kgs-20230930

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

____________________

FORM 10-Q

____________________

(Mark One)


x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023


o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________

Commission File Number: 001-41732

____________________

Kodiak Gas Services, Inc.

(Exact Name of Registrant as Specified in its Charter)

____________________


Delaware						83-3013440
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

15320 Highway 105 W, Suite 210 Montgomery, Texas						77356
(Address of principal executive offices)						(Zip Code)

Registrant’s telephone number, including area code: (936) 539-3300

____________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange

on which registered

Common stock, par value $0.01 per share

KGS

New York Stock Exchange

____________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 9, 2023, the registrant had 77,400,000 shares of common stock, par value $0.01 per share, outstanding.

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		Page
Cautionary Note Regarding Forward-Looking Statements

PART I.	FINANCIAL INFORMATION	1

Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Stockholders’ Equity	3
	Condensed Consolidated Statements of Cash Flows	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.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	36

PART II.	OTHER INFORMATION	38

Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	38

Signatures		41

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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;

•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 place undue reliance 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 deterioration in general economic, business, geopolitical or industry conditions, including as a result of the conflict between Russia and Ukraine, inflation, and slow economic growth in the United States;

•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;

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•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;

•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 throughout Part I, Item 2. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 1A. "Risk Factors" sections of this Quarterly Report on Form 10-Q for the quarterly period ended September 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.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

KODIAK GAS SERVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except share and per share data)


	As of September 30, 2023		As of December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	6,128	$	20,431
Accounts receivable, net	116,875		97,551
Inventories, net	70,606		72,155
Fair value of derivative instruments	—		823
Contract assets	9,608		3,555
Prepaid expenses and other current assets	13,253		9,520
Total current assets	216,470		204,035
Property, plant and equipment, net	2,511,110		2,488,682
Operating lease right-of-use assets, net	33,453		9,827
Goodwill	305,553		305,553
Identifiable intangible assets, net	125,257		132,362
Fair value of derivative instruments	51,790		64,517
Other assets	607		564
Total assets	$	3,244,240	$	3,205,540
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	48,835	$	37,992
Accrued liabilities	102,448		93,873
Contract liabilities	71,917		57,109
Total current liabilities	223,200		188,974
Long-term debt, net of unamortized debt issuance cost	1,747,912		2,720,019
Operating lease liabilities	34,026		6,754
Deferred tax liabilities	65,258		57,155
Other liabilities	2,052		3,545
Total liabilities	$	2,072,448	$	2,976,447
Commitments and contingencies (Note 13)
Stockholders’ Equity:
Common stock, par value $0.01 per share; 750,000,000 shares of common stock authorized, 77,400,000 and 59,000,000 shares of common stock issued and outstanding as of September 30, 2023 and December 31, 2022, respectively	774		590
Additional paid-in capital	956,465		33,189
Retained earnings	214,553		195,314
Total stockholders’ equity	1,171,792		229,093
Total liabilities and stockholders’ equity	$	3,244,240	$	3,205,540

See accompanying notes to the unaudited condensed consolidated financial statements.

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KODIAK GAS SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except share and per share data)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022
Revenues:
Compression Operations	$	186,673	$	163,662	$	545,989	$	483,965
Other Services	44,310		18,983		78,412		44,172
Total revenues	230,983		182,645		624,401		528,137
Operating expenses:
Cost of operations (exclusive of depreciation and amortization shown below):
Compression Operations	65,470		55,872		193,257		167,145
Other Services	38,820		14,037		65,907		34,638
Depreciation and amortization	46,087		44,111		136,414		129,913
Selling, general and administrative expenses	19,648		11,190		46,171		32,760
Gain on sale of capital assets	—		(818)		(721)		(825)
Total operating expenses	170,025		124,392		441,028		363,631
Income from operations	60,958		58,253		183,373		164,506
Other income (expenses):
Interest expense, net	(39,710)		(49,859)		(182,030)		(104,616)
Loss on extinguishment of debt	(6,757)		—		(6,757)		—
Gain on derivatives	15,141		51,862		42,080		76,972
Other income (expense)	38		(19)		39		(10)
Total other income (expenses)	(31,288)		1,984		(146,668)		(27,654)
Income before income taxes	29,670		60,237		36,705		136,852
Income tax expense	7,904		14,337		9,765		32,496
Net income	$	21,766	$	45,900	$	26,940	$	104,356
Basic and diluted earnings per share
Basic net earnings per share	$	0.28	$	0.78	$	0.41	$	1.77
Diluted net earnings per share	$	0.28	$	0.78	$	0.41	$	1.77
Basic weighted average shares of common stock outstanding	76,731,868		59,000,000		64,954,244		59,000,000
Diluted weighted average shares of common stock outstanding	76,899,483		59,000,000		65,121,859		59,000,000

See accompanying notes to the unaudited condensed consolidated financial statements.

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KODIAK GAS SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

(in thousands, except share data)


	Common Stock
	Shares	Amount		Additional Paid-In Capital		Retained Earnings		Total Stockholders’ Equity
Balance, January 1, 2022	59,000,000	$	590	$	871,403	$	88,078	$	960,071
Equity compensation - profits interests	—	—		(136)		619		483
Net income, as restated	—	—		—		49,555		49,555
Balance, March 31, 2022, as restated	59,000,000	$	590	$	871,267	$	138,252	$	1,010,109
Distribution to parent	—	—		(838,000)		—		(838,000)
Net income	—	—		—		8,901		8,901
Balance, June 30, 2022	59,000,000	$	590	$	33,267	$	147,153	$	181,010
Net income	—	—		—		45,900		45,900
Balance, September 30, 2022	59,000,000	$	590	$	33,267	$	193,053	$	226,910
Balance, January 1, 2023	59,000,000	$	590	$	33,189	$	195,314	$	229,093
Equity compensation - profits interests	—	—		(193)		879		686
Net loss	—	—		—		(12,343)		(12,343)
Balance, March 31, 2023	59,000,000	$	590	$	32,996	$	183,850	$	217,436
Equity compensation - profits interests	—	—		193		29		222
Distribution to parent	—	—		(33,189)		(9,111)		(42,300)
Net income	—	—		—		17,517		17,517
Balance, June 30, 2023	59,000,000	$	590	$	—	$	192,285	$	192,875
Proceeds from initial public offering, net of underwriter discount	18,400,000	184		277,656		—		277,840
Offering costs	—	—		(10,823)		—		(10,823)
Debt novation	—	—		687,590		—		687,590
Equity compensation - profits interests	—	—		—		502		502
Equity compensation - Omnibus Plan	—	—		2,042		—		2,042
Net income	—	—		—		21,766		21,766
Balance, September 30, 2023	77,400,000	$	774	$	956,465	$	214,553	$	1,171,792

See accompanying notes to the unaudited condensed consolidated financial statements.

