-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IMj3v9PIrigipIa/cjgpu1CNU/Om9OjZEFMUaUFp9QAqrGi5HLn3p1yIrP0xzO0R +6sOTVgEpuyputZRDTHKzw== 0000899243-99-002334.txt : 19991117 0000899243-99-002334.hdr.sgml : 19991117 ACCESSION NUMBER: 0000899243-99-002334 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANOVER COMPRESSOR CO CENTRAL INDEX KEY: 0000909413 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 752344249 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13071 FILM NUMBER: 99753443 BUSINESS ADDRESS: STREET 1: 12001 NORTH HOUSTON ROSSLYN CITY: HOUSTON STATE: TX ZIP: 77086 BUSINESS PHONE: 2814478787 MAIL ADDRESS: STREET 1: 12001 NORTH HOUSTON ROSSLYN CITY: HOUSTON STATE: TX ZIP: 77086 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 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 Number 1-13071 HANOVER COMPRESSOR COMPANY (Exact name of registrant as specified in its charter) Delaware 75-2344249 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12001 North Houston Rosslyn Houston, Texas 77086 (Address of principal executive offices) (281) 447-8787 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] As of November 8, 1999 there were 28,723,798 shares of the Company's common stock, $0.001 par value, outstanding. HANOVER COMPRESSOR COMPANY CONDENSED CONSOLIDATED BALANCE SHEET (unaudited) (in thousands of dollars, except for par value and share amounts) September 30, December 31, 1999 1998 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 9,090 $ 11,503 Accounts receivable trade, net 87,488 70,205 Inventory 66,078 63,044 Costs and estimated earnings in excess of billings on uncompleted contracts 10,215 7,871 Prepaid taxes 11,924 9,466 Other current assets 5,593 2,967 --------- --------- Total current assets 190,388 165,056 --------- --------- Property, plant and equipment: Compression equipment and facilities 444,407 422,896 Land and buildings 18,513 15,044 Transportation and shop equipment 25,149 21,667 Other 11,322 11,119 --------- --------- 499,391 470,726 Accumulated depreciation (72,864) (78,228) --------- --------- Net property, plant and equipment 426,527 392,498 --------- --------- Intangible and other assets 67,065 57,036 --------- --------- $ 683,980 $ 614,590 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 562 $ 444 Accounts payable, trade 25,466 23,361 Accrued liabilities 18,957 17,599 Advance billings 12,520 9,694 Billings on uncompleted contracts in excess of costs and estimated earnings 3,017 694 --------- --------- Total current liabilities 60,522 51,792 Long-term debt 124,540 156,943 Other liabilities 83,330 42,858 Deferred income taxes 66,774 46,284 --------- --------- Total liabilities 335,166 297,877 --------- --------- Common stockholders' equity: Common stock, $.001 par value; 100 million shares authorized; 28,713,798 and 28,590,472 shares issued and outstanding, respectively 29 29 Additional paid-in capital 271,604 269,005 Notes receivable - employee stockholders (9,411) (10,146) Accumulated other comprehensive income (loss) (329) 152 Retained earnings 88,507 60,998 Treasury stock - 83,697 and 175,547 common shares, respectively, at cost (1,586) (3,325) --------- --------- Total common stockholders' equity 348,814 316,713 --------- --------- $ 683,980 $ 614,590 ========= ========= The accompanying notes are an integral part of these condensed consolidated financial statements. HANOVER COMPRESSOR COMPANY CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (unaudited) (in thousands of dollars, except per share amounts)
Three months Nine months ended September 30, ended September 30, ------------------- ---------------------- 1999 1998 1999 1998 -------- -------- --------- --------- Revenues: Rentals $ 50,042 $ 38,534 $ 137,749 $ 105,711 Parts and service 9,035 7,677 21,398 18,281 Compressor fabrication 16,493 12,601 35,441 44,576 Production equipment fabrication 7,733 11,945 21,177 30,052 Gain on sale of assets 1,063 105 4,799 2,142 Other 96 934 2,141 1,416 -------- -------- --------- --------- 84,462 71,796 222,705 202,178 -------- -------- --------- --------- Expenses: Rentals 16,228 12,322 45,454 35,479 Parts and service 5,349 5,976 13,484 13,903 Compressor fabrication 13,785 10,910 29,102 37,888 Production equipment fabrication 5,727 7,747 15,664 19,693 Selling, general and administrative 8,851 7,081 24,232 19,866 Depreciation and amortization 9,086 9,486 28,536 28,588 Leasing expense 7,143 2,776 14,727 2,776 Interest expense 1,804 2,347 7,841 9,228 -------- -------- --------- --------- 67,973 58,645 179,040 167,421 -------- -------- --------- --------- Income before income taxes 16,489 13,151 43,665 34,757 Provision for income taxes 6,101 5,103 16,156 13,486 -------- -------- --------- --------- Net income 10,388 8,048 27,509 21,271 -------- -------- --------- --------- Other comprehensive loss, net of tax: Foreign currency translation adjustment 100 82 481 84 -------- -------- --------- --------- Comprehensive income $ 10,288 $ 7,966 $ 27,028 $ 21,187 ======== ======== ========= ========= Weighted average common and common equivalent shares outstanding: Basic 28,542 28,531 28,483 28,504 -------- -------- --------- --------- Diluted 30,728 30,152 30,487 30,133 -------- -------- --------- --------- Earnings per common share: Basic $ 0.36 $ 0.28 $ 0.97 $ 0.75 -------- -------- --------- --------- Diluted $ 0.34 $ 0.27 $ 0.90 $ 0.71 -------- -------- --------- ---------
