<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 JUNE 30, 2000
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 76-0625124
(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 August 11, 2000 there were 62,864,191 shares of the Company's common
stock, $0.001 par value, outstanding.
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANOVER COMPRESSOR COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
(in thousands of dollars, except for par value and share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,746 $ 5,756
Accounts receivable trade, net 127,993 93,715
Inventory 101,252 66,562
Costs and estimated earnings in excess of billings
on uncompleted contracts 24,157 4,782
Prepaid taxes 17,054 16,430
Other current assets 13,674 5,287
--------------- ---------------
Total current assets 297,876 192,532
--------------- ---------------
Property, plant and equipment:
Compression equipment and facilities 545,885 520,403
Land and buildings 27,316 19,000
Transportation and shop equipment 35,019 27,616
Other 12,778 10,029
--------------- ---------------
620,998 577,048
Accumulated depreciation (96,672) (79,583)
--------------- ---------------
Net property, plant and equipment 524,326 497,465
--------------- ---------------
Intangible and other assets 139,742 66,513
--------------- ---------------
$ 961,944 $ 756,510
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 16,909 $ 15,967
Accounts payable, trade 41,489 32,308
Accrued liabilities 21,373 22,065
Advance billings 13,891 13,328
Billings on uncompleted contracts in excess of
costs and estimated earnings 5,173 898
--------------- ---------------
Total current liabilities 98,835 84,566
Long-term debt 71,545 69,681
Other liabilities 114,219 80,549
Deferred income taxes 76,732 66,307
--------------- ---------------
Total liabilities 361,331 301,103
--------------- ---------------
Mandatorily redeemable convertible preferred securities 86,250 86,250
Commitments and contingencies
Common stockholders' equity:
Common stock, $.001 par value; 200 million shares authorized;
62,773,539 and 57,505,874 shares issued and
outstanding, respectively 63 57
Additional paid-in capital 391,974 272,945
Notes receivable - employee stockholders (1,949) (3,387)
Accumulated other comprehensive loss (476) (311)
Retained earnings 125,377 101,439
Treasury stock - 66,144 and 167,394 common shares respectively,
at cost (626) (1,586)
--------------- ---------------
Total common stockholders' equity 514,363 369,157
--------------- ---------------
$ 961,944 $ 756,510
=============== ===============
</TABLE>
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 Six months
ended June 30, ended June 30,
-------------------------- -------------------------
2000 1999 2000 1999
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rentals $ 57,797 $ 45,273 $ 113,901 $ 87,707
Parts and service 19,565 7,732 29,699 12,363
Compressor fabrication 14,986 11,707 29,171 18,948
Production and processing equipment fabrication 15,186 7,558 21,111 13,444
Gain on sale of property, plant and equipment 3,412 269 4,698 3,736
Other 3,231 1,260 5,308 2,045
------------ ----------- ----------- -----------
114,177 73,799 203,888 138,243
------------ ----------- ----------- -----------
Expenses:
Rentals 20,690 15,252 38,841 29,226
Parts and service 13,138 4,711 20,498 8,135
Compressor fabrication 12,483 9,660 23,874 15,317
Production and processing equipment fabrication 11,935 5,495 16,418 9,937
Selling, general and administrative 10,899 7,984 20,014 15,381
Depreciation and amortization 12,292 10,237 22,651 19,450
Leasing expense 10,060 4,074 18,136 7,584
Interest expense 1,005 2,923 2,635 6,037
Distributions on mandatorily redeemable
convertible preferred securities 1,592 0 3,183 0
------------ ----------- ----------- -----------
94,094 60,336 166,250 111,067
------------ ----------- ----------- -----------
Income before income taxes 20,083 13,463 37,638 27,176
Provision for income taxes 7,310 4,981 13,700 10,055
------------ ----------- ----------- -----------
Net income 12,773 8,482 23,938 17,121
------------ ----------- ----------- -----------
Other comprehensive loss, net of tax:
