FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Numbers: 001-15843
333-48279
UNIVERSAL COMPRESSION HOLDINGS, INC.
UNIVERSAL COMPRESSION, INC.
(Exact name of registrants as specified in their charters)
DELAWARE 13-3989167
TEXAS 74-1282680
(States or other jurisdictions of (I.R.S. Employer
incorporation of organization) Identification Nos.)
4440 BRITTMOORE ROAD
HOUSTON, TEXAS 77041-8004
(Address of principal executive (Zip Code)
offices)
(713) 335-7000
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
UNIVERSAL COMPRESSION, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q
WITH THE REDUCED DISCLOSURE FORMAT.
As of October 31, 2001, there were 30,555,281 shares of Universal Compression
Holdings, Inc.'s common stock, $0.01 par value, outstanding and 4,910 shares of
Universal Compression, Inc.'s common stock, $10.00 par value, outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL COMPRESSION HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, 2001 MARCH 31, 2001
------------------ ------------------
(UNAUDITED)
ASSETS
Current Assets:
Cash $ 5,622 $ 12,279
Accounts receivable, net 118,805 87,088
Inventories, net 125,161 120,939
Other current assets 30,912 24,212
------------------ ------------------
Total current assets 280,500 244,518
Property, plant and equipment
Contract compression equipment 699,099 592,449
Other 66,812 52,810
Accumulated depreciation (74,892) (55,634)
------------------ ------------------
Net property, plant, and equipment 691,019 589,625
Goodwill 364,291 294,358
Other assets, net 48,910 47,755
------------------ ------------------
Total assets $ 1,384,720 $ 1,176,256
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 167,431 $ 143,303
Current portion of long-term debt and capital
lease obligations 60,872 3,452
------------------ ------------------
Total current liabilities 228,303 146,755
Long-term debt 208,132 204,875
Non-current deferred tax liability 105,981 90,126
Deferred gain 103,846 75,146
Capital lease obligations 5,181 6,086
Other liabilities 154 694
------------------ ------------------
Total liabilities 651,597 523,682
Common stock 306 285
Treasury stock (134) (134)
Paid in capital 722,703 663,882
Currency translation adjustment 1,986 845
Deferred compensation (2,772) --
Retained earnings/(deficit) 11,034 (12,304)
------------------ ------------------
Total stockholders' equity 733,123 652,574
------------------ ------------------
Total liabilities and stockholders' equity $ 1,384,720 $ 1,176,256
================== ==================
See accompanying notes to unaudited consolidated financial statements.
2
UNIVERSAL COMPRESSION HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues:
Contract compression $ 85,190 $ 28,681 $ 161,140 $ 54,955
Sales 89,118 10,131 153,529 18,401
--------- --------- --------- ---------
Total revenues 174,308 38,812 314,669 73,356
Costs and expenses:
Contract compression, exclusive of depreciation and amortization 29,749 9,903 57,314 18,873
Cost of sales, exclusive of depreciation and amortization 76,430 8,480 129,705 15,028
Depreciation and amortization 11,712 6,679 23,092 14,177
Selling, general and administrative 15,813 3,769 28,489 7,224
Operating lease 12,973 1,995 25,566 2,684
Interest expense 6,573 5,221 12,105 13,225
Other (income) / expense 189 (41) 236 (257)
Non-recurring charges -- -- -- 7,059
--------- --------- --------- ---------
Total costs and expenses 153,439 36,006 276,507 78,013
--------- --------- --------- ---------
Income (loss) before income taxes and extraordinary items 20,869 2,806 38,162 (4,657)
Income taxes (benefit) 8,076 1,053 14,824 (1,746)
--------- --------- --------- ---------
Income (loss) before extraordinary items $ 12,793 1,753 23,338 (2,911)
========= ========= ========= =========
Extraordinary loss, net of $3,759
income tax benefit -- -- -- (6,264)
--------- --------- --------- ---------
Net income (loss) $ 12,793 $ 1,753 $ 23,338 $ (9,175)
========= ========= ========= =========
Weighted average common and common equivalent shares outstanding:
Basic 30,396 13,504 29,443 11,173
--------- --------- --------- ---------
Diluted 30,606 13,881 29,713 11,173
--------- --------- --------- ---------
Earnings per share - basic:
Income (loss) before extraordinary items $ 0.42 $ 0.13 $ 0.79 $ (0.26)
--------- --------- --------- ---------
Extraordinary loss -- -- -- $ (0.56)
--------- --------- --------- ---------
Net income (loss) $ 0.42 $ 0.13 $ 0.79 $ (0.82)
--------- --------- --------- ---------
Earnings per share - diluted:
Income (loss) before extraordinary items $ 0.42 $ 0.13 $ 0.79 $ (0.26)
--------- --------- --------- ---------
Extraordinary loss -- -- -- $ (0.56)
--------- --------- --------- ---------
Net income (loss) $ 0.42 $ 0.13 $ 0.79 $ (0.82)
--------- --------- --------- ---------
See accompanying notes to unaudited consolidated financial statements.
3
UNIVERSAL COMPRESSION HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
SEPTEMBER 30,
-----------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 23,338 ($ 9,175)
Adjustments to reconcile net income (loss) to cash
provided by operating activities, net of effect of
acquisitions:
Depreciation and amortization 23,092 14,177
Gain on asset sales (222) (102)
Amortization of debt issuance costs 1,346 732
Accretion of discount notes 9,906 9,697
Deferred income taxes 10,239 (1,125)
Accounts receivable (4,570) (14,509)
Inventories 26,596 (5,995)
Accounts payable and accrued expenses (32,763) 11,361
Other (6,264) 3,722
--------- ---------
Net cash provided by operating activities 50,698 8,783
Cash flows from investing activities:
Additions to property, plant and equipment, net (91,405) (30,779)
Sale-leaseback of vehicles -- (713)
Acquisitions (153,048) (114,912)
Proceeds from sale of fixed assets 1,976 139,647
--------- ---------
Net cash used in investing activities (242,477) (6,757)
Cash flows from financing activities:
Principal repayments of long-term debt (6,350) (107,091)
Net borrowings (repayment) under revolving line of
credit 57,000 (75,000)
Net repayment on sale-leaseback of vehicles (1,004) (79)
Net borrowings (repayment ) on financing leases 80,000 (10,580)
Common stock issuance 55,987 196,185
Debt issuance costs (1,652) (5,320)
Treasury stock -- (9)
--------- ---------
Net cash provided (used) by financing activities 183,981 (1,894)
Effect of exchange rate 1,141 --
Net increase (decrease) in cash and cash equivalents (6,657) 132
Cash and cash equivalents at beginning of period 12,279 1,403
--------- ---------
Cash and cash equivalents at end of period $ 5,622 $ 1,535
========= =========
See accompanying notes to unaudited consolidated financial statements.
4
UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
1. BASIS OF PRESENTATION
Organization
Universal Compression Holdings, Inc. (the "Company") was formed on December
12, 1997 for the purpose of acquiring Tidewater Compression Service, Inc.
("TCS") from Tidewater Inc. ("Tidewater"). Upon completion of the acquisition on
February 20, 1998 (the "Tidewater Acquisition"), TCS became the Company's wholly
owned subsidiary and changed its name to Universal Compression, Inc.
("Universal"). Through this subsidiary, the Company's gas compression service
operations date back to 1954. The Company is a holding company which conducts
its operations through its wholly owned subsidiary, Universal.
On May 30, 2000, the Company completed an initial public offering of
7,275,000 shares of its common stock, which provided the Company with net
proceeds (after deducting underwriting discounts and commissions) of
approximately $149.2 million. Concurrently with the initial public offering, the
Company implemented a recapitalization pursuant to which all existing classes of
the Company's stock were converted into common stock. Also concurrently with the
initial public offering, the Company entered into a $50 million revolving credit
facility and $200 million operating lease facility. The proceeds of the offering
and the $62.6 million in initial proceeds from the new operating lease facility
were used to repay $192.7 million of indebtedness, and the remaining proceeds
were used for working capital and to pay expenses associated with the offering
and concurrent financing transactions.
On February 9, 2001, the Company completed its acquisition of Weatherford
Global Compression Services, L.P. and certain related entities ("Weatherford
Global"), a supplier of natural gas compression equipment and services and a
division of Weatherford International, Inc. Under the terms of the agreement, a
subsidiary of Weatherford International, Inc. was merged into Universal in
exchange for 13.75 million shares of the Company's common stock. In connection
with the acquisition, Weatherford agreed, subject to conditions, to limit its
voting rights to 33 1/3% of the Company's voting power for up to two years.
On July 3, 2001, the Company completed the public offering (the "Offering")
of 1,333,333 shares of its common stock, par value $0.01 per share, together
with 2,666,667 shares of the Company's common stock sold by certain selling
stockholders, including Castle Harlan Partners III, L.P. and its affiliates. The
shares were sold in the Offering at a price of $28.50 per share, and the
Offering provided the Company with net proceeds (after deducting underwriting
discounts and commissions) of approximately $36.1 million. The Company used the
proceeds to fund the cash portion of the purchase price in its acquisition of
KCI, Inc., to repay a portion of KCI's indebtedness concurrently with the
acquisition, as described below, and to partially fund the purchase price in its
acquisition of Louisiana Compressor Maintenance, Inc., as described below.
Following the Offering, Castle Harlan owned or had voting control over
approximately 6% of the Company's outstanding common stock.
The Company completed the acquisition of Gas Compression Services, Inc.
("GCSI") on September 15, 2000, of ISS Compression, Inc. and its operating
subsidiary, IEW Compression, Inc. (collectively "IEW") on February 28, 2001, of
the international operations of Compressor Systems, Inc. ("CSII") on April 23,
2001, of KCI, Inc. ("KCI") on July 11, 2001, of Louisiana Compressor
Maintenance, Inc. ("LCM") on July 13, 2001 and of Technical Compression Service,
Inc. ("TCSI") on October 3, 2001.
These consolidated financial statements should be read in conjunction with
the consolidated financial statements presented in the Company's Annual Report
on Form 10-K for the year ended March 31, 2001. That report contains a more
comprehensive summary of the Company's major accounting policies. In the opinion
of management, the accompanying unaudited consolidated financial statements
contain all appropriate adjustments, all of which are normally recurring
adjustments unless otherwise noted, considered necessary to present fairly the
financial position of the Company and its consolidated subsidiaries and the
results of operations and cash flows for the respective periods. Operating
results for the three-month period and six-month period ended September 30, 2001
are not necessarily indicative of the results that may be expected for the
fiscal year ending March 31, 2002.
5
EARNINGS PER SHARE (UNAUDITED)
Basic and diluted net income (loss) per share is calculated in accordance
with Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share".
The following table sets forth the computation of basic and diluted net income
(loss) per share (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
BASIC EARNINGS PER SHARE 2001 2000 2001 2000
-------- -------- -------- --------
Income (loss) before extraordinary items $ 12,793 $ 1,753 $ 23,338 ($ 2,911)
Extraordinary loss, net of income tax -- -- -- (6,264)
-------- -------- -------- --------
Net income (loss) $ 12,793 $ 1,753 $ 23,338 ($ 9,175)
Weighted average common stock outstanding 30,396 13,504 29,443 11,173
Basic net income (loss) per share:
Before extraordinary loss $ 0.42 $ 0.13 $ 0.79 ($ 0.26)
-------- -------- -------- --------
Extraordinary loss, net of income tax -- -- -- ($ 0.56)
-------- -------- -------- --------
Basic net income (loss) per share $ 0.42 $ 0.13 $ 0.79 ($ 0.82)
-------- -------- -------- --------
DILUTED EARNINGS PER SHARE
Income (loss) before extraordinary items $ 12,793 $ 1,753 $ 23,338 ($ 2,911)
Extraordinary loss, net of income tax -- -- -- (6,264)
-------- -------- -------- --------
Net income (loss) $ 12,793 $ 1,753 $ 23,338 ($ 9,175)
Weighted average common stock outstanding 30,396 13,504 29,443 11,173
Dilutive effect of stock options outstanding 210 377 270 --
-------- -------- -------- --------
Weighted average diluted common stock outstanding 30,606 13,881 29,713 11,173
======== ======== ======== ========
Diluted income (loss) per share:
Before extraordinary loss $ 0.42 $ 0.13 $ 0.79 ($ 0.26)
-------- -------- -------- --------
Extraordinary loss, net of income tax -- -- -- ($ 0.56)
-------- -------- -------- --------
Diluted net income (loss) per share $ 0.42 $ 0.13 $ 0.79 ($ 0.82)
-------- -------- -------- --------
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year amounts to
conform to the current year classification.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 2000, the FASB issued
SFAS No. 138, which amends certain provisions of SFAS 133 to clarify four areas
causing difficulties in implementation. The amendment included expanding the
normal purchase and sale exemption for supply contracts, permitting the
offsetting of certain intercompany foreign currency derivatives and thus
reducing the number of third party derivatives, permitting hedge accounting for
foreign-currency denominated assets and liabilities, and redefining interest
rate risk to reduce sources of ineffectiveness. SFAS 133 requires that an entity
recognize all derivative instruments as either assets or liabilities in the
balance sheet and measure those instruments at fair value. If certain conditions
are met, a derivative may be specifically designated as (1) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (2) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (3) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation. We
adopted SFAS 133 and the corresponding amendments under SFAS 138 on April 1,
2001. This statement had no impact on our consolidated results of operations,
financial position or cash flows.
6
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the
SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. On June 26, 2000, the SEC issued an
amendment to SAB 101, effectively delaying its implementation until the fourth
quarter of fiscal years beginning after December 15, 1999. After reviewing SAB
101 and its amendment, we believe that our revenue recognition policy is
appropriate and that the effects of SAB 101 and its amendment were immaterial to
our results of operations.
