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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 June 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 July 31, 2001, there were 30,517,343 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.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL COMPRESSION HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, 2001 March 31, 2001
----------------- ----------------
(unaudited)
ASSETS
Current Assets:
Cash $ 10,589 $ 12,279
Accounts receivable, net 95,256 87,088
Inventories 109,213 120,939
Other current assets 24,720 24,212
----------- -----------
Total current assets 239,778 244,518
Property, plant and equipment
Rental equipment 615,512 592,449
Other 52,898 52,810
Accumulated depreciation (63,716) (55,634)
----------- -----------
Net property, plant, and equipment 604,694 589,625
Goodwill 304,689 294,358
Other assets, net 49,237 47,755
----------- -----------
Total assets $ 1,198,398 $ 1,176,256
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 130,719 $ 143,303
Current portion of long term debt and capital lease obligation 10,146 3,452
----------- -----------
Total current liabilities 140,865 146,755
Long-term debt 208,125 204,875
Non-current deferred tax liability 90,110 90,126
Deferred gain 88,700 75,146
Capital lease obligations 5,557 6,086
Other liabilities 704 694
----------- -----------
Total liabilities 534,061 523,682
Common stock 285 285
Treasury Stock (134) (134)
Paid in capital 664,253 663,882
Currency translation adjustment 1,692 845
Retained deficit (1,759) (12,304)
----------- -----------
Total stockholders' equity 664,337 652,574
----------- -----------
Total liabilities and stockholders' equity $ 1,198,398 $ 1,176,256
=========== ===========
See accompanying notes to unaudited consolidated financial statements
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UNIVERSAL COMPRESSION HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Three Months Ended June 30,
2001 2000
----------------- -----------------
Revenues:
Rentals $ 75,950 $ 26,274
Sales 64,411 8,270
Other (47) 216
----------------- -----------------
Total revenues 140,314 34,760
Costs and expenses:
Rentals, exclusive of depreciation and amortization 27,565 8,970
Cost of sales, exclusive of depreciation and amortization 53,275 6,548
Depreciation and amortization 11,380 7,498
Selling, general and administrative 12,676 3,455
Operating lease 12,593 689
Interest expense 5,532 8,004
Non-recurring charges -- 7,059
----------------- -----------------
Total costs and expenses 123,021 42,223
----------------- -----------------
Income (loss) before income taxes and extraordinary items 17,293 (7,463)
Income taxes (benefit) 6,748 (2,799)
----------------- -----------------
Income (loss) before extraordinary items $ 10,545 $ (4,664)
================= =================
Extraordinary loss, net of $3,759
income tax benefit -- (6,264)
----------------- -----------------
Net income (loss) $ 10,545 $ (10,928)
================= =================
Weighted average common and common equivalent shares outstanding:
Basic 28,481 8,817
----------------- -----------------
Diluted 28,811 8,817
----------------- -----------------
Earnings per share - basic:
Income (loss) before extraordinary items $ 0.37 $ (0.53)
Extraordinary loss -- (0.71)
----------------- -----------------
Net income (loss) $ 0.37 $ (1.24)
================= =================
Earnings per share - diluted:
Income (loss) before extraordinary items $ 0.37 $ (0.53)
Extraordinary loss -- (0.71)
----------------- -----------------
Net income (loss) $ 0.37 $ (1.24)
================= =================
See accompanying notes to unaudited consolidated financial statements.
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UNIVERSAL COMPRESSION HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended June 30,
2001 2000
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 10,545 $ (10,928)
Adjustments to reconcile net loss to cash
provided by operating activities, net of effect of acquisitions:
Depreciation and amortization 11,380 7,498
Gain (loss) on asset sales 137 (93)
Amortization of debt issuance costs 653 329
Accretion of discount notes 4,896 5,055
Deferred income taxes (16) (3,759)
Other (9,566) 4,588
--------- ---------
Net cash provided by operating activities 18,029 2,690
Cash flows from investing activities:
Additions to property, plant and equipment, net (40,325) (18,893)
Acquisitions (25,029) --
Proceeds from sale of fixed assets 973 62,647
--------- ---------
Net cash used in investing activities (64,381) 43,754
Cash flows from financing activities:
Principal repayments of long-term debt (1,467) (107,091)
Net borrowings (repayment) under revolving line of credit 6,000 (75,000)
Net repayment on sale-leaseback of vehicles (394) (68)
Net borrowings (repayment ) on financing lease 40,000 (10,580)
Common stock issuance 371 157,063
Debt issuance costs (695) (5,320)
Treasury stock -- (9)
--------- ---------
Net cash provided by financing activities 43,815 (41,005)
Effect of exchange rate 847 --
Net increase (decrease) in cash and cash equivalents (1,690) 5,439
Cash and cash equivalents at beginning of period 12,279 1,403
--------- ---------
Cash and cash equivalents at end of period $ 10,589 $ 6,842
========= =========
See accompanying notes to unaudited consolidated financial statements.
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UNIVERSAL COMPRESSION HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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.
Accordingly, the Company is dependent upon the distribution of earnings from
Universal, whether in the form of dividends, advances or payments on account of
intercompany obligations, to service its debt obligations.
Effective May 30, 2000, the Company completed an initial public
offering of 7,275,000 shares of its common stock (which includes 275,000 shares
of common stock issued pursuant to an over allotment option granted to the
underwriters), 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 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 Weatherford Global Compression Services, L.P.
("Weatherford Global") on February 9, 2001, 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 and of Louisiana
Compressor Maintenance, Inc. ("LCM") on July 13, 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 ended June 30, 2001 are not
necessarily indicative of the results that may be expected for the fiscal year
ending March 31, 2002.