The accompanying notes are an integral part of these condensed consolidated financial statements. HANOVER COMPRESSOR COMPANY CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) (in thousands of dollars)
Nine Months ended September 30, -------------------------- 1999 1998 --------- --------- Cash flows from operating activities: Net income $ 27,509 $ 21,271 Adjustments: Depreciation and amortization 28,536 28,588 Amortization of debt issuance costs and debt discount 725 557 Bad debt expense 723 394 Gain on sale of assets (4,799) (2,142) Equity in income of nonconsolidated affiliates (647) (819) Deferred income taxes 10,248 6,391 Changes in assets and liabilities: Accounts receivable (16,995) (19,848) Inventory (1,434) (22,654) Costs and estimated earnings in excess of billings on uncompleted contracts (21) (6,900) Accounts payable and other liabilities 2,317 15,966 Advance billings 2,826 1,235 Other (7,561) (13,460) --------- --------- Net cash provided by operating activities 41,427 8,579 --------- --------- Cash flows from investing activities: Cash used for business acquisitions (35,312) (17,137) Capital expenditures (200,752) (119,405) Repayment of advances to unconsolidated subsidiaries 8,000 - Investment in nonconsolidated subsidiaries (4,906) - Proceeds from sale of fixed assets 220,584 206,998 --------- --------- Net cash provided by (used in) investing activities (12,386) 70,456 --------- --------- Cash flows from financing activities: Net repayment on revolving credit facility (25,000) (71,453) Repayments of shareholder notes 1,488 75 Equity issuance costs - (162) Proceeds from warrant conversions and stock option exercises 330 - Debt issuance costs - (1,384) Repayment of long-term debt (8,194) (819) Purchase of treasury stock - (2,048) Other - 11 --------- --------- Net cash used in financing activities (31,376) (75,780) --------- --------- Effect of exchange rate changes on cash and equivalents (78) (154) --------- --------- Net increase (decrease) in cash and cash equivalents (2,413) 3,101 Cash and cash equivalents at beginning of period 11,503 4,561 --------- --------- Cash and cash equivalents at end of period $ 9,090 $ 7,662 ========= ========= Supplemental disclosure of cash flow information: Common stock issued in exchange for note receivable $ 753 Property sold in exchange for note receivable $ 3,480 $ 1,500 Acquisitions of businesses: Property, plant and equipment acquired $ 39,105 $ 17,156 Other noncash assets acquired 11,311 5,613 Liabilities assumed 1,562 359 Deferred taxes 10,242 5,273 Common Stock issued 3,300 -
The accompanying notes are an integral part of these condensed consolidated financial statements. HANOVER COMPRESSOR COMPANY Notes to Condensed Consolidated Financial Statements 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Hanover Compressor Company (the "Company") included herein have been prepared in accordance with generally accepted accounting principles for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is the opinion of management that the information furnished includes all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly the financial position, results of operations, and cash flows of the Company for the periods indicated. The financial statement information included herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 1998. These interim results are not necessarily indicative of results for a full year. EARNINGS PER COMMON SHARE Basic earnings per common share is computed using the weighted average number of shares outstanding for the period. Diluted earnings per common share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding options and warrants to purchase common stock. Included in diluted shares are common stock equivalents relating to options of 1,645,000 and 1,228,000 and warrants of 359,000 and 401,000 for the nine months ended September 30, 1999 and 1998, respectively. 