In July 2001, the FASB issued SFAS 141, "Business Combinations," effective
for all business combinations initiated after June 30, 2001 and SFAS 142,
"Goodwill and Other Intangible Assets". The Company elected to adopt SFAS 142
effective April 1, 2001 as the first interim period financial statements had not
previously been issued. SFAS 141 addresses financial accounting and reporting
for goodwill and other intangible assets acquired in a business combination at
acquisition. SFAS 142 addresses financial accounting and reporting for
intangible assets acquired individually or with a group of other assets (but not
those acquired in a business combination) at acquisition. It also addresses
financial accounting and reporting for goodwill and other intangible assets
subsequent to their acquisition. Had SFAS 142 been effective April 1, 2000, we
would have adopted it in the first quarter of fiscal 2000 and our net income
during the three months ended September 30, 2000 would have been $2.5 million,
as a result of the elimination of $.7 million of amortization expense related to
goodwill. In addition, our net loss and loss before taxes and extraordinary
items during the six months ended September 30, 2000 would have been $7.4
million and $3.4 million, respectively, as a result of the elimination of $1.3
million of amortization expense related to goodwill, together with a decrease in
the recorded income tax benefit of $0.5 million.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 provides new
guidance on the recognition of impairment losses on long-lived assets to be held
and used or to be disposed of and also broadens the definition of what
constitutes a discontinued operation and how the results of a discontinued
operation are to be measured and presented. SFAS No. 144 supersedes SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and Accounting Principle Board Opinion No. 30, while retaining
many of the requirements of these two statements. Under SFAS No. 144, assets
held for sale (APB Opinion No. 30) that are a component of an entity will be
included in discontinued operations if the operations and cash flows will be or
have been eliminated from the ongoing operations of the entity and the entity
will not have any significant continuing involvement in the operations
prospectively. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001, with early adoption encouraged. SFAS No. 144 is not expected
to materially change the methods used by the Company to measure impairment
losses on long-lived assets, but may result in additional future dispositions
being reported as discontinued operations than is currently permitted. The
Company plans to adopt SFAS No. 144 on April 1, 2002.
3. ACQUISITIONS
On April 23, 2001, the Company acquired the international operations of
Compressor Systems, Inc. based in Midland, Texas for approximately $30 million
in cash. The acquisition resulted in the recording of $13 million of goodwill,
which is not subject to amortization.
On July 11, 2001, the Company acquired KCI, a Tulsa, Oklahoma-based
fabricator of large horsepower compressors for approximately $26.3 million in
cash and 694,927 shares of the Company's common stock. In addition, the Company
incurred costs and assumed other liabilities related to the transaction of
approximately $6 million. Concurrently with the acquisition, the Company repaid
substantially all of KCI's approximately $51 million of indebtedness. In order
to fund the acquisition, the Company used approximately $50 million of the
availability under its revolver and $27.3 million of the funds received from the
public offering of its stock in July 2001. The acquisition resulted in the
recording of $40.2 million of goodwill, which is not subject to amortization.
On July 13, 2001, the Company acquired LCM, a Houma, Louisiana based
supplier of maintenance, repair, overhaul and upgrade services to the natural
gas pipeline and related markets for approximately $26.3 million in cash. In
order to fund the acquisition the Company used approximately $25 million of the
availability under its revolving credit facility and $1.3 million of the funds
received from the public offering of its stock. The acquisition resulted in the
recording of $17.4 million of goodwill, which is not subject to amortization.
The Company's acquisitions were accounted for as purchases and accordingly,
the results of operations of the acquired businesses are included in the
accompanying financial statements from the date of acquisition.
7
4. INVENTORIES, NET
Inventories, net consisted of the following (in thousands):
SEPTEMBER 30, MARCH 31,
2001 2001
------------- ---------
(UNAUDITED)
Raw materials $ 75,702 $ 63,473
Finished goods 12,462 38,705
Work-in-progress 36,997 18,761
--------- --------
Total $ 125,161 $120,939
========= ========
5. OPERATING LEASE FACILITIES
In May 2000, the Company and Universal entered into a $200 million operating
lease facility pursuant to which the Company sold and leased back certain
compression equipment from a Delaware business trust for a five-year term. The
rental payments under the lease facility included an amount based on LIBOR plus
a variable amount depending on the Company's operating and financial results,
applied to the funded amount of the lease. Under the lease facility, the Company
received an aggregate of approximately $155 million in proceeds from the sale of
compression equipment in May, November and December 2000 and in connection with
the GCSI acquisition, in September 2000. The equipment was sold and leased back
by the Company for a five-year period from May 2000 and deployed by the Company
under its normal operating procedures. The equipment sold had a book value of
approximately $106 million and the equipment sale resulted in deferred gain of
approximately $49 million that was transferred to new operating lease
facilities.
The Company had residual value guarantees on the equipment under the
operating lease facility of approximately 85% of the funded amount that were due
upon termination of the lease and which could be satisfied by a cash payment or
the exercise of the purchase option. The facility contained certain covenants
restricting the Company's operations, including its ability to enter into
acquisition and sales transactions, incur additional indebtedness, permit
additional liens on its assets and pay dividends. The Company's obligations
under this facility were collateralized by liens on its compression equipment
subject to the lease and certain related rights. Under the operating lease
facility, Universal was the lessee and the Company guaranteed certain of
Universal's obligations thereunder. The Company has replaced this facility with
new operating lease facilities with similar terms.
In connection with the Weatherford Global acquisition, on February 9, 2001,
the Company raised $427 million under a new seven-year term senior secured notes
operating lease facility (the "SSN Operating Lease Facility") funded primarily
through an offering of $350 million 8 7/8% senior secured notes due 2008 by an
unaffiliated entity that is the lessor under the operating lease. The Company
also entered into a new $125 million secured revolving credit facility and a new
$200 million asset-backed securitization operating lease facility (the "ABS
Operating Lease Facility"), which facility consists of a series of six leases
with terms ranging from three to eight years. At the closing of the Weatherford
Global acquisition, the Company funded approximately $80 million under the ABS
Operating Lease Facility and had no amounts outstanding under the new revolving
credit facility. The proceeds from the two new operating lease facilities were
used to restructure previous operating lease obligations and refinance certain
existing indebtedness of the Company (including the previous operating lease
facility described above in the first paragraph) and Weatherford Global.
During the quarter, the Company funded $40.0 million under the ABS Operating
Lease Facility. The funds were used for acquisitions, capital expenditures and
for general working capital purposes. At September 30, 2001, the Company had
outstanding lease balances totaling $607.5 million and the equipment sold under
the two new operating lease facilities had a book value of approximately $503.7
million and the equipment sale resulted in a deferred gain of approximately
$103.8 million.
On October 23, 2001, the Company raised an additional $122 million under
the SSN Operating Lease Facility, which was funded primarily through an offering
of an additional $100 million of 8 7/8% senior secured notes due 2008, together
with $18.3 million in additional borrowings under an existing term loan and an
additional $3.7 million equity investment in an unaffiliated entity that is the
lessor under the operating lease. The net proceeds from the sale of equipment
under the SSN Operating Lease Facility were used to repay all of the outstanding
indebtedness under its revolving credit facility, with the remaining proceeds
used to repay a portion of the obligations under the ABS Operating Lease
Facility and for other indebtedness and for general corporate purposes.
Under the operating lease facilities, the Company, as lessee, makes rental
payments to the lessor for the leased equipment. Under the SSN Operating Lease
Facility, the rental payments include amounts based on the interest accrued on
the 8 7/8% senior secured notes and an amount based on LIBOR or a variable base
rate equal to the sum of the interest accrued on the lessor's term loan, the
yield on the equity investment in the lessor and other fees. The equipment
leased by the Company under the SSN Operating Lease Facility had an initial
appraised value of $549 million. The Company has residual value guarantees on
the equipment under the SSN
8
Operating Lease Facility of approximately 82% of the funded amount that are due
upon termination of the lease in the event the purchase option or renewal
options are not selected by the lessee.
Under the ABS Operating Lease Facility, the rental payments are based on a
variable rate plus the yield on the equity investment in the facility. The ABS
Operating Lease Facility is collateralized by a first priority security interest
in all of the assets under the facility. At the end of each lease term under the
ABS Operating Lease Facility, the Company has residual value guarantees on the
equipment under the facility of approximately 85% of the funded amount.
The Company annually assesses whether it is probable that the value of the
property at the end of the lease terms will be less than the residual value
guarantee for each operating lease. On the date the deficiency becomes probable,
the expected deficiency (up to the maximum for which the Company is responsible)
would be accrued by the Company using the straight-line method over the
remaining term of the leases.
6. LONG-TERM DEBT
Castle Harlan's reduced ownership of our common stock following our offering
in July 2001 constituted a change of control under the indenture governing our 9
7/8% senior discount notes, giving the holders of the notes the right to require
us to repurchase those notes through August 23, 2001. We repurchased
approximately $5.8 million face value of the 9 7/8% senior discount notes using
borrowings under our revolving credit facility.
7. EXTRAORDINARY LOSSES
During the quarter ended June 30, 2000, the Company incurred extraordinary
losses of $6.3 million (net of $3.8 million income tax benefit) related to its
debt restructuring that occurred concurrently with the Company's initial public
offering of its common stock.
8. NON-RECURRING CHARGES
During the quarter ended June 30, 2000, the Company incurred non-recurring
charges of $7.1 million, related to the early termination of a management
agreement and a consulting agreement and other related fees in connection with
the Company's initial public offering and concurrent financing transactions.
9. RELATED PARTY TRANSACTIONS
Management Agreement
Castle Harlan, Inc., an affiliate of a significant stockholder of the
Company, entered into an agreement whereby, in exchange for certain management
services rendered, the Company agreed to pay a fee to Castle Harlan, Inc.
totaling $3 million per year. The amount was paid in advance for the first year
and quarterly in advance thereafter. The agreement was for a term of five years,
renewable automatically from year to year thereafter unless Castle Harlan Inc.
or its affiliates beneficially own less than 20% of the then outstanding stock
of the Company.
In connection with the initial public offering in the quarter ended June 30,
2000, the Company terminated its Management Agreement with Castle Harlan, Inc.
In exchange for such termination, the Company paid $3 million in cash and issued
136,364 shares of its common stock to Castle Harlan.
Transitional Services Agreement
Concurrently with the closing of the Weatherford Global acquisition,
Weatherford International Inc. and Weatherford Global, as the Company's
subsidiary, entered into a transitional services agreement under which
Weatherford International Inc. provided certain administrative and support
services, such as shared corporate office space and general communication and
information services, to Weatherford Global until June 9, 2001. Weatherford
Global paid Weatherford International Inc. $125,000 for thirty days of these
services.
9
10. INDUSTRY SEGMENTS
Prior to the Weatherford Global merger, the Company had three principal
industry segments: Domestic Rental and Maintenance, International Rental and
Maintenance (including Canada) and Engineered Products. Due to the Weatherford
Global merger, the changing nature of the markets the Company serves and in
order to align ourselves with those markets, the Company changed its internal
business organization during fiscal 2001. In addition, during the second quarter
of fiscal 2002 the Company changed the name of its Rental and Maintenance
segment to Contract Compression. The Company is now organized into four
principal businesses or operating segments: Domestic Contract Compression,
International Contract Compression (including Canada), Fabrication and Parts
Sales and Service. The two Contract Compression Segments provide natural gas
compression rental and maintenance services to meet specific customer
requirements. The Fabrication Segment involves the design, fabrication and sale
of natural gas and air compression packages to meet customer specifications. The
International Contract Compression (including Canada) Segment represents all of
the Company's international rental and maintenance (including Canada)
operations. The Parts Sales and Service Segment involves the sale of parts to
and the service of compressor units owned by oilfield companies.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately since each business
requires different marketing strategies due to customer specifications. Each of
these business groups has one or more general managers who report directly to
the Chief Executive Officer ("CEO"). The CEO has been identified as the Chief
Operating Decision Maker as defined by SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." We have restated segment results for
prior periods as a result of our fiscal 2001 realignment.
In addition to these four operating segments, accounting, administration,
facilities, finance, human resources, legal, marketing, procurement and sales
groups also report to the CEO. The CEO does not evaluate the operating segments
based upon fully allocated profit and loss statements, and the segments'
reportable operating profit excludes allocated expenses. Operating segments do
not have material sales to other segments, and accordingly, there are no
inter-segment revenues to be reported. The Company also does not allocate our
restructuring charges, interest and other income, interest expense or income
taxes to operating segments.
The following table presents sales and other financial information by industry
segment for the three-month period ended September 30, 2001 (in thousands):
DOMESTIC INTERNATIONAL
CONTRACT CONTRACT PARTS SALES CORPORATE
COMPRESSION COMPRESSION FABRICATION AND SERVICE AND OTHER TOTAL
Revenues $68,871 $16,319 $56,831 $32,287 -- $174,308
Gross margin $43,882 $11,559 $ 6,051 $ 6,637 -- $ 68,129
Operating income $29,708 $ 6,250 $ 1,876 $ 2,770 -- $ 40,604
The following table presents sales and other financial information by industry
segment for the three-month period ended September 30, 2000 (in thousands):
DOMESTIC INTERNATIONAL
CONTRACT CONTRACT PARTS SALES CORPORATE
COMPRESSION COMPRESSION FABRICATION AND SERVICE AND OTHER TOTAL
Revenues $24,396 $4,286 $8,318 $1,926 $(114) $38,812
Gross margin $15,525 $3,254 $1,363 $ 401 $(114) $20,429
Operating income $ 7,678 $1,290 $ 796 $ 331 $(114) $ 9,981
The following table presents sales and other financial information by industry
segment for the six-month period ended September 30, 2001 (in thousands):
DOMESTIC INTERNATIONAL
CONTRACT CONTRACT PARTS SALES CORPORATE
COMPRESSION COMPRESSION FABRICATION AND SERVICE AND OTHER TOTAL
Revenues $130,790 $30,350 $89,065 $64,464 -- $314,669
Gross margin $ 82,631 $21,195 $10,247 $13,577 -- $127,650
Operating income $ 54,069 $11,938 $ 3,276 $ 6,786 -- $ 76,069
10
The following table presents sales and other financial information by industry
segment for the six-month period ended September 30, 2000 (in thousands):
DOMESTIC INTERNATIONAL
CONTRACT CONTRACT PARTS SALES CORPORATE
COMPRESSION COMPRESSION FABRICATION AND SERVICE AND OTHER TOTAL
Revenues $46,571 $8,385 $15,979 $2,421 -- $73,356
Gross margin $29,770 $6,313 $ 2,885 $ 487 -- $39,455
Operating income $13,381 $2,598 $ 1,717 $ 358 -- $18,054
No one customer accounted for more than 10% of revenues for any of the periods
presented.
11. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is involved in various
pending or threatened legal actions. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions will not have a
materially adverse effect on the Company's financial position, operating results
or cash flows.
The Company has no other commitments or contingent liabilities which, in the
judgment of management, would result in losses that would materially affect the
Company's consolidated financial position or operating results.
On May 24, 2001, the Company entered into an agreement with Tidewater to
settle acquisition-related claims, which included costs for remediation pursuant
to an environmental assessment, in exchange for payment to the Company of $1
million and termination of the purchase price adjustment agreement, which
eliminated any payment obligation by the Company under that agreement.