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KODIAK GAS SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)


	For the Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities:
Net income	$	26,940	$	104,356
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense	136,414		129,913
Stock-based compensation expense	3,452		619
Amortization of debt issuance costs	11,260		9,453
Non-cash lease expense	3,132		2,066
Provision for credit losses	2,047		85
Inventory reserve	375		375
Gain on sale of capital assets	(721)		(825)
Change in fair value of derivatives	13,551		(86,676)
Deferred tax provision	6,312		26,807
Loss on extinguishment of debt	4,359		—
Changes in operating assets and liabilities:
Accounts receivable	(21,371)		5,048
Inventories	1,174		(9,904)
Contract assets	(6,053)		(8,111)
Prepaid expenses and other current assets	(3,733)		598
Accounts payable	3,257		403
Accrued and other liabilities	8,497		8,673
Contract liabilities	14,807		3,974
Net cash provided by operating activities	203,699		186,854
Cash flows from investing activities:
Purchase of capital assets	(145,573)		(199,707)
Proceeds from sale of capital assets	1,055		8,023
Other	(45)		(86)
Net cash used in investing activities	(144,563)		(191,770)
Cash flows from financing activities:
Borrowings on debt instruments	756,418		1,409,006
Payments on debt instruments	(1,021,556)		(545,730)
Payment of debt issuance cost	(32,759)		(27,819)
Proceeds from initial public offering, net of underwriter discounts	277,840		—
Offering costs	(9,247)		—
Loss on extinguishment of debt	(1,835)		—

Distribution to parent	(42,300)		(838,000)

Net cash used in financing activities	(73,439)		(2,543)
Net decrease in cash and cash equivalents	(14,303)		(7,459)
Cash and cash equivalents - beginning of period	20,431		28,795
Cash and cash equivalents - end of period	$	6,128	$	21,336
Supplemental cash disclosures:
Cash paid for interest	$	173,006	$	88,569
Cash paid for taxes	$	5,946	$	1,836
Supplemental disclosure of non-cash investing activities:
(Increase) decrease in accrued capital expenditures	$	(6,498)	$	8,773
Supplemental disclosure of non-cash financing activities:
Non-cash debt novation	$	(689,829)	$	—
Non-cash loss on extinguishment of debt	$	(563)	$	—
Non-cash offering costs	$	(792)	$	—

See accompanying notes to the unaudited condensed consolidated financial statements.

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KODIAK GAS SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Organization and Description of Business

Kodiak Gas Services, Inc. (together with its subsidiaries, referred to as “Kodiak” or the “Company”) began its operations in 2011. On February 8, 2019, Kodiak was acquired by entities affiliated with EQT AB (publ). On October 24, 2019, the Company acquired Pegasus Optimization Managers, LLC, a provider of natural gas compression operations.

The Company is an operator of contract compression infrastructure in the U.S., primarily in the Permian Basin and Eagle Ford Shale with additional operations in the Powder River Basin, Mid-Continent Region, DJ Basin, Appalachian Basin, Barnett Shale / East Texas Region and Black Warrior Basin. The Company operates its compression units under fixed-revenue contracts with upstream and midstream customers. The Company manages its business through two operating segments: Compression Operations and Other Services. Compression Operations consists of operating Company-owned and customer-owned compression infrastructure for its customers to enable the production, gathering and transportation of natural gas and oil. Other Services consists of station construction, maintenance and overhaul, and other ancillary time and material-based offerings. See Note 18 (“Segments”).

Stock Split

On June 20, 2023, Kodiak’s board of directors approved a 590,000-for-1 split (the “Stock Split”) of the Company’s common stock. Prior to the consummation of the initial public offering of the Company’s common stock (the “IPO”), the Company was 100% owned by its parent, Frontier TopCo Partnership, L.P. (“Kodiak Holdings”). The Stock Split became effective upon filing of the Company’s Amended and Restated Certificate of Incorporation on June 28, 2023 in connection with the IPO. The par value of the Company’s common stock was not adjusted as a result of the Stock Split, however, the number of shares that the Company is authorized to issue increased to 750,000,000. As a result of the Stock Split, 59,000,000 shares of common stock were outstanding. All share and per share data shown in the accompanying condensed consolidated financial statements and related notes has been retroactively revised to give effect to the Stock Split for all periods presented.

IPO

On June 28, 2023, Kodiak’s Registration Statement on Form S-1 relating to the IPO was declared effective by the U.S. Securities and Exchange Commission (“SEC”) and the shares of its common stock began trading on the New York Stock Exchange on June 29, 2023. On July 3, 2023, Kodiak issued and sold 16,000,000 shares of common stock at a price to the public of $16.00 per share. Kodiak received net proceeds of approximately $230.8 million, after deducting expenses and underwriting discounts and commissions payable by the Company. On July 13, 2023, the Company issued and sold an additional 2,400,000 shares of common stock at a price to the public of $16.00 per share (referred to herein as the “overallotment”). The Company received net proceeds of approximately $36.2 million, after deducting underwriting discounts. The net proceeds were used for repayment of existing indebtedness, as described further in Note 9 (“Debt and Credit Facilities”), and general corporate purposes. After giving effect to these transactions, Kodiak had 77,400,000 shares of common stock issued and outstanding.

2. Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared on the accrual basis using accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP are not required in these interim financial statements and have been condensed or omitted. Management believes that the information furnished reflects all normal recurring adjustments necessary to fairly present the Company’s consolidated financial position, results of operations and cash flows for the periods indicated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements presented in Kodiak’s latest annual financial statements included in Kodiak’s final prospectus filed with the SEC on June 30, 2023 pursuant to Rule 424(b)(4) (the “IPO Prospectus”), which contain a more comprehensive summary of the Company’s accounting policies. The interim results reported herein are not necessarily indicative of results for a full year.

These unaudited condensed consolidated financial statements include the accounts of Kodiak and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation.

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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.

3. Revenue Recognition

The following table disaggregates the Company’s revenue by type and timing of provision of services or transfer of goods (in thousands):


	Three Months Ended September 30,
	2023		2022
Services provided over time:
Compression Operations	$	184,959	$	162,063
Other Services	41,268		16,987
Total services provided over time	226,227		179,050
Services provided or goods transferred at a point in time:
Compression Operations	1,714		1,599
Other Services	3,042		1,996
Total services provided or goods transferred at a point in time	4,756		3,595
Total revenue	$	230,983	$	182,645


	Nine Months Ended September 30,
	2023		2022
Services provided over time:
Compression Operations	$	539,576	$	477,430
Other Services	69,543		39,757
Total services provided over time	609,119		517,187
Services provided or goods transferred at a point in time:
Compression Operations	6,413		6,535
Other Services	8,869		4,415
Total services provided or goods transferred at a point in time	15,282		10,950
Total revenue	$	624,401	$	528,137

The Company derives its revenue from contracts with customers, which comprise the following revenue streams:

Compression Operations

Compression Operations consists of operating Company-owned and customer-owned compression infrastructure for the Company’s customers, pursuant to fixed-revenue contracts enabling the production, gathering and transportation of natural gas and oil.