2. INVENTORIES Inventory consisted of the following amounts (in thousands): September 30, December 31, 1999 1998 ------------- ------------ Parts and supplies $38,458 $32,808 Work in progress 22,936 19,962 Finished goods 4,684 10,274 ------- ------- $66,078 $63,044 ======= ======= 3. SALES AND LEASE BACK OF EQUIPMENT In June 1999, the Company completed a $200 million sale and lease back of certain compression equipment. The lease back of the equipment is recorded as an operating lease. Under the agreement, the equipment was sold and leased back by the Company for a 5 year period and will continue to be deployed by the Company under its normal operating procedures. At any time, the Company has the option to repurchase the equipment at fair market value. The lease provides for a substantial residual value guarantee (approximately $165 million) by the Company, which is due upon termination of the lease and which may be satisfied by a cash payment or the exercise of a purchase option by the Company. The equipment sold had a book value of approximately $160 million and the equipment sale resulted in a gain of approximately $40 million that is deferred until the end of the lease. If the Company does not exercise its purchase options under the agreement, the deferred gain will be recognized to the extent it exceeds required payments by the Company under the residual value guarantee and other requirements of the agreement. Previously, in July 1998, the Company completed another $200 million sale and lease back of certain compression equipment. The lease back of the equipment is recorded as an operating lease. Under the agreement, the equipment was sold and leased back by the Company for a 5 year period and will continue to be deployed by the Company under its normal operating procedures. At any time, the Company has the option to repurchase the equipment at fair market value. Both lease agreements call for variable quarterly payments that fluctuate with the London Interbank Borrowing Rate. The following provides future minimum lease payments under the leasing arrangements exclusive of any guarantee payments (in thousands): 1999 -- $7,000; 2000 -- $28,000; 2001 -- $28,000; 2002 -- $28,000; 2003 -- $22,000; 2004 -- $14,000. In July, 1998 and in connection with the 1998 leasing transaction, the Company entered into two-year swap transactions to manage lease rental exposure with notional amounts of $75,000,000 and $125,000,000 and strike rates of 5.51% and 5.56%, respectively. The differential paid or received on the swap transactions is recognized as an adjustment to leasing expense. The counterparty to this contractual arrangement is a major financial institution with which the Company also has other financial relationships. The Company is exposed to credit loss in the event of nonperformance by this counterparty. However, the Company does not anticipate nonperformance by this party and no material loss would be expected from their nonperformance. The fair market value of these interest rate swaps is based on market quotes and is approximately $1 million at September 30,1999. 4. COMMITMENTS AND CONTINGENCIES In the ordinary course of business the Company is involved in various pending or threatened legal actions. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. 5. INDUSTRY SEGMENTS The Company manages its business segments primarily on the type of product or service provided. The Company has four principal industry segments: Rentals - Domestic, Rentals - International, Compressor Fabrication and Production Equipment Fabrication. The Rental segments provide natural gas compression rental and maintenance services to meet specific customer requirements. The Compressor Fabrication segment involves the design, fabrication and sale of natural gas compression units to meet unique customer specifications. The Production Equipment Fabrication segment designs, fabricates and sells equipment utilized in the production of crude oil and natural gas. The Company evaluates the performance of its segments based on segment gross profit. Segment gross profit for each segment includes direct operating expenses. Costs excluded from segment gross profit include selling, general and administrative, depreciation and amortization, leasing, interest and income taxes. Amounts defined as "Other" include sales of assets, results of other insignificant operations, corporate related items primarily related to cash management activities and parts and service operations which are not separately managed. Revenues include sales to external customers and intersegment sales. Intersegment sales are accounted for at cost and are eliminated in consolidation. Identifiable assets are tangible and intangible assets that are identified with the operations of a particular industry segment, or which are allocated when used jointly. The following table presents sales and other financial information by industry segment for the three months ended September 30, 1999 and 1998 (in thousands).
