends on our Leverage Ratio as of the most recent determination date ranging from 2.00% if our Leverage Ratio is less than or equal to 3.00:1.00 to 3.00% if our Leverage Ratio is greater than 5.50:1.00 and (ii) in the case of prime rate-based borrowings, the prime rate (subject to a floor of 2.5%) plus a spread that depends on our Leverage Ratio as of the most recent determination date ranging from 1.00% if our Leverage Ratio is less than or equal to 3.00:1.00 to 2.00% if our Leverage Ratio is greater than 5.50:1.00.
The applicable interest rates as of June 30, 2023 were 10.25% (prime rate plus 2.00%) and 8.34% (Term SOFR rate plus 0.10% plus 3.00%). The applicable interest rates as of December 31, 2022 were 9.50% (prime rate plus 2.00%) and 7.60% (Term SOFR rate plus 0.10% plus 3.00%).
Term Loan
As of January 1, 2022, a wholly-owned subsidiary of Kodiak had a term loan (the “Term Loan”) pursuant to a credit agreement with unaffiliated unsecured lenders and Wells Fargo Bank, N.A., as administrative agent. On May 19, 2022, we entered into the Term Loan Credit Agreement (as amended from time to time, the “Term Loan Credit Agreement”) whereby we increased the aggregate commitments under the Term Loan from $400 million to $1 billion and made certain changes to our financial covenants, including (i) the financial covenants were not measured for the second quarter of 2022 and (ii) the maximum Leverage Ratio (calculated based on the ratio of Consolidated Total Debt to Consolidated EBITDA, each as defined in the Term Loan Credit Agreement) was increased to 7.50x through the first quarter of 2023; 7.25x thereafter through the third quarter of 2023; 7.00x thereafter through the first quarter of 2024; 6.75x thereafter through the first quarter of 2025; 6.50x thereafter through the first quarter of 2026; 6.25x thereafter through the fourth quarter of 2026; and 6.00x in the first quarter of 2027 and thereafter. We were in compliance with all financial covenants as of June 30, 2023 and December 31, 2022.
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On March 31, 2023, our wholly-owned subsidiary entered into the First Amendment to the Term Loan Credit Agreement, which extended the maturity date to September 22, 2028. Lender fees and costs totaling $0.75 million were incurred for this amendment and will be amortized over the life of the loans to interest expense. Borrowings under the Term Loan incurred interest at the following applicable rates: interest rates were based on 6.00% plus an alternate base rate and 7.00% plus an adjusted eurocurrency rate for alternate base rate loans and eurocurrency loans, respectively. The interest rates were 12.16% and 10.67% as of June 30, 2023 and December 31, 2022, respectively.
As disclosed in Note 19 - (“Subsequent Events”) to the Condensed Consolidated Financial Statements included elsewhere in this Report, we used the net proceeds of our IPO, together with the proceeds resulting from the Term Loan Derivative Settlement and borrowings under our ABL Facility, to repay $300 million of borrowings outstanding under the Term Loan on July 3, 2023. In connection with the IPO, all of the Company’s and its subsidiaries’ remaining obligations under the Term Loan were assumed by a parent entity of Kodiak Holdings, and the Company’s obligations thereunder were terminated. As a result, the Company is no longer a borrower or guarantor under, nor otherwise obligated with respect to the debt outstanding under the Term Loan.
Derivatives and Hedging Activities
To mitigate a portion of the exposure to fluctuations in the variable interest rate of the ABL Facility and the Term Loan, we have entered into various derivative instruments.
Our interest rate swaps exchange variable interest rates for fixed interest rates. We have not designated any derivative instruments as hedges for accounting purposes and do not enter into such instruments for speculative or trading purposes. See Note 10 (“Derivative Instruments”) to the Condensed Consolidated Financial Statements included elsewhere in this Report.
Parent Entity Distribution
On June 27, 2023, we made a cash distribution of $42.3 million to a parent entity of Kodiak Holdings prior to the consummation of the IPO, of which $11.0 million was funded with cash on hand and $31.3 million was funded with borrowings under the ABL Facility.
Non-GAAP Financial Measures
Management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include the non-GAAP financial measures of Adjusted Gross Margin, Adjusted Gross Margin Percentage, Adjusted EBITDA, Adjusted EBITDA Percentage, Discretionary Cash Flow and Free Cash Flow.