Compression Operations for Company-owned, as well as customer-owned, compressors are generally satisfied over time as services are rendered based upon specific performance criteria identified in the applicable contract. The service performed is substantially the same during each period of the contract, and revenues are therefore recognized on a straight-line, time-based method over the contract term as the customer simultaneously receives and consumes the benefits provided by the service.

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If variable consideration exists, it is allocated to the distinct monthly service within the series to which such variable consideration relates. The Company has elected to apply the invoicing practical expedient to recognize revenue for such variable consideration, as the invoice corresponds to the value transferred to the customer based on the Company’s performance completed to date.

Service revenue earned primarily on freight and crane charges that are directly reimbursable by the Company’s customers is recognized at the point in time the service is provided and control is transferred to the customer. At such time, the customer has the ability to direct the use of the benefits of such service after the performance obligation is satisfied. The amount of consideration the Company receives and revenue the Company recognizes is based upon the invoice amount.

There are typically no material obligations for returns, refunds, or warranties. The Company’s standard contracts do not usually include non-cash consideration.

Other Services

This revenue stream primarily relates to compressor station construction services provided to certain customers and services provided based on time, parts and/or materials with customers.

For most of the Company’s construction contracts, the Company integrates a significant set of tasks and components into a single contract for its customers. Hence, the entire contract is accounted for as one performance obligation. The Company recognizes revenue over time as the Company performance creates or enhances an asset that the customer controls.

For construction services, revenue is recognized using an input method. Measure of the progress towards satisfaction of the performance obligation is based on the actual amount of labor and material costs incurred. The amount of the transaction price recognized as revenue is determined by multiplying the transaction price by the ratio of actual costs incurred to total estimated costs expected for the construction services. Judgment is involved in the estimation of the progress toward completion. Any adjustments to the measure of the progress toward completion is accounted for on a prospective basis. Changes to the scope of service are recognized as an adjustment to the transaction price in the period in which the change occurs.

Services provided based on time spent, parts and/or materials is generally short-term in nature and labor rates and parts pricing is agreed upon prior to commencing the service. As revenue is recognized when time passes, this revenue is recognized at the point in time when the service is rendered.

Contract Assets and Liabilities

The Company recognizes a contract asset when the Company has the right to consideration in exchange for goods or services transferred to a customer. Contract assets are transferred to trade receivables when the rights become unconditional. The Company had contract assets of $9.6 million and $3.6 million as of September 30, 2023, and December 31, 2022, respectively. There was no contract asset balance as of January 1, 2022. The Company records contract liabilities when cash payments are received or due in advance of performance. The Company’s contract liabilities were $71.9 million as of September 30, 2023. As of January 1, 2023 and 2022, the beginning balances for contract liabilities were $57.1 million and $51.2 million, respectively, all of which was recognized as revenue in the nine months ended September 30, 2023 and 2022, respectively. No revenue was recognized from beginning balances in the three months ended September 30, 2023 and 2022.

Performance Obligations

As of September 30, 2023, the aggregate amount of transaction price allocated to unsatisfied performance obligations related to the Company’s revenue for the Compression Operations segment is $1.1 billion. The Company expects to recognize these remaining performance obligations as follows (in thousands):


	Remainder of 2023		2024		2025		2026		2027 and thereafter		Total
Remaining performance obligations	$	162,915	$	504,092	$	241,526	$	101,568	$	54,906	$	1,065,007

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4. Accounts Receivable, net

Accounts receivable, net consist of the following (in thousands):


	As of September 30, 2023		As of December 31, 2022		As of December 31, 2021
Accounts receivable	$	119,869	$	98,500	$	81,708
Allowance for credit losses	2,994		949		959
Accounts receivable, net	$	116,875	$	97,551	$	80,749

For the three and nine months ended September 30, 2023, the Company recorded a $2.0 million increase in allowance for credit losses related to expected credit losses from a customer in bankruptcy experiencing financial distress. For the three and nine months ended September 30, 2022, the Company had immaterial movements related to direct write-downs charged against the allowance for credit losses.

5. Inventories, net

Inventories consist of the following (in thousands):


	As of September 30, 2023		As of December 31, 2022
Non-serialized parts	$	59,093	$	61,082
Serialized parts	11,513		11,073
Total inventories	$	70,606	$	72,155

6. Property, Plant and Equipment, net

Property, plant and equipment, net consist of the following (in thousands):


	As of September 30, 2023		As of December 31, 2022
Compression equipment	$	3,113,641	$	2,973,599
Trailers and vehicles	9,239		7,193
Field equipment	18,385		15,501
Technology hardware and software	10,330		6,698
Leasehold improvements	4,209		1,947
Shipping containers	3,349		3,137
Furniture and fixtures	1,570		1,519
Finance lease	530		981
Land	20		—
Total property and equipment, gross	3,161,273		3,010,575
Less: accumulated depreciation	(650,163)		(521,893)
Property, plant and equipment, net	$	2,511,110	$	2,488,682

Depreciation expense was $43.7 million and $129.3 million for the three and nine months ended September 30, 2023, respectively, and is recorded within depreciation and amortization on the accompanying condensed consolidated statements of operations. Depreciation expense was $41.7 million and $122.8 million for the three and nine months ended September 30, 2022, respectively.

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7. Goodwill and Identifiable Intangible Assets, net

There were no changes in the carrying amount of goodwill during the nine months ended September 30, 2023. All of the goodwill was allocated to the Company’s Compression Operations reporting unit.

The Company’s identifiable intangible assets consist of the following as of September 30, 2023 and December 31, 2022 (in thousands):


	As of September 30, 2023
	Original Cost		Accumulated Amortization		Net Amount		Remaining Weighted Average Amortization Period (years)
Trade name	$	13,000	$	(3,018)	$	9,982	15.4
Customer relationships	150,000		(34,725)		115,275		13.1
Total identifiable intangible assets	$	163,000	$	(37,743)	$	125,257


	As of December 31, 2022
	Original Cost		Accumulated Amortization		Net Amount		Remaining Weighted Average Amortization Period (years)
Trade name	$	13,000	$	(2,531)	$	10,469	16.1
Customer relationships	150,000		(28,107)		121,893		13.8
Total identifiable intangible assets	$	163,000	$	(30,638)	$	132,362

Amortization expense was $2.4 million and $7.1 million for each of the three and nine months ended September 30, 2023 and 2022 and is recorded within depreciation and amortization on the condensed consolidated statements of operations.

As of September 30, 2023, the following is a summary of future minimum amortization expense for identified intangible assets (in thousands):


	Amount
Years ending December 31,
Remainder of 2023	$	2,368
2024	9,474
2025	9,474
2026	9,474
2027	9,474
Thereafter	84,993
Total	$	125,257

8. Long-Lived and Other 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 compressors from the 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 the Company’s 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 estimated future discounted net cash flows. No impairment was recorded nor triggering events were identified for the three and nine month periods ended September 30, 2023 and 2022.