PRODUCTION DOMESTIC INTERNATIONAL COMPRESSOR EQUIPMENT ELIMINA- RENTALS RENTALS FABRICATION FABRICATION OTHER TIONS CONSOLIDATED -------- ------------- ----------- ----------- ----- -------- ------------ September 30, 1999: Revenues from external customers $ 35,777 $ 14,265 $ 16,493 $ 7,733 $ 10,194 - $ 84,462 Intersegment sales - 300 14,194 856 1,412 $ (16,762) - ------------ ------------- ------------ ---------- --------- ---------- ----------- Total revenues 35,777 14,565 30,687 8,589 11,606 (16,762) 84,462 Gross Profit 23,665 10,149 2,708 2,006 4,845 - 43,373 Identifiable assets 466,795 133,545 51,366 23,184 9,090 - 683,980 September 30, 1998: Revenues from external customers $ 27,488 $ 11,046 $ 12,601 $ 11,945 $ 8,716 - $ 71,796 Intersegment sales - 300 17,061 697 2,263 $ (20,321) - ------------ ------------- ------------ ---------- --------- ---------- ----------- Total revenues 27,488 11,346 29,662 12,642 10,979 (20,321) 71,796 Gross Profit 18,510 7,702 1,691 4,198 2,740 - 34,841
The following table presents sales and other financial information by industry segment for the nine months ended September 30, 1999 and 1998 (in thousands).
PRODUCTION DOMESTIC INTERNATIONAL COMPRESSOR EQUIPMENT ELIMINA- RENTALS RENTALS FABRICATION FABRICATION OTHER TIONS CONSOLIDATED -------- ------------- ----------- ----------- ----- -------- ------------ September 30, 1999: Revenues from external customers $ 98,514 $ 39,235 $ 35,441 $ 21,177 $ 28,338 - $ 222,705 Intersegment sales - 900 45,256 2,990 17,955 $ (67,101) - ---------- ------------ ----------- ----------- --------- --------- ----------- Total revenues 98,514 40,135 80,697 24,167 46,293 (67,101) 222,705 Gross Profit 66,119 26,176 6,339 5,513 14,854 - 119,001 September 30, 1998: Revenues from external customers $ 77,874 $ 27,837 $ 44,576 $ 30,052 $ 21,839 - $ 202,178 Intersegment sales - 900 45,726 3,381 6,456 $ (56,463) - ---------- ------------ ----------- ----------- --------- --------- ----------- Total revenues 77,874 28,737 90,302 33,433 28,295 (56,463) 202,178 Gross Profit 50,952 19,279 6,688 10,359 7,937 - 95,215
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain matters discussed in this document are "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as the Company "believes", "anticipates", "expects", "estimates" or words of similar import. Similarly, statements that describe the Company's future plans, objectives or goals are also forward- looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those anticipated as of the date of this report. The risks and uncertainties include (1) the loss of market share through competition, (2) the introduction of competing technologies by other companies, (3) a prolonged substantial reduction in natural gas prices which would cause a decline in the demand for the Company's compression and oil and gas production equipment, (4) new governmental safety, health and environmental regulations which could require significant capital expenditures by the Company and (5) changes in economic or political conditions in the countries in which the Company operates. The forward-looking statements included herein are only made as of the date of this report and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. GENERAL The Company is the market leader in full service natural gas compression and a leading provider of service, fabrication and equipment for contract natural gas handling applications. The Company provides this equipment on a rental, contract compression, maintenance and acquisition leaseback basis. Founded in 1990 and publicly held since 1997, the Company's customers include premier independent and major natural gas production, processing and transportation companies throughout the Western Hemisphere. As of September 30, 1999, the Company operated a fleet of 3,716 compression rental units with an aggregate capacity of approximately 1,345,000 horsepower. On June 15, 1999, the Company completed a $200 million, 5-year lease transaction (the "Equipment Lease") arranged by Chase Securities Inc. The transaction has been structured as a sale and lease back of compression equipment to Hanover Equipment Trust 1999A, a Delaware business trust (the "Trust"). Under the Equipment Lease, the compression equipment was sold to the Trust for $200 million and leased back by the Company for a 5-year period. The compression equipment will continue to be deployed by the Company under its normal operating procedures. Additionally, the Company has the option to repurchase the equipment from the Trust at any time. The lease provides for a residual