Foreign currency translation adjustment (9) (72) (165) (381)
------------ ----------- ----------- -----------
Comprehensive income $ 12,764 $ 8,410 $ 23,773 $ 16,740
============ =========== =========== ===========
Net income available to common stockholders $ 12,773 $ 8,482 $ 23,938 $ 17,121
============ =========== =========== ===========
Weighted average common and common
equivalent shares outstanding:
Basic 59,594 56,942 58,504 56,906
------------ ----------- ----------- -----------
Diluted 64,396 60,886 63,689 60,640
------------ ----------- ----------- -----------
Earnings per common share:
Basic $ 0.21 $ 0.15 $ 0.41 $ 0.30
------------ ----------- ----------- -----------
Diluted $ 0.20 $ 0.14 $ 0.38 $ 0.28
------------ ----------- ----------- -----------
</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>
Six Months
ended June 30,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 23,938 $ 17,121
Adjustments:
Depreciation and amortization 22,651 19,450
Amortization of debt issuance costs and debt discount 320 357
Bad debt expense 495 326
Gain on sale of ownership interests and property, plant
and equipment (6,831) (3,736)
Equity in income of nonconsolidated affiliates (1,498) (377)
Deferred income taxes 8,610 6,378
Changes in assets and liabilities excluding the impact of
business acquisitions:
Accounts receivable (12,524) (7,819)
Inventory (26,356) (3,812)
Costs and estimated earnings in excess of billings on
uncompleted contracts (10,731) (291)
Accounts payable and other liabilities (3,203) (6,647)
Other current assets (5,196) (181)
Other (1,167) (4,029)
----------- -----------
Net cash provided by (used in) operating activities (11,492) 16,740
----------- -----------
Cash flows from investing activities:
Cash used for business acquisitions, net (25,438) -
Capital expenditures (129,864) (117,825)
Investment in nonconsolidated subsidiaries (4,580) -
Cash returned from unconsolidated subsidiaries - 8,000
Proceeds from sale of property, plant and equipment 116,808 216,867
----------- -----------
Net cash provided by (used in) investing activities (43,074) 107,042
----------- -----------
Cash flows from financing activities:
Net borrowings (repayment) on revolving credit facility 900 (117,500)
Repayments of shareholder notes 1,669 193
Issuance of common stock, net 59,400 -
Proceeds from warrant conversions and stock option exercises 1,047 80
Repayment of long-term debt (393) (234)
----------- -----------
Net cash provided by (used in) financing activities 62,623 (117,461)
----------- -----------
Effect of exchange rate changes on cash and equivalents (67) (32)
----------- -----------
Net increase in cash and cash equivalents 7,990 6,289
Cash and cash equivalents at beginning of period 5,756 11,503
----------- -----------
Cash and cash equivalents at end of period $ 13,746 $ 17,792
=========== ===========
Supplemental disclosure of cash flow information:
Common stock issued in exchange for note
receivable $ $ 752
Property and ownership interests sold in exchange for
note receivable $ 2,783 $ 2,427
Acquisitions of businesses:
Property, plant and equipment acquired $ 8,274 $
Other noncash assets acquired $ 98,024 $
Liabilities assumed $ (21,270) $
Deferred taxes $ (1,815) $
Common and treasury stock issued $ (57,775) $
</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 for the year ended
December 31, 1999. These interim results are not necessarily indicative of
results for a full year.
In December 1999, the Company issued $86,250,000 of unsecured 7.25%
Mandatorily Redeemable Convertible Preferred Securities (the "Preferred
Securities") through Hanover Compressor Capital Trust, a wholly owned finance
subsidiary of the Company. The Company has fully and unconditionally guaranteed
the Preferred Securities.
STOCK SPLIT
In June 2000, the Company completed a 2 for 1 stock split effected in the
form of a 100% stock dividend. All common stock, additional paid-in capital and
earnings per common share information has been restated for all periods
presented to reflect this stock split.
STOCK OFFERING
In May 2000, the Company completed a private placement of 2 million newly
issued shares of restricted common stock to an institutional investor.
