Kodiak Gas Services(KGS) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) The unaudited financial statements for June 30, 2023, detail the company's financial position, operations, and cash flows Condensed Consolidated Balance Sheets 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 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 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] - Distributions to the parent company were significantly lower at $42.3 million in H1 2023, compared to $838.0 million in H1 2022[27] Notes to Financial Statements 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][111] - As of June 30, 2023, the company had $1.1 billion in remaining performance obligations for its Compression Operations segment[55] - 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][79][111] - The company accrued a contingent liability of $28.4 million as of June 30, 2023, related to a Texas sales tax audit[99] Management's Discussion and Analysis (MD&A) 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] - 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] 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 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][237] - 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] - The four largest customers accounted for approximately 38% of recurring revenues for the six months ended June 30, 2023[240] Controls and Procedures 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][243] - 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] - Remediation efforts include documenting and tracking out-of-period adjustments, enhancing assessment protocols, and engaging an external firm for assistance[244][247] PART II. OTHER INFORMATION Legal Proceedings 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] Risk Factors 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][252] - 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] Use of Proceeds from IPO 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] - The underwriters' full exercise of their purchase option on July 11, 2023, raised an additional $36.2 million in net proceeds[257] - Proceeds were used for debt repayment and general corporate purposes, consistent with the IPO prospectus[256][257] Other Information 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] - Nirav Shah was appointed as a new independent director effective August 8, 2023[262] Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, credit agreements, incentive plans, and officer certifications