value guarantee (approximately 83% of the total cost) by the Company, which is due upon termination of the lease and which may be satisfied by a cash payment or the exercise of a purchase option by the Company. The sale of the equipment resulted in a gain of approximately $40 million, which is being deferred until the end of the lease. Proceeds from the Equipment Lease were used to repay borrowings under the Company's existing $200 million revolving credit facility with The Chase Manhattan Bank, as agent (the "Bank Credit Agreement"). RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 REVENUES The Company's total revenues increased by $12.7 million, or 18%, to $84.5 million during the three months ended September 30, 1999 from $71.8 million during the three months ended September 30, 1998. The increase resulted primarily from growth of the Company's natural gas compressor rental fleet but was offset by decreases in production equipment fabrication revenue. Revenues from rentals increased by $11.5 million, or 30%, to $50.0 million during the three months ended September 30, 1999 from $38.5 million during the three months ended September 30, 1998. Domestic revenues from rentals increased by $8.3 million, or 30%, to $35.8 million during the three months ended September 30, 1999 from $27.5 million during the three months ended September 30, 1998. International rental revenues increased by $3.2 million, or 29%, to $14.2 million during the three months ended September 30, 1999 from $11.0 million during the three months ended September 30, 1998. The increase in both domestic and international rental revenue resulted from expansion of the Company's rental fleet. Domestic horsepower in the rental fleet increased by 40% from approximately 791,000 horsepower at September 30, 1998 to approximately 1,104,000 horsepower at September 30, 1999. In addition, international horsepower increased by 61% from approximately 150,000 horsepower at September 30, 1998 to approximately 241,000 horsepower at September 30, 1999. Revenue from parts and service increased by $1.3 million, or 18% to $9.0 million during the three months ended September 30, 1999 from $7.7 million during the three months ended September 30, 1998 primarily due to commissions earned on third party sales and engineering services. Revenues from the fabrication and sale of compressor equipment to third parties increased by $3.9 million, or 31%, to $16.5 million during the three months ended September 30, 1999 from $12.6 million during the three months ended September 30, 1998. During the three months ended September 30, 1999, an aggregate of approximately 76,000 horsepower of compression equipment was fabricated compared to approximately 49,000 horsepower fabricated during the three months ended September 30, 1998. Revenues from the fabrication and sale of production equipment decreased by $4.2 million, or 35%, to $7.7 million during the three months ended September 30, 1999 from $11.9 million during the three months ended September 30, 1998 primarily due to the decline in well completions resulting from lower energy prices in the early part of 1999. EXPENSES Rentals operating expenses increased by $3.9 million, or 32%, to $16.2 million during the three months ended September 30, 1999 from $12.3 million during the three months ended September 30, 1998. The increase resulted primarily from the corresponding 30% increase in revenues from rentals over the corresponding period in 1998. Operating expenses of parts and service decreased by $0.6 million, or 10% to $5.3 million, contrary to the revenue increase, due to the commissions earned on third party sales and engineering services which have lower than normal related expenses. Operating expenses of compressor fabrication increased by $2.9 million, or 26%, to $13.8 million during the three months ended September 30, 1999 from $10.9 million during the three months ended September 30, 1998 commensurate with the corresponding increase in compressor fabrication revenue. The operating expenses attributable to production equipment fabrication decreased by $2.0 million, or 26%, to $5.7 million during the three months ended September 30, 1999 from $7.7 million during the three months ended September 30, 1998, resulting from the decrease in revenue from production equipment fabrication as previously discussed. Selling, general and administrative expenses increased $1.8 million, or 25%, to $8.9 million during the three months ended September 30, 1999 from $7.1 million during the three months ended September 30, 1998. The increase resulted from