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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):
BASIC EARNINGS PER SHARE
Three Months Ended
June 30,
2001 2000
------------- ------------
Income (loss) before extraordinary loss $ 10,545 $ (4,664)
Extraordinary loss, net of income tax -- (6,264)
------------- ------------
Net income (loss) $ 10,545 $ (10,928)
============= ============
Weighted average common stock outstanding 28,481 8,817
Basic net income (loss) per share:
Before extraordinary loss $ 0.37 $ (0.53)
Extraordinary loss, net of income tax -- (0.71)
------------- ------------
Basic net income (loss) per share $ 0.37 $ (1.24)
============= ============
DILUTED EARNINGS PER SHARE
Income (loss) before extraordinary loss $ 10,545 $ (4,664)
Extraordinary loss, net of income tax -- (6,264)
------------- ------------
Net income (loss) $ 10,545 $ (10,928)
============= ============
Weighted average common stock outstanding 28,481 8,817
Dilutive effect of stock options outstanding 330 --
------------- ------------
Weighted average diluted shares of common stock outstanding 28,811 8,817
============= ============
Diluted income (loss) per share:
Before extraordinary loss $ 0.37 $ (0.53)
Extraordinary loss, net of income tax -- (0.71)
------------- ------------
Diluted net income (loss) per share $ 0.37 $ (1.24)
============= ============
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") 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 2000, the FASB issued
SFAS 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
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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 positions 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, 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. Statement 141 addresses financial accounting and
reporting for goodwill and other intangible assets acquired in a business
combination at acquisition. Statement 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. We adopted SFAS 142 effective
April 1, 2001. Had the Standard been effective April 1, 2000, we would have
adopted it in the first quarter of fiscal 2001 and our loss before taxes and
extraordinary items would have been $6,788 as a result of the elimination of
$0.7 million of amortization expense related to goodwill, net loss would have
been $10,506 as a result of the elimination of $0.7 million of amortization
expense related to goodwill and a decrease in the recorded income tax benefit of
$0.3 million and loss per basic share and diluted share would have been $1.19
and $1.19, respectively.
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.
This acquisition was accounted for as a purchase and accordingly, the
results of operations of the acquired business are included in the accompanying
financial statements from the date of acquisition.
4. INVENTORIES
Inventories consisted of the following (in thousands):
June 30, March 31,
2001 2001
------------ ------------
(unaudited)
Raw materials $ 64,252 $ 63,473
Finished goods 30,479 38,705
Work-in-progress 14,482 18,761
------------ ------------
Total $ 109,213 $ 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.
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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 existing 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 million under the ABS
Operating Lease Facility. The funds were used for acquisitions as well as for
general working capital purposes. At June 30, 2001, the Company had outstanding
lease balances totaling $567.5 million and the equipment sold to the two new
operating lease facilities had a book value of approximately $478.8 million and
the equipment sale resulted in a deferred gain of approximately $88.7 million.
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 $427 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. 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.
7. 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.
8. 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 and Weatherford Global, as the Company's subsidiary, entered into a
transitional services agreement under which Weatherford 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 $125,000 for thirty days of these
services.
9. INDUSTRY SEGMENTS
Prior to the Weatherford Global merger, the Company had three principal
industry segments: Domestic Rental and Maintenance, International Rental and
Maintenance 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. The Company is now organized into four
principal businesses or operating segments: Domestic Rental and Maintenance,
International Rental and Maintenance, Fabrication and Parts Sales and Service.
The two Rental and Maintenance 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
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customer specifications. The International Rental and Maintenance Segment
represents all of the Company's international rental and maintenance 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 June 30, 2001 (in thousands):
INTERNATIONAL
DOMESTIC RENTAL RENTAL AND PARTS SALES AND CORPORATE AND
AND MAINTENANCE MAINTENANCE FABRICATION SERVICE OTHER TOTAL
Revenues $ 61,920 $ 14,030 $ 32,234 $ 32,177 $ (47) $ 140,314
Gross margin 38,755 9,281 4,193 7,295 (50) 59,474
Operating income 24,591 5,555 1,098 4,224 (50) 35,418
The following table presents sales and other financial information by industry
segment for the three-month period ended June 30, 2000 (in thousands):
INTERNATIONAL
DOMESTIC RENTAL RENTAL AND PARTS SALES AND CORPORATE AND
AND MAINTENANCE MAINTENANCE FABRICATION SERVICE OTHER TOTAL
Revenues $ 22,175 $ 4,099 $ 7,661 $ 609 $ 216 $ 34,760
Gross margin 14,245 3,059 1,522 201 59 19,086
Operating income 5,703 1,308 921 121 (609) 7,444
No one customer accounted for more than 10% of revenues for either of the
periods presented.
10. 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.
11. SUBSEQUENT EVENTS
On July 3, 2001, the Company completed 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 underwriters did not
purchase additional shares to cover over allotments. 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 cash portion of 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.
Pursuant to the indenture governing the 9 7/8% senior discount notes
due 2008 of Universal, the holders of the notes have the right to require UCI to
repurchase the notes through August 23, 2001 at a price equal to 101% of the
accreted value, plus accrued and unpaid interest to date as a result of the
consummation of the Offering as Castle Harlan's ownership of less than 20% of
the Company's common stock constituted a change of control under the indenture.
As of June 30, 2001, UCI had approximately $205.7 million aggregate principal
amount outstanding under its 9 7/8% senior
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discount notes. The Company expects to finance any repurchases of the 9 7/8%
senior discount notes through its revolving credit facility or its operating
lease facilities.