Adjusted Gross Margin and Adjusted Gross Margin Percentage
Adjusted Gross Margin is a non-GAAP financial measure. We define Adjusted Gross Margin as revenue less cost of operations, exclusive of depreciation and amortization expense. We believe that Adjusted Gross Margin is useful as a supplemental measure to our operating profitability. Adjusted Gross Margin is impacted primarily by the pricing trends for service operations and cost of operations, including labor rates for service technicians, volume and per compression unit costs for lubricant oils, quantity and pricing of routine preventative maintenance on compression units and property tax rates on compression units. Adjusted Gross Margin should not be considered an alternative to, or more meaningful than, gross margin or any other measure of financial performance presented in accordance with GAAP. Moreover, Adjusted Gross Margin as presented may not be comparable to similarly titled measures of other companies. Because we capitalize assets, depreciation and amortization of equipment is a necessary element of our costs. To compensate for the limitations of Adjusted Gross Margin as a measure of our performance, we believe that it is important to consider gross margin determined under GAAP, as well as Adjusted Gross Margin, to evaluate our operating profitability.
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Adjusted Gross Margin for Compression Operations
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||
| Total revenues |
$ | 181,619 | $ | 162,808 | $ | 359,316 | $ | 320,303 | ||||||||
| Cost of operations (excluding depreciation and amortization) |
(65,017 | ) | (58,336 | ) | (127,787 | ) | (111,273 | ) | ||||||||
| Depreciation and amortization |
(45,430 | ) | (43,397 | ) | (90,327 | ) | (85,802 | ) | ||||||||
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| Gross margin |
$ | 71,172 | $ | 61,075 | $ | 141,202 | $ | 123,228 | ||||||||
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| Gross Margin Percentage |
39.2 | % | 37.5 | % | 39.3 | % | 38.5 | % | ||||||||
| Depreciation and amortization |
45,430 | 43,397 | 90,327 | 85,802 | ||||||||||||
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| Adjusted Gross Margin |
$ | 116,602 | $ | 104,472 | $ | 231,529 | $ | 209,030 | ||||||||
| Adjusted Gross Margin Percentage(1) |
64.2 | % | 64.2 | % | 64.4 | % | 65.3 | % | ||||||||
| (1) | Calculated using Adjusted Gross Margin for Compression Operations as a percentage of total Compression Operations revenues. |
Adjusted Gross Margin for Other Services
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||
| Total revenues |
$ | 21,687 | $ | 14,343 | $ | 34,102 | $ | 25,189 | ||||||||
| Cost of operations (excluding depreciation and amortization) |
(18,099 | ) | (11,774 | ) | (27,087 | ) | (20,601 | ) | ||||||||
| Depreciation and amortization |
— | — | — | — | ||||||||||||
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| Gross margin |
$ | 3,588 | $ | 2,569 | $ | 7,015 | $ | 4,588 | ||||||||
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| Gross Margin Percentage |
16.5 | % | 17.9 | % | 20.6 | % | 18.2 | % | ||||||||
| Depreciation and amortization |
— | — | — | — | ||||||||||||
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| Adjusted Gross Margin |
$ | 3,588 | $ | 2,569 | $ | 7,015 | $ | 4,588 | ||||||||
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| Adjusted Gross Margin Percentage(1) |
16.5 | % | 17.9 | % | 20.6 | % | 18.2 | % | ||||||||
| (1) | Calculated using Adjusted Gross Margin for Other Services as a percentage of total Other Services revenues. |
Adjusted EBITDA and Adjusted EBITDA Percentage
We define Adjusted EBITDA as net income before interest expense, net plus, (i) tax expense (benefit); (ii) depreciation and amortization; (iii) realized loss (gain) on derivatives; (iv) unrealized loss (gain) on derivatives; (v) equity compensation expense; (vi) transaction expenses; (vii) loss (gain) on sale of assets; and (viii) impairment of compression equipment. We define Adjusted EBITDA Percentage as Adjusted EBITDA divided by total revenues. Adjusted EBITDA and Adjusted EBITDA Percentage are used as supplemental financial measures by our management and external users of our financial statements, such as investors, commercial banks and other financial institutions, to assess:
| • | the financial performance of our assets without regard to the impact of financing methods, capital structure or historical cost basis of our assets; |
| • | the viability of capital expenditure projects and the overall rates of return on alternative investment opportunities; |
| • | the ability of our assets to generate cash sufficient to make debt payments and pay dividends; and |
| • | our operating performance as compared to those of other companies in our industry without regard to the impact of financing methods and capital structure. |
We believe that Adjusted EBITDA and Adjusted EBITDA Percentage provide useful information because, when viewed with our GAAP results and the accompanying reconciliation, they provide a more complete understanding of our performance than GAAP results alone. We also believe that external users of our financial statements benefit from having access to the same financial measures that management uses in evaluating the results of our business.