the increased activity in the Company's rentals business segments as described above. The Company believes that earnings before interest, leasing expense, taxes, depreciation and amortization (EBITDA) is a standard measure of financial performance used for valuing companies in the compression industry. EBITDA is a useful common 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 bulk of which are long-lived assets in the compression industry), or what their tax attributes may be. Additionally, since EBITDA is a basic source of funds not only for growth but to service indebtedness, lenders in both the private and public debt markets use EBITDA as a primary determinant of borrowing capacity. EBITDA for the three months ended September 30, 1999 increased 24% to $34.5 million from $27.8 million for the three months ended September 30, 1998 primarily due to the increase in the Company's rental revenue. Depreciation and amortization decreased by $0.4 million to $9.1 million during the three months ended September 30, 1999 compared to $9.5 million during the three months ended September 30, 1998 due to the Equipment Leases entered into in July, 1998 and June, 1999. Interest expense decreased by $0.5 million to $1.8 million during the three months ended September 30, 1999 from $2.3 million for the three months ended September 30, 1998. The Company incurred leasing expense of $7.1 million during the three months ended September 30, 1999 compared to $2.8 million during the three months ended September 30, 1998 resulting from the Equipment Leases entered into in July, 1998 and June, 1999. The Company expects to incur annual operating lease expense of approximately $28 million, an amount equivalent to the annual interest expense of the Bank Credit Agreement that was repaid with the proceeds of the sale of the compression equipment to the Trust. INCOME TAXES The provision for income taxes increased by $1.0 million, or 20%, to $6.1 million during the three months ended September 30, 1999 from $5.1 million during the three months ended September 30, 1998. The increase resulted primarily from the corresponding increase in income before taxes. The average effective income tax rates during the three months ended September 30, 1999 and 1998 were 37% and 39%, respectively. The decrease in average effective income tax rates is due to expected benefits from a foreign sales corporation established in 1998. NET INCOME Net income increased $2.4 million, or 29%, to $10.4 million during the three months ended September 30, 1999 from $8.0 million during the three months ended September 30, 1998 for the reasons discussed above. NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 REVENUES The Company's total revenues increased by $20.5 million, or 10%, to $222.7 million during the nine months ended September 30, 1999 from $202.2 million during the nine months ended September 30, 1998. The increase resulted both from growth of the Company's natural gas compressor rental fleet but was offset by decreases in compressor fabrication and production equipment fabrication revenues. Revenues from rentals increased by $32.0 million, or 30%, to $137.7 million during the nine months ended September 30, 1999 from $105.7 million during the nine months ended September 30, 1998. Domestic revenues from rentals increased by $20.6 million, or 27%, to $98.5 million during the nine months ended September 30, 1999 from $77.9 million during the nine months ended September 30, 1998. International revenues from rentals and maintenance increased by $11.4 million, or 41%, to $39.2 million during the nine months ended September 30, 1999 from $27.8 million during the nine months ended September 30, 1998. The increase in both domestic and international rental and maintenance revenues resulted primarily from expansion of the Company's rental fleet. Revenue from parts and service increased by $3.1 million, or 17% to $21.4 million during the nine months ended September 30, 1999 from $18.3 million during the nine months ended September 30, 1998. Revenues from the fabrication and sale of compressor equipment to third parties decreased by $9.1 million, or 20%, to $35.5 million during the nine months ended September 30, 1999 from $44.6 million during the nine months ended September 30, 1998. During the nine months ended September 30, 1999, an aggregate of approximately 194,000 horsepower of compression equipment was fabricated compared to 164,000 horsepower for the nine months ended September 30, 1998. The Company believes the revenue decrease during the nine month period is due in part