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 4,635,000 and 3,000,000 and warrants of 551,000 and
734,000 for the six months ended June 30, 2000 and 1999, respectively. The
mandatorily redeemable convertible preferred securities were excluded from
diluted shares because they were antidilutive.
2. BUSINESS COMBINATIONS
In June 2000, the Company purchased the stock of Applied Processing
Solutions, Inc. for approximately 2,300,000 restricted shares of Hanover Common
stock. The acquisition was accounted for under the purchase method of accounting
and resulted in the recognition of approximately $47 million in goodwill.
The pro forma information set forth below assumes that the acquisitions
completed in 2000 and 1999 are accounted for as if the purchases had occurred at
the beginning of 1999. The pro forma information is presented for informational
purposes only and is not necessarily indicative of the results of operations
that would have been achieved had the acquisitions been consummated at that time
(in thousands, except per share amounts):
Six Months Ended June 30,
-------------------------
2000 1999
----------- -----------
(unaudited) (unaudited)
Revenue $242,855 $173,391
Net income 25,103 17,587
Earnings per common share - basic 0.42 0.30
Earnings per common share - diluted $ 0.38 $ 0.28
3. INVENTORIES
Inventory consisted of the following amounts (in thousands):
June 30, December 31,
2000 1999
-------- -------
Parts and supplies $ 66,709 $44,058
Work in progress 29,237 18,677
Finished goods 5,306 3,827
-------- -------
$101,252 $66,562
======== =======
<PAGE>
4. GAINS ON SALES OF ASSETS AND OWNERSHIP INTERESTS IN SUBSIDIARIES
In June 2000, the Company sold a 25 percent undivided ownership interest in
a power generation plant owned by the Company to a third party for $5 million.
The transaction resulted in a gain on sale of approximately $1.3 million which
was recorded in Gain on Sale of Assets in the condensed consolidated statement
of income and comprehensive income. Also in June 2000, the Company sold 50% of
the common stock of its wholly owned Venezuelan subsidiary, Servicompressores,
to a third party for approximately $3.1 million. The sale price was paid
$350,000 in cash and approximately $2.8 million in a note receivable from the
purchaser. The resulting gain of approximately $2.1 million was recorded in
Other Revenues in the condensed consolidated statement of income and
comprehensive income.
5. SALES AND LEASE BACK OF EQUIPMENT
Previously, in March 2000, the Company completed a $200 million sale and
lease back of certain compression equipment. Under the agreement, the Company
received $100 million proceeds from the sale of compression equipment at closing
and may sell an additional $100 million of compression equipment during the next
twelve months. In June 1999 and in July 1998 the Company completed two other
separate $200 million sale and lease back transactions of certain compression
equipment. The lease agreements call for variable quarterly payments that
fluctuate with the London Interbank Borrowing Rate. The following future minimum
lease payments are due under the leasing arrangements exclusive of any guarantee
payments (in thousands): 2000 -- $19,100; 2001 --$38,800; 2002 -- $39,400;
2003 -- $31,800; 2004 -- $16,100; 2005 - $2,000.
In July 1998 and in connection with the 1998 leasing transaction, the
Company entered into 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 $3.1 million at June 30, 2000.
6. 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.
7. REPORTABLE SEGMENTS
The Company manages its business segments primarily on the type of product
or service provided. The Company has four principal reportable 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,
<PAGE>
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 and processing 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 property, plant and
equipment, 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 reportable
segment, or which are allocated when used jointly.
The following table presents sales and other financial information by
reportable segment for the three months ended June 30, 2000 and 1999 (in
thousands).