Adjusted EBITDA and Adjusted EBITDA Percentage should not be considered as alternatives to, or more meaningful than, revenues, net income, operating income, cash flows from operating activities or any other measure of financial performance presented in accordance with GAAP as measures of operating performance and liquidity. Moreover, our Adjusted EBITDA and Adjusted EBITDA Percentage as presented may not be comparable to similarly titled measures of other companies.
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Given we are a capital intensive business, depreciation, impairment of compression equipment and the interest cost of acquiring compression equipment are necessary elements of our costs. To compensate for these items, we believe that it is important to consider both net income and net cash provided by operating activities determined under GAAP, as well as Adjusted EBITDA and Adjusted EBITDA Percentage, to evaluate our financial performance and our liquidity. Our Adjusted EBITDA and Adjusted EBITDA Percentage exclude some, but not all, items that affect net income and net cash provided by operating activities, and these measures may vary among companies. Management compensates for the limitations of Adjusted EBITDA and Adjusted EBITDA Percentage as an analytical tool by reviewing the comparable GAAP measures, understanding the differences between the measures and incorporating this knowledge into management’s decision-making processes.
The following table reconciles net income, the most directly comparable GAAP financial measure, to Adjusted EBITDA, its most directly comparable Non-GAAP financial measure, for each of the periods presented (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net income |
$ | 17,517 | $ | 8,901 | $ | 5,174 | $ | 58,456 | ||||||||
| Interest expense, net |
60,964 | 36,829 | 119,687 | 62,469 | ||||||||||||
| Tax expense |
5,851 | 2,781 | 1,861 | 18,159 | ||||||||||||
| Depreciation and amortization |
45,430 | 43,397 | 90,327 | 85,802 | ||||||||||||
| Realized (gain) on derivatives |
(25,835 | ) | — | (25,835 | ) | — | ||||||||||
| Unrealized loss (gain) on derivatives |
3,595 | 3,386 | 21,529 | (32,822 | ) | |||||||||||
| Equity compensation expense(1) |
29 | — | 908 | 619 | ||||||||||||
| Transaction expenses(2) |
1,072 | 1,600 | 1,273 | 1,600 | ||||||||||||
| Gain on sale of assets |
(738 | ) | — | (721 | ) | (7 | ) | |||||||||
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| Adjusted EBITDA |
$ | 107,885 | $ | 96,894 | $ | 214,203 | $ | 194,276 | ||||||||
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| Adjusted EBITDA Percentage |
53.1 | % | 54.7 | % | 54.4 | % | 56.2 | % | ||||||||
| (1) | For the six months ended June 30, 2023 and 2022 there were $0.9 million and $0.6 million, respectively, of non-cash adjustments for equity compensation expense related to the Time-Vesting Units. |
| (2) | Represents certain costs associated with non-recurring professional services, our equity owners’ expenses and other costs. |
The following table reconciles net cash provided by operating activities to Adjusted EBITDA for each of the periods presented (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net cash provided by operating activities |
$ | 94,678 | $ | 72,851 | $ | 117,968 | $ | 127,647 | ||||||||
| Interest expense, net |
60,964 | 36,829 | 119,687 | 62,469 | ||||||||||||
| Tax expense |
5,851 | 2,781 | 1,861 | 18,159 | ||||||||||||
| Deferred tax provision (benefit) |
(3,282 | ) | (1,116 | ) | (761 | ) | (14,974 | ) | ||||||||
| Realized gain on derivatives |
(25,835 | ) | — | (25,835 | ) | — | ||||||||||
| Transaction expenses(1) |
1,072 | 1,600 | 1,273 | 1,600 | ||||||||||||
| Other(2) |
(6,763 | ) | (4,315 | ) | (13,109 | ) | (6,912 | ) | ||||||||
| Change in operating assets and liabilities |
(18,800 | ) | (11,736 | ) | 13,119 | 6,287 | ||||||||||
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| Adjusted EBITDA |
$ | 107,885 | $ | 96,894 | $ | 214,203 | $ | 194,276 | ||||||||
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| (1) | Represents certain costs associated with non-recurring professional services, our equity owners’ expenses and other costs. |
| (2) | Includes amortization of debt issuance costs, non-cash lease expense, provision for credit losses and inventory reserve. |
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Discretionary Cash Flow
We define Discretionary Cash Flow as net cash provided by operating activities less maintenance capital expenditures, transaction expenses, certain changes in operating assets and liabilities and certain other expenses. We believe Discretionary Cash Flow is a useful liquidity and performance measure and supplemental financial measure for us in assessing our ability to pay cash dividends to our stockholders, make growth capital expenditures and assess our operating performance. Our ability to pay dividends is subject to limitations due to restrictions contained in our ABL Credit Agreement as further described elsewhere herein. Discretionary Cash Flow is presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP, such as revenues, net income, operating income (loss) or cash flows from operating activities. Discretionary Cash Flow as presented may not be comparable to similarly titled measures of other companies.