to a project where a customer supplied its own engines which are typically provided by the Company and in part to lower energy prices earlier in 1999 which reduced the demand for compressors. Revenues from the fabrication and sale of production equipment decreased by $8.9 million, or 30%, to $21.2 million during the nine months ended September 30, 1999 from $30.1 million during the nine months ended September 30, 1998 primarily due to the decline in well completions resulting from lower energy prices during the first half of 1999. The Company recognized gains on sales of assets of $4.8 million during the nine months ended September 30, 1999 compared to $2.1 million during the nine months ended September 30, 1998. The increase is primarily due to the increase in horsepower sold from the rental fleet to customers exercising options to purchase equipment they previously had rented. For the nine months ended September 30, 1999, the Company sold approximately 26,400 horsepower compared to 12,000 horsepower for the nine months ended September 30, 1998. EXPENSES Rentals operating expenses increased by $10.0 million, or 28%, to $45.5 million during the nine months ended September 30, 1999 from $35.5 million during the nine months ended September 30, 1998. The increase resulted primarily from the corresponding 30% increase in revenues from rentals over the corresponding period in 1998. Operating expenses of parts and service decreased by $.4 million, or 3% to $13.5 million, contrary to the revenue increase, due to the commissions earned on third party sales, sale of engines and engineering services which have lower than normal related expenses. Operating expenses of compressor fabrication decreased by $8.8 million, or 23%, to $29.1 million during the nine months ended September 30, 1999 from $37.9 million during the nine months ended September 30, 1998. This expense decrease was a result of the corresponding decrease in compressor fabrication revenue. In addition, the operating expenses attributable to production equipment fabrication decreased by $4.0 million, or 21%, to $15.7 million during the nine months ended September 30, 1999 from $19.7 million during the nine months ended September 30, 1998, resulting from the decrease in revenue from the production equipment fabrication as previously discussed. Selling, general and administrative expenses increased $4.4 million, or 22%, to $24.2 million during the nine months ended September 30, 1999 from $19.8 million during the nine months ended September 30, 1998. The increase in these expenses resulted from the increased activity in the Company's rental and maintenance business segment as described above. Depreciation and amortization was $28.5 million during the nine months ended September 30, 1999 compared to $28.6 million during the nine months ended September 30, 1998. The decrease in depreciation as a result of the equipment leases entered into in July 1998 and June 1999 was offset by the increase in depreciation on the additions to the rental fleet. Interest expense decreased by $1.4 million, or 15%, to $7.8 million during the nine months ended September 30, 1999 from $9.2 million during the nine months ended September 30, 1998. The decrease in interest expense resulted from the Equipment Leases entered into in July 1998 and June 1999. The Company incurred leasing expense of $14.7 million during the nine months ended September 30, 1999 compared to $2.8 million during the nine months ended September 30, 1998. INCOME TAXES The provision for income taxes increased by $2.7 million, or 20%, to $16.2 million during the nine months ended September 30, 1999 from $13.5 million during the nine months ended September 30, 1998. The increase resulted primarily from the corresponding increase in income before taxes. The effective income tax rates during the nine months ended September 30, 1999 and 1998 were 37% and 39%, respectively. The decrease in average effective income rates is due to expected benefits from a foreign sales corporation established in 1998. NET INCOME Net income increased $6.2 million, or 29%, to $27.5 million during the nine months ended September 30, 1999 from $21.3 million during the nine months ended September 30, 1998 for the reasons discussed above. LIQUIDITY AND CAPITAL RESOURCES The Company has historically utilized internally generated funds and equity and debt financing to finance the growth of its compressor fleet and maintain sufficient compression and production equipment inventory. Capital expenditures for property, plant and equipment were $200.8 million for the