12. SUBSEQUENT EVENTS
On October 3, 2001, the Company completed its acquisition of TCSI, located
in Belle Chase, Louisiana. TCSI provides compression parts and services to the
natural gas producing industry as well as to the refinery and petrochemical
industries. Under the terms of the purchase agreement, the Company acquired TCSI
for approximately $22.5 million in cash. In order to fund the acquisition, the
Company used approximately $19 million under its ABS Operating Lease Facility
and approximately $3.5 million under its revolving credit facility.
On October 17, 2001, 28,379 shares of the Company's common stock were
released to the Company from an escrow account, in connection with the GCSI
acquisition. The shares relate to a claim made by the Company against the former
GCSI shareholders for various items pursuant to the terms of the GCSI
acquisition agreement.
On October 23, 2001, the Company sold an additional $122 million of
compression equipment to BRL Universal Equipment 2001 A, L.P. and leased the
equipment back under its existing SSN Operating Lease Facility. The Company used
the net proceeds from the sale of the compression equipment to repay all of the
outstanding indebtedness under its revolving credit facility with the remaining
proceeds used to repay a portion of the obligations under its ABS Operating
Lease Facility and/or for other indebtedness and for general corporate purposes.
11
UNIVERSAL COMPRESSION, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, 2001 MARCH 31, 2001
------------------ ------------------
(UNAUDITED)
ASSETS
Current Assets:
Cash $ 5,622 $ 12,279
Accounts receivable, net 118,805 87,088
Inventories, net 125,161 120,939
Other current assets 30,759 24,059
------------------ ------------------
Total current assets 280,347 244,365
Property, plant and equipment
Contract compression equipment 699,099 592,449
Other 66,812 52,810
Accumulated depreciation (74,892) (55,634)
------------------ ------------------
Net property, plant, and equipment 691,019 589,625
Goodwill 364,060 294,127
Other assets, net 44,572 43,417
------------------ ------------------
Total assets $ 1,379,998 $ 1,171,534
================== ==================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 167,205 $ 143,531
Current portion of long term debt and capital lease obligation 60,872 3,452
Total current liabilities 228,077 146,983
Long-term debt 208,132 204,875
Non-current deferred tax liability 105,981 90,126
Deferred gain 103,846 75,146
Capital lease obligations 5,181 6,086
Other liabilities 154 694
------------------ ------------------
Total liabilities 651,371 523,910
Common stock 49 49
Paid in capital 708,129 651,607
Currency translation adjustment 1,986 845
Retained earnings / (deficit) 18,463 (4,877)
------------------ ------------------
Total stockholder's equity 728,627 647,624
------------------ ------------------
Total liabilities and stockholder's equity $ 1,379,998 $ 1,171,534
================== ==================
See accompanying notes to unaudited consolidated financial statements.
12
UNIVERSAL COMPRESSION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues:
Contract compression $ 85,190 $ 28,681 $ 161,140 $ 54,955
Sales 89,118 10,131 153,529 18,401
--------- --------- --------- ---------
Total revenues 174,308 38,812 314,669 73,356
Costs and expenses:
Contract compression, exclusive of depreciation and amortization 29,749 9,903 57,314 18,873
Cost of sales, exclusive of depreciation and amortization 76,430 8,480 129,705 15,028
Depreciation and amortization 11,712 6,677 23,092 14,173
Selling, general and administrative 15,813 3,769 28,489 7,224
Operating lease 12,973 1,995 25,566 2,684
Interest expense 6,573 5,221 12,105 12,627
Non-recurring charges -- -- -- 7,059
--------- --------- --------- ---------
Other (income) / expense 189 (41) 236 (257)
--------- --------- --------- ---------
Total costs and expenses 153,439 36,004 276,507 77,411
--------- --------- --------- ---------
Income (loss) before income taxes and extraordinary items 20,869 2,808 38,162 (4,055)
Income taxes (benefit) 8,076 1,054 14,824 (1,520)
--------- --------- --------- ---------
Income (loss) before extraordinary items $ 12,793 1,754 23,338 (2,535)
========= ========= ========= =========
Extraordinary loss, net of $2,037
income tax benefit -- -- -- (3,393)
--------- --------- --------- ---------
Net income (loss) $ 12,793 $ 1,754 $ 23,338 $ (5,928)
========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
13
UNIVERSAL COMPRESSION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
SEPTEMBER 30,
-----------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 23,338 $ (5,928)
Adjustments to reconcile net income (loss) to cash
provided by operating activities, net of effect of acquisitions:
Depreciation and amortization 23,092 14,173
Gain on asset sales (222) (102)
Amortization of debt issuance costs 1,346 717
Increase in payable to parent -- 153,818
Accretion of discount notes 9,906 9,114
Deferred income taxes 10,239 597
Accounts receivable (4,570) (14,509)
Inventories 26,595 (5,995)
Accounts payable and accrued expenses (32,387) 11,361
Other (6,948) 3,292
--------- ---------
Net cash provided by operating activities 50,389 166,538
Cash flows from investing activities:
Additions to property, plant and equipment, net (91,405) (30,779)
Sale-leaseback of vehicles -- (713)
Acquisitions (153,048) (114,912)
Proceeds from sale of fixed assets 1,976 139,647
--------- ---------
Net cash used in investing activities (242,477) (6,757)
Cash flows from financing activities:
Principal repayments of long-term debt (6,576) (74,855)
Net borrowings (repayment) under revolving line of credit 57,000 (75,000)
Net repayment on sale-leaseback of vehicles (1,004) (79)
Net borrowings (repayment ) on financing lease 80,000 (10,580)
Acquisition -- 6,185
Investment in subsidiary by parent 56,522 --
Debt issuance costs (1,652) (5,320)
--------- ---------
Net cash provided (used) by financing activities 184,290 (159,649)
Effect of exchange rate 1,141 --
Net increase (decrease) in cash and cash equivalents (6,657) 132
Cash and cash equivalents at beginning of period 12,279 1,403
--------- ---------
Cash and cash equivalents at end of period $ 5,622 $ 132
========= =========
See accompanying notes to unaudited consolidated financial statements.
14
UNIVERSAL COMPRESSION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
1. BASIS OF PRESENTATION
Organization
Universal Compression, Inc. was formed on December 12, 1997 for the purpose
of acquiring Tidewater Compression Service, Inc. ("TCS") from Tidewater Inc.
("Tidewater"). Upon completion of the acquisition on February 20, 1998 (the
"Tidewater Acquisition"), Acquisition Corp. was merged with and into TCS, which
changed its name to Universal Compression, Inc. (the "Company"). The Company is
a wholly owned subsidiary of Universal Compression Holdings, Inc. ("Holdings").
On May 30, 2000, Holdings completed an initial public offering of 7,275,000
shares of its common stock, which provided Holdings with net proceeds (after
deducting underwriting discounts and commissions) of approximately $149.2
million. Concurrently with the initial public offering, Holdings implemented a
recapitalization pursuant to which all existing classes of Holdings' stock were
converted into common stock. Also concurrently with the initial public offering,
the Company entered into a $50 million revolving credit facility and $200
million operating lease facility. The proceeds of the offering and the $62.6
million in initial proceeds from the new operating lease facility were used to
repay $192.7 million of indebtedness, and the remaining proceeds were used for
working capital and to pay expenses associated with the offering and concurrent
financing transactions.
On February 9, 2001, the Company completed its acquisition of Weatherford
Global Compression Services, L.P. and certain related entities ("Weatherford
Global"), a supplier of natural gas compression equipment and services and a
division of Weatherford International, Inc. Under the terms of the agreement, a
subsidiary of Weatherford International, Inc. was merged into Universal in
exchange for 13.75 million shares of the Company's common stock. In connection
with the acquisition, Weatherford agreed, subject to conditions, to limit its
voting rights to 33 1/3% of the Company's voting power for up to two years.
On July 3, 2001, Holdings completed the public offering (the "Offering") of
1,333,333 shares of its common stock, par value $0.01 per share, together with
2,666,667 shares of Holdings' common stock sold by certain selling stockholders,
including Castle Harlan Partners III, L.P. and its affiliates. The shares were
sold in the Offering at a price of $28.50 per share, and the Offering provided
Holdings with net proceeds (after deducting underwriting discounts and
commissions) of approximately $36.1 million.
The Company completed its acquisition of Gas Compression Services, Inc.
("GCSI") on September 15, 2000, of ISS Compression, Inc. and its operating
subsidiary, IEW Compression, Inc. (collectively "IEW") on February 28, 2001, of
the international operations of Compressor Systems, Inc. ("CSII") on April 23,
2001, of KCI, Inc. ("KCI") on July 11, 2001, of Louisiana Compressor
Maintenance, Inc. ("LCM") on July 13, 2001 and of Technical Compression Service,
Inc. ("TCSI") on October 3, 2001.
These consolidated financial statements should be read in conjunction with
the consolidated financial statements presented in the Company's Annual Report
on Form 10-K for the year ended March 31, 2001. That report contains a more
comprehensive summary of the Company's major accounting policies. In the opinion
of management, the accompanying unaudited consolidated financial statements
contain all appropriate adjustments, all of which are normally recurring
adjustments unless otherwise noted, considered necessary to present fairly the
financial position of the Company and its consolidated subsidiaries and the
results of operations and cash flows for the respective periods. Operating
results for the three-month period and six-month period ended September 30, 2001
are not necessarily indicative of the results that may be expected for the
fiscal year ending March 31, 2002.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year amounts to
conform to the current year classification.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 2000, the FASB issued
SFAS No. 138, which amends certain provisions of SFAS 133 to clarify four areas
causing difficulties in implementation. The amendment included expanding the
normal purchase and sale exemption for supply contracts, permitting the
offsetting of certain intercompany foreign currency derivatives and thus
reducing the number of third party derivatives, permitting hedge accounting for
foreign-currency denominated assets and liabilities, and redefining interest
rate risk to reduce sources of ineffectiveness. SFAS 133 requires that an entity
recognize all derivative instruments as either assets or liabilities in the
balance sheet and measure those instruments at fair
15
value. If certain conditions are met, a derivative may be specifically
designated as (1) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (2) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (3) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. The Company adopted SFAS 133 and the
corresponding amendments under SFAS 138 on April 1, 2001. This statement had no
impact on our consolidated results of operations, financial position or cash
flows.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the
SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. On June 26, 2000, the SEC issued an
amendment to SAB 101, effectively delaying its implementation until the fourth
quarter of fiscal years beginning after December 15, 1999. After reviewing SAB
101 and its amendment, the Company believes that our revenue recognition policy
is appropriate and that the effects of SAB 101 and its amendment were immaterial
to our results of operations.
In July 2001, the FASB issued SFAS 141, "Business Combinations," effective
for all business combinations initiated after June 30, 2001 and SFAS 142,
"Goodwill and Other Intangible Assets". We elected to adopt SFAS 142 effective
April 1, 2001 as the first interim period financial statements had not
previously been issued. SFAS 141 addresses financial accounting and reporting
for goodwill and other intangible assets acquired in a business combination at
acquisition. SFAS 142 addresses financial accounting and reporting for
intangible assets acquired individually or with a group of other assets (but not
those acquired in a business combination) at acquisition. It also addresses
financial accounting and reporting for goodwill and other intangible assets
subsequent to their acquisition. Had SFAS 142 been effective April 1, 2000, we
would have adopted it in the first quarter of fiscal 2000 and our net income
during the three months ended September 30, 2000 would have been $2.5 million,
as a result of the elimination of $.7 million of amortization expense related to
goodwill. In addition, our net loss and loss before taxes and extraordinary
items during the six months ended September 30, 2000 would have been $7.4
million and $3.4 million, respectively, as a result of the elimination of $1.3
million of amortization expense related to goodwill, together with a decrease in
the recorded income tax benefit of $0.5 million.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 provides new
guidance on the recognition of impairment losses on long-lived assets to be held
and used or to be disposed of and also broadens the definition of what
constitutes a discontinued operation and how the results of a discontinued
operation are to be measured and presented. SFAS No. 144 supersedes SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and Accounting Principle Board Opinion No. 30, while retaining
many of the requirements of these two statements. Under SFAS No. 144, assets
held for sale (APB Opinion No. 30) that are a component of an entity will be
included in discontinued operations if the operations and cash flows will be or
have been eliminated from the ongoing operations of the entity and the entity
will not have any significant continuing involvement in the operations
prospectively. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001, with early adoption encouraged. SFAS No. 144 is not expected
to materially change the methods used by the Company to measure impairment
losses on long-lived assets, but may result in additional future dispositions
being reported as discontinued operations than is currently permitted. The
Company plans to adopt SFAS No. 144 on April 1, 2002.
3. ACQUISITIONS
On April 23, 2001, the Company acquired the international operations of
Compressor Systems, Inc. based in Midland, Texas for approximately $30 million
in cash. The acquisition resulted in the recording of $13 million of goodwill,
which is not subject to amortization.
On July 11, 2001, the Company acquired KCI, a Tulsa, Oklahoma-based
fabricator of large horsepower compressors for approximately $26.3 million in
cash and 694,927 shares of the Company's common stock. In addition, the Company
incurred costs and assumed other liabilities related to the transaction of
approximately $6 million. Concurrently with the acquisition, the Company repaid
substantially all of KCI's approximately $51 million of indebtedness. In order
to fund the acquisition, the Company used approximately $50 million of the
availability under its revolver and $27.3 million of the funds received from the
public offering of its stock in July 2001. The acquisition resulted in the
recording of $40.2 million of goodwill, which is not subject to amortization.
On July 13, 2001, the Company acquired LCM, a Houma, Louisiana based
supplier of maintenance, repair, overhaul and upgrade services to the natural
gas pipeline and related markets for approximately $26.3 million in cash. In
order to fund the acquisition the Company used approximately $25 million of the
availability under its revolving credit facility and $1.3 million of the funds
received from the public offering of its stock. The acquisition resulted in the
recording of $17.4 million of goodwill, which is not subject to amortization.
16
The Company's acquisitions were accounted for as purchases and accordingly,
the results of operations of the acquired businesses are included in the
accompanying financial statements from the date of acquisition.
