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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
OR
| | | | | |
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 | o | | Accelerated filer | o |
| | | | |
Non-accelerated filer | x | | Smaller reporting company | o |
| | | | |
| | | Emerging growth company | x |
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.
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;
•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;
•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.
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.
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.
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.
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.
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.
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.
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 | |
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.
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.
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
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 | |
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.
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
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
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.
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 | |
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
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
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.
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.
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
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.
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.
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.
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