Immediately following the Offering, an affiliate of Weatherford
International, Inc. ("Weatherford") beneficially owned approximately 46% of the
Company's outstanding common stock. Pursuant to a voting agreement entered into
concurrently with the Company's acquisition of Weatherford Global and certain
related entities, Weatherford agreed to limit its voting power to 33 1/3% of the
Company's outstanding common stock, until the earlier of two years from the
closing of the acquisition or the date that Castle Harlan and its affiliates own
less than 5% of the Company's outstanding stock. The sale of shares by Castle
Harlan in the Offering did not result in a termination of the voting agreement
giving Weatherford voting control over the full 46% of the Company's shares that
it owned following the Offering.
In addition to its voting control, Weatherford and its affiliates are
entitled to designate, which it has done, three persons to serve on our board of
directors for so long as they own at least 20% of our outstanding common stock.
If Weatherford's ownership falls below 20%, Weatherford may designate only two
directors. If Weatherford's ownership falls below 10%, it will no longer have
the right to designate directors to our board. Castle Harlan was also entitled
to designate a total of three persons to our board of directors. Although it
lost this right following the Offering, its two current designees, John K.
Castle and William M. Pruellage, are serving terms that do not expire until our
2003 annual meeting of stockholders.
On July 11, 2001, the Company completed its acquisition of KCI, a
Tulsa, Oklahoma-based fabricator of large horsepower compressors. Under the
terms of the purchase agreement, the Company acquired KCI 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 connection with the acquisition and the issuance of shares of common
stock in the acquisition, the Company 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, the Company has
agreed to prepare and file a registration statement to register the resale of
the shares of common stock issued in the acquisition. 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 the
Company or other holders of the Company's common stock. The former KCI
shareholders have agreed, with exceptions, not to sell or transfer any shares of
the Company's common stock until after October 9, 2001, 90 days after the
closing of the acquisition.
On July 13, 2001, the Company completed its acquisition of LCM, a
Houma, Louisiana based supplier of maintenance, repair, overhaul and upgrade
services to the natural gas pipeline and related markets. Under the terms of the
purchase agreement, the Company acquired LCM 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.
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UNIVERSAL COMPRESSION, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, 2001 March 31, 2001
------------------- -------------------
(unaudited)
ASSETS
Current Assets:
Cash $ 10,589 $ 12,279
Accounts receivable, net 95,256 87,088
Inventories 109,213 120,939
Other current assets 24,567 24,059
------------------ -------------------
Total current assets 239,625 244,365
Property, plant and equipment
Rental equipment 615,512 592,449
Other 52,898 52,810
Accumulated depreciation (63,716) (55,634)
------------------ -------------------
Net property, plant, and equipment 604,694 589,625
Goodwill 304,458 294,127
Other assets, net 44,899 43,417
------------------ -------------------
Total assets $ 1,193,676 $ 1,171,534
================== ===================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 130,945 $ 143,531
Current portion of long term debt and capital lease obligation 10,146 3,452
------------------- ------------------
Total current liabilities 141,091 146,983
Long-term debt 208,125 204,875
Non-current deferred tax liability 90,110 90,126
Deferred gain 88,700 75,146
Capital lease obligations 5,557 6,086
Other liabilities 704 694
------------------- ------------------
Total liabilities 534,287 523,910
Common stock 49 49
Paid in capital 651,978 651,607
Currency translation adjustment 1,692 845
Retained deficit 5,670 (4,877)
------------------- ------------------
Total stockholders' equity 659,389 647,624
------------------- ------------------
Total liabilities and stockholder's equity $ 1,193,676 $ 1,171,534
=================== ==================
See accompanying notes to unaudited consolidated financial statements.
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UNIVERSAL COMPRESSION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Three Months Ended June 30,
2001 2000
----------------- -----------------
Revenues:
Rentals $ 75,950 $ 26,274
Sales 64,411 8,270
Other (47) 216
----------------- -----------------
Total revenues 140,314 34,760
Costs and expenses:
Rentals, exclusive of depreciation and amortization 27,565 8,970
Cost of sales, exclusive of depreciation and amortization 53,275 6,548
Depreciation and amortization 11,380 7,496
Selling, general and administrative 12,676 3,455
Operating lease 12,593 689
Interest expense 5,532 7,406
Non-recurring charges -- 7,059
----------------- -----------------
Total costs and expenses 123,021 41,623
----------------- -----------------
Income (loss) before income taxes and extraordinary items 17,293 (6,863)
Income taxes (benefit) 6,748 (2,574)
----------------- -----------------
Income (loss) before extraordinary items $ 10,545 $ (4,289)
================= =================
Extraordinary loss, net of $2,037
income tax benefit
-- (3,393)
----------------- -----------------
Net income (loss) $ 10,545 $ (7,682)
================= =================
See accompanying notes to unaudited consolidated financial statements.
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UNIVERSAL COMPRESSION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended June 30,
2001 2000
------------------- ------------------
Cash flows from operating activities:
Net loss $ 10,545 $ (7,682)
Adjustments to reconcile net loss to cash
provided by operating activities, net of effect of acquisitions:
Depreciation and amortization 11,380 7,496
Gain (loss) on asset sales 137 (93)
Amortization of debt issuance costs 653 314
Increase in payable to parent -- 114,703
Accretion of discount notes 4,896 4,472
Deferred income taxes (16) (2,037)
Other (9,566) 4,150
------------------- ------------------
Net cash provided by operating activities 18,029 121,323
Cash flows from investing activities:
Additions to property, plant and equipment, net (40,325) (18,893)
Acquisitions (25,029) --
Proceeds from sale of fixed assets 973 62,647
------------------- ------------------
Net cash used in investing activities (64,381) 43,754
Cash flows from financing activities:
Principal repayments of long-term debt (1,467) (74,855)
Net borrowings (repayment) under revolving line of credit 6,000 (75,000)
Net repayment on sale-leaseback of vehicles (394) (68)
Net proceeds (repayment) of financing lease 40,000 (10,580)
Investment in subsidiary by parent 371 6,185
Debt issuance costs (695) (5,320)
------------------- ------------------
Net cash provided by financing activities 43,815 (159,638)
Effect of exchange rate 847 --
Net increase (decrease) in cash and cash equivalents (1,690) 5,439
Cash and cash equivalents at beginning of period 12,279 1,403
------------------- ------------------
Cash and cash equivalents at end of period $ 10,589 $ 6,842
=================== ==================
See accompanying notes to unaudited consolidated financial statements.