4. INVENTORIES, NET
Inventories, net consisted of the following (in thousands):
SEPTEMBER 30, MARCH 31,
2001 2001
------------- -------------
(UNAUDITED)
Raw materials $ 75,702 $ 63,473
Finished goods 12,462 38,705
Work-in-progress 36,997 18,761
------------- -------------
Total $ 125,161 $ 120,939
============= =============
5. OPERATING LEASE FACILITIES
In May 2000, the Company and Holdings entered into a $200 million operating
lease facility pursuant to which the Company sold and leased back certain
compression equipment from a Delaware business trust for a five-year term. The
rental payments under the lease facility included an amount based on LIBOR plus
a variable amount depending on the Company's operating and financial results,
applied to the funded amount of the lease. Under the lease facility, the Company
received an aggregate of approximately $155 million in proceeds from the sale of
compression equipment in May, November and December 2000 and in connection with
the GCSI acquisition, in September 2000. The equipment was sold and leased back
by the Company for a five-year period from May 2000 and deployed by the Company
under its normal operating procedures. The equipment sold had a book value of
approximately $106 million and the equipment sale resulted in deferred gain of
approximately $49 million that was transferred to new operating lease
facilities.
The Company had residual value guarantees on the equipment under the
operating lease facility of approximately 85% of the funded amount that were due
upon termination of the lease and which could be satisfied by a cash payment or
the exercise of the purchase option. The facility contained certain covenants
restricting the Company's operations, including its ability to enter into
acquisition and sales transactions, incur additional indebtedness, permit
additional liens on its assets and pay dividends. The Company's obligations
under this facility were collateralized by liens on its compression equipment
subject to the lease and certain related rights. Under the operating lease
facility, Universal was the lessee and the Company guaranteed certain of
Universal's obligations thereunder. The Company has replaced this facility with
new operating lease facilities with similar terms.
In connection with the Weatherford Global acquisition, on February 9, 2001,
the Company raised $427 million under a new seven-year term senior secured notes
operating lease facility (the "SSN Operating Lease Facility") funded primarily
through an offering of $350 million 8 7/8% senior secured notes due 2008 by an
unaffiliated entity. The Company also entered into a new $125 million secured
revolving credit facility and a new $200 million asset-backed securitization
operating lease facility (the "ABS Operating Lease Facility"), which facility
consists of a series of six leases with terms ranging from three to eight years.
At the closing of the Weatherford Global acquisition, the Company funded
approximately $80 million under the ABS Operating Lease Facility and had no
amounts outstanding under the new revolving credit facility. The proceeds from
the two new operating lease facilities were used to restructure existing
operating lease obligations and refinance certain previous indebtedness of the
Company (including the previous operating lease facility described above in the
first paragraph) and Weatherford Global.
During the quarter, the Company funded $40 million under the ABS Operating
Lease Facility. The funds were used for acquisitions, capital expenditures and
for general working capital purposes. At September 30, 2001, the Company had
outstanding lease balances totaling $607.5 million and the equipment sold under
the two new operating lease facilities had a book value of approximately $503.7
million and the equipment sale resulted in a deferred gain of approximately
$103.8 million.
On October 23, 2001, the Company raised an additional $122 million under
the SSN Operating Lease Facility, which was funded primarily through an offering
of an additional $100 million of 8 7/8% senior secured notes due 2008, together
with $18.3 million in additional borrowings under an existing term loan and an
additional $3.7 million equity investment in an unaffiliated entity that is the
lessor under the operating lease. The net proceeds from the sale of equipment
under the SSN Operating Lease Facility were used to repay all of the outstanding
indebtedness under its revolving credit facility, with the remaining proceeds
used to repay a portion of the obligations under the ABS Operating Lease
Facility and for other indebtedness and for general corporate purposes.
Under the operating lease facilities, the Company, as lessee, makes rental
payments to the lessor for the leased equipment. Under the SSN Operating Lease
Facility, the rental payments include amounts based on the interest accrued on
the 8 7/8% senior secured notes and an amount based on LIBOR or a variable base
rate equal to the sum of the interest accrued on the lessor's term loan, the
17
yield on the equity investment in the lessor and other fees. The equipment
leased by the Company under the SSN Operating Lease Facility had an initial
appraised value of $549 million. The Company has residual value guarantees on
the equipment under the SSN Operating Lease Facility of approximately 82% of the
funded amount that are due upon termination of the lease in the event the
purchase option or renewal options are not selected by the lessee.
Under the ABS Operating Lease Facility, the rental payments are based on a
variable rate plus the yield on the equity investment in the facility. The ABS
Operating Lease Facility is collateralized by a first priority security interest
in all of the assets under the facility. At the end of each lease term under the
ABS Operating Lease Facility, the Company has residual value guarantees on the
equipment under the facility of approximately 85% of the funded amount.
The Company annually assesses whether it is probable that the value of the
property at the end of the lease terms will be less than the residual value
guarantee for each operating lease. On the date the deficiency becomes probable,
the expected deficiency (up to the maximum for which the Company is responsible)
would be accrued by the Company using the straight-line method over the
remaining term of the leases.
6. LONG-TERM DEBT
Castle Harlan's reduced ownership of our common stock following our offering
in July 2001 constituted a change of control under the indenture governing our
9 7/8% senior discount notes, giving the holders of the notes the right to
require us to repurchase those notes through August 23, 2001. We repurchased
approximately $5.8 million face value of the 9 7/8% senior discount notes using
borrowings under our revolving credit facility.
7. EXTRAORDINARY LOSSES
During the quarter ended June 30, 2000, the Company incurred extraordinary
losses of $3.4 million (net of $2.0 million income tax benefit) related to its
debt restructuring that occurred concurrently with Holdings' initial public
offering of its common stock.
8. NON-RECURRING CHARGES
During the quarter ended June 30, 2000, the Company incurred non-recurring
charges of $7.1 million, related to the early termination of a management
agreement and a consulting agreement and other related fees in connection with
Holdings' initial public offering and concurrent financing transactions.
9. RELATED PARTY TRANSACTIONS
Management Agreement
Castle Harlan, Inc., an affiliate of a significant stockholder of Holdings,
entered into an agreement whereby, in exchange for certain management services
rendered, Holdings agreed to pay a fee to Castle Harlan Inc. totaling $3 million
per year. The amount was paid in advance for the first year and quarterly in
advance thereafter. The agreement was for a term of five years, renewable
automatically from year to year thereafter unless Castle Harlan Inc. or its
affiliates beneficially own less than 20% of the then outstanding stock of
Holdings.
In connection with the initial public offering in the quarter ended June 30,
2000, Holdings terminated its Management Agreement with Castle Harlan, Inc. In
exchange for such termination, Holdings paid $3 million in cash and issued
136,364 shares of its common stock to Castle Harlan.
Transitional Services Agreement
Concurrently with the closing of the Weatherford Global acquisition,
Weatherford International, Inc. and Weatherford Global, as the Company's
subsidiary, entered into a transitional services agreement under which
Weatherford International, Inc. provided certain administrative and support
services, such as shared corporate office space and general communication and
information services, to Weatherford Global until June 9, 2001. Weatherford
Global paid Weatherford International, Inc $125,000 for thirty days of these
services.
18
10. INDUSTRY SEGMENTS
Prior to the Weatherford Global merger, the Company had three principal
industry segments: Domestic Rental and Maintenance, International Rental and
Maintenance (including Canada) and Engineered Products. Due to the Weatherford
Global merger, the changing nature of the markets the Company serves and in
order to align ourselves with those markets, the Company changed its internal
business organization during fiscal 2001. In addition, during the second quarter
of fiscal 2002 the Company changed the name of its Rental and Maintenance
segments to Contract Compression. The Company is now organized into four
principal businesses or operating segments: Domestic Contract Compression,
International Contract Compression (including Canada), Fabrication and Parts
Sales and Service. The two Contract Compression Segments provide natural gas
compression rental and maintenance services to meet specific customer
requirements. The Fabrication Segment involves the design, fabrication and sale
of natural gas and air compression packages to meet customer specifications. The
International Contract Compression (including Canada) Segment represents all of
the Company's international rental and maintenance (including Canada)
operations. The Parts Sales and Service Segment involves the sale of parts to
and the service of compressor units owned by oilfield companies.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately since each business
requires different marketing strategies due to customer specifications. Each of
these business groups has one or more general managers who report directly to
the Chief Executive Officer ("CEO"). The CEO has been identified as the Chief
Operating Decision Maker as defined by SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Company has restated segment
results for prior periods as a result of our fiscal 2001 realignment.
In addition to these four operating segments, accounting, administration,
facilities, finance, human resources, legal, marketing, procurement and sales
groups also report to the CEO. The CEO does not evaluate the operating segments
based upon fully allocated profit and loss statements, and the segments'
reportable operating profit excludes allocated expenses. Operating segments do
not have material sales to other segments, and accordingly, there are no
inter-segment revenues to be reported. The Company also does not allocate our
restructuring charges, interest and other income, interest expense or income
taxes to operating segments.
The following table presents sales and other financial information by industry
segment for the three-month period ended September 30, 2001 (in thousands):
DOMESTIC INTERNATIONAL
CONTRACT CONTRACT PARTS SALES CORPORATE
COMPRESSION COMPRESSION FABRICATION AND SERVICE AND OTHER TOTAL
Revenues $68,871 $16,319 $56,831 $32,287 -- $174,308
Gross margin $43,882 $11,559 $ 6,051 $ 6,637 -- $ 68,129
Operating income $29,708 $ 6,250 $ 1,876 $ 2,770 -- $ 40,604
The following table presents sales and other financial information by industry
segment for the three-month period ended September 30, 2000 (in thousands):
DOMESTIC INTERNATIONAL
CONTRACT CONTRACT PARTS SALES CORPORATE
COMPRESSION COMPRESSION FABRICATION AND SERVICE AND OTHER TOTAL
Revenues $24,396 $4,286 $8,318 $1,926 $(114) $38,812
Gross margin $15,525 $3,254 $1,363 $ 401 $(114) $20,429
Operating income $ 7,678 $1,290 $ 796 $ 331 $(114) $ 9,981
The following table presents sales and other financial information by industry
segment for the six-month period ended September 30, 2001 (in thousands):
DOMESTIC INTERNATIONAL
CONTRACT CONTRACT PARTS SALES CORPORATE
COMPRESSION COMPRESSION FABRICATION AND SERVICE AND OTHER TOTAL
Revenues $130,790 $30,350 $89,065 $64,464 -- $314,669
Gross margin $ 82,631 $21,195 $10,247 $13,577 -- $127,650
Operating income $ 54,069 $11,938 $ 3,276 $ 6,786 -- $ 76,069
19
The following table presents sales and other financial information by industry
segment for the six-month period ended September 30, 2000 (in thousands):
DOMESTIC INTERNATIONAL
CONTRACT CONTRACT PARTS SALES CORPORATE
COMPRESSION COMPRESSION FABRICATION AND SERVICE AND OTHER TOTAL
Revenues $46,571 $8,385 $15,979 $2,421 -- $73,356
Gross margin $29,770 $6,313 $ 2,885 $ 487 -- $39,455
Operating income $13,381 $2,598 $ 1,717 $ 358 -- $18,054
No one customer accounted for more than 10% of revenues for any of the periods
presented.
11. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is involved in various
pending or threatened legal actions. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions will not have a
materially adverse effect on the Company's financial position, operating results
or cash flows.
The Company has no other commitments or contingent liabilities which, in the
judgment of management, would result in losses that would materially affect the
Company's consolidated financial position or operating results.
On May 24, 2001, the Company entered into an agreement with Tidewater to
settle acquisition-related claims, which included costs for remediation pursuant
to an environmental assessment, in exchange for payment to the Company of $1
million and termination of the purchase price adjustment agreement, which
eliminated any payment obligation by the Company under that agreement.
12. SUBSEQUENT EVENTS
On October 3, 2001, the Company completed its acquisition of TCSI, located
in Belle Chase, Louisiana. TCSI provides compression parts and services to the
natural gas producing industry as well as to the refinery and petrochemical
industries. Under the terms of the purchase agreement, the Company acquired TCSI
for approximately $22.5 million in cash. In order to fund the acquisition, the
Company used approximately $19 million under its ABS Operating Lease Facility
and approximately $3.5 million under its revolving credit facility.
On October 17, 2001, 28,379 shares of the Company's common stock were
released to the Company from an escrow account, in connection with the GCSI
acquisition. The shares relate to a claim made by the Company against the former
GCSI shareholders for various items pursuant to the terms of the GSCI
acquisition agreement.
On October 23, 2001, the Company sold an additional $122 million of
compression equipment to BRL Universal Equipment 2001 A, L.P. and leased the
equipment back under its existing SSN Operating Lease Facility. The Company used
the net proceeds from the sale of the compression equipment to repay all of the
outstanding indebtedness under its revolving credit facility with the remaining
proceeds used to repay a portion of the obligations under its ABS Operating
Lease Facility and/or for other indebtedness and for general corporate purposes.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" intended to qualify for
the safe harbors from liability established by the Private Securities Litigation
Reform Act of 1995. All statements other than statements of historical fact
contained in report are forward-looking statements. You can identify many of
these statements by looking for words such as "believes," "expects," "will,"
"intends," "projects," "anticipates," "estimates," "continues" or similar words
or the negative thereof.
Such forward-looking statements include, without limitation:
o anticipated cost savings and other synergies resulting from the
businesses we have acquired;
o the sufficiency of available cash flows to fund continuing operations;
o anticipated synergies, future revenues, gross margins and EBITDA, as
adjusted, in our business and primary business segments, including
from our acquisitions;
o capital improvements;
o the expected amount of capital expenditures;
o our future financial position;
o the future value of our equipment;
o our growth strategy and projected costs; and
o plans and objectives of our management for our future operations.
Such forward-looking statements are subject to various risks and
uncertainties that could cause actual results to differ materially from those
anticipated as of the date of this report. The risks related to our business
described in our Annual Report on Form 10-K for the year ended March 31, 2001
under "Risk Factors" and elsewhere could cause actual results to differ from
those described in, or otherwise projected or implied by, the forward-looking
statements. Although we believe that the expectations reflected in these
forward-looking statements are based on reasonable assumptions, these
expectations may prove to be incorrect. Important factors that could cause
actual results to differ materially from the expectations reflected in these
forward-looking statements include, among other things:
o our inability to successfully integrate the business we have acquired
or may acquire in the future;
o conditions in the oil and gas industry, including the demand for
natural gas and the impact of the price of natural gas;
o competition among the various providers of contract compression
services;
o changes in safety and environmental regulations pertaining to the
production and transportation of natural gas;
o changes in economic or political conditions in operating markets;
o acts of war or terrorism or governmental or military responses
thereto;
o introduction of competing technologies by other companies;
o our ability to retain and grow our customer base;
o employment workforce factors, including loss of key employees; and
o liability claims related to the use of our products and services.