<TABLE>
<CAPTION>
PRODUCTION
DOMESTIC INTERNATIONAL COMPRESSOR EQUIPMENT ELIMINAT- CONSOLI-
RENTALS RENTALS FABRICATION FABRICATION OTHER IONS DATED
---------- ------------- ----------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
June 30, 2000:
Revenues from
external
customers $ 39,020 $ 18,777 $ 14,986 $ 15,186 $ 26,208 - $ 114,177
Intersegment
sales - 300 26,550 1,127 15,804 $ (43,781) -
--------- ------------- ----------- ----------- ---------- ---------- -----------
Total revenues 39,020 19,077 41,536 16,313 42,012 (43,781) 114,177
Gross Profit 25,135 11,972 2,503 3,251 13,070 - 55,931
Identifiable
assets 645,358 163,268 46,955 92,617 13,746 - 961,944
June 30,1999:
Revenues from
external
customers $ 32,537 $ 12,736 $ 11,707 $ 7,558 $ 9,261 - $ 73,799
Intersegment
sales - 300 12,143 1,536 9,902 $ (23,881) -
--------- ------------- ----------- ----------- ---------- ---------- -----------
Total revenues 32,537 13,036 23,850 9,094 19,163 (23,881) 73,799
Gross Profit 21,977 8,044 2,047 2,063 4,550 - 38,681
</TABLE>
The following table presents sales and other financial information by
reportable segment for the six months ended June 30, 2000 and 1999 (in
thousands).
<TABLE>
<CAPTION>
PRODUCTION
DOMESTIC INTERNATIONAL COMPRESSOR EQUIPMENT ELIMINAT- CONSOLI-
RENTALS RENTALS FABRICATION FABRICATION OTHER IONS DATED
---------- ------------- ----------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
June 30, 2000:
Revenues from
external
customers $ 77,228 $ 36,673 $ 29,171 $ 21,111 $ 39,705 - $ 203,888
Intersegment
sales - 600 52,303 1,747 21,296 $ (75,946) -
--------- ------------- ----------- ----------- ---------- ---------- -----------
Total revenues 77,228 37,273 81,474 22,858 61,001 (75,946) 203,888
Gross Profit 51,042 24,018 5,297 4,693 19,207 - 104,257
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
June 30,1999:
Revenues from
external
customers $ 62,737 $ 24,970 $ 18,948 $ 13,444 $ 18,144 - $ 138,243
Intersegment
sales - 600 31,062 2,134 16,543 $ (50,339) -
--------- ------------- ----------- ----------- ---------- ---------- -----------
Total revenues 62,737 25,570 50,010 15,578 34,687 (50,339) 138,243
Gross Profit 42,454 16,027 3,631 3,507 10,009 - 75,628
</TABLE>
8. SUBSEQUENT EVENTS
In July 2000, the Company completed its acquisition of Stewart and Stevenson
Services' natural gas compressor leasing business for approximately $60 million
in cash and notes payable. Under terms of the agreement, the Company purchased
gas compression equipment and related support operations from Stewart &
Stevenson, and Stewart & Stevenson will refer subsequent compression leasing
business to the Company.
In July 2000, the Company executed a definitive agreement to acquire the
Dresser Rand compression services division from Ingersoll-Rand Company for $190
million. Under the terms of the agreement, half of the purchase price will be in
cash with the balance paid in newly issued restricted Hanover common stock. It
is anticipated that the transaction, which is subject to required regulatory
approvals, will be completed in the third quarter of this year.
In July 2000, the Company and OEC Compression Corporation signed a
definitive merger agreement pursuant to which the Company will acquire OEC
Compression Corporation in an all-stock transaction. The transaction is subject
to approval by OEC shareholders and required regulatory approvals. The
transaction is expected to close in the fourth quarter of this year.
In August 2000, the Company completed a $100 million sale and leaseback of
certain compression equipment pursuant to the agreement entered into in March
2000. See Note 5.
<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 oil and gas prices which would cause a decline in the demand for
the Company's compression and oil and gas production and processing equipment,
(4) new governmental safety, health and environmental regulations which could
require significant capital expenditures by the Company; (5) inability to
successfully integrate businesses acquired; and (6) 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 a market leader in full-service natural gas compression and
a leading provider of contract natural gas handling service, fabrication and
equipment. 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 June 30, 2000, the Company operated a
fleet of 4,116 compression rental units with an aggregate capacity of
approximately 1,585,000 horsepower.