Free Cash Flow
We define Free Cash Flow as net cash provided by operating activities less maintenance and growth capital expenditures, transaction expenses, certain changes in operating assets and liabilities and certain other expenses. We believe Free Cash Flow is a liquidity measure and useful supplemental financial measure for us in assessing our ability to pursue business opportunities and investments to grow our business and to service our debt. Free Cash Flow is presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP, such as revenues, net income (loss), operating income (loss) or cash flows from operating activities. Free Cash Flow as presented may not be comparable to similarly titled measures of other companies.
The following table reconciles net cash provided by operating activities, to Discretionary Cash Flow and Free Cash Flow, for each of the periods presented (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net cash provided by operating activities |
$ | 94,678 | $ | 72,851 | $ | 117,968 | $ | 127,647 | ||||||||
| Maintenance capital expenditures(1) |
(10,940 | ) | (9,320 | ) | (15,743 | ) | (17,431 | ) | ||||||||
| Transaction expenses(2) |
1,072 | 1,600 | 1,273 | 1,600 | ||||||||||||
| Gain on sale of assets |
(738 | ) | — | (721 | ) | (7 | ) | |||||||||
| Change in operating assets and liabilities |
(18,800 | ) | (11,736 | ) | 13,119 | 6,287 | ||||||||||
| Other(3) |
(399 | ) | (898 | ) | (1,317 | ) | (1,693 | ) | ||||||||
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| Discretionary Cash Flow |
$ | 64,873 | $ | 52,497 | $ | 114,579 | $ | 116,403 | ||||||||
| Growth capital expenditures(4)(5) |
(32,529 | ) | (54,689 | ) | (68,344 | ) | (126,590 | ) | ||||||||
| Proceeds from sale of assets |
1,023 | 1 | 1,055 | 13 | ||||||||||||
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| Free Cash Flow |
$ | 33,367 | $ | (2,191 | ) | $ | 47,290 | $ | (10,174 | ) | ||||||
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| (1) | See “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources —Cash Requirements —Capital Expenditures” for information regarding amounts designated as maintenance capital expenditures. |
| (2) | Represents certain costs associated with non-recurring professional services, our equity owners’ expenses and other costs. |
| (3) | Includes non-cash lease expense, provision for credit losses and inventory reserve. |
| (4) | For the three months ended June 30, 2023 and 2022, growth capital expenditures include a $2.0 million and a $10.1 million decrease in accrued capital expenditures, respectively. For the six months ended June 30, 2023 and 2022, growth capital expenditures includes a $10.0 million and a $1.9 million decrease in accrued capital expenditures, respectively. |
| (5) | For the three months ended June 30, 2023 and 2022, there were $4.8 million and $1.7 million of non-unit growth capital expenditures, respectively. For the six months ended June 30, 2023 and 2022, there were $7.2 million and $2.2 million of non-unit growth capital expenditures, respectively. Remaining amounts for the six months ended June 30, 2023 and 2022 represent growth capital expenditures to expand our operating capacity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Cash Requirements—Capital Expenditures” for information regarding amounts designated as growth capital expenditures. |
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The following table reconciles net income to Discretionary Cash Flow and Free Cash Flow, for each of the periods presented (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||
| Net income |
$ | 17,517 | $ | 8,901 | $ | 5,174 | $ | 58,456 | ||||||||
| Depreciation and amortization |
45,430 | 43,397 | 90,327 | 85,802 | ||||||||||||
| Unrealized loss (gain) on derivatives |
3,595 | 3,386 | 21,529 | (32,822 | ) | |||||||||||
| Deferred tax provision (benefit) |
3,282 | 1,116 | 761 | 14,974 | ||||||||||||
| Amortization of debt issuance costs |
5,626 | 3,417 | 11,071 | 5,212 | ||||||||||||
| Equity compensation expense(1) |
29 | — | 908 | 619 | ||||||||||||
| Transaction expenses(2) |
1,072 | 1,600 | 1,273 | 1,600 | ||||||||||||
| Gain on sale of assets |
(738 | ) | — | (721 | ) | (7 | ) | |||||||||
| Maintenance capital expenditures(3) |
(10,940 | ) | (9,320 | ) | (15,743 | ) | (17,431 | ) | ||||||||
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| Discretionary Cash Flow |
$ | 64,873 | $ | 52,497 | $ | 114,579 | $ | 116,403 | ||||||||
| Growth capital expenditures(4)(5) |
(32,529 | ) | (54,689 | ) | (68,344 | ) | (126,590 | ) | ||||||||
| Proceeds from sale of assets |
1,023 | 1 | 1,055 | 13 | ||||||||||||
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| Free Cash Flow |
$ | 33,367 | $ | (2,191 | ) | $ | 47,290 | $ | (10,174 | ) | ||||||