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9. Debt and Credit Facilities

Debt consists of the following (in thousands):


	As of September 30, 2023		As of December 31, 2022
ABL Facility	$	1,789,086	$	1,754,224
Term Loan	—		1,000,000
Total debt outstanding	1,789,086		2,754,224
Less: unamortized debt issuance cost	(41,174)		(34,205)
Long-term debt, net of unamortized debt issuance cost	$	1,747,912	$	2,720,019

ABL Facility

As of January 1, 2022, a wholly-owned subsidiary of Kodiak had a revolving asset-based loan credit facility (the “ABL Facility”) with unaffiliated secured lenders and JPMorgan Chase Bank, N.A., as administrative agent.

On May 19, 2022, wholly-owned subsidiaries of Kodiak entered into the Third Amendment to the Third Amended and Restated Credit Agreement which mainly served to amend the applicable rate from LIBOR to the Secured Overnight Financing Rate (“SOFR”) and allow for the return of capital to the parent of Kodiak in the amount of $838 million by increasing borrowings on the ABL Facility by $225 million, increasing the Term Loan by $600 million and utilizing $13 million of cash on hand. In addition, the ABL Facility size was increased from $1.9 billion to $2.1 billion to increase available liquidity under the facility. New lender fees and costs totaling $13.2 million were incurred as a result of the amendment and will be amortized over the life of the loan to interest expense.

On March 22, 2023, wholly-owned subsidiaries of Kodiak entered into the Fourth Amended and Restated 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”) which mainly served to extend the maturity date from June 2024 to March 2028. The total facility size was increased from $2.1 billion to $2.2 billion to increase available liquidity under the facility. New lender fees and costs totaling $31.8 million were incurred and will be amortized over the life of the loan to interest expense. An additional $4.2 million in accrued interest related to exiting lenders was expensed and paid in the period. The remaining unamortized debt issuance costs of $1.2 million associated with the exiting lenders was written-off in interest expense, net in the period. On May 31, 2023, the ABL Credit Agreement was amended to, among other things, permit distributions of overallotment proceeds from the IPO and revise the terms related to the payment and prepayment of the Term Loan. On June 27, 2023, the ABL Credit Agreement was further amended to remove the ability to make distributions related to overallotment proceeds from the IPO and to instead require prepayment of the obligations upon the issuance of any equity interests by Kodiak pursuant to the overallotment in the IPO. In connection with the IPO, the Company became a borrower under the ABL Facility. As of September 30, 2023, there was $14.7 million letters of credit outstanding under the ABL Facility.

Pursuant to the ABL Credit Agreement, the Company must comply with certain restrictive covenants, including a minimum interest coverage ratio of 2.5x and a maximum Leverage Ratio (calculated based on the ratio of Consolidated Total Debt to Consolidated EBITDA, each as defined in the ABL Credit Agreement). The maximum Leverage Ratio is (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. All loan amounts are collateralized by essentially all the assets of the Company. The Company was in compliance with all covenants as of September 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 rates as of September 30, 2023 were 10.25% (prime rate plus 2.00%) and 8.34% (Term SOFR rate plus 0.10% plus 2.75%). The applicable interest rates as of December 31, 2022 were 9.50% (prime rate plus 2.00%) and

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7.60% (Term SOFR rate plus 0.10% plus 3.00%). We pay an annualized commitment fee of 0.25% on the unused portion of our ABL Facility if borrowings are greater than 50% of total commitments and 0.50% on the unused portion on the ABL Facility if borrowings are less than 50% of total commitments.

The ABL Facility is a “revolving credit facility” that includes a lock box arrangement whereby, under certain events, remittances from customers are forwarded to a bank account controlled by the administrative agent and are applied to reduce borrowings under the facility. One such event occurs when availability under the ABL Credit Agreement falls below a specified threshold (i.e., the greater of $200 million or 10% of the aggregate commitments at the time of measurement). As of September 30, 2023 and December 31, 2022, availability under the ABL Facility was in excess of the specified threshold and as such the entire balance was classified as long-term in accordance with its maturity.

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. In May 2022, the Company completed a recapitalization and distribution of $838 million to the parent of Kodiak primarily by increasing the borrowings from the ABL Facility by $225 million and the Term Loan by $600 million per the Amended and Restated Term Loan Credit Agreement entered into by the Company on May 19, 2022 (as amended from time to time, the “Term Loan Credit Agreement”) and utilizing $13 million of cash on hand. New lender fees and costs totaling $14.6 million were incurred for this amendment and will be amortized over the life of the loan to interest expense.

On March 31, 2023, the Company’s wholly-owned subsidiary entered into the First Amendment to the Amended and Restated Term Loan Credit Agreement pursuant to which the maturity date was extended to September 22, 2028. Lender fees and costs totaling $0.75 million were incurred for this amendment and were amortized over the life of the loan to interest expense.

On June 29, 2023, the Company terminated all interest rate swaps and collars attributable to the Term Loan and recognized a gain on derivatives and received cash of $25.8 million during the period ended June 30, 2023 (the “Term Loan Derivative Settlement”). On July 3, 2023, in connection with the IPO, the Company used the net proceeds from the IPO, together with the proceeds resulting from the Term Loan Derivative Settlement and borrowings under the ABL Facility, to repay $300 million of borrowings outstanding under the Term Loan. Additionally, a subsidiary of Kodiak entered into a Novation, Assignment, and Assumption Agreement ("Novation Agreement") with Kodiak Holdings, pursuant to which all of the Company’s remaining obligations under the Term Loan were assumed by Kodiak Holdings, and the Company’s obligations thereunder were terminated. The Company is no longer a borrower or guarantor under, nor otherwise obligated with respect to the debt outstanding under the Term Loan. As part of the $300 million repayment of the Term Loan, unamortized debt issuance costs of $4.4 million and fees of $2.4 million were recorded to loss on extinguishment for the three and nine months ended September 30, 2023. The carrying value of the term debt novated under the Novation Agreement of $689.8 million (comprised of $700.0 million of principal balance less $10.2 million of unamortized debt issuance costs) was considered an equity transaction with the Parent and recorded to additional paid-in capital in the statement of stockholder's equity.

As of September 30, 2023, the scheduled maturities, without consideration of potential mandatory prepayments, of the long-term debt were as follows (in thousands):


	Amount
Years ended December 31,
Remainder of 2023	$	—
2024	—
2025	—
2026	—
2027	—
Thereafter	1,789,086
Total	$	1,789,086

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Debt Issuance Costs

Debt issuance costs of $41.2 million, as of September 30, 2023, are being amortized over the term of the ABL Facility. As of December 31, 2022, $34.2 million were being amortized over the terms of the ABL Facility and Term Loan. Amortization expense related to these costs of $0.2 million and $11.3 million for the three and nine months ended September 30, 2023, are included in interest expense in the accompanying condensed consolidated statements of operations. Amortization expense was $4.3 million and $9.5 million for the three and nine months ended September 30, 2022.

