<PAGE>
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.
<PAGE>
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.
<PAGE>
HANOVER COMPRESSOR COMPANY
CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
(in thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------- ----------------------
1999 1998 1999 1998
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
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
-------- -------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>
HANOVER COMPRESSOR COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(in thousands of dollars)
<TABLE>
<CAPTION>
Nine Months
ended September 30,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
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 -
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>
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
======= =======
<PAGE>
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,
<PAGE>
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).
<TABLE>
<CAPTION>
PRODUCTION
DOMESTIC INTERNATIONAL COMPRESSOR EQUIPMENT ELIMINA-
RENTALS RENTALS FABRICATION FABRICATION OTHER TIONS CONSOLIDATED
-------- ------------- ----------- ----------- ----- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
The following table presents sales and other financial information by
industry segment for the nine months ended September 30, 1999 and 1998 (in
thousands).
<TABLE>
<CAPTION>
PRODUCTION
DOMESTIC INTERNATIONAL COMPRESSOR EQUIPMENT ELIMINA-
RENTALS RENTALS FABRICATION FABRICATION OTHER TIONS CONSOLIDATED
-------- ------------- ----------- ----------- ----- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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".
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,090
<SECURITIES> 0
<RECEIVABLES> 89,421
<ALLOWANCES> 1,933
<INVENTORY> 66,078
<CURRENT-ASSETS> 190,388
<PP&E> 499,391
<DEPRECIATION> 72,864
<TOTAL-ASSETS> 683,980
<CURRENT-LIABILITIES> 60,522
<BONDS> 0
0
0
<COMMON> 271,633
<OTHER-SE> 77,181
<TOTAL-LIABILITY-AND-EQUITY> 683,980
<SALES> 24,226
<TOTAL-REVENUES> 84,462
<CGS> 19,512
<TOTAL-COSTS> 66,169
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,804
<INCOME-PRETAX> 16,489
<INCOME-TAX> 6,101
<INCOME-CONTINUING> 10,388
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,388
<EPS-BASIC> 0.36
<EPS-DILUTED> 0.34
</TABLE>