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| (1) | For the six months ended June 30, 2023 and 2022, there were $0.9 million and $0.6 million, respectively, of non-cash adjustments for equity compensation expense related to the Time Vesting Units. |
| (2) | Represents certain costs associated with non-recurring professional services, our equity owners’ expenses and other costs. |
| (3) | See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Cash Requirements—Capital Expenditures” for information regarding amounts designated as maintenance capital expenditures. |
| (4) | For the three months ended June 30, 2023 and 2022, growth capital expenditures include a $2.0 million and a $10.1 million decrease in accrued capital expenditures, respectively. For the six months ended June 30, 2023 and 2022, growth capital expenditures include a $10.0 million and a $1.9 million decrease in accrued capital expenditures, respectively. |
| (5) | For the three months ended June 30, 2023 and 2022, there were $4.8 million and $1.7 million of non-unit growth capital expenditures, respectively. For the six months ended June 30, 2023 and 2022, there were $7.2 million and $2.2 million of non-unit growth capital expenditures, respectively. Remaining amounts for the six months ended June 30, 2023 and 2022 represent growth capital expenditures to expand our operating capacity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Cash Requirements—Capital Expenditures” for information regarding amounts designated as growth capital expenditures. |
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Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon certain financial estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. We base our estimates on historical experience, available information and various other assumptions we believe to be reasonable under the circumstances. On an ongoing basis, we evaluate our estimates; however, actual results may differ from these estimates under different assumptions or conditions. The accounting policies that we believe require management’s most difficult, subjective or complex judgments and are the most critical to its reporting of results of operations and financial position are as follows:
Business Combinations and Goodwill
Goodwill acquired in connection with business combinations represents the excess of consideration over the fair value of net assets acquired. Certain assumptions and estimates are employed in determining the fair value of assets acquired and liabilities assumed. Goodwill is not amortized, but is reviewed for impairment annually, or more frequently if impairment indicators arise that suggest the carrying value of goodwill may not be recovered.
Goodwill - Impairment Assessments
We evaluate goodwill for impairment annually and whenever events or changes indicate that it is more likely than not that the fair value at the reporting unit level could be less than its carrying value (including goodwill). We estimate the fair value based on a number of factors, including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and Company specific events. Estimating projected cash flows requires us to make certain assumptions as it relates to future operating performance.
Application of the goodwill impairment test requires judgments, including a qualitative assessment to determine whether there are any impairment indicators, and determining the fair value of the reporting unit. A number of significant assumptions and estimates are involved in the application of the income approach to forecast future cash flows, including revenue and operating income growth rates, discount rates and other factors. While we believe that our estimates of current value are reasonable, if actual results differ from the estimates and judgments used including such items as future cash flows and the volatility inherent in markets which we serve, impairment charges against the carrying value of those assets could be required in the future.
No events or circumstances occurring that indicated that the fair value of the entity may be below its carrying amount. No goodwill impairment was recorded for the three and six months ended June 30, 2023 and 2022.
Impairment of Long-Lived Assets
Long-lived assets, including property, plant, and equipment, and other finite-lived identifiable intangible assets, are reviewed for impairment whenever events or changes in circumstances, including the removal of compression units from our active fleet, indicate that the carrying amount of an asset may not be recoverable. Such events and changes may include significant changes in performance relative to expected operating results, significant changes in asset use, significant negative industry or economic trends, and changes in our business strategy, among others. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to estimated future undiscounted net cash flows expected to be generated by the asset.