21
All subsequent written and oral forward-looking statements attributable to us or
any person acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section and elsewhere in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in our Annual Report on Form 10-K for the year ended March 31,
2001 under "Risk Factors." The forward-looking statements included herein are
only made as of the date of this report and we undertake no obligation to
publicly update such forward-looking statements to reflect new information,
subsequent events or otherwise.
The terms "our", "we," and "us" when used in this report refer to Universal
Compression Holdings, Inc. and its subsidiaries, including Universal
Compression, Inc. ("Universal"), as a combined entity, except where it is made
clear that such term means only the parent company, and includes its
predecessors.
GENERAL
We were formed in December 1997 to acquire all of the outstanding stock of
Tidewater Compression Service, Inc. Upon completion of the acquisition in
February 1998, Tidewater Compression became our wholly-owned operating
subsidiary and changed its name to Universal Compression, Inc. Through this
subsidiary, our gas compression service operations date back to 1954.
During the quarter ended June 30, 2000, we completed an initial public
offering of 7,275,000 shares of our common stock, par value $0.01 per share,
which provided us with net proceeds (after deducting underwriting discounts and
commissions) of approximately $149.2 million. Concurrently with our initial
public offering, we implemented a recapitalization pursuant to which all then
existing classes of our stock were converted into common stock. We used the
proceeds of the offering and the $62.6 million in initial proceeds from an
operating lease facility to repay $192.7 million of indebtedness, and the
remaining proceeds for working capital and to pay expenses associated with the
offering and concurrent financing transactions.
On February 9, 2001, the Company completed its acquisition of Weatherford
Global Compression Services, L.P. and certain related entities ("Weatherford
Global"), a supplier of natural gas compression equipment and services and a
division of Weatherford International, Inc. Under the terms of the agreement, a
subsidiary of Weatherford International, Inc. was merged into Universal in
exchange for 13.75 million shares of the Company's common stock. In connection
with the acquisition, Weatherford agreed, subject to conditions, to limit its
voting rights to 33 1/3% of the Company's voting power for up to two years.
On July 3, 2001, we completed the public offering of 1,333,333 shares of
our common stock, together with 2,666,667 shares of our common stock sold by
certain selling stockholders, including Castle Harlan Partners III, L.P. and its
affiliates. The shares were sold in the offering at a price of $28.50 per share,
and the offering provided us with net proceeds (after deducting underwriting
discounts and commissions) of approximately $36.1 million. We used the proceeds
to fund the cash portion of the purchase price for our acquisition of KCI, Inc.,
to repay a portion of KCI's indebtedness concurrently with the acquisition and
to partially fund the purchase price for our acquisition of LCM. Following the
offering, Castle Harlan owned or had voting control over approximately 6% of our
outstanding common stock.
Consummation of the July 2001 offering, and Castle Harlan's reduced
ownership of our common stock following that offering, gave the holders of
Universal's 9 7/8% senior discount notes the right to require us to repurchase
those notes at a price equal to 101% of the accreted value, plus accrued and
unpaid interest to date. We repurchased approximately $5.8 million face value of
the 9 7/8% senior discount notes using borrowings under our revolving credit
facility.
Since our initial public offering, we have completed seven primary
acquisitions. Our completed acquisitions include GCSI in September 2000,
Weatherford Global and IEW in February 2001, CSII in April 2001, and KCI and LCM
in July 2001, and TCSI in October 2001. GCSI added approximately 138,000
horsepower to our fleet and provided us with an increased customer base,
additional market segments and additional fabrication capabilities. IEW added
approximately 26,000 horsepower to our fleet, as well as important offshore
service capabilities. CSII added approximately 34,000 horsepower to our fleet in
Mexico and Argentina. KCI added approximately 125,000 horsepower to our domestic
fleet as well as significant fabrication expertise and capabilities, a 100,000
square foot fabrication facility in Tulsa, Oklahoma and expertise in the
pipeline and related natural gas markets. LCM added to our ability to be a
supplier of maintenance, repair, overhaul and upgrade services to natural gas
pipeline and related markets. TCSI added to our compression parts and service
capabilities for the natural gas producing industry as well as the refinery and
petrochemical industries.
Our Weatherford Global acquisition in February 2001 more than doubled our
size. We acquired Weatherford Global, which was the second largest natural gas
compression services company in the world in terms of horsepower, for 13,750,000
shares of our common stock (approximately 45% of our current total outstanding
shares) and the restructuring of approximately $323 million in debt and
operating lease obligations. This acquisition added over 950,000 horsepower to
our fleet and provided us with a number of
22
important strategic and operational benefits, including expanded international
operations, an increased parts sales and service business and cost savings and
synergies. Pursuant to a voting agreement, Weatherford agreed to limit its
voting power to 33 1/3% of our outstanding common stock, subject to certain
limitations.
We are the second largest provider of natural gas compressor rental, sales,
operations, maintenance and fabrication services to the natural gas industry in
terms of horsepower, with one of the largest natural gas compressor fleets in
the U.S. and a strong presence in key international markets.
UNIVERSAL COMPRESSION HOLDINGS, INC.
Three months ended September 30, 2001 compared to three months ended September
30, 2000
Revenues. Our total revenues for the three months ended September 30, 2001
increased $135.2 million, or 348%, to $174.1 million, compared to $38.9 million
for the three months ended September 30, 2000. Our contract compression revenues
increased by $56.5 million, or 197%, to $85.2 million during the three months
ended September 30, 2001 from $28.7 million during the three months ended
September 30, 2000. Domestic contract compression revenues increased by $44.5
million, or 182%, to $68.9 million during the three months ended September 30,
2001 from $24.4 million during the three months ended September 30, 2000. Our
international contract compression revenues increased by $12 million, or 281%,
to $16.3 million during the three months ended September 30, 2001 from $4.3
million during the three months ended September 30, 2000. The increase in
domestic contract compression revenues primarily resulted from continued
expansion of our contract compression fleet and through our acquisitions. The
increase in international contract compression revenues resulted from expansion
of our international contract compression fleet, primarily through the addition
of horsepower from our acquisitions, particularly our Weatherford Global
acquisition, continued expansion of our existing contract compression fleet and
continued high utilization rates.
Domestic average contracted horsepower for the three months ended September
30, 2001 increased by 200% to approximately 1,603,000 horsepower from
approximately 535,000 horsepower for the three months ended September 30, 2000.
In addition, international average contracted horsepower for the three months
ended September 30, 2001 increased by 469% to approximately 313,000 horsepower
from approximately 55,000 horsepower for the three months ended September 30,
2000, primarily through expansion of our international contract compression
fleet, continued high utilization rates and additional service. Our average
horsepower utilization rate for the three months ended September 30, 2001 was
approximately 90.2%, up from 86.2% in the three months ended September 30, 2000.
At the end of the quarter, we had approximately 2.1 million available
horsepower. These average horsepower and utilization amounts include KCI for 81
days and LCM for 79 days from the date of the acquisitions.
Our revenue from fabrication increased to $56.8 million for the quarter from
$8.3 million in the same quarter a year ago, an increase of 583%. The increase
in fabrication revenue, consisting mostly of equipment fabrication, was due
primarily to our acquisitions. Revenues from fabrication vary quarter to quarter
due to the time of completion of the equipment being sold. Our backlog of
fabrication projects at September 30, 2001 was approximately $101 million,
compared with a backlog of $26.8 million at the same time a year earlier. From
June 30 to September 30, 2001, our backlog increased $54 million, primarily due
to the acquisition of KCI.
Our revenues from parts sales and service increased to $32.2 million during
the three months ended September 30, 2001 from $1.9 million during the three
months ended September 30, 2000, an increase of 1,576%. The increase was due
primarily to our acquisitions of Weatherford Global and IEW, which have made the
parts sales and service segment a more significant part of our business.
Gross Margin. Our gross margin (defined as total revenue less rental
expense, cost of sales (exclusive of depreciation and amortization), gain on
asset sales and interest income) for the three months ended September 30, 2001
increased $47.7 million, or 233%, to $68.1 million from $20.4 million for the
three months ended September 30, 2000. Our contract compression gross margin for
the three months ended September 30, 2001 increased $36.6 million, or 195%, to
$55.4 million compared to a gross margin of $18.8 million for the three months
ended September 30, 2000. Contract compression gross margin increased primarily
as the result of our contract compression revenue growth discussed above and
operating cost improvements realized by contract compression operations. Our
fabrication gross margin for the three months ended September 30, 2001 increased
$4.7 million, or 344%, to $6.0 million compared to a gross margin of $1.4
million for the three months ended September 30, 2000. Fabrication gross margin
increased primarily due to increased sales resulting from our acquisitions, as
well as strong customer demand, cost reductions and resulting gross margin
effects.
Our parts sales and service gross margin for the three months ended
September 30, 2001 increased $6.2 million, or 1,555%, to $6.6 million compared
to a gross margin of $401 thousand for the three months ended September 30,
2000. Parts sales and service gross margin increased primarily due to our
acquisitions, our continued growth within the industry and operating cost
improvements.
23
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses for the three months ended September 30, 2001 increased
$12.0 million, or 319%, compared to the three months ended September 30, 2000.
Selling, general and administrative expenses represented approximately 9% of
revenue for the three months ended September 30, 2001 compared to approximately
10% of revenue for the three months ended September 30, 2000. The percentage
decrease was primarily due to synergies achieved in our acquisitions. These
reductions have been offset partially by increases in certain expenses related
to our operating as a publicly traded company.
EBITDA, As Adjusted. Our EBITDA, as adjusted, for the three months ended
September 30, 2001 increased 212% to $52.1 million from $16.7 million for the
three months ended September 30, 2000, primarily due to increases in total
horsepower from acquisitions, continued expansion of our existing contract
compression fleet and parts and service division, improved utilization of the
compression contract compression fleet, gross margin contribution from
fabrication, operating cost improvements realized by contract compression
operations, and decreased selling, general and administrative expenses as a
percentage of revenues, as discussed above. EBITDA, as adjusted, is defined as
net income plus income taxes, interest expense, leasing expense, management
fees, depreciation and amortization, excluding non-recurring items and
extraordinary gains or losses. EBITDA, as adjusted, is not a measure of
financial performance under generally accepted accounting principles and should
not be considered an alternative to operating income or net income as an
indicator of our operating performance or to net cash provided by operating
activities as a measure of its liquidity. Additionally, the EBITDA, as adjusted,
computation used herein may not be comparable to other similarly titled measures
of other companies. EBITDA, as adjusted, represents a measure upon which
management assesses financial performance, and certain covenants in our
borrowing arrangements are tied to similar measures. We believe that EBITDA, as
adjusted, is a standard measure of financial performance used for valuing
companies in the compression industry. EBITDA, as adjusted, is a useful
yardstick as it measures the capacity of companies to generate cash without
reference to how they are capitalized, how they account for significant non-cash
charges for depreciation and amortization associated with assets used in the
business (the majority of which are long-lived assets in the compression
industry), or what their tax attributes may be.
Depreciation and Amortization. Depreciation and amortization increased by
$5.0 million to $11.7 million during the three months ended September 30, 2001,
compared to $6.7 million during the three months ended September 30, 2000. The
increase resulted primarily from the expansion of our contract compression
fleet, offset partially by the compression equipment sold and leased back under
our operating lease facilities. Included in depreciation and amortization for
the three months ended September 30, 2000 is $0.7 million of amortization
expense. As of April 1, 2001, the Company adopted SFAS 142, which among other
things, eliminated amortization of goodwill.
Operating Lease. Operating lease expense increased by $11.0 million to $13.0
million during the three months ended September 30, 2001 from $2 million during
the three months ended September 30, 2000. The increase is due to the expense
associated with increased balances on the operating lease facilities entered
into concurrently with the Weatherford Global merger. The outstanding balance
under the operating lease facilities at September 30, 2001 was $607.5 million,
consisting of $427.0 million under our SSN Operating Lease Facility and $180.5
million under our asset-backed securitization operating lease facility.
Interest Expense. Interest expense increased $1.4 million to $6.6 million
for the three months ended September 30, 2001 from $5.2 million for the three
months ended September 30, 2000 primarily due to the increased accretion of our
9 7/8% senior discount notes and interest on the outstanding balance of our
revolving credit facility.
Net Income. We had net income of $12.8 million for the three months ended
September 30, 2001 compared to a net income of $1.8 million for the three months
ended September 30, 2000. The change was primarily due to an increase in our
gross margins and an increase in our contracted horsepower related to the
continued expansion of our fleet, offset partially by increased depreciation,
increased leasing expense resulting from our operating lease facilities,
increased selling, general and administrative expense resulting from our
increased headcount due to growth and increased income tax expense resulting
from our positive operating income.
Six months ended September 30, 2001 compared to six months ended September 30,
2000
Revenues. Our total revenues for the six months ended September 30, 2001
increased $241.3 million, or 329%, to $314.7 million, compared to $73.4 million
for the six months ended September 30, 2000. Our contract compression revenues
increased by $106.1 million, or 193%, to $161.1 million during the six months
ended September 30, 2001 from $55.0 million during the six months ended
September 30, 2000. Domestic contract compression revenues increased by $84.2
million, or 181%, to $130.8 million during the six months ended September 30,
2001 from $46.6 million during the six months ended September 30, 2000. Our
international contract compression revenues increased by $21.9 million, or 262%,
to $30.3 million during the six months ended September 30, 2001 from $8.4
million during the six months ended September 30, 2000. The increase in domestic
contract compressions revenue primarily resulted from continued expansion of our
contract compression fleet and through our acquisitions. The increase in
international contract compression revenues resulted from expansion of our
international contract compression fleet, primarily through the addition
24
of horsepower from our acquisitions, particularly our Weatherford Global
acquisition, continued expansion of our contract compression fleet and continued
high utilization rates.
Domestic average rented horsepower for the six months ended September 30,
2001 increased by 197% to approximately 1,529,000 horsepower from approximately
514,000 horsepower for the six months ended September 30, 2000. In addition,
international average rented horsepower for the six months ended September 30,
2001 increased 435% to approximately 289,000 horsepower from approximately
54,000 horsepower for the six months ended September 30, 2000, primarily through
expansion of our international contract compression fleet, continued high
utilization rates and additional service. Our average horsepower utilization
rate for the six months ended September 30, 2001 was approximately 88.7%, up
from 85.3% in the six months ended September 30, 2000. As of September 30, 2001,
we had approximately 2.0 million available horsepower. These average horsepower
and utilization amounts include KCI for 81 days and LCM for 79 days from the
date of the acquisitions.