10. Derivative Instruments

The Company has entered into interest rate swaps exchanging variable interest rates for fixed interest rates and in prior periods, entered into interest rate collars that fix interest rates within a range through the simultaneous purchase of an interest rate cap and sale of an interest rate floor. The Company has not designated any derivative instruments as hedges for accounting purposes and does not enter into such instruments for speculative or trading purposes. The Company’s derivative instruments are recognized on the unaudited condensed consolidated balance sheets at fair value and classified as current or long-term depending on the maturity date of the derivative instrument and whether the net carrying value is in a net asset or net liability position. Realized and unrealized gains and losses associated with the derivative instruments are recognized in gain on derivative instrument within the unaudited condensed consolidated statements of operations.

On June 29, 2023, the Company terminated $750.0 million of notional amounts related to interest rate swaps and collars attributable to the Term Loan and recognized a gain on derivatives of $25.8 million during the nine months ended September 30, 2023.

The table below summarizes information related to the notional amount and maturity dates for interest rate swaps at September 30, 2023:


Notional Amount			Maturities
$125,000,000			12/4/2024
$225,000,000			12/5/2024
$200,000,000			6/14/2025
$125,000,000			12/6/2025
$175,000,000			6/14/2026
$125,000,000			6/22/2026
$125,000,000			12/6/2026
$75,000,000			5/18/2027
$100,000,000			5/19/2027
$200,000,000			5/19/2027
$125,000,000			12/6/2027

Of the total notional amount of $1.6 billion, $375 million is related to forward dated interest rate swaps with an effective date after September 30, 2023.

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The following tables set forth the Company’s assets that were measured at fair value on a recurring basis during the period, by level, within the fair value hierarchy and classification of the Company’s derivative instruments not designated as hedging instruments on the accompanying condensed consolidated balance sheets (in thousands):


	As of September 30, 2023
	Level 1		Level 2		Level 3		Total
Current assets:
Interest rate swaps	$	—	$	—	$	—	$	—
Total current assets	$	—	$	—	$	—	$	—
Non-current assets:
Interest rate swaps	$	—	$	51,790	$	—	$	51,790
Total non-current assets	$	—	$	51,790	$	—	$	51,790
Total	$	—	$	51,790	$	—	$	51,790


	As of December 31, 2022
	Level 1		Level 2		Level 3		Total
Current assets:
Interest rate swaps	$	—	$	823	$	—	$	823
Total current assets	$	—	$	823	$	—	$	823
Non-current assets:
Interest rate swaps	$	—	$	48,955	$	—	$	48,955
Interest rate collars	—		15,562		—		15,562
Total non-current assets	$	—	$	64,517	$	—	$	64,517
Total	$	—	$	65,340	$	—	$	65,340

The following table summarizes the effects of the Company’s derivative instruments in the condensed consolidated statements of operations (in thousands):


Derivative Instruments Not Designated as Hedging Instrument	Location of Gain Recognized	Three Months Ended September 30,
		2023		2022
Interest rate swaps	Gain on derivatives	$	15,141	$	44,809
Interest rate collars	Gain on derivatives	—		7,053
Total gain on derivative		$	15,141	$	51,862


Derivative Instruments Not Designated as Hedging Instrument	Location of Gain (Loss) Recognized	Nine Months Ended September 30,
		2023		2022
Interest rate swaps	Gain on derivatives	$	42,649	$	54,796
Interest rate collars	Gain (loss) on derivatives	(569)		22,176
Total gain on derivative		$	42,080	$	76,972

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 from actively quoted public markets. including interest rate curves and credit spreads.

11. Fair Value Measurements

The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, derivative instruments and long-term debt. The carrying amounts of cash and cash equivalents, accounts receivable, accrued liabilities, and accounts payable are representative of their respective fair values due to the short-term maturity of these instruments. The fair value of debt and contingent consideration are considered Level 3

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measurements. These fair value measurements are based on unobservable inputs. The fair value of variable rate long-term debt is based upon the current market rates for debt with similar credit risk and maturity which approximates fair value. Debt includes the ABL Facility and is shown net of unamortized debt issuance cost in the tables below. The contingent consideration liability is measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings. The fair value estimate reflects the contractual terms of the purchase agreement (e.g., potential payment amounts, length of measurement periods, manner of calculating any amounts due) and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate. Depending on the contractual terms of the purchase agreement, the probability of achieving future cash flows generally represents the only significant unobservable input. There was no change in the fair value of contingent consideration during the three and nine months ended September 30, 2023. See fair value tables below (in thousands):


	As on September 30, 2023
	Level 1		Level 2		Level 3		Total
Debt	$	—	$	—	$	1,747,912	$	1,747,912
Contingent Consideration	—		—		3,673		3,673
Total	$	—	$	—	$	1,751,585	$	1,751,585


	As of December 31, 2022
	Level 1		Level 2		Level 3		Total
Debt	$	—	$	—	$	2,720,019	$	2,720,019
Contingent Consideration	—		—		3,673		3,673
Total	$	—	$	—	$	2,723,692	$	2,723,692

12. Stockholders’ Equity

Holders of the Company’s common stock are entitled to one vote for each share. As of September 30, 2023 and December 31, 2022, there were 77,400,000 and 59,000,000 shares of common stock issued and outstanding, respectively. Holders of common stock are entitled to receive, in the event of a liquidation, dissolution or winding up, ratably the assets available for distribution to the stockholders after payment of all liabilities.

On July 3, 2023, 16,000,000 shares of common stock were issued and sold as part of the closing of the IPO, resulting in net proceeds of $230.8 million, after deducting expenses and underwriting discounts and commissions payable by us. On July 13, 2023, the underwriters exercised in full their option to purchase additional shares of common stock pursuant to the underwriting agreement relating to the IPO. On July 13, 2023, the Company issued and sold an additional 2,400,000 shares of common stock at a price to the public of $16.00 per share. The Company received net proceeds of approximately $36.2 million, after deducting underwriting discounts and commissions payable. The net proceeds were used for repayment of existing indebtedness and general corporate purposes. After giving effect to these transactions, Kodiak had 77,400,000 shares of common stock issued and outstanding.

Class B and C Profits Interests

Prior to the IPO, Kodiak Holdings issued incentive awards to certain employees of Kodiak Gas Services, LLC (a wholly-owned subsidiary of the Company) in the form of Class B incentive units (“Class B Units”). The Company records stock-based compensation expense associated with the Class B Units because of the employment relationship of the grantees with Kodiak Gas Services, LLC.

