Kodiak Gas Services, Inc. (NYSE:KGS) Q4 2023 Earnings Conference Call March 7, 2024 11:00 AM ET Company Participants Graham Sones - VP of IR Mickey McKee - President and CEO John Griggs - CFO Conference Call Participants James Rollyson - Raymond James John Mackay - Goldman Sachs Neel Mitra - Bank of America Jeremy Tonet - JPMorgan Neal Dingmann - Truist Securities Zack Van Everen - TPH Selman Akyol - Stifel Operator Greetings, welcome to the Kodiak Gas Services Fourth Quarter and Full Year 2023 Earnings Con ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2023 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission File Number: 001-41732 ____________________ Kodiak Gas Services, Inc. (Exact Name of Registrant ...

PART I. FINANCIAL INFORMATION [Financial Statements (Unaudited)](index=6&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) The unaudited financial statements for June 30, 2023, detail the company's financial position, operations, and cash flows [Condensed Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of June 30, 2023, total assets increased to **$3.26 billion**, total liabilities rose to **$3.07 billion**, and stockholders' equity decreased to **$192.9 million** Condensed Consolidated Balance Sheet Highlights | Account | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | **Total current assets** | $262,152 | $204,035 | | **Property, plant and equipment, net** | $2,486,846 | $2,488,682 | | **Total assets** | **$3,261,363** | **$3,205,540** | | **Total current liabilities** | $209,798 | $188,974 | | **Long-term debt, net** | $2,769,355 | $2,720,019 | | **Total liabilities** | **$3,068,488** | **$2,976,447** | | **Total stockholders' equity** | $192,875 | $229,093 | [Condensed Consolidated Statements of Operations](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Q2 2023 revenues grew 14.8% to **$203.3 million** with net income nearly doubling, but H1 2023 net income plummeted 91.1% Statement of Operations Summary | Metric | Q2 2023 (in thousands) | Q2 2022 (in thousands) | YoY Change | H1 2023 (in thousands) | H1 2022 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | **Total revenues** | $203,306 | $177,151 | 14.8% | $393,418 | $345,492 | 13.9% | | **Income from operations** | $62,060 | $51,904 | 19.6% | $122,415 | $106,253 | 15.2% | | **Interest expense, net** | ($60,964) | ($36,829) | 65.5% | ($119,687) | ($62,469) | 91.6% | | **Unrealized (loss) gain on derivatives** | ($3,595) | ($3,386) | 6.2% | ($21,529) | $32,822 | -165.6% | | **Net income** | **$17,517** | **$8,901** | **96.8%** | **$5,174** | **$58,456** | **-91.1%** | | **Basic and diluted EPS** | $0.30 | $0.15 | 100.0% | $0.09 | $0.99 | -90.9% | [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For H1 2023, net cash from operating activities decreased, investing cash outflow significantly fell, and financing activities shifted to a net use Cash Flow Summary for the Six Months Ended June 30 | Cash Flow Activity | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | **Net cash provided by operating activities** | $117,968 | $127,647 | | **Net cash used in investing activities** | ($92,993) | ($145,950) | | **Net cash (used in) provided by financing activities** | ($4,035) | $10,135 | | **Net increase (decrease) in cash** | $20,940 | ($8,168) | - The decrease in investing cash outflow was primarily due to a reduction in capital asset purchases, which were **$94.0 million** in H1 2023 compared to **$146.0 million** in H1 2022[27](index=27&type=chunk) - Distributions to the parent company were significantly lower at **$42.3 million** in H1 2023, compared to **$838.0 million** in H1 2022[27](index=27&type=chunk) [Notes to Financial Statements](index=10&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) Key notes detail the company's July 2023 IPO, revenue streams, debt structure, and segment performance - On July 3, 2023, the company completed its IPO, issuing 16,000,000 shares and receiving net proceeds of approximately **$231.4 million**[33](index=33&type=chunk)[111](index=111&type=chunk) - As of June 30, 2023, the company had **$1.1 billion** in remaining performance obligations for its Compression Operations segment[55](index=55&type=chunk) - Total debt outstanding was **$2.82 billion** as of June 30, 2023, consisting of a **$1.82 billion** ABL Facility and a **$1.0 billion** Term Loan, with Term Loan obligations assumed by the parent company post-IPO[64](index=64&type=chunk)[79](index=79&type=chunk)[111](index=111&type=chunk) - The company accrued a contingent liability of **$28.4 million** as of June 30, 2023, related to a Texas sales tax audit[99](index=99&type=chunk) [Management's Discussion and Analysis (MD&A)](index=26&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes revenue growth to increased demand for compression operations, with fleet horsepower growing 3.1% and utilization at 99.9% Operational Highlights | Operating Data | As of June 30, 2023 | As of June 30, 2022 | Percentage Change | | :--- | :--- | :--- | :--- | | **Fleet horsepower** | 3,180,906 | 3,084,406 | 3.1% | | **Revenue-generating horsepower** | 3,177,286 | 3,074,613 | 3.3% | | **Horsepower utilization** | 99.9% | 99.7% | 0.2% | - For H1 2023, Compression Operations revenue increased by **$39.0 million** (12.2%) due to higher average revenue-generating horsepower and increased average revenue per horsepower[158](index=158&type=chunk) - Interest expense for H1 2023 increased by **$57.2 million** (91.6%) compared to H1 2022, primarily due to higher borrowings and increased effective interest rates[164](index=164&type=chunk) Adjusted EBITDA Reconciliation | Metric | H1 2023 (in thousands) | H1 2022 (in thousands) | | :--- | :--- | :--- | | **Net income** | $5,174 | $58,456 | | Interest expense, net | 119,687 | 62,469 | | Tax expense | 1,861 | 18,159 | | Depreciation and amortization | 90,327 | 85,802 | | Unrealized loss (gain) on derivatives | 21,529 | (32,822) | | **Adjusted EBITDA** | **$214,203** | **$194,276** | [Market Risk Disclosures](index=45&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate risk from its variable-rate ABL Facility, with **$1.82 billion** outstanding, and customer concentration risk - The company's main exposure is to interest rate risk on its ABL Facility, which had **$1.82 billion** outstanding at June 30, 2023[236](index=236&type=chunk)[237](index=237&type=chunk) - A 1.0% increase in the average interest rate on the ABL Facility for H1 2023 would have increased interest expense by an estimated **$8.8 million**[237](index=237&type=chunk) - The four largest customers accounted for approximately **38%** of recurring revenues for the six months ended June 30, 2023[240](index=240&type=chunk) [Controls and Procedures](index=45&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were ineffective as of June 30, 2023, due to a material weakness in internal control over financial reporting - A material weakness in internal control over financial reporting was identified, rendering disclosure controls and procedures ineffective as of June 30, 2023[242](index=242&type=chunk)[243](index=243&type=chunk) - The material weakness stemmed from an out-of-period adjustment related to derivative interest rate swaps that was not properly recorded, resulting in a restatement for Q1 2022[243](index=243&type=chunk) - Remediation efforts include documenting and tracking out-of-period adjustments, enhancing assessment protocols, and engaging an external firm for assistance[244](index=244&type=chunk)[247](index=247&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=47&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in ongoing sales tax audits with the Texas Comptroller's office and is actively in settlement discussions - The company has received notices from the Texas Comptroller's office regarding sales tax audits for periods between December 2015 and December 2022 and is currently in settlement discussions[250](index=250&type=chunk) [Risk Factors](index=47&type=section&id=Item%201A.%20Risk%20Factors) A material change to risk factors includes the newly identified material weakness in internal controls, which could impact accurate financial reporting and timely filings - A new risk factor has been added related to the identified material weakness in internal controls over financial reporting[251](index=251&type=chunk)[252](index=252&type=chunk) - The weakness stems from an erroneously recorded adjusting entry related to unrealized gain/loss on derivatives, incorrectly posted in Q2 2022 instead of Q1 2022[253](index=253&type=chunk) [Use of Proceeds from IPO](index=48&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company completed its IPO on July 3, 2023, raising approximately **$231.4 million** in net proceeds, used for debt repayment and general corporate purposes - The IPO on July 3, 2023, raised net proceeds of approximately **$231.4 million**[256](index=256&type=chunk) - The underwriters' full exercise of their purchase option on July 11, 2023, raised an additional **$36.2 million** in net proceeds[257](index=257&type=chunk) - Proceeds were used for debt repayment and general corporate purposes, consistent with the IPO prospectus[256](index=256&type=chunk)[257](index=257&type=chunk) [Other Information](index=48&type=section&id=Item%205.%20Other%20Information) Director Teresa Mattamouros resigned effective August 7, 2023, and Nirav Shah was elected as a new independent director effective August 8, 2023 - Teresa Mattamouros resigned as a director effective August 7, 2023[261](index=261&type=chunk) - Nirav Shah was appointed as a new independent director effective August 8, 2023[262](index=262&type=chunk) [Exhibits](index=49&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, credit agreements, incentive plans, and officer certifications