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UNIVERSAL COMPRESSION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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").
Effective May 30, 2000,Holdings completed an initial public offering of
7,275,000 shares of its common stock (which includes 275,000 shares of common
stock issued pursuant to an over allotment option granted to the underwriters),
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 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 Weatherford Global Compression Services, L.P.
and certain related entities ("Weatherford Global") on February 9, 2001, 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 and of Louisiana Compressor Maintenance, Inc. ("LCM") on July 13,
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 ended June 30, 2001 are not
necessarily indicative of the results that may be expected for the fiscal year
ending March 31, 2002.
RECLASSIFICATIONS
Certain re classifications 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") 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 2000, the FASB issued
SFAS 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. 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 positions 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". The Company elected to adopt SFAS
142 effective April 1, 2001 as the first interim period financial statements had
not previously been issued. Statement 141 addresses financial accounting and
reporting for goodwill and other intangible assets acquired in a business
combination at acquisition. Statement 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
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reporting for goodwill and other intangible assets subsequent to their
acquisition. We adopted SFAS 142 effective April 1, 2001. Had the Standard been
effective April 1, 2000, we would have adopted it in the first quarter of fiscal
2001 and our loss before taxes and extraordinary items would have been $6,188 as
a result of the elimination of $0.7 million of amortization expense related to
goodwill and net loss would have been $7,260 as a result of the elimination of
$0.7 million of amortization expense related to goodwill and a decrease in the
recorded income tax benefit of $0.3 million.
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.
This acquisition was accounted for as a purchase and accordingly, the
results of operations of the acquired business are included in the accompanying
financial statements from the date of acquisition.
4. INVENTORIES
Inventories consisted of the following (in thousands):
June 30, March 31,
2001 2001
------------ ------------
(unaudited)
Raw materials $ 64,252 $ 63,473
Finished goods 30,479 38,705
Work-in-progress 14,482 18,761
----------- -----------
Total $ 109,213 $ 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 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 million under the ABS
Operating Lease Facility. The funds were used for acquisitions as well as for
general working capital purposes. At June 30, 2001, the Company had outstanding
lease balances totaling $567.5 million and the equipment sold to the two new
operating lease facilities had a book value of approximately $478.8 million and
the equipment sale resulted in a deferred gain of approximately $88.7 million.
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 $427 million. The Company
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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. 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.
7. 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.
8. 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 and Weatherford Global, as the Company's subsidiary, entered into a
transitional services agreement under which Weatherford 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 $125,000 for thirty days of these
services.
9. INDUSTRY SEGMENTS
Prior to the Weatherford Global merger, the Company had three principal
industry segments: Domestic Rental and Maintenance, International Rental and
Maintenance 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. The Company is now organized into four
principal businesses or operating segments: Domestic Rental and Maintenance,
International Rental and Maintenance, Fabrication and Parts Sales and Service.
The two Rental and Maintenance 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 Rental
and Maintenance Segment represents all of the Company's international rental and
maintenance 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 June 30, 2001 (in thousands):
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INTERNATIONAL
DOMESTIC RENTAL RENTAL AND PARTS SALES AND CORPORATE AND
AND MAINTENANCE MAINTENANCE FABRICATION SERVICE OTHER TOTAL
Revenues $ 61,920 $ 14,030 $ 32,234 $ 32,177 $ (47) $ 140,314
Gross margin 38,755 9,281 4,193 7,295 (50) 59,474
Operating income 24,591 5,555 1,098 4,224 (50) 35,418
The following table presents sales and other financial information by industry
segment for the three-month period ended June 30, 2000 (in thousands):
INTERNATIONAL
DOMESTIC RENTAL RENTAL AND PARTS SALES AND CORPORATE AND
AND MAINTENANCE MAINTENANCE FABRICATION SERVICE OTHER TOTAL
Revenues $ 22,175 $ 4,099 $ 7,661 $ 609 $ 216 $ 34,760
Gross margin 14,245 3,059 1,522 201 59 19,086
Operating income 5,703 1,308 921 121 (607) 7,446
No one customer accounted for more than 10% of revenues for either of the
periods presented.
10. 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.
11. SUBSEQUENT EVENTS
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
underwriters did not purchase additional shares to cover over allotments. 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.
Pursuant to the indenture, consummation of the Offering gave the
holders of the Company's 9 7/8% senior discount notes the right to require the
Company to repurchase those notes at a price equal to 101% of the accreted
value, plus accrued and unpaid interest to date. As of June 30, 2001, UCI had
approximately $205.7 million aggregate principal amount outstanding under its
9?% senior discount notes. The Company expects to finance any repurchases of the
9?% senior discount notes through its revolving credit facility or its operating
lease facilities.
On July 11, 2001, the Company completed its acquisition of KCI, a
Tulsa, Oklahoma-based fabricator of large horsepower compressors. Under the
terms of the purchase agreement, the Company acquired KCI 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 connection with the acquisition and the issuance of Holdings' shares
of common stock in the acquisition, Holdings 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, Holdings has
agreed to prepare and file a registration statement to register the resale of
the shares of common stock issued in the acquisition. 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 Holdings
or other holders of Holdings' common stock. The former KCI shareholders have
agreed, with exceptions, not to sell or transfer any shares of Holdings' common
stock until after October 9, 2001, 90 days after the closing of the acquisition.