On March 6, 2019, 61,098.4 Class B Units were authorized under the Kodiak Holdings 2019 Class B Unit Incentive Plan for grants to certain employees and non-employee board members. These Class B Units are intended to constitute “profits interests” for federal income tax purposes, but constitute a substantive class of equity under GAAP. As of September 30, 2023 , there were 60,406.9 authorized Class B Units and 57,058.5 were outstanding. As of December 31, 2022, there were 61,068.0 authorized Class B Units and 60,363.4 were outstanding. There were no Class B Units granted in the nine months ended September 30, 2023 or 2022. Twenty-five percent (25%) of the Class B Units are subject to time vesting (the “Time-Vesting Units”) and the remaining 75% of the Class B Units are subject to performance-vesting (the “Performance-Vesting Units”). Time-Vesting Units vest in equal annual installments on each of the first five anniversaries of the applicable vesting commencement date, subject to the Class B Unit holder’s continuous service through the applicable vesting date. Performance-Vesting Units vest based on the achievement of certain investor return metrics, subject to the Class B Unit holder’s continuous service through the applicable vesting date. Holders of Class B Units are entitled to distributions on

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vested awards in accordance with the Kodiak Holdings distribution waterfall. Class B Units are not subject to any conversion rights other than an automatic conversion to Class C incentive units (“Class C Units”) in connection with certain terminations of employment. Each Class C Unit is eligible to receive distributions up to an amount equal to the fair market value of the corresponding converted Class B Unit on the date of conversion. As of September 30, 2023 no material conversions had occurred.

There are no performance hurdles associated with the Time-Vesting Units. The fair value of each incentive award was estimated on its applicable grant date using an option pricing model.

Stock compensation expense is recognized ratably over the vesting period of the awards. During the nine months ended September 30, 2023 and 2022, approximately $1.4 million and $0.6 million, respectively, in stock compensation expense was recognized in selling, general and administrative expenses. As of September 30, 2023, there were 3,079.1 unvested Time-Vesting Units, representing $0.5 million in unrecognized stock compensation expense.

2023 Omnibus Incentive Plan

On June 20, 2023, Kodiak’s board of directors authorized and adopted the Kodiak Gas Services, Inc. Omnibus Incentive Plan (the “Omnibus Plan”) for employees, consultants and directors. The Omnibus Plan enables Kodiak’s board of directors (or a committee authorized by Kodiak’s board of directors) to award incentive and non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents, other stock-based awards, cash awards and substitute awards intended to align the interests of service providers, including the Company’s named executive officers, with those of the Company’s stockholders. A total of 6,375,000 shares of common stock have been reserved for issuance pursuant to awards under the Omnibus Plan.

On June 29, 2023, Kodiak granted 1,297,188 shares of common stock equity awards to certain employees, including Kodiak’s named executive officers, pursuant to awards under the Omnibus Plan. 985,313 of the shares were granted pursuant to awards of time-based restricted stock units (“RSUs”) that vest ratably over a three-year period, subject to continuous service through each vesting date. 311,875 of the shares were granted pursuant to awards of performance stock units (“PSUs”) that cliff vest at the end of a three-year performance period, with the ultimate number of shares earned and issued ranging from 0-190% of the number of shares subject to the PSU award, subject to continuous service through the end of the performance period.

The following table summarizes award activity under the Omnibus Plan for the nine-month period ending September 30, 2023:


	RSUs			PSUs
	Number of RSUs	Weighted-Average Price		Number of PSUs	Weighted-Average Price
Outstanding at December 31, 2022	—	—		—	—
Granted	985,313	$	16.00	311,875	$	16.99
Vested or exercised	—	—		—	—
Forfeited	(20,679)	—		—	—
Outstanding at September 30, 2023	964,634	$	16.00	311,875	$	16.99
Restricted stock awards expected to vest	964,634	$	16.00	311,875	$	16.99

As of September 30, 2023, the total future compensation cost related to non-vested equity awards was approximately $18.7 million assuming the performance-based restricted stock units vest at 100% per the terms of the applicable award. During the three and nine months ended September 30, 2023, approximately $2.0 million in stock compensation expense was recognized in selling, general and administrative expenses. There was no such expense recorded for the three and nine months ended September 30, 2022.

13. Commitments and Contingencies

Purchase Commitments

Purchase commitments primarily consist of future commitments to purchase new compression units ordered but not received. The commitments as of September 30, 2023, were $215.7 million, of which $182.9 million is expected to be settled within the next twelve months.

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Contingent Consideration

The Company agreed to pay, as contingent consideration, up to $3.7 million of certain past due accounts receivable acquired in connection with a prior acquisition in 2019, if collected, to the seller. The Company records contingent consideration at the acquisition and end of reporting periods at fair value in accrued liabilities. As of September 30, 2023 and December 31, 2022, none of the outstanding receivables had been collected.

Sales Tax Contingency

Between October 2019 and April 2023, the Company received notices from the Texas Comptroller’s office in regards to audits for periods ranging from December 2015 through December 2022. The audits pertain to whether the Company may owe sales tax on certain of its compression equipment that it had purchased during that time period. As of December 31, 2022, the Company had accrued a total amount of $27.8 million for this contingent liability. During the nine months ended September 30, 2023, based on current information the Company accrued an additional $0.9 million and as of September 30, 2023, the Company had accrued a total of $28.7 million for this contingent liability.

Legal Matters

From time to time, the Company may become involved in various legal matters. Management believes that there are no legal matters as of September 30, 2023 whose resolution could have a material adverse effect on the unaudited condensed consolidated financial statements.

14. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in thousands):


	As of September 30, 2023		As of December 31, 2022
Prepaid insurance	$	3,733	$	3,997
Prepaid rent	799		589
Deferred IPO issuance costs	—		3,047
Deferred project costs	3,538		—
Interest rate swap receivable	1,559		—
Other	3,624		1,887
Total prepaid expenses and other current assets	$	13,253	$	9,520

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15. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):


	As of September 30, 2023		As of December 31, 2022
Sales tax liability	$	28,688	$	27,820
Accrued interest	11,746		16,347
Accrued bonus	10,475		7,764
Accrued taxes	14,675		9,667
Accrued payroll	1,036		2,744
Accrued legal fee	1,823		1,906
Lease liabilities - current portion	—		3,090
Contingent consideration	3,673		3,673
Accrued accounts payable	16,629		14,080
Accrued insurance	109		2,231
Station construction accrual	12,361		—
Other	1,233		4,551
Total accrued liabilities	$	102,448	$	93,873

16. Income Taxes

For the three and nine months ended September 30, 2023, the Company recorded income tax expense of $7.9 million and $9.8 million, respectively. Income tax expense for the three and nine months ended September 30, 2022 was $14.3 million and $32.5 million, respectively. The effective tax rate was approximately 26.6% and 26.6% for the three and nine months ended September 30, 2023, compared to 23.8% and 23.7% for the three and nine months ended September 30, 2022. The difference between the Company’s effective tax rates for the three and nine months ended September 30, 2023 and 2022 and the U.S. statutory tax rate of 21% was primarily due to state income taxes.

In August 2022, the U.S. Inflation Reduction Act of 2022 and the CHIPS and Science Act of 2022 were signed into law. These acts include, among other provisions, a corporate alternative minimum tax of 15%, an excise tax on the repurchase of corporate stock, various climate and energy provisions, and incentives for investment in semiconductor manufacturing. These provisions are not expected to have a material impact on the Company’s results of operations or financial position.

The Company did not have any uncertain tax benefits as of September 30, 2023 and December 31, 2022. For the three and nine months ended September 30, 2023 and 2022, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts had been recognized in the condensed consolidated statement of operations.