Our revenue from fabrication increased to $89.0 million for the six-month
period from $15.9 million for the comparable period last year, an increase of
457%. The increase in fabrication revenue, consisting mostly of equipment
fabrication, was due primarily to our acquisitions. Revenues from fabrication
vary quarter to quarter due to the time of completion of the equipment being
sold. Our backlog of fabrication projects at September 30, 2001 was
approximately $101 million, compared with a backlog of $26.8 million at the same
time a year earlier. From June 30 to September 30, 2001, our backlog increased
$54 million, primarily due to the acquisition of KCI.
Our revenues from parts sales and service increased to $64.5 million during
the six months ended September 30, 2001 from $2.4 million during the six months
ended September 30, 2000, an increase of 2,563%. Parts sales and service gross
margin increased primarily due to our acquisitions, our continued growth within
the industry and operating cost improvements.
Gross Margin. Our gross margin (defined as total revenue less rental
expense, cost of sales (exclusive of depreciation and amortization), gain on
asset sales and interest income) for the six months ended September 30, 2001
increased $88.2 million, or 223%, to $127.7 million from $39.5 million for the
six months ended September 30, 2000. Our contract compression gross margin for
the six months ended September 30, 2001 increased $67.7 million, or 188%, to
$103.8 million compared to a gross margin of $36.1 million for the six months
ended September 30, 2000. Contract compression gross margin increased primarily
as the result of our contract compression revenue growth discussed above and
operating cost improvements realized by contract compression operations. Our
fabrication gross margin for the six months ended September 30, 2001 increased
$7.4 million, or 255%, to $10.2 million compared to a gross margin of $2.8
million for the six months ended September 30, 2000. Fabrication gross margin
increased primarily due to increased sales resulting from our acquisitions, as
well as strong customer demand, cost reductions and their resulting gross margin
effects.
Our parts sales and service gross margin for the six months ended September
30, 2001 increased $13 million or 2,688%, to $13.6 million compared to a gross
margin of $487 thousand for the six months ended September 30, 2000. Parts sales
and service gross margin increased primarily due to our acquisitions, our
continued growth within the industry and operating cost improvements.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses for the six months ended September 30, 2001 increased
$21.3 million or 294% compared to the six months ended September 30, 2000.
Selling, general and administrative expenses represented approximately 9% of
revenue for the six months ended September 30, 2001 compared to approximately
10% of revenue for the six months ended September 30, 2000. The percentage
decrease was primarily due to the elimination of management fees in connection
with our initial public offering in May 2000 in addition to synergies achieved
in our acquisitions. These reductions have been offset partially by increases in
certain expenses related to our operating as a publicly traded company.
EBITDA, As Adjusted. Our EBITDA, as adjusted, for the six months ended
September 30, 2001 increased 205% to $98.9 million from $32.4 million for the
six months ended September 30, 2000, primarily due to increases in horsepower
from acquisitions, continued expansion of our contract compression fleet parts
and service division, improved utilization of the compression contract
compression fleet, gross margin contribution from fabrication, operating cost
improvements realized by contract compression operations, and decreased selling,
general and administrative expenses as a percentage of revenue, as discussed
above. EBITDA, as adjusted, is defined as net income plus income taxes, interest
expense, leasing expense, management fees, depreciation and amortization,
excluding non-recurring items and extraordinary gains or losses. EBITDA, as
adjusted, is not a measure of financial performance under generally accepted
accounting principles and should not be considered an alternative to operating
income or net income as an indicator of our operating performance or to net cash
provided by operating activities as a measure of its liquidity. Additionally,
the EBITDA, as adjusted, computation used herein may not be comparable to other
similarly titled measures of other companies. EBITDA, as adjusted, represents a
measure upon which management assesses financial performance, and certain
covenants in our borrowing arrangements are tied to similar measures. We believe
that EBITDA, as adjusted, is a standard measure of financial performance used
for valuing companies in the compression industry. EBITDA, as adjusted, is a
useful yardstick as it
25
measures the capacity of companies to generate cash without reference to how
they are capitalized, how they account for significant non-cash charges for
depreciation and amortization associated with assets used in the business (the
majority of which are long-lived assets in the compression industry), or what
their tax attributes may be.
Non-recurring Charges. During the six months ended September 30, 2000, we
incurred non-recurring charges of $7.1 million related to the early termination
of a management agreement and a consulting agreement and other related fees in
connection with our initial public offering and concurrent financing
transactions.
Depreciation and Amortization. Depreciation and amortization increased by
$8.9 million to $23.1 million during the six months ended September 30, 2001,
compared to $14.2 million during the six months ended September 30, 2000. The
increase resulted primarily from the expansion of our contract compression
fleet, offset partially by the compression equipment sold and leased back under
our operating lease facilities. Included in depreciation and amortization for
the six months ended September 30, 2000 is $1.3 million of amortization expense.
As of April 1, 2001, the Company adopted SFAS 142, which among other things,
eliminated amortization of goodwill.
Operating Lease. Operating lease expense increased by $22.9 million to $25.6
million during the six months ended September 30, 2001 from $2.7 million during
the six months ended September 30, 2000. The increase is due to the expense
associated with increased balances on the operating lease facilities entered
into concurrently with the Weatherford Global merger. The outstanding balance
under the operating lease facilities at September 30, 2001 was $607.5 million,
consisting of $427.0 million under our SSN Operating Lease Facility and $180.5
million under our asset-backed securitization operating lease facility.
Interest Expense. Interest expense decreased $1.1 million to $12.1 million
for the six months ended September 30, 2001 from $13.2 million for the six
months ended September 30, 2000, primarily as a result of the reduction of debt
resulting from our initial public offering and financing restructurings. The
decrease in interest expense was offset partially by increased accretion of our
9 7/8% senior discount notes and interest on the outstanding balance of our
revolving credit facility.
Extraordinary Loss. During the six months ended September 30, 2000, we
incurred extraordinary losses of $10.0 million ($6.3 million net of income tax)
related to debt restructurings that occurred concurrently with our initial
public offering.
Net Income (Loss). We had net income of $23.3 million for the six months
ended September 30, 2001 compared to a net loss of $9.2 million for the six
months ended September 30, 2000. The change was primarily due to extraordinary
and non-recurring charges incurred during the six months ended September 30,
2000, as well as an increase in our gross margins and decrease in interest
expense, offset partially by increased depreciation and amortization related to
the continued expansion of our fleet, increased leasing expense resulting from
our operating lease facilities, increased selling, general and administrative
expense resulting from our increased headcount due to growth and increased
income tax expense resulting from our positive operating income.
Liquidity and Capital Resources
In May 2000, concurrently with our initial public offering, we entered into
a $200 million, five-year operating lease facility, which involved a sale and
leaseback of compression equipment to a trust. Under this operating lease
facility, certain of our compression equipment was sold to the trust for
approximately $155 million and leased back by us for a five-year period. At the
same time, we repaid and terminated a term loan and revolving credit facility
and entered into a $50 million secured revolving credit facility which had a
five-year term. This revolver and our previous operating lease facility were
repaid and terminated in February 2001 in connection with our Weatherford Global
acquisition.
On July 3, 2001, we completed the offering of 1,333,333 shares of our common
stock, par value $0.01 per share, together with 2,666,667 shares of our common
stock sold by certain selling stockholders, including Castle Harlan Partners
III, L.P. and its affiliates. The shares were sold in the offering at a price of
$28.50 per share, and the offering provided us with net proceeds (after
deducting underwriting discounts and commissions) of approximately $36.1
million. We used the proceeds to fund the cash portion of the purchase price in
our acquisition of KCI, Inc., to repay a portion of KCI's indebtedness
concurrently with the acquisition, as described below, and to partially fund the
cash portion of the purchase price in our acquisition of Louisiana Compressor
Maintenance, Inc., as described below. Following the offering, Castle Harlan
owned or had voting control over approximately 6% of our outstanding common
stock.
Pursuant to the indenture governing the 9 7/8% senior discount notes due
2008 of Universal, the holders of the notes had the right to require Universal
to repurchase the notes through August 23, 2001 as a result of the consummation
of the Offering as Castle Harlan's ownership of less than 20% of our common
stock constituted a change of control under the indenture. We repurchased
approximately $5.8 million face value of these notes in August 2001 with
borrowings under our revolving credit facility. As of
26
September 30, 2001, Universal had approximately $205.8 million aggregate
principal amount outstanding under the 9 7/8% senior discount notes.
During the second fiscal quarter, the Company completed two acquisitions,
KCI for approximately $26.3 million in cash and 694,927 shares of our common
stock, and LCM for approximately $26.3 million in cash. KCI, a Tulsa,
Oklahoma-based fabricator of large horsepower compressors, provides us with
significant fabrication expertise and capabilities and added approximately
125,000 horsepower to our contract compression fleet with an average horsepower
utilization rate of 85%. LCM, a Houma, Louisiana-based supplier of maintenance,
repair, overhaul and upgrade services to the natural gas pipeline and related
markets is expected to add approximately $18 million in revenue and
approximately $4.5 million in EBITDA, as adjusted, in the first full year of
combined operations.
In connection with the KCI acquisition, we entered into registration rights
agreements, which provide certain demand and piggyback registration rights to
the former holders of the common stock of KCI and the partnership interests of
KCI Compression Company, L.P. Under the terms of the agreements, we agreed to
file a registration statement to register the resale of the shares of common
stock issued in the acquisition, which registration statement is now effective.
In addition, the former KCI holders may request to have the sale of their shares
included in certain registration statements with respect to any proposed public
offering by us or other holders of our common stock.
Our cash and cash equivalents balance at September 30, 2001 was $5.6
million, compared to $12.3 million at March 31, 2001. For the six months ended
September 30, 2001, we provided cash flow from operations of $50.7 million, used
$242.4 million of cash for investing activities, provided another $183.9 million
of cash in financing activities and had a $1.1 million positive effect of
exchange rate change.
During the six months ended September 30, 2001, $80.0 million was received
for compression equipment sold under our asset-backed securitization operating
lease facility, $23.3 million was generated from net income, and $57.0 million
was received from net borrowings under our revolving credit facility. We used
this cash as follows: $91.4 million for capital expenditures, $153.0 million for
acquisitions, $17.0 million on working capital changes and $6.4 million to make
net principal payments on outstanding indebtedness.
As of September 30, 2001, our book debt to capitalization ratio was 27%. As
of that date, including the synthetic lease our debt to capitalization ratio
was 55%.
On October 23, 2001, we sold an additional $122 million of compression
equipment to BRL Universal Equipment 2001 A, L.P. and leased the equipment back
under our existing SSN Operating Lease Facility. We used the net proceeds from
the sale of the compression equipment to repay all of the outstanding
indebtedness under our revolving credit facility with the remaining proceeds
used to repay a portion of the obligations under its ABS Operating Lease
Facility and for other indebtedness and for general corporate purposes.
As of November 10, 2001, subject to covenant and other restrictions, we had
unused availability of approximately $165.5 million (approximately $40.5 million
under our asset-backed securitization facility and $125 million under our
revolving credit facility). Subject to certain covenant restrictions, we also
have up to an additional $244 million available under our SSN Operating Lease
Facility until one year from February 9, 2001. Any additional amounts under this
facility would be funded through an additional issuance of notes under the
indenture by BRL, the unaffiliated lessor under the facility and a corresponding
increase in the BRL term loan and equity investment, which would be used to
purchase additional equipment to lease to Universal under the operating lease.
We have realized approximately $20 million of cost savings on an annualized
basis from our Weatherford Global acquisition. The key drivers for the savings
were the elimination of overlapping areas of various domestic operations,
including fabrication facilities, as well as duplicate selling, general and
administrative activities.
For fiscal 2002, we expect revenues to be approximately $670 to $680
million, with expected EBITDA, as adjusted, of approximately $213 million. These
results are expected based on slight quarterly gross margin improvements in both
the domestic and international contract compression segments and the parts,
sales and service segment, as well as continued revenue growth in all business
segments.
Operating lease and net interest expense for the current fiscal year are
expected to be approximately $80 to $81 million, with depreciation of
approximately $48 million for the fiscal year.
Under current market conditions, these projections are expected to result
in approximately $1.72 earnings per diluted share for the fiscal year.
Capital expenditures, excluding acquisitions, are expected to be
approximately $190 to $200 million for the year, with international expenditures
between $30 and $40 million and approximately $25 million being used for
maintenance capital needs.
27
We believe that funds generated from our operations, together with our
existing cash, the net proceeds to us from our July 2001 stock offering, the net
proceeds from our recent sale of additional equipment under the SSN Operating
Lease Facility, and the additional capacity available under our revolving credit
facility and operating lease facilities will be sufficient to finance our
current operations, planned capital expenditures and internal growth for the
remainder of fiscal year 2002. If we were to make significant additional
acquisitions for cash, we may need to obtain additional debt, equity or
operating lease financing.
UNIVERSAL COMPRESSION, INC.
Three months ended September 30, 2001 compared to three months ended September
30, 2000
Revenues. Universal's total revenues for the three months ended September
30, 2001 increased $135.2 million, or 348%, to $174.1 million, compared to $38.9
million for the three months ended September 30, 2000. Universal's contract
compression revenues increased by $56.5 million, or 197%, to $85.2 million
during the three months ended September 30, 2001 from $28.7 million during the
three months ended September 30, 2000. Domestic contract compression revenues
increased by $44.5 million, or 182%, to $68.9 million during the three months
ended September 30, 2001 from $24.4 million during the three months ended
September 30, 2000. Universal's international contract compression revenues
increased by $12 million, or 281%, to $16.3 million during the three months
ended September 30, 2001 from $4.3 million during the three months ended
September 30, 2000. The increase in domestic contract compression revenues
primarily resulted from continued expansion of our contract compression fleet as
well as through Universal's acquisitions. The increase in international contract
compression revenues resulted from expansion of Universal's international
contract compression fleet, primarily through the addition of horsepower from
Universal's acquisitions, particularly our Weatherford Global acquisition,
continued expansion of our existing contract compression fleet and continued
high utilization rates.
Domestic average rented horsepower for the three months ended September 30,
2001 increased by 200% to approximately 1,603,000 horsepower from approximately
535,000 horsepower for the three months ended September 30, 2000. In addition,
international average rented horsepower for the three months ended September 30,
2001 increased by 469% to approximately 313,000 horsepower from approximately
55,000 horsepower for the three months ended September 30, 2000, primarily
through expansion of our international contract compression fleet and continued
high utilization rates. Our average horsepower utilization rate for the three
months ended September 30, 2001 was approximately 90.2%, up from 86.2% in the
three months ended September 30, 2000. At the end of the quarter, we had
approximately 2.1 million available horsepower. These average horsepower and
utilization amounts include KCI for 81 days and LCM for 79 days from the date of
the acquisitions.