Impairment losses are recognized in the period in which the impairment occurs and represent the excess of the asset carrying value over its fair value estimated future undiscounted net cash flows. No impairment was recorded for the three and six months ended June 30, 2023 and 2022.
Estimated Useful Lives of Property, Plant and Equipment
Property, plant and equipment is carried at cost. Depreciation is computed on a straight-line basis using useful lives that are estimated based on assumptions and judgments that reflect both historical experience and expectations regarding future use of our assets. The use of different assumptions and judgments in the calculation of depreciation, especially those involving useful lives, would likely result in significantly different net book values of our assets and results of operations.
Commitments and Contingencies
From time to time, we may be involved in various claims and litigation arising in the ordinary course of business. Additionally, our compliance with state and local sales tax regulations is subject to audit by various taxing authorities. Certain taxing authorities have either claimed or issued an assessment that specific operational processes, which we and others in our industry regularly conduct, result in transactions that are subject to state sales taxes. We and others in our industry have disputed these claims and assessments based on either existing tax statutes or published guidance by the taxing authorities.
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We utilize both internal and external counsel in evaluating our potential exposure to adverse outcomes from orders, judgments or settlements. While we are unable to predict the ultimate outcome of these actions, the accounting standard for contingencies requires management to make judgments about future events that are inherently uncertain. We are required to record a loss during any period in which we believe a contingency is probable and can be reasonably estimated. To the extent that actual outcomes differ from our estimates, or additional facts and circumstances cause us to revise our estimates, our earnings will be affected. We record legal costs as incurred, and all recorded legal liabilities are revised, as required, as better information becomes available to us.
As of June 30, 2023, based on the information currently available, we have accrued a contingent liability of approximately $28.4 million relating to the Sales Tax Audit for the periods currently under audit classified in accrued liabilities on the consolidated balance sheet.
For the year ended December 31, 2020, we wrote off an outstanding receivable balance of $3.7 million, due to us from a previous acquisition, to bad debt expense. Additionally, we recorded a contingent liability of $3.7 million related to the remaining 50% of the receivable balance due to the seller in accrued liabilities. As of June 30, 2023, none of the outstanding receivables had been collected.
As of June 30, 2023, there are no other legal matters for which resolution could have a material adverse effect on the consolidated financial statements.
Fair Value of Derivative Instruments
We use any of three valuation approaches to measure fair value: the market approach, the income approach, and the cost approach in determining the appropriate valuation methodologies based on the nature of the asset or liability being measured and the reliability of the inputs used in arriving at fair value.
We record derivative instruments at fair value using level 2 inputs of the fair value hierarchy. The interest rate swaps and interest rate collars are valued using a discounted cash flow analysis on the expected cash flows of each derivative using observable inputs including interest rate curves and credit spreads.
As of June 30, 2023, $43.8 million was recorded for the fair value of the asset of the derivative instruments compared to $65.3 million asset of the derivative instruments recorded as of December 31, 2022.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (“Topic 326”): Measurement of Credit Losses on Financial Instruments which changes the impairment model for financial assets measured at amortized cost and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new current expected credit loss model that will result in earlier recognition of allowance for losses. The Company adopted this Topic 326 on January 1, 2023. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements.
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| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Interest Rate Risk
Our primary exposure to interest rate risk results from outstanding borrowings under the ABL Facility, which has a floating interest rate component. We use interest rate derivative instruments to manage our exposure to fluctuations in these variable interest rate components.
As of June 30, 2023 and December 31, 2022, we had $1.82 billion and $1.75 billion, respectively, outstanding under the ABL Facility and $1.225 billion and $1.325 billion outstanding and effective notional amounts of floating to fixed interest rate swaps, respectively, which we attribute to our borrowings under our ABL Facility. Excluding the effect of interest rate swaps, the average annualized interest rate incurred on the ABL Facility for borrowings during the six months ended June 30, 2023 was approximately 8.10% and we estimate that a 1.0% increase in the applicable average interest rates for the six months ended June 30, 2023 would have resulted in an estimated $8.8 million increase in ABL-related interest expense.
As of June 30, 2023, we had $1.0 billion outstanding under the Term Loan. During the six months ended June 30, 2023 we had $350.0 million notional amounts of floating to fixed interest rate swaps and a $400.0 million notional amount interest rate collar with a floor of 1.70% and a cap of 2.00% that we attribute to our Term Loan. On June 29, 2023 we terminated these positions resulting in proceeds of $26.9 million. Excluding the effect of interest rate derivatives, the average annualized interest rate incurred on the Term Loan for borrowings during the six months ended June 30, 2023 was 11.92%, and we estimate that a 1.0% increase in the applicable average interest rates for the six months ended June 30, 2023 would have resulted in an estimated $5.0 million increase in interest expense related to Term Loan.