In June 2000, the Company acquired Applied Process Solutions, Inc. ("APSI")
for approximately 2,300,000 newly issued shares of the Company's common stock.
The results of operations from APSI have been included from the date of
acquisition. In addition, the Company completed a 2 for 1 stock split effected
in the form of a 100% stock dividend in June 2000. Accordingly, common stock,
additional paid-in capital and all earnings per share information have been
restated for all periods presented.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 Compared To Three Months Ended June 30, 1999
Revenues
The Company's total revenues increased by $40.4 million, or 55%, to $114.2
million during the three months ended June 30, 2000 from $73.8 million during
the three months ended June 30, 1999. The
<PAGE>
increase resulted primarily from growth of the Company's natural gas compressor
rental fleet as well as increases in both parts and service revenue and
compressor fabrication revenue.
Revenues from rentals increased by $12.5 million, or 28%, to $57.8 million
during the three months ended June 30, 2000 from $45.3 million during the three
months ended June 30, 1999. Domestic revenues from rentals increased by $6.4
million, or 20%, to $39.0 million during the three months ended June 30, 2000
from $32.6 million during the three months ended June 30, 1999. International
rental revenues increased by $6.1 million, or 47%, to $18.8 million during the
three months ended June 30, 2000 from $12.7 million during the three months
ended June 30, 1999. The increase in both domestic and international rental
revenues resulted from expansion of the Company's rental fleet. At June 30,
2000, the compressor rental fleet consisted of approximately 1,585,000
horsepower, a 26% increase over the 1,258,000 horsepower in the rental fleet at
June 30, 1999. Domestic horsepower in the rental fleet increased by 21% to
1,269,000 horsepower at June 30, 2000 from approximately 1,046,000 horsepower at
June 30, 1999. In addition, international horsepower increased by 49% to
316,000 horsepower at June 30, 2000 from approximately 212,000 horsepower at
June 30, 1999.
Revenues from parts and service increased by $11.9 million, or 153% to
$19.6 million during the three months ended June 30, 2000 from $7.7 million
during the three months ended June 30, 1999. This increase was due primarily to
increased marketing focus and partially from expansion of business activities
through recent acquisitions. Revenues from compressor fabrication increased by
$3.3 million, or 28%, to $15.0 million during the three months ended June 30,
2000 from $11.7 million during the three months ended June 30, 1999. During the
three months ended June 30, 2000, an aggregate of approximately 75,000
horsepower of compression equipment was fabricated compared to approximately
65,000 horsepower fabricated during the three months ended June 30, 1999. The
increase in horsepower produced during the three months ended June 30, 2000
resulted from an increased demand for compression equipment due to higher
natural gas prices.
Revenues from production and processing equipment fabrication increased by
$7.6 million, or 101%, to $15.2 million during the three months ended June 30,
2000 from $7.6 million during the three months ended June 30, 1999. The increase
was due primarily to the acquisition of APSI during June, 2000.
The Company recognized gains on sales of property, plant and equipment of
$3.4 million during the three months ended June 30, 2000 compared to $.3 million
during the three months ended June 30, 1999. The increase was due primarily to
the sale of 25% undivided interest in a power generation plant owned by the
Company. In addition, the Company sold approximately 7,600 horsepower during the
three months ended June 30, 2000 compared to 4,000 horsepower during the three
months ended June 30, 1999.
Other income during the three months ended June 30, 2000 amounted to $3.2
million compared to $1.3 million during the three months ended June 30, 1999, an
increase of $1.9 million or 156%. The increase was due to the sale of 50% of
Company's ownership interest in a consolidated subsidiary for cash and notes
receivable resulting in a gain on disposition of approximately $2.1 million.