Universal's revenue from fabrication increased to $56.8 million for the
quarter from $8.3 million in the same quarter a year ago, an increase of 583%.
The increase in fabrication revenue, consisting mostly of equipment fabrication
was due primarily to Universal's acquisitions. Revenues from fabrication vary
quarter to quarter due to the time of completion of the equipment being sold.
Universal's backlog of fabrication projects at September 2001 was approximately
$101 million, compared with a backlog of $26.8 million at the same time a year
earlier. From June 30 to September 30, 2001, Universal's backlog increased $54
million, primarily due to the acquisition of KCI.
Universal's revenues from parts sales and service increased to $32.2
million during the three months ended September 30, 2001 from $1.9 million
during the three months ended September 30, 2000, an increase of 1,576%. The
increase was due primarily to Universal's acquisitions, which have made the
parts sales and service segment a more significant part of Universal's business.
Gross Margin. Universal's gross margin (defined as total revenue less
rental expense, cost of sales (exclusive of depreciation and amortization), gain
on asset sales and interest income) for the three months ended September 30,
2001 increased $47.7 million, or 233%, to $68.1 million from $20.4 million for
the three months ended September 30, 2000. Universal's contract compression
gross margin for the three months ended September 30, 2001 increased $36.6
million, or 195%, to $55.4 million compared to a gross margin of $18.8 million
for the three months ended September 30, 2000. Contract compression gross margin
increased primarily as the result of Universal's contract compression revenue
growth discussed above and operating cost improvements realized by contract
compression operations. Universal's fabrication gross margin for the three
months ended September 30, 2001 increased $4.6 million, or 344%, to $6.0 million
compared to a gross margin of $1.4 million for the three months ended September
30, 2000. Fabrication gross margin increased primarily due to increased sales
resulting from Universal's acquisitions, as well as strong customer demand, cost
reductions and their resulting gross margin effects.
Universal's parts sales and service gross margin for the three months ended
September 30, 2001 increased $6.2 million or 1,555%, to $6.6 million compared to
a gross margin of $401 thousand for the three months ended September 30, 2000.
Parts sales and service gross margin increased primarily due to our
acquisitions, our continued growth within the industry and operating cost
improvements.
28
Selling, General and Administrative Expenses. Universal's selling, general
and administrative expenses for the three months ended September 30, 2001
increased $12.0 million, or 319% compared to the three months ended September
30, 2000. Selling, general and administrative expenses represented approximately
9% of revenue for the three months ended September 30, 2001 compared to
approximately 10% of revenue for the three months ended September 30, 2000. The
percentage decrease was primarily due to synergies achieved in Universal's
acquisitions. These reductions have been offset partially by increases in
certain expenses related to Universal's operating as a publicly traded company.
EBITDA, As Adjusted. Our EBITDA, as adjusted, for the three months ended
September 30, 2001 increased 212% to $52.1 million from $16.7 million for the
three months ended September 30, 2000, primarily due to increases in total
horsepower, continued expansion of our existing contract compression fleet and
parts and services division, improved utilization of the compression contract
compression fleet, gross margin contribution from fabrication, operating cost
improvements realized by contract compression operations, and decreased selling,
general and administrative expenses as a percentage of revenues, as discussed
above. EBITDA, as adjusted, is defined as net income plus income taxes, interest
expense, leasing expense, management fees, depreciation and amortization,
excluding non-recurring items and extraordinary gains or losses. EBITDA, as
adjusted, is not a measure of financial performance under generally accepted
accounting principles and should not be considered an alternative to operating
income or net income as an indicator of Universal's operating performance or to
net cash provided by operating activities as a measure of its liquidity.
Additionally, the EBITDA, as adjusted, computation used herein may not be
comparable to other similarly titled measures of other companies. EBITDA, as
adjusted, represents a measure upon which management assesses financial
performance, and certain covenants in Universal's borrowing arrangements will be
tied to similar measures. We believe that EBITDA, as adjusted, is a standard
measure of financial performance used for valuing companies in the compression
industry. EBITDA, as adjusted, is a useful yardstick as it measures the capacity
of companies to generate cash without reference to how they are capitalized, how
they account for significant non-cash charges for depreciation and amortization
associated with assets used in the business (the majority of which are
long-lived assets in the compression industry), or what their tax attributes may
be.
Depreciation and Amortization. Depreciation and amortization increased by
$5.0 million to $11.7 million during the three months ended September 30, 2001,
compared to $6.7 million during the three months ended September 30, 2000. The
increase resulted primarily from the expansion of Universal's contract
compression fleet, offset partially by the compressor equipment sold and leased
back under Universal's operating lease facility. Included in depreciation and
amortization for the three months ended September 30, 2000 is $0.7 million of
amortization expense. As of April 1, 2001, the Company adopted SFAS 142, which
among other things, eliminated amortization of goodwill.
Operating Lease. Operating lease expense increased by $11.0 million to
$13.0 million during the three months ended September 30, 2001 from $2 million
during the three months ended September 30, 2000. The increase is due to the
expense associated with an increased balances on the operating lease facilities
entered into concurrently with the Weatherford Global merger. The outstanding
balance under the operating lease facilities at September 30, 2001 was $607.5
million, consisting of $427.0 million under our SSN Operating Lease Facility and
$180.5 million under our asset-backed securitization operating lease facility.
Interest Expense. Interest expense increased $1.4 million to $6.6 million
for the three months ended September 30, 2001 from $5.2 million for the three
months ended September 30, 2000 primarily due to the increased accretion of our
9 7/8% senior discount notes and the assumption and interest on the outstanding
balance of Universal's revolving credit facility.
Net Income. We had net income of $12.8 million for the three months ended
September 30, 2001 compared to a net income of $1.8 million for the three months
ended September 30, 2000. The change was primarily due to an increase in
Universal's gross margins and an increase in Universal's contracted horsepower
related to the continued expansion of Universal's fleet, offset partially by
increased depreciation, increased leasing expense resulting from Universal's
operating lease facilities, increased selling, general and administrative
expense resulting from Universal's increased headcount due to growth and
increased income tax expense resulting from Universal's positive operating
income.
Six months ended September 30, 2001 compared to six months ended September 30,
2000
Revenues. Universal's total revenues for the six months ended September 30,
2001 increased $241.3 million, or 329%, to $314.7 million, compared to $73.4
million for the six months ended September 30, 2000. Universal's contract
compression revenues increased by $106.1 million, or 193%, to $161.1 million
during the six months ended September 30, 2001 from $55.0 million during the six
months ended September 30, 2000. Domestic contract compression revenues
increased by $84.2 million, or 181%, to $130.8 million during the six months
ended September 30, 2001 from $46.6 million during the six months ended
September 30, 2000. Universal's international contract compression revenues
increased by $21.9 million, or 262%, to $30.3 million during the six months
ended September 30, 2001 from $8.4 million during the six months ended September
30, 2000. The increase in domestic contract compression revenues primarily
resulted from continued expansion of our contract compression fleet as well as
through Universal's acquisitions. The increase in international contract
compression revenues resulted from expansion of Universal's international
contract
29
compression fleet, primarily through the addition of horsepower from Universal's
acquisitions, particularly our Weatherford Global acquisition, continued
expansion of our contract compression fleet and continued high utilization
rates.
Domestic average rented horsepower for the six months ended September 30, 2001
increased by 197% to approximately 1,529,000 horsepower from approximately
514,000 horsepower for the six months ended September 30, 2000. In addition,
international average rented horsepower for the six months ended September 30,
2001 increased 435% to approximately 289,000 horsepower from approximately
54,000 horsepower for the six months ended September 30, 2000, primarily through
expansion of our international contract compression fleet and continued high
utilization rates. Our average horsepower utilization rate for the six months
ended September 30, 2001 was approximately 88.7%, up from approximately 85.3% in
the six months ended September 30, 2000. At the end of the quarter, we had
approximately 2.0 million available horsepower. These average horsepower and
utilization amounts include KCI for 81 days and LCM for 79 days from the date of
the acquisitions.
Universal's revenue from fabrication increased to $89.0 million for the
six-month period from $15.9 million for the comparable period last year, an
increase of 457%. The increase in fabrication revenue, consisting mostly of
equipment fabrication was due primarily to Universal's acquisitions. Revenues
from fabrication vary quarter to quarter due to the time of completion of the
equipment being sold. Universal's backlog of fabrication projects at September
30, 2001 was approximately $101 million, compared with a backlog of $26.8
million at the same time a year earlier. From June 30 to September 30, 2001,
Universal's backlog increased $54 million, primarily due to the acquisition of
KCI.
Universal's revenues from parts sales and service increased to $64.5 million
during the six months ended September 30, 2001 from $2.4 million during the six
months ended September 30, 2000, an increase of 2,563%. The increase was due
primarily to Universal's acquisitions, which have made the parts sales and
service segment a more significant part of Universal's business.
Gross Margin. Universal's gross margin (defined as total revenue less rental
expense, cost of sales (exclusive of depreciation and amortization), gain on
asset sales and interest income) for the six months ended September 30, 2001
increased $88.2 million, or 223%, to $127.7 million from $39.5 million for the
six months ended September 30, 2000. Universal's contract compression gross
margin for the six months ended September 30, 2001 increased $67.7 million, or
188%, to $103.8 million compared to a gross margin of $36.1million for the six
months ended September 30, 2000. Contract compression gross margin increased
primarily as the result of Universal's contract compression revenue growth
discussed above and operating cost improvements realized by contract compression
operations. Universal's fabrication gross margin for the six months ended
September 30, 2001 increased $7.4 million, or 255%, to $10.2 million compared to
a gross margin of $2.8 million for the six months ended September 30, 2000.
Fabrication gross margin increased primarily due to increased sales resulting
from Universal's acquisitions, as well as strong customer demand, cost
reductions and their resulting gross margin effects.
Universal's parts sales and service gross margin for the six months ended
September 30, 2001 increased $13 million or 2,688%, to $13.6 million compared to
a gross margin of $484 thousand for the six months ended September 30, 2000.
Parts sales and service gross margin increased primarily due to our
acquisitions, our continued growth within the industry and operating cost
improvements.
Selling, General and Administrative Expenses. Universal's selling, general
and administrative expenses for the six months ended September 30, 2001
increased $21.3 million, or 294% compared to the six months ended September 30,
2000. Selling, general and administrative expenses represented approximately 9%
of revenue for the six months ended September 30, 2001 compared to approximately
10% of revenue for the six months ended September 30, 2000. The percentage
decrease was primarily due to the elimination of management fees in connection
with Universal's initial public offering in May 2000 in addition to synergies
achieved in Universal's acquisitions. These reductions have been offset
partially by increases in certain expenses related to Universal's operating as a
publicly traded company.
EBITDA, As Adjusted. Our EBITDA, as adjusted, for the six months ended
September 30, 2001 increased 205% to $98.9 million from $32.4 million for the
six months ended September 30, 2000, primarily due to increases in horsepower
from acquisitions, continued expansion of our contract compression fleet and
parts and services division, utilization of the compression contract compression
fleet, gross margin contribution from fabrication, operating cost improvements
realized by contract compression operations, and decreased selling, general and
administrative expenses as a percentage of revenue, as discussed above. EBITDA,
as adjusted, is defined as net income plus income taxes, interest expense,
leasing expense, management fees, depreciation and amortization, excluding
non-recurring items and extraordinary gains or losses. EBITDA, as adjusted, is
not a measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to operating income or
net income as an indicator of Universal's operating performance or to net cash
provided by operating activities as a measure of its liquidity. Additionally,
the EBITDA, as adjusted, computation used herein may not be comparable to other
similarly titled measures of other companies. EBITDA, as adjusted, represents a
measure upon which management assesses financial performance, and certain
covenants in Universal's borrowing arrangements will be tied to similar
measures. We believe that EBITDA, as adjusted, is a standard
30
measure of financial performance used for valuing companies in the compression
industry. EBITDA, as adjusted, is a useful yardstick as it measures the capacity
of companies to generate cash without reference to how they are capitalized, how
they account for significant non-cash charges for depreciation and amortization
associated with assets used in the business (the majority of which are
long-lived assets in the compression industry), or what their tax attributes may
be.
Non-recurring Charges. During the six months ended September 30, 2000, we
incurred non-recurring charges of $7.1 million related to the early termination
of a management agreement and a consulting agreement and other related fees in
connection with Holdings' initial public offering and concurrent financing
transactions.
Depreciation and Amortization. Depreciation and amortization increased by
$8.9 million to $23.1 million during the six months ended September 30, 2001,
compared to $14.2 million during the six months ended September 30, 2000. The
increase resulted primarily from the expansion of Universal's contract
compression fleet, offset partially by the compressor equipment sold and leased
back under Universal's operating lease facility. Included in depreciation and
amortization for the six months ended September 30, 2000 is $1.3 million of
amortization expense. As of April 1, 2001, the Company adopted SFAS 14, which
among other things, eliminated amortization of goodwill.
Operating Lease. Operating lease expense increased by $22.9 million to $25.6
million during the six months ended September 30, 2001 from $2.7 million during
the six months ended September 30, 2000. The increase is due to the expense
associated with an increased balances on the operating lease facilities entered
into concurrently with the Weatherford Global merger. The outstanding balance
under the operating lease facilities at September 30, 2001 was $607.5 million,
consisting of $427.0 million under our SSN Operating Lease Facility and $180.5
million under our asset-backed securitization operating lease facility.
Interest Expense. Interest expense decreased $522 thousand to $12.1 million
for the six months ended September 30, 2001 from $12.6 million for the six
months ended September 30, 2000, primarily as a result of the reduction of debt
resulting from Universal's initial public offering and financing restructurings.
The decrease in interest expense was offset partially by increased accretion of
Universal's 9 7/8% senior discount notes and interest on the outstanding balance
of Universal's revolving credit facility.
Extraordinary Loss. During the six months ended September 30, 2000, we
incurred extraordinary losses of $5.4 million ($3.4 million net of income tax)
related to debt restructurings that occurred concurrently with Holdings' initial
public offering.