17. Defined Contribution Plan

The Company maintains a defined contribution savings plan for its employees. The Company contributed $0.7 million and $2.3 million to the plan for the three and nine months ended September 30, 2023, respectively. The Company contributed $0.7 million and $2.1 million to the plan for the three and nine months ended September 30, 2022, respectively.

18. Segments

The Company manages its business through two operating segments: Compression Operations and Other Services. Compression Operations consists of operating Company-owned and customer-owned compression infrastructure for its 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 customers, including station construction, maintenance and overhaul, and other ancillary time and material based offerings.

The Company evaluates performance and allocates resources based on the gross margin of each segment, which includes revenues directly attributable to the specific segment and all costs of service directly attributable to the specific segment, which includes cost of operations and depreciation and amortization. Depreciation and amortization for the Compression Operations segment was $46.1 million and $136.4 million for the three and nine months ended September 30, 2023

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respectively. Depreciation and amortization for the Compression Operations segment was $44.1 million and $129.9 million for the three and nine months ended September 30, 2022 respectively. Revenue includes only sales to external customers. The following table represents financial metrics by segment (in thousands):


	Compression Operations		Other Services		Total
Three Months Ended September 30, 2023
Revenue	$	186,673	$	44,310	$	230,983
Gross margin	75,116		5,490		80,606
Total assets	3,213,764		30,476		3,244,240
Capital expenditures	51,539		—		51,539
Three Months Ended September 30, 2022
Revenue	$	163,662	$	18,983	$	182,645
Gross margin	63,679		4,946		68,625
Total assets	3,133,249		3,715		3,136,964
Capital expenditures	53,755		—		53,755


	Compression Operations		Other Services		Total
Nine Months Ended September 30, 2023
Revenue	$	545,989	$	78,412	$	624,401
Gross margin	216,318		12,505		228,823
Total assets	3,213,764		30,476		3,244,240
Capital expenditures	145,573		—		145,573
Nine Months Ended September 30, 2022
Revenue	$	483,965	$	44,172	$	528,137
Gross margin	186,907		9,534		196,441
Total assets	3,133,249		3,715		3,136,964
Capital expenditures	199,707		—		199,707

The following table reconciles total gross margin to income before income taxes (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Total gross margin	$	80,606	$	68,625	$	228,823	$	196,441
Selling, general and administrative expenses	(19,648)		(11,190)		(46,171)		(32,760)
Gain on sale of capital assets	—		818		721		825
Interest expense, net	(39,710)		(49,859)		(182,030)		(104,616)
Loss on extinguishment of debt	(6,757)		—		(6,757)		—
Gain on derivatives	15,141		51,862		42,080		76,972
Other (expense) income	38		(19)		39		(10)
Income before income taxes	$	29,670	$	60,237	$	36,705	$	136,852

19. Earnings Per Share of Common Stock

Basic earnings per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock is computed by using the weighted average shares of common stock outstanding, including the dilutive effect of restricted shares based on an average share price during the period. For

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the three and nine months ended September 30, 2023 and September 30, 2022, there were no anti-dilutive shares, respectively. The computations of basic and diluted earnings per share for the three and nine months ended September 30, 2023 and September 30, 2022 are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except share and per share data)	2023		2022		2023		2022
Net income	$	21,766	$	45,900	$	26,940	$	104,356

Basic weighted average shares of common stock	76,731,868		59,000,000		64,954,244		59,000,000
Effect of dilutive securities	167,615		—		167,615		—
Diluted weighted average shares of common stock	76,899,483		59,000,000		65,121,859		59,000,000

Basic earnings per share of common stock	$	0.28	$	0.78	$	0.41	$	1.77
Diluted earnings per share of common stock	$	0.28	$	0.78	$	0.41	$	1.77

20. Subsequent Events

The following event occurred subsequent to the date the condensed financial statements were available to be issued:

On October 24, 2023 the Company's board of directors declared an initial cash dividend of $0.38 per share of common stock, or $1.52 per share of common stock on an annualized basis, for the third quarter of 2023. The cash dividend of approximately $29 million will be paid on November 10, 2023 to all stockholders of record as of the close of business on November 3, 2023.

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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.

Operational Highlights

The following table summarizes certain horsepower, unit count and horsepower utilization percentages for our fleet for the periods presented.


	As of September 30,				Percentage Change
	2023		2022
Operating Data (at period end):
Fleet horsepower (1)	3,213,096		3,106,316		3.4	%
Revenue-generating horsepower (2)	3,210,076		3,098,545		3.6	%
Fleet compression units	3,051		3,011		1.3	%
Revenue-generating compression units	3,034		3,004		1.0	%
Revenue-generating horsepower per revenue-generating compression unit (3)	1,058		1,031		2.6	%
Horsepower utilization (4)	99.9	%	99.7	%	0.2	%

(1)Fleet horsepower includes revenue-generating horsepower and idle horsepower, which is comprised of 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 31,520 and 60,025 of non-marketable or obsolete horsepower as of September 30, 2023 and 2022, respectively.

(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.

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Horsepower

The 3.4% and 3.6% increase in fleet horsepower and revenue-generating horsepower, respectively, were primarily attributable to 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 2.6% increase in revenue-generating horsepower per revenue-generating compression unit was due to the purchase and deployment of new, large horsepower units.

Financial Results of Operations

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022

The following table presents selected financial and operating information for the periods presented (in thousands):


	For the Three Months Ended September 30,				% Change
	2023		2022
Revenues:
Compression operations	$	186,673	$	163,662	14.1	%
Other services	44,310		18,983		133.4	%
Total revenues	230,983		182,645		26.5	%
Operating expenses:
Cost of operations (exclusive of depreciation and amortization shown below):
Compression operations	65,470		55,872		17.2	%
Other services	38,820		14,037		176.6	%
Depreciation and amortization	46,087		44,111		4.5	%
Selling, general and administrative expenses	19,648		11,190		75.6	%
Gain on sale of capital assets	—		(818)		nm
Total operating expenses	170,025		124,392		36.7	%
Income from operations	60,958		58,253		4.6	%
Other income (expenses):
Interest expense, net	(39,710)		(49,859)		(20.4)	%
Loss on extinguishment of debt	(6,757)		—		nm
Gain on derivatives	15,141		51,862		(70.8)	%
Other income (expense)	38		(19)		(300.0)	%
Total other income (expenses)	(31,288)		1,984		(1,677.0)	%
Income before income taxes	29,670		60,237
Income tax expense	7,904		14,337		(44.9)	%
Net income	$	21,766	$	45,900	(52.6)	%

Revenues and Sources of Income

Compression Operations

Compression Operations revenue increased $23.0 million (14.1%) for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Substantially all, or $22.9 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 and due to an increase in average revenue per revenue-generating horsepower per month.

Other Services

Other Services revenue increased $25.3 million (133.4%) for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. This increase was primarily due to a $24.3 million increase in revenue from

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station construction services driven primarily by increases in demand and scope of station projects, and a $1.0 million increase in revenue from parts and service, driven by increased customer demand.