nine months ended September 30, 1999 as compared to $119.4 million for the nine months ended September 30, 1998 as the Company has pursued acquisition leaseback opportunities where energy producers outsource their compression service needs. For the nine months ended September 30, 1999, the company has spent approximately $67.4 million related to acquisition leasebacks as compared to $14.7 million during the nine months ended September 30, 1998. In addition, the company utilized $35.3 million to acquire the stock of certain businesses and the related assets and liabilities. The proceeds from the 1999 Equipment Lease agreement were used to repay borrowings under the Bank Credit Agreement. As a result of the 1999 Lease Transaction, the Company has approximately $99 million of availability under the Credit Facility. The Company believes its available Credit Facility plus available cash and internally generated funds will be sufficient to fund its anticipated level of remaining 1999 capital expenditures estimated to be approximately $60 million. IMPACT OF THE YEAR 2000 Many computer systems, software products and other equipment utilize microprocessors in which the year is represented by only two digit entries, as "19" is inferred to be the century. Date sensitive software may interpret a date using "00" as the year 1900 rather than the year 2000, which could disrupt operations due to systems failures or software miscalculations. These date fields need to accept four digit entries to distinguish dates beginning in the year 2000. Issues related to this situation are commonly referred to as "Year 2000 issues". Primarily to accommodate its growth, the Company continues to install various modifications or upgrade existing computer software and hardware. These hardware and software upgrades accommodate Year 2000 issues. The costs associated with the software modifications are being incurred in the ordinary course of business and are not expected to be material in relation to either future operating results, cash flows or financial condition. The Company has completed substantially all critical hardware and software upgrades related to Year 2000 issues. The Company has reviewed its machinery and equipment operation and believes that none of the significant machinery and equipment utilized in its core operations is dependent on microprocessors which may be materially affected by Year 2000 complications. The Company is finalizing communications with its significant customers, suppliers and vendors to ensure that those parties have appropriate plans to address Year 2000 issues where they may otherwise impact the operations of the Company. There is inherent uncertainty related to Year 2000 issues due to the possibility of failures by third party customers, suppliers and vendors, which cannot be anticipated. The Company cannot guarantee the systems of other companies on which it relies will be converted timely and will not have a material adverse effect on the Company's operations, cash flows or financial position. The Company has limited contingency plans in place to address possible interruptions specific to certain operations resulting from third party failures. ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to interest rate and foreign currency risk. The Company periodically enters into interest rate swaps to manage its exposure to fluctuations in interest rates. At September 30, 1999, the fair market value of these interest rate swaps is approximately $1.0 million. The Company does not use derivative financial instruments to mitigate foreign currency risk. PART II. OTHER INFORMATION Item 6: Exhibits and reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports submitted on Form 8-K; none. All other items specified by Part II of this report are inapplicable and have been omitted. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HANOVER COMPRESSOR COMPANY Date: November 12, 1999 By: /s/ Michael J. McGhan ______________________________________ Michael J. McGhan President and Chief Executive Officer Date: November 12, 1999 By: /s/ Curtis A. Bedrich ______________________________________ Curtis A. Bedrich Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
5 THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HANOVER COMPRESSOR COMPANY FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 SEP-30-1999 9,090 0 89,421 1,933 66,078 190,388 499,391 72,864 683,980 60,522 0 0 0 271,633 77,181 683,980 24,226 84,462 19,512 66,169 0 0 1,804 16,489 6,101 10,388 0 0 0 10,388 0.36 0.34
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