On July 13, 2001, the Company completed its acquisition of LCM, a
Houma, Louisiana-based supplier of maintenance, repair, overhaul and upgrade
services to the natural gas pipeline and related markets. Under the terms of the
purchase agreement, the Company acquired LCM 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE 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 this report are forward-looking statements, including, without
limitation, statements regarding future financial position, business strategy,
proposed acquisitions, budgets, litigation, projected costs and plans and
objectives of management for future operations. 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.
Forward-looking statements in this report include, without limitation:
anticipated cost savings and other synergies resulting from our acquisition of
Weatherford Global and other businesses;
the sufficiency of our available cash flows to fund our continuing operations;
anticipated synergies, future revenues and EBITDA, as adjusted, resulting from
our acquisitions of Weatherford Global, Gas Compression Services, Inc., IEW
Compression, Inc., KCI, Inc., Louisiana Compressor Maintenance, Inc. and other
businesses;
capital improvements;
the expected amount of capital expenditures;
our future financial position;
the future value of our equipment;
our growth strategy and projected costs; and
plans and objectives of our management for our future operations.
These forward-looking statements are subject to various risks and uncertainties
that could cause our 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 in this report could cause our actual results to differ from those
described in, or otherwise projected or implied by, the forward-looking
statements. Although the Company believes that the expectations reflected in
these forward-looking statements are based on reasonable assumptions, no
assurance can be given that these expectations will prove to be correct.
Important factors that could cause our actual results to differ materially from
the expectations reflected in these forward-looking statements include, among
other things:
our inability to successfully integrate the business of Weatherford Global Gas
Compression Services, Inc., IEW Compression, Inc., KCI, Inc., Louisiana
Compressor Maintenance, Inc. and other businesses;
conditions in the oil and gas industry, including the demand for natural gas and
the impact of the price of natural gas;
competition among the various providers of contract compression services;
changes in safety and environmental regulations pertaining to the production and
transportation of natural gas;
changes in economic or political conditions in operating markets;
introduction of competing technologies by other companies;
our ability to retain and grow our customer base;
employment workforce factors, including loss of key employees; and
liability claims related to the use of our products and services.
All subsequent written and oral forward-looking statements made by us or on our
behalf are expressly qualified in their entirety by the cautionary statements
contained or referred to in this section. The forward-looking statements
included in this report are only made as of the date of this report and the
Company undertake no obligation to publicly update such forward-looking
statements to reflect new information, subsequent events or otherwise.
The terms "our," "Company," "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.
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19
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 (including 275,000 shares of
common stock issued pursuant to an over allotment option granted to the
underwriters), 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 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 underwriters did not purchase additional shares to cover over
allotments. 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 amd 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.
Consummation of the Offering gave the holders of Universal's 9 7/8%
senior discount notes the right to require Universal to repurchase those notes
at a price equal to 101% of the accreted value, plus accrued and unpaid interest
to date. The Company expects to finance any repurchases of the 9 7/8% senior
discount notes through the Credit Agreement or the operating lease facilities.
Since our initial public offering, we have completed six acquisitions.
Our completed acquisitions include Gas Compression Services, Inc. ("GCSI") in
September 2000, Weatherford Global and IEW Compression in February 2001,
Compressor Systems International, Inc., the international operations of
Compressor Systems, Inc. ("CSII"), in April 2001, KCI, Inc. on July 11, 2001 and
Louisiana Compressor Maintenance, Inc. on July 13, 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.
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 46% of total outstanding
shares following the Offering) 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 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 the Company's 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 gas compressor fleets
in the U.S. and a strong presence in key international markets.
UNIVERSAL COMPRESSION HOLDINGS, INC.
Three months ended June 30, 2001 compared to three months ended June 30, 2000
Revenues. Our total revenues for the three months ended June 30, 2001
increased $105.5 million, or 303.2%, to $140.3 million, compared to $34.8
million for the three months ended June 30, 2000. Our rental revenues increased
by $49.7 million, or 189.0%, to $76.0 million during the three months ended June
30, 2001 from $26.3 million during the three months ended June 30, 2000.
Domestic rental revenues increased by $39.7 million, or 178.8%, to $61.9 million
during the three months ended June 30, 2001 from $22.2 million during the three
months ended June 30, 2000. Our international rental revenues increased by $9.9
million, or 241.5%, to $14.0 million during the three months ended June 30, 2001
from $4.1 million during the three months ended June 30, 2000. The increase in
domestic rental revenues primarily resulted from continued expansion of our
existing rental fleet and through the acquisition of GCSI, Weatherford Global
and IEW. The increase in international rental revenues resulted from expansion
of our international rental fleet primarily through the addition of horsepower
from our acquisitions, particularly our Weatherford Global acquisition,
continued expansion of our existing rental fleet and continued high utilization
rates.
Domestic average rented horsepower for the three months ended June 30,
2001 increased by 197.8% to approximately 1,465,000 horsepower from
approximately 492,000 horsepower for the three months ended June 30, 2000. In
addition, international average rented horsepower for the three months ended
June 30, 2001 increased by 447.2% to approximately 290,000 horsepower from
approximately 53,000 horsepower for the three months ended June 30, 2000,
primarily through expansion of our international rental fleet, continued high
utilization rates and additional service. Our average horsepower utilization
rate for the three months ended June 30, 2001 was approximately 89.4%, up from
84.3% in the three months ended June 30, 2000. At the end of the quarter, we had
approximately 2.0 million available horsepower. These horsepower and utilization
amounts include Weatherford Global and IEW for the full first quarter and CSII
for the 68 days from the date of the acquisition.