Net Income (Loss). We had net income of $23.3 million for the six months
ended September 30, 2001 compared to a net loss of $5.9 million for the six
months ended September 30, 2000. The change was primarily related to
extraordinary and non-recurring charges incurred during the six months ended
September 30, 2000, as well as an increase in Universal's gross margins and
decrease in interest expense, offset partially by increased depreciation and
amortization related to the continued expansion of Universal's fleet, leasing
expense resulting from Universal's operating lease facilities, selling, general
and administrative expense resulting from Universal's increased headcount due to
growth and income tax expense resulting from Universal's positive operating
income.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to some market risk due to the floating or variable interest
rates under our financing arrangements. A portion of the interest and lease
payments under our financing arrangements are based on a floating rate (a base
rate or LIBOR, at our option, in the case of our revolving credit facility, and
LIBOR, in the case of our operating lease facilities) plus a variable amount
based on our operating results. The one-month LIBOR rate at September 30, 2001
was 2.637%. A 1.0% increase in interest rates would result in a $1.3 million
annual increase in our interest and operating lease expense. As of September 30,
2001, approximately $134 million of our indebtedness and other obligations
outstanding bear interest at floating rates.
In order to minimize any significant foreign currency credit risk, we
generally contractually require that payment by our customers be made in U.S.
dollars. If payment is not made in U.S. dollars, we generally utilize the
exchange rate into U.S. dollars on the payment date or balance payments in local
currency against local expenses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
31
On July 11, 2001, we issued 694,927 shares of our common stock to MCNIC
Compression GP, Inc., MCNIC Compression LP, Inc. and the former stockholders of
KCI, Inc., in connection with our acquisition of all of the outstanding
ownership interests of KCI Compression Company, L.P. The shares were issued in
reliance on an exemption from the registration requirements of the Securities
Act of 1933, as amended, pursuant to Section 4(2) thereof.
Pursuant to the terms of the registration rights agreements entered into in
connection with the acquisition, we have an effective shelf registration
statement on Form S-3 that registers the resale from time to time of these
shares. Under the registration rights agreements, the selling shareholders may
sell up to an aggregate of 347,464 shares in one or more offerings at any time,
and may sell the remaining 347,463 shares any time after January 7, 2002. We
will not receive any of the proceeds from the sale of any of these shares.
We also entered into an escrow agreement in connection with the KCI
acquisition pursuant to which 118,833 of the shares are being held in escrow to
indemnify us against certain losses we may incur under the purchase agreement.
The shares held in escrow may not be sold unless and until they are released to
the selling shareholders in accordance with the terms of the escrow agreement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 16, 2001 we held our Annual Meeting of Shareholders. The matters
voted upon at the meeting and the results of those votes were as follows:
1. Re-election of three Class A members of the Board of Directors for a
term expiring at our 2004 Annual meeting of Shareholders:
Votes Votes
For Withheld
------ --------
Thomas C. Case 24,941,007 168,769
Uriel E. Dutton 24,947,207 168,569
C. Kent May 24,940,927 168,849
2. Adoption of the new Employee Stock Purchase Plan, which permits
eligible employees to purchase shares of our common stock at a 15%
discount and without brokerage fees, subject to various limitations:
For Against Abstain Broker non-vote
--- ------- ------- ---------------
24,875,319 231,509 2,954 0
3. Approval of new Restricted Stock Plan for Executive Officers, which
permits the granting of shares of our common stock to our officers and
key employees, which grants vest over time:
For Against Abstain Broker non-vote
--- ------- ------- ---------------
23,479,839 1,628,540 1,897 0
4. Approval of the new Directors' Stock Plan, which allows our
non-employee directors that are entitled to receive director fees to
elect to receive those fees in shares of our common stock rather than
cash:
For Against Abstain Broker non-vote
--- ------- ------- ---------------
23,858,385 1,247,544 3,847 0
5. Ratification of the appointment of Deloitte & Touche LLP to serve as
the Company's Independent Auditors for Fiscal 2002:
For Against Abstain Broker non-vote
--- ------- ------- ---------------
25,101,894 7,148 734 0
32
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following documents have been included as Exhibits to this report:
EXHIBIT DESCRIPTION
------- -----------
4.1 First Supplemental Indenture dated as of September 11, 2001,
among BRL Universal Equipment 2001 A, L.P. and BRL Universal
Equipment Corp., as Issuers, and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.1 of Universal
Compression Holdings, Inc.'s Current Report on Form 8-K dated
October 24, 2001).
4.2 Registration Rights Agreement dated as of October 23, 2001, among
BRL Universal Equipment 2001 A, L.P., and BRL Universal Equipment
Corp., as Issuer, Universal Compression Holdings, Inc. and
Universal Compression, Inc., Deutsche Banc Alex. Brown Inc.,
First Union Securities, Inc., Banc One Capital Markets, Inc. and
Scotia Capital (USA), Inc. as Initial Purchasers (incorporated by
reference to Exhibit 4.2 of Universal Compression Holdings,
Inc.'s Current Report on Form 8-K dated October 24, 2001).
10.1 First Amendment to Equipment Lease Agreement dated as of October
15, 2001 between BRL Universal Equipment 2001 A, L.P., as Lessor,
and Universal Compression, Inc., as Lessee (incorporated by
reference to Exhibit 10.1 of Universal Compression Holdings,
Inc.'s Current Report on Form 8-K dated October 24, 2001).
10.2 First Amended and Restated Participation Agreement, dated as of
October 15, 2001, among Universal Compression, Inc., as Lessee,
Universal Compression Holdings, Inc., as Guarantor, BRL Universal
Compression Equipment 2001 A, L.P., as Lessor, the financial
institutions listed on the signature pages as Tranche B Lenders,
The Bank of New York, not in its individual capacity but as
Indenture Trustee, Paying Agent, Transfer Agent and Registrar for
the Tranche A Noteholders, BRL Universal Equipment Management,
Inc., as Lessor General Partner, Bankers Trust Company, as
Administrative Agent and Collateral Agent for the Tranche B
Lenders and Indenture Trustee on behalf of the Tranche A
Noteholders, Deutsche Banc Alex. Brown Inc., as Arranger, The
Bank of Nova Scotia, as Syndicate Agent for Tranche B Lenders,
Bank One, N.A., as Documentation Agent for Tranche B Lenders, and
First Union National Bank, as Managing Agent (incorporated by
reference to Exhibit 10.2 of Universal Compression Holdings,
Inc.'s Current Report on Form 8-K dated October 24, 2001).
10.3 Participation Agreement Supplement No. 1, dated as of October 23,
2001, among Universal Compression, Inc., as Lessee, Universal
Compression Holdings, Inc., as Guarantor, BRL Universal Equipment
2001 A, L.P., as Lessor, The Bank of New York, not in its
individual capacity but as Indenture Trustee for the Tranche A
Noteholders (incorporated by reference to Exhibit 10.3 of
Universal Compression Holdings, Inc.'s Current Report on Form 8-K
dated October 24, 2001).
33
10.4 First Amendment to Tranche B Loan Agreement, dated as of October
15, 2001, among BRL Universal Equipment 2001 A, L.P., Bankers
Trust Company, as Administrative Agent for Tranche B Lenders and
as Collateral Agent (incorporated by reference to Exhibit 10.4 of
Universal Compression Holdings, Inc.'s Current Report on Form 8-K
dated October 24, 2001).
10.5 Universal Compression Holdings, Inc. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 4.1 of Universal
Compression Holdings, Inc.'s Registration Statement on Form S-8
(File No. 333-67784) dated August 17, 2001).
10.6 Universal Compression Holdings, Inc. Restricted Stock Plan for
Executive Officers (incorporated by reference to Exhibit 4.2 of
Universal Compression Holdings, Inc.'s Registration Statement on
Form S-8 (File No. 333-67784) dated August 17, 2001).
10.7 Universal Compression Holdings, Inc. Directors' Stock Plan
(incorporated by reference to Exhibit 4.3 of Universal
Compression Holdings, Inc.'s Registration Statement on Form S-8
(File No. 333-67784) dated August 17, 2001).
10.8* Universal Compression Holdings, Inc. Form of Restricted Stock
Agreement with respect to the Restricted Stock Plan for Executive
Officers.
10.9 Universal Compression, Inc. 401(k) Retirement and Savings Plan
(incorporated by reference to Exhibit 4.1 of Universal
Compression Holdings, Inc.'s Registration Statement on Form S-8
(File No. 333-69504) dated September 17, 2001).
----------
* Filed herewith
(b) Reports on Form 8-K.
The Company and Universal filed one current report on Form 8-K during the second
quarter of fiscal 2002:
- The Company and Universal filed a Current Report on Form 8-K on July
23, 2001 to report under Item 5 among other things, (i) the completion
of the Offering, (ii) the right of holders of Universal's 9 7/8%
senior discount notes to require Universal to repurchase those notes
as a result of Castle Harlan's reduced ownership of the Company's
common stock following the Offering, (iii) completion of the
acquisition of KCI and (iv) completion of the acquisition of LCM and
to file under Item 7 certain exhibits relating to the foregoing.
In addition, the Company and Universal filed the following Current Reports on
Form 8-K subsequent to September 30, 2001:
- On October 9, 2001, the Company and Universal filed a Current Report
on Form 8-K reporting under Item 5 the retirement of Jack B. Hilburn,
Senior Vice President, and reporting under Item 9 the Company's
participation in Deutsche Bank Alex. Brown's 2001 Global High Yield
Conference and the reaffirmation of certain earnings guidance at such
conference.
- On October 24, 2001, the Company and Universal filed a Current Report
on Form 8-K reporting under Item 5 the sale of $122 million of
equipment under its SSN Operating Lease Facility and filing under Item
7 certain exhibits relating thereto.
- On October 29, 2001, the Company and Universal filed a Current Report
on Form 8-K reporting under Item 5 the issuance of a press release
announcing earnings for its second fiscal quarter and reporting under
Item 9 certain matters discussed on a conference call broadcast to
investors over the Internet with respect to the results of the
quarter.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized.
UNIVERSAL COMPRESSION HOLDINGS, INC.
Date: November 14, 2001 By: /s/ RICHARD W. FITZGERALD
-------------------------
Richard W. FitzGerald,
Senior Vice President and
Chief Financial Officer
UNIVERSAL COMPRESSION, INC.
By: /s/ RICHARD W. FITZGERALD
-------------------------
Richard W. FitzGerald,
Senior Vice President and
Chief Financial Officer
35
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
------- -----------
4.1 First Supplemental Indenture dated as of September 11, 2001,
among BRL Universal Equipment 2001 A, L.P. and BRL Universal
Equipment Corp., as Issuers, and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.1 of Universal
Compression Holdings, Inc.'s Current Report on Form 8-K dated
October 24, 2001).
4.2 Registration Rights Agreement dated as of October 23, 2001, among
BRL Universal Equipment 2001 A, L.P., and BRL Universal Equipment
Corp., as Issuer, Universal Compression Holdings, Inc. and
Universal Compression, Inc., Deutsche Banc Alex. Brown Inc.,
First Union Securities, Inc., Banc One Capital Markets, Inc. and
Scotia Capital (USA), Inc. as Initial Purchasers (incorporated by
reference to Exhibit 4.2 of Universal Compression Holdings,
Inc.'s Current Report on Form 8-K dated October 24, 2001).
10.1 First Amendment to Equipment Lease Agreement dated as of October
15, 2001 between BRL Universal Equipment 2001 A, L.P., as Lessor,
and Universal Compression, Inc., as Lessee (incorporated by
reference to Exhibit 10.1 of Universal Compression Holdings,
Inc.'s Current Report on Form 8-K dated October 24, 2001).
10.2 First Amended and Restated Participation Agreement, dated as of
October 15, 2001, among Universal Compression, Inc., as Lessee,
Universal Compression Holdings, Inc., as Guarantor, BRL Universal
Compression Equipment 2001 A, L.P., as Lessor, the financial
institutions listed on the signature pages as Tranche B Lenders,
The Bank of New York, not in its individual capacity but as
Indenture Trustee, Paying Agent, Transfer Agent and Registrar for
the Tranche A Noteholders, BRL Universal Equipment Management,
Inc., as Lessor General Partner, Bankers Trust Company, as
Administrative Agent and Collateral Agent for the Tranche B
Lenders and Indenture Trustee on behalf of the Tranche A
Noteholders, Deutsche Banc Alex. Brown Inc., as Arranger, The
Bank of Nova Scotia, as Syndicate Agent for Tranche B Lenders,
Bank One, N.A., as Documentation Agent for Tranche B Lenders, and
First Union National Bank, as Managing Agent (incorporated by
reference to Exhibit 10.2 of Universal Compression Holdings,
Inc.'s Current Report on Form 8-K dated October 24, 2001).
10.3 Participation Agreement Supplement No. 1, dated as of October 23,
2001, among Universal Compression, Inc., as Lessee, Universal
Compression Holdings, Inc., as Guarantor, BRL Universal Equipment
2001 A, L.P., as Lessor, The Bank of New York, not in its
individual capacity but as Indenture Trustee for the Tranche A
Noteholders (incorporated by reference to Exhibit 10.3 of
Universal Compression Holdings, Inc.'s Current Report on Form 8-K
dated October 24, 2001).
10.4 First Amendment to Tranche B Loan Agreement, dated as of October
15, 2001, among BRL Universal Equipment 2001 A, L.P., Bankers
Trust Company, as Administrative Agent for Tranche B Lenders and
as Collateral Agent (incorporated by reference to Exhibit 10.4 of
Universal Compression Holdings, Inc.'s Current Report on Form 8-K
dated October 24, 2001).
10.5 Universal Compression Holdings, Inc. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 4.1 of Universal
Compression Holdings, Inc.'s Registration Statement on Form S-8
(File No. 333-67784) dated August 17, 2001).
10.6 Universal Compression Holdings, Inc. Restricted Stock Plan for
Executive Officers (incorporated by reference to Exhibit 4.2 of
Universal Compression Holdings, Inc.'s Registration Statement on
Form S-8 (File No. 333-67784) dated August 17, 2001).
36
10.7 Universal Compression Holdings, Inc. Directors' Stock Plan
(incorporated by reference to Exhibit 4.3 of Universal
Compression Holdings, Inc.'s Registration Statement on Form S-8
(File No. 333-67784) dated August 17, 2001).
10.8* Universal Compression Holdings, Inc. Form of Restricted Stock
Agreement with respect to the Restricted Stock Plan for Executive
Officers.
10.9 Universal Compression, Inc. 401(k) Retirement and Savings Plan
(incorporated by reference to Exhibit 4.1 of Universal
Compression Holdings, Inc.'s Registration Statement on Form S-8
(File No. 333-69504) dated September 17, 2001).
----------
* Filed herewith
37