<PAGE>
Expenses
Operating expenses of the rental segments increased by $5.4 million, or
36%, to $20.7 million during the three months ended June 30, 2000 from $15.3
million during the three months ended June 30, 1999. The increase resulted
primarily from the corresponding 28% increase in revenues from rentals over the
corresponding period in 1999. The gross profit percentage from rentals was 64%
during the three months ended June 30, 2000 and 66% during the three months
ended June 30, 1999. Operating expenses of parts and service increased by $8.4
million, or 179% to $13.1 million, which relates to the 153% increase in parts
and service revenue. The gross profit margin from parts and service was 33%
during the three months ended June 30, 2000 from 39% during the three months
ended June 30, 1999. Operating expenses of compressor fabrication increased by
$2.8 million, or 29%, to $12.5 million during the three months ended June 30,
2000 from $9.7 million during the three months ended June 30, 1999 commensurate
with the corresponding increase in compressor fabrication revenue. The gross
profit margin on compression fabrication was 17% during the three months ended
June 30, 2000 and 18% during the three months ended June 30, 1999. The operating
expenses attributable to production and processing equipment fabrication
increased by $6.4 million, or 117%, to $11.9 million during the three months
ended June 30, 2000 from $5.5 million during the three months ended June 30,
1999. The gross profit margin attributable to production and processing
equipment fabrication was 21% during the three months ended June 30, 2000 and
was 27% during the three months ended June 30, 1999. The decrease in gross
profit margin for production and processing equipment fabrication was
attributable to the acquisition of APSI which has lower gross margins than the
Company has historically experienced.
Selling, general and administrative expenses increased $2.9 million, or
37%, to $10.9 million during the three months ended June 30, 2000 from $8.0
million during the three months ended June 30, 1999. The increase was
attributable to increased personnel and other administrative and selling
expenses associated with increased activity in the Company's rentals, parts and
service and compressor equipment fabrication business segments as described
above as well as recent acquisitions.
The Company believes that earnings before interest, leasing expense,
distributions on mandatorily redeemable convertible preferred securities, income
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
June 30, 2000 increased 47% to $45.0 million from $30.7 million for the three
months ended June 30, 1999 primarily due to the increase in the Company's rental
revenue for reasons previously discussed. EBITDA should not be considered in
isolation from, or a substitute for, net income, cash flows from operating
activities or other consolidated income or cash flow data prepared in accordance
with generally accepted accounting principles.
<PAGE>
Depreciation and amortization increased by $2.1 million to $12.3 million
during the three months ended June 30, 2000 compared to $10.2 million during the
three months ended June 30, 1999. The increase in depreciation was due to the
additions to the rental fleet which were partially offset by the sale of
compressor equipment in the Equipment Leases (As defined below under "LIQUIDITY
AND CAPITAL RESOURCES").
The Company incurred leasing expense of $10.1 million during the three
months ended June 30, 2000 compared to $4.1 million during the three months
ended June 30, 1999 resulting from the Equipment Leases entered into in June
1999 and March 2000.
Interest expense decreased by $1.9 million to $1.0 million during the three
months ended June 30, 2000 from $2.9 million for the three months ended June 30,
1999. The decrease in interest expense was due in part to utilization of
proceeds from the Equipment Lease and proceeds from private stock offering which
were used to reduce indebtedness under the Bank Credit Agreement.
Income Taxes
The provision for income taxes increased by $2.3 million, or 47%, to $7.3
million during the three months ended June 30, 2000 from $5.0 million during the
three months ended June 30, 1999. The increase resulted primarily from the
corresponding increase in income before income taxes. The average effective
income tax rates during the three months ended June 30, 2000 and 1999 were 36.4%
and 37.0%, respectively.
Net Income
Net income increased $4.3 million, or 51%, to $12.8 million during the
three months ended June 30, 2000 from $8.5 million during the three months ended
June 30, 1999 for the reasons discussed above.
Six months Ended June 30, 2000 Compared To Six months Ended June 30, 1999
Revenues
The Company's total revenues increased by $65.7 million, or 48%, to $203.9
million during the six months ended June 30, 2000 from $138.2 million during the
six months ended June 30, 1999. The increase resulted primarily from growth of
the Company's natural gas compressor rental fleet as well as increases in both
parts and service revenue and compressor fabrication revenue.