Our revenue from fabrication increased to $32.2 million from $7.7
million, an increase of 318.2%. The increase in fabrication revenue, consisting
mostly of equipment fabrication, was due primarily to our acquisition of
Weatherford Global. Revenues from fabrication vary quarter to quarter
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20
due to the time of completion of the equipment being sold. Our backlog of
fabrication projects at the end of June 2001 was approximately $46.9 million,
compared with a backlog of $18.4 million at the same time a year earlier. From
March 31 to June 30, 2001, our backlog increased $6.5 million.
Our revenues from parts sales and service increased to $32.2 million
during the three months ended June 30, 2001 from $609 thousand during the three
months ended June 30, 2000, an increase of 5,187.4%. 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 June 30, 2001
increased $40.4 million, or 211.5%, to $59.5 million from $19.1 million for the
three months ended June 30, 2000. Our rental gross margin for the three months
ended June 30, 2001 increased $30.7 million, or 177.5%, to $48.0 million
compared to gross margin of $17.3 million for the three months ended June 30,
2000. Rental gross margin increased primarily as the result of our rental
revenue growth discussed above and operating cost improvements realized by
rental operations. Our fabrication gross margin for the three months ended June
30, 2001 increased $2.7 million, or 180.0%, to $4.2 million compared to a gross
margin of $1.5 million for the three months ended June 30, 2000. Fabrication
gross margin increased primarily due to increased sales resulting from our
acquisitions of GCSI and Weatherford Global as well as strong customer demand,
cost reductions and their resulting gross margin effects.
Our parts sales and service gross margin for the three months ended
June 30, 2001 increased $7.1 million or 3,532.3%, to $7.3 million compared to a
gross margin of $201 thousand for the three months ended June 30, 2000. Parts
sales and service gross margin increased primarily due to our acquisition of
Weatherford Global and operating cost improvements.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses for the three months ended June 30, 2001 increased $9.2
million compared to the three months ended June 30, 2000. Selling, general and
administrative expenses represented 9.0% of revenue for the three months ended
June 30, 2001 compared to 9.9% of revenue for the three months ended June 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 of GCSI and Weatherford Global. 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 June 30, 2001 increased 196.2% to $46.8 million from $15.8 million for the
three months ended June 30, 2000, primarily due to increases in horsepower from
acquisitions and continued expansion of our existing rental fleet and
utilization of the compression rental fleet, gross margin contribution from
fabrication, operating cost improvements realized by rental operations, and a
decreased percentage of selling, general and administrative expenses, 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.
Non-recurring Charges. During the three months ended June 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 $3.9 million to $11.4 million during the three months ended June 30, 2001,
compared to $7.5 million during the three months ended June 30, 2000. The
increase resulted primarily from the expansion of our rental 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 June 30, 2000 is $675 thousand of amortization expense. As of April 1,
2001, the Company has adopted SFAS 142 which, among other things, eliminated
amortization of goodwill.
Operating Lease. Operating lease expense increased by $11.9 million to
$12.6 million during the three months ended June 30, 2001 from $689 thousand
during the three months ended June 30, 2000. The increase is due to the expense
associated with increased balance on the operating lease facilities entered into
concurrently with the Weatherford Global merger. The outstanding balance under
the operating lease facilities at June 30, 2001 was $567.5 million, consisting
of $427.0 million under our new operating lease facility and $140.5 million
under our asset-backed securitization operating lease facility.
Interest Expense. Interest expense decreased $2.5 million to $5.5
million for the three months ended June 30, 2001 from $8.0 million for the three
months ended June 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 the assumption and refinancing of debt related
to our GCSI acquisition.
Extraordinary Loss. During the three months ended June 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 $10.5 million for the three
months ended June 30, 2001 compared to a net loss of $10.9 million for the three
months ended June 30, 2000. The change was primarily due to extraordinary and
non-recurring charges incurred during the three months ended June 30, 2000 as
well as 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.
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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, as described below.
Our cash and cash equivalents balance at June 30, 2001 was $10.6
million, compared to $12.3 million at March 31, 2001. For the three months ended
June 30, 2001, we provided cash flow from operations of $18.0 million, used
$64.4 million of cash for investing activities and provided another $43.8
million of cash in financing activities and had a $0.8 million positive effect
of exchange rate change.
During the three months ended June 30, 2001, $40.0 million was received
for compression equipment under our asset-backed securitization operating lease
facility, $10.5 million was generated from net income, and $6.0 million was
received from borrowings under our revolving credit facility. We used this cash
as follows: $40.3 million for capital expenditures, $25.0 million for
acquisitions, $9.6 million on working capital changes and $1.5 million to make
net principal payments on outstanding indebtedness.
On July 3, 2001, the Company, completed 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 cash portion of 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.
Pursuant to the indenture governing the 9 7/8% senior discount notes
due 2008 of Universal, the holders of the notes have 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
the Company's common stock constitutes a change of control under the indenture.
As of June 30, 2001, Universal had approximately $205.7 million aggregate
principal amount outstanding under the 9 7/8% senior discount notes. The Company
expects to finance any repurchases of the 9 7/8% senior discount notes through
its revolving credit facility or its operating lease facilities.