Counterparty Risk
Our credit exposure generally relates to receivables for services provided. If any significant customer of ours should have credit or financial problems resulting in a delay or failure to pay the amount it owes us, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. Additionally, if any significant vendor of ours should have financial problems or operational delays, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. For example, an affiliate of one of our customers in the Powder River Basin has been undergoing a bankruptcy proceeding since 2019. Such customer has from time to time been late in remitting payment for our compression services, which we have continued to deliver, and we are pursuing prompt payment of the amount owed. We do not expect the amount owed presents any material concentration risk. If payment is not timely remitted, we expect to suspend services to such customer.
Concentration Risk
For the six months ended June 30, 2023 and year ended December 31, 2022, our four largest customers accounted for approximately 38% and 39%, respectively, of our recurring revenues, with no single customer accounting for more than 14% for both ending periods. If any significant customer of ours should discontinue their partnership with us, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Commodity Price Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices. We do not take title to any natural gas or oil in connection with our services and, accordingly, have no direct exposure to fluctuating commodity prices. However, the demand for our compression operations depends upon the continued demand for, and production of, natural gas and oil. Sustained low natural gas or oil prices over the long term could result in a decline in the production of natural gas or oil, which could result in reduced demand for our compression operations.
| Item 4. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation and supervision of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were not effective due to the material weakness in our internal control over financial reporting described below. However, after giving full consideration to such material weakness, and the additional analyses and other procedures that we performed to ensure that our condensed consolidated financial statements included in this Quarterly Report were prepared in accordance with U.S. GAAP, our management has concluded that our consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods disclosed in conformity with U.S. GAAP.
Management has determined that the Company had a material weakness in its internal control over financial reporting. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We did not maintain effective internal control over the proper inclusion of an out of period adjustment in the preparation of comparable interim unaudited condensed consolidated financial statements, which resulted in an adjustment to our derivative interest rate swaps for the period ended March 31, 2022.
Remediation Plan
We have begun the process of, and we are focused on, measures to remediate the material weakness related to out of period adjustments in the comparable interim unaudited condensed financial statements. Our internal control remediation efforts include the following:
| • | We have evaluated closing entries within each respective historical period and account balance by formally documenting and tracking out of period adjustments. |
| • | We have enhanced our assessment of out of period adjustments for inclusion in comparable interim unaudited condensed financial statements to ensure transactions are recorded in the appropriate reporting period. |
| • | We engaged an outside firm to assist management with (i) reviewing our current processes, procedures, and systems and assessing the design of controls to identify opportunities to enhance the design of controls that would address relevant risks identified by management, and (ii) enhancing and implementing protocols to retain sufficient documentary evidence of operating effectiveness of such controls. |
We cannot provide any assurance that such remedial measures, or any other remedial measures we take, will be effective.
Changes in Internal Control Over Financial Reporting
We are taking actions to remediate the material weaknesses relating to our internal control over financial reporting. Except as otherwise described above, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
| Item 1. | Legal Proceedings. |
From time to time, we and our subsidiaries may be involved in various claims and litigation arising in the ordinary course of business. In management’s opinion, the resolution of such matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows.
Between October 2019 and April 2023, we received notices from the Texas Comptroller’s office in regards to audits for periods ranging from December 2015 through December 2022. Based on the timing and nature of a previous settlement, we may receive similar treatment on settlement of our sales tax liability. We are actively in settlement discussions with the Comptroller, and if necessary, we will exhaust our administrative remedies to the maximum extent possible.
| Item 1A. | Risk Factors. |
Except as set forth below, there have been no material changes to the risk factors previously disclosed under the heading “Risk Factors” in the IPO Prospectus.
We have identified a material weakness in our internal controls, and we cannot provide assurances that this weakness will be effectively remediated, or that additional material weaknesses will not occur in the future.
If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud, or file our periodic reports in a timely manner.
During the preparation and review of the unaudited interim condensed consolidated financial statements for the three and six month periods ended June 30, 2023 and 2022, the Company identified a previously corrected adjusting entry that was erroneously recorded in the three months ended June 30, 2022 and should have been recorded in the three months ended March 31, 2022. This entry was specific to the unrealized (loss) gain on derivatives and did not impact the six-month period ended June 30, 2022 financial statements.