Revenues from rentals increased by $26.2 million, or 30%, to $113.9 million
during the six months ended June 30, 2000 from $87.7 million during the six
months ended June 30, 1999. Domestic revenues from rentals increased by $14.5
million, or 23%, to $77.2 million during the six months ended June 30, 2000 from
$62.7 million during the six months ended June 30, 1999. International rental
revenues increased by $11.7 million, or 47%, to $36.7 million during the six
months ended June 30, 2000 from
<PAGE>
$25.0 million during the six months ended June 30, 1999. The increase in both
domestic and international rental revenue resulted from expansion of the
Company's rental fleet.
Revenue from parts and service increased by $17.3 million, or 140% to $29.7
million during the six months ended June 30, 2000 from $12.4 million during the
six months ended June 30, 1999. The increase was due in part to increased
marketing focus and through expansion of business through recent acquisitions.
Revenues from compressor fabrication increased by $10.3 million, or 54%, to
$29.2 million during the six months ended June 30, 2000 from $18.9 million
during the six months ended June 30, 1999. During the six months ended June 30,
2000, an aggregate of approximately 141,000 horsepower of compression equipment
was fabricated compared to approximately 119,000 horsepower fabricated during
the six months ended June 30, 1999. The increase in horsepower produced during
the six months ended June 30, 2000 resulted from an increased demand for
compression equipment due to higher natural gas prices. In addition, during the
six months ended June 30, 1999 a customer supplied its engines for a project
which are typically provided by the Company, which lowered revenues from third
party sales without reducing the amount of horsepower fabricated during that
quarter.
Revenues from production and processing equipment fabrication increased by
$7.7 million, or 57% to $21.1 million during the six months ended June 30, 2000
from $13.4 million during the six months ended June 30, 1999. The increase is
due primarily to the acquisition of APSI during June, 2000.
The Company recognized gains on sales of property, plant and equipment of
$4.7 million during the six months ended June 30, 2000 compared to $3.7 million
during the six months ended June 30, 1999. The increase is due primarily to the
sale of a 25% undivided interest in a power generation plant owned by the
Company. In addition, the Company sold approximately 15,000 horsepower during
the six months ended June 30, 2000 compared to 11,000 horsepower during the six
months ended June 30, 1999.
Other income during the six months ended June 30, 2000 amounted to $5.3
million compared to $2.0 million during the six months ended June 30, 1999, an
increase of $3.3 million or 160%. The increase was due primarily to the sale of
50% of the Company's ownership interest in a consolidated subsidiary for cash
and notes receivable resulting in a gain on disposition of approximately $2.1
million.
Expenses
Operating expenses of the rental segments increased by $9.6 million, or
33%, to $38.8 million during the six months ended June 30, 2000 from $29.2
million during the six months ended June 30, 1999. The increase resulted
primarily from the corresponding 30% increase in revenues from rentals over the
corresponding period in 1999. The gross profit percentage from rentals was 66%
during the six months ended June 30, 2000 and 67% during the six months ended
June 30, 1999. Operating expenses of parts and service increased by $12.4
million, or 152% to $20.5 million, which relates to the 140% increase in parts
and service revenue. The gross profit margin from parts and service was 31%
during the six months ended June 30, 2000 and 34% during the six months ended
June 30, 1999. Operating expenses of compressor fabrication increased by $8.6
million, or 56%, to $23.9 million during the six months ended
<PAGE>
June 30, 2000 from $15.3 million during the six months ended June 30, 1999
commensurate with the corresponding increase in compressor fabrication revenue.
The gross profit margin on compression fabrication was 18% during the six months
ended June 30, 2000 and 19% during the six months ended June 30, 1999. The
operating expenses attributable to production and processing equipment
fabrication increased by $6.5 million, or 65%, to $16.4 million during the six
months ended June 30, 2000 from $9.9 million during the six months ended June
30, 1999. The gross profit margin attributable to production and