As of July 31, 2001, we had unused availability of approximately $109.5
million (approximately $59.5 million under our asset-backed securitization
facility and $50.0 million under our revolving credit facility). Under the
revolving credit facility, $110 million is currently committed and $15 million
is obtainable upon payment of additional fees. Subject to certain covenant
restrictions, we also have up to an additional $366 million available under our
new operating lease facility until one year from February 9, 2001. Additional
amounts under this facility would be funded through an additional issuance of
senior secured notes by BRL, an unaffiliated entity which is the lessor under
that facility, and a corresponding increase in the related BRL term loan and
equity investment. The proceeds, if any, from the additional notes, term loan
and equity investment would then be used to purchase additional equipment to
lease to Universal under the operating lease.
On July 11, 2001, the Company completed its acquisition of KCI, a
Tulsa, Oklahoma-based fabricator of large horsepower compressors. Under the
terms of the purchase agreement, the Company acquired KCI 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 Offering. This acquisition provides us with significant
fabrication expertise and capabilities and added approximately 125,000
horsepower to our rental fleet with an average horsepower utilization rate of
85%. As of July 31, 2001, we estimate that KCI's fabrication backlog was
approximately $70 million.
In connection with the acquisition and the issuance of shares of common
stock in the acquisition, the Company 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, the Company has
agreed to file a registration statement to register the resale of the shares of
common stock issued in the acquisition. 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 the Company or other
holders of the Company's common stock. The former KCI holders have agreed, with
exceptions, not to sell or transfer any shares of the Company's common stock
until after October 9, 2001, 90 days after the closing of the acquisition.
On July 13, 2001, the Company completed its acquisition of LCM, a
Houma, Louisiana-based supplier of maintenance, repair, overhaul and upgrade
services to the natural gas pipeline and related markets. Under the terms of the
purchase agreement, the Company acquired LCM for approximately $26.3 million in
cash. In order to fund the acquisition the Company used approximately $25
million of the availability under its revolver and $1.3 million of the funds
received from the Offering. Under current operating conditions, we expect LCM to
add approximately $18 million in revenue and approximately $4.5 million in
EBITDA, as adjusted, in the first full year of combined operations.
As of June 30, 2001, 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, the Company is expecting revenues to be approximately
$650 to $660 million, with EBITDA, as adjusted, of approximately $210 to $213
million. These results are expected based on slight quarterly gross margin
improvements in both the domestic and international rental segments and the
parts, sales and service segment, as well as, continued revenue growth in all
business segments.
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Operating lease and net interest expense are expected to be
approximately $77 to $80 million with depreciation being approximately $48 to
$50 million for the fiscal year.
These projections are expected to result in approximately $1.70
earnings per diluted share for the fiscal year.
Capital expenditures, excluding our acquisitions of CSII, KCI and LCM,
are expected to be approximately $180 to $200 million for the year, with
international expenditures between $30 and $40 million and only $25 million
being used for maintenance, capital and other corporate needs.
We believe that funds generated from our operations, together with our
existing cash, the net proceeds to us from the Offering, 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 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 June 30, 2001 compared to three months ended June 30, 2000
Revenues. Universal's total revenues for the three months ended June
30, 2001 increased $105.5 million, or 303.2%, to $140.3 million, compared to
$34.8 million for the three months ended June 30, 2000. Universal's rental
revenues increased by $49.7 million, or 189.0%, to $76.0 million during the
three months ended June 30, 2001 from $26.3 million during the three months
ended June 30, 2000. Domestic rental revenues increased by $39.7 million, or
178.8%, to $61.9 million during the three months ended June 30, 2001 from $22.2
million during the three months ended June 30, 2000. Universal's international
rental revenues increased by $9.9 million, or 241.5%, to $14.0 million during
the three months ended June 30, 2001 from $4.1 million during the three months
ended June 30, 2000. The increase in domestic rental revenues primarily resulted
from continued expansion of our existing rental fleet as well as through the
acquisition of GCSI, Weatherford Global and IEW. The increase in international
rental revenues resulted from expansion of Universal's international rental
fleet primarily through the addition of horsepower from Universal's
acquisitions, particularly our Weatherford Global acquisition, continued
expansion of our existing rental fleet and continued high utilization rates.
Domestic average rented horsepower for the three months ended June 30,
2001 increased by 197.8% to approximately 1,465,000 horsepower from
approximately 492,000 horsepower for the three months ended June 30, 2000. In
addition, international average rented horsepower for the three months ended
June 30, 2001 increased by 447.2% to approximately 290,000 horsepower from
approximately 53,000 horsepower for the three months ended June 30, 2000,
primarily through expansion of our international rental fleet and continued high
utilization rates. Our average horsepower utilization rate for the three months
ended June 30, 2001 was approximately 89.4%, up from 84.3% in the three months
ended June 30, 2000. At the end of the quarter, we had approximately 2.0 million
available horsepower. These horsepower and utilization amounts include
Weatherford Global and IEW for the full first quarter and CSII for the 68 days
from the date of their acquisition.
Universal's revenue from fabrication increased to $32.2 million from
$7.7 million, an increase of 318.2%. The increase in fabrication revenue,
consisting mostly of equipment fabrication was due primarily to Universal's
acquisition Weatherford Global. 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 the end of June 2001 was approximately $46.9
million, compared with a backlog of $18.4 million at the same time a year
earlier. From March 31 to June 30, 2001, Universal's backlog increased $6.5
million.
Universal's revenues from parts sales and service increased to $32.2
million during the three months ended June 30, 2001 from $609 thousand during
the three months ended June 30, 2000, an increase of 5,187.4%. The increase was
due primarily to Universal's acquisitions of Weatherford Global and IEW 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 June 30, 2001
increased $40.4 million, or 211.5%, to $59.5 million from $19.1 million for the
three months ended June 30, 2000. Universal's rental gross margin for the three
months ended June 30, 2001 increased $30.7 million, or 177.5%, to $48.0 million
compared to gross margin of $17.3 million for the three months ended June 30,
2000. Rental gross margin increased primarily as the result of Universal's
rental revenue growth discussed above and operating cost improvements realized
by rental operations. Universal's fabrication gross margin for the three months
ended June 30, 2001 increased $2.7 million, or 180.0%, to $4.2 million compared
to a gross margin of $1.5 million for the three months ended June 30, 2000.