While we are in the process of remedial action to address the material weakness, we cannot provide any assurance that such remedial measures, or any other remedial measures we take, will be effective. The material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are designed and operating effectively. Any failure to design or maintain effective internal control over financial reporting or any difficulties encountered in their implementation or improvement could increase compliance costs, negatively impact the market price of our common stock, or otherwise harm our operating results or cause us to fail to meet our reporting obligations.
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| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Use of Proceeds
On June 28, 2023, our Registration Statement on Form S-1 (File No. 333-271050) relating to our IPO was declared effective by the SEC. On July 3, 2023, we completed the IPO, pursuant to which we issued and sold 16,000,000 shares at a price to the public of $16.00 per share. Goldman Sachs & Co. LLC, J.P. Morgan and Barclays served as lead book-running managers for the IPO. BofA Securities, Raymond James, RBC Capital Markets, Stifel, Truist Securities and TPH&Co., the energy business of Perella Weinberg Partners, served as book-running managers for the IPO. Comerica Securities, Fifth Third Securities, Inc., Regions Securities LLC, Texas Capital Securities, AmeriVet Securities, Guzman & Company, R. Seelaus & Co., LLC and Siebert Williams Shank served as co-managers for the IPO. We received net proceeds of approximately $231.4 million, after deducting expenses and underwriting discounts and commissions payable by us. There has been no material change in the planned use of proceeds from our IPO as described in the IPO Prospectus.
On July 11, 2023, the underwriters of the IPO exercised in full their option to purchase additional shares of common stock pursuant to the underwriting agreement relating to the IPO. The transaction resulted in our issuing and selling an additional 2,400,000 shares of common stock at a price to the public of $16.00 per share on July 13, 2023. We received net proceeds of approximately $36.2 million therefrom, after deducting underwriting discounts and commissions payable by us. The proceeds were used for repayment of existing indebtedness and general corporate purposes.
| Item 3. | Defaults Upon Senior Securities. |
None.
| Item 4. | Mine Safety Disclosures. |
Not Applicable.
| Item 5. | Other Information. |
Securities Trading Plans of Directors and Executive Officers
During the quarter covered by this Report, none of our directors or “officers” (as such term is defined in Rule16a-1(f) under the Exchange Act) adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (as each term is defined in Item 408(a) of Regulation S-K).
Resignation of Board Member
Effective as of August 7, 2023, Teresa Mattamouros resigned from her position as director of the Company and member of the Personnel & Compensation Committee of the Board. Ms. Mattamouros did not resign due to any disagreement with the Company on any matter relating to its operations, policies or practices. The Company thanks Ms. Mattamouros for her service to the Company and its stockholders.
Appointment of Board Member
Effective August 8, 2023, Nirav Shah was elected a director of the Company and a member of the Nominating, Governance & Sustainability Committee of the Board. Mr. Shah will serve as a Class III director with a term expiring at the Company’s third annual meeting of stockholders following the Company’s initial public offering. The Board has determined that Mr. Shah meets the independence standards established under the New York Stock Exchange corporate governance listing standards. There is no arrangement or understanding between Mr. Shah and any other person pursuant to which he was appointed to the Board or the Nominating, Governance & Sustainability Committee, and there are currently no transactions in which Mr. Shah has an interest requiring disclosure under Item 404(a) of Regulation S-K. There are no family relationships between Mr. Shah and any director or executive officer of the Company.
In connection with Mr. Shah’s appointment to the Board, the Company entered into an indemnification agreement with Mr. Shah, pursuant to which the Company will indemnify Mr. Shah to the fullest extent permitted under Delaware law against liability that may arise by reason of his service to the Company, and to advance certain expenses incurred as a result of any proceeding against him as to which he could be indemnified. The forgoing description of the indemnification agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the indemnification agreement, which is filed herewith as Exhibit 10.11 and is incorporated into this Item 5 by reference.
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| Item 6. | Exhibits. |
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Kodiak Gas Services, Inc. | ||||||
| Date: August 10, 2023 | By: | /s/ John B. Griggs | ||||
| John B. Griggs | ||||||
| Executive Vice President and Chief Financial Officer | ||||||
| (Principal Financial Officer) | ||||||
| Date: August 10, 2023 | By: | /s/ Ewan W. Hamilton | ||||
| Ewan W. Hamilton | ||||||
| Executive Vice President and Chief Accounting Officer | ||||||
| (Principal Accounting Officer) | ||||||
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