Operating Costs and Other Expenses

Compression Operations

Compression Operations expenses increased $9.6 million (17.2%) for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. This was primarily due to a $4.6 million increase in direct expenses, driven by increases in pricing and volume of lubricant oil and coolant and parts to support increased activity, a $3.0 million increase in direct labor expenses related to increased headcount and salaries, a $1.9 million increase in indirect expenses, and a $0.1 million increase in freight and crane charges that are directly reimbursable by our customers.

Other Services

Other Services expense increased $24.8 million (176.6%) for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 This increase was primarily due to a $23.7 million increase in expenses from station construction services driven primarily by increases in demand and scope of station projects, and $1.1 million from parts and service, driven by increased customer demand.

Depreciation and Amortization

Depreciation and Amortization increased $2.0 million (4.5%) for the three months ended September 30, 2023 compared to the three months ended September 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 $8.5 million (75.6%) for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. This was primarily due to a $2.5 million increase in stock compensation expense mainly related to share-based compensation awards granted as part of the IPO, a $2.0 million increase in bad debt expense related to expected credit losses from a customer in bankruptcy experiencing financial distress, a $1.1 million increase in labor and benefits, mainly related to increased headcount and salaries, 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 higher insurance, office expenses, and other general administrative expenses.

Interest Expense, Net

Interest expense, net decreased $10.1 million (20.4%) for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. This decrease is primarily due to the extinguishment of the Term Loan in July 2023; partially offset by an increase in the effective interest rate on the ABL Facility.

Loss on Extinguishment of Debt

Loss on extinguishment of debt increased $6.8 million related to the write off of debt issuance costs and other fees as a result of the extinguishment of the Term Loan during the three months ended September 30, 2023. No such loss was recognized in the three months ended September 30, 2022.

Gain on Derivatives

Gain on derivatives decreased $36.7 million (70.8%) for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. This is primarily related to an $8.0 million increase in the fair value of derivatives due to an increase in the long-term SOFR yield curve and cash received on derivatives of $7.2 million, as compared to a $53.9 million increase in the fair value of derivatives due to an increase in the long-term SOFR yield curve and cash paid on derivatives of $2.0 during the three months ended September 30, 2023 and 2022, respectively.

Income tax expense

Income tax expense decreased by $6.4 million (44.9%) for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. This was primarily due to a decrease in pre-tax income of $45.0 million for the three months ended September 30, 2023 compared to pre-tax income for the three months ended September 30, 2022.

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Financial Results of Operations

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

The following table presents selected financial and operating information for the periods presented (in thousands):


	For the Nine Months Ended September 30,				% Change
	2023		2022
Revenues:
Compression operations	$	545,989	$	483,965	12.8	%
Other services	78,412		44,172		77.5	%
Total revenues	624,401		528,137		18.2	%
Operating expenses:
Cost of operations (exclusive of depreciation and amortization shown below):
Compression operations	193,257		167,145		15.6	%
Other services	65,907		34,638		90.3	%
Depreciation and amortization	136,414		129,913		5.0	%
Selling, general and administrative expenses	46,171		32,760		40.9	%
Gain on sale of capital assets	(721)		(825)		(12.6)	%
Total operating expenses	441,028		363,631		21.3	%
Income from operations	183,373		164,506		11.5	%
Other income (expenses):
Interest expense, net	(182,030)		(104,616)		74.0	%
Loss on extinguishment of debt	(6,757)		—		nm
Gain on derivatives	42,080		76,972		(45.3)	%
Other income (expense)	39		(10)		(490.0)	%
Total other expenses	(146,668)		(27,654)		430.4	%
Income before income taxes	36,705		136,852		(73.2)	%
Income tax expense	9,765		32,496		(70.0)	%
Net income	$	26,940	$	104,356	(74.2)	%

Revenues and Sources of Income

Compression Operations

Compression Operations revenue increased $62.0 million (12.8%) for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The $62.0 million increase was the result of an increase in average revenue-generating horsepower as a result of increased demand for our compression operations and due to an increase in average revenue per revenue-generating horsepower per month.

Other Services

Other Services revenue increased $34.2 million (77.5%) for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. This increase was primarily due to a $29.8 million increase in revenues from station construction services driven primarily by increases in demand and scope of station projects, and $4.4 million from parts and service, driven by increased customer demand.

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Operating Costs and Other Expenses

Compression Operations

Compression Operations expenses increased $26.1 million (15.6%) for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. This was primarily due to a $11.6 million increase in direct expenses, driven by increases in pricing and volume of lubricant oil and coolant and parts to support increased activity, a $9.9 million increase in direct labor expenses related to increased headcount and salaries, a $4.7 million increase in indirect expenses; partially offset by a $0.1 million decrease in freight and crane charges that are directly reimbursable by our customers.

Other Services

Other Services expense increased $31.3 million (90.3%) for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. This was primarily due to a $27.6 million increase in expenses from station construction services driven primarily by increases in demand and scope of station projects and $3.7 million from parts and service, driven by increased customer demand.

Depreciation and Amortization

Depreciation and Amortization increased $6.5 million (5.0%) for the nine months ended September 30, 2023 compared to the nine months ended September 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 $13.4 million (40.9%) for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. This was primarily due to a $3.1 million increase in labor and benefits, mainly related to increased headcount and salaries, a $2.8 million increase in stock compensation expense related to equity compensation plans, a $2.0 million increase in bad debt expense related to expected credit losses from a customer in bankruptcy experiencing financial distress, a $2.5 million increase in professional fees mainly related to transactions costs, and a $2.5 million increase in other overhead expenses, primarily as a result of higher insurance, entertainment and office expenses.

Interest Expense, Net

Interest expense, net increased $77.4 million (74.0%) for the nine months ended September 30, 2023 compared to the nine months ended September 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. This was partially offset by the extinguishment of the Term Loan in July 2023.

Loss on Extinguishment of Debt

Loss on extinguishment of debt increased $6.8 million related to the write off debt issuance costs and other fees as a result of the extinguishment of the Term Loan during the nine months ended September 30, 2023. No such loss was recognized in the nine months ended September 30, 2022.

Gain on Derivatives

Gain on derivatives decreased $34.9 million (45.3%) for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. This is primarily related to a $25.8 million settlement on the termination of derivatives attributable to the Term Loan and $29.8 million cash received on derivative settlements on our interest rate swaps and collars, offset by a decrease in the change in fair value of the derivatives of $13.5 million during the nine months ended September 30, 2023, as compared to a $9.7 million cash paid on derivatives on our interest rate swaps and collars, offset by an increase in the change in fair value of derivatives of $86.7 million during the nine months ended September 30, 2022 due to an increase in the long-term SOFR and LIBOR yield curves.

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Income tax expense

Income tax expense decreased by $22.7 million (70.0%) for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. This was primarily due to a decrease in pre-tax income of $114.5 million for the nine months ended September 30, 2023 compared to pre-tax income for the nine months ended September 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 compression infrastructure 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.

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 on assets required to operate the business but not including 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 and 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 c