Fabrication gross margin increased primarily due to increased sales resulting
from Universal's acquisitions of GCSI and Weatherford Global 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 June 30, 2001 increased $7.1 million or 3,532.3%, to $7.3 million compared
to a gross margin of $201 thousand for the three months ended June 30, 2000.
Parts sales and service gross margin increased primarily due to Universal's
acquisition of Weatherford Global and operating cost improvements.
Selling, General and Administrative Expenses. Universal's selling,
general and administrative expenses for the three months ended June 30, 2001
increased $9.2 million compared to the three months ended June 30, 2000.
Selling, general and administrative expenses represented 9.0% of revenue for the
three months ended June 30, 2001 compared to 9.9% of revenue for the three
months ended June 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 of GCSI and Weatherford Global. 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 June 30, 2001 increased 196.2% to $46.8 million from $15.8 million for the
three months ended June 30, 2000, primarily due to increases in horsepower and
utilization of the compression rental fleet, gross margin contribution from
fabrication, operating cost improvements realized by rental operations, and a
decreased percentage of selling, general and administrative expenses, 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
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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.
Non-recurring Charges. During the three months ended June 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 $3.9 million to $11.4 million during the three months ended June 30, 2001,
compared to $7.5 million during the three months ended June 30, 2000. The
increase resulted primarily from the expansion of Universal's rental 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 June 30, 2000 is $675 thousand of amortization
expense. As of April 1, 2001, the Company has adopted SFAS 142 which, among
other things, eliminated amortization of goodwill.
Operating Lease. Operating lease expense increased by $11.9 million to
$12.6 million during the three months ended June 30, 2001 from $689 thousand
during the three months ended June 30, 2000. The increase is due to the expense
associated with an increased balance on the operating lease facilities entered
into concurrently with the Weatherford Global merger. The outstanding balance
under the operating lease facilities at June 30, 2001 was $567.5 million,
consisting of $427.0 million under Universal's new operating lease facility and
$140.5 million under Universal's asset-backed securitization operating lease
facility.
Interest Expense. Interest expense decreased $1.9 million to $5.5
million for the three months ended June 30, 2001 from $7.4 million for the three
months ended June 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 the assumption and refinancing of
debt related to Universal's GCSI acquisition.
Extraordinary Loss. During the three months ended June 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 $10.5 million for the three
months ended June 30, 2001 compared to a net loss of $7.7 million for the three
months ended June 30, 2000. The change was primarily related to extraordinary
and non-recurring charges incurred during the three months ended June 30, 2000
as well as 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.
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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 June 30, 2001 was
3.835%. A 1.0% increase in interest rates would result in a $0.8 million annual
increase in our interest and operating lease expense. As of June 30, 2001,
approximately $83 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 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
------- -----------
10.1 Registration Rights Agreement dated July 11, 2001 by and among Universal
Compression Holdings, Inc. and the former shareholders of KCI, Inc., (incorporated
by reference to Exhibit 10.1 of Universal Compression Holdings, Inc.'s Current
Report on Form 8-K dated July 23, 2001).
10.2 Registration Rights Agreement dated July 11, 2001 by and among Universal
Compression Holdings, Inc., MCNIC Compression GP, Inc. and MCNIC Compression LP,
Inc. (incorporated by reference to Exhibit 10.2 of Universal Compression Holdings,
Inc.'s Current Report on Form 8-K dated July 23, 2001).
---------------
* Filed herewith
(b) Reports on Form 8-K.
Two reports were filed on Form 8-K during the first quarter of fiscal 2002:
- The Company and Universal filed a Current Report on Form 8-K on May 21,
2001 to report under Item 5 among other things, the filing of a
Registration Statement on Form S-4 with respect to the exchange offer
of $350,000,000 principal amount of registered 8?% senior secured notes
of BRL Universal Equipment 2001 A, L.P., the lessor under our senior
secured notes operating lease facility, and its subsidiary, for like
principal amount of outstanding unregistered 8?% senior secured notes
that were issued in a private placement transaction pursuant to Rule
144A under the Securities Act of 1933, as amended.
- The Company and Universal filed a Current Report on Form 8-K on June 5,
2001 to report under Item 5 among other things, (i) the settlement of
the Company's claims against Tidewater, Inc. relating to the Company's
1998 acquisition of Tidewater Compression Service Inc. in exchange for
payment to the Company of $1 million and termination of the Purchase
Price Adjustment Agreement dated as of February 20, 1998, (ii) the
Company's entering into an agreement to acquire KCI, Inc. and (iii) the
filing of a Registration Statement on Form S-3 with respect to the
Offering.
In addition, 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?% 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.
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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: August 10, 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
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INDEX TO EXHIBITS
Exhibit Description
------- -----------
10.1 Registration Rights Agreement dated July 11, 2001 by and among Universal
Compression Holdings, Inc. and the former shareholders of KCI, Inc., (incorporated
by reference to Exhibit 10.1 of Universal Compression Holdings, Inc.'s Current
Report on Form 8-K dated July 23, 2001).
10.2 Registration Rights Agreement dated July 11, 2001 by and among Universal
Compression Holdings, Inc., MCNIC Compression GP, Inc. and MCNIC Compression LP,
Inc. (incorporated by reference to Exhibit 10.2 of Universal Compression Holdings,
Inc.'s Current Report on Form 8-K dated July 23, 2001).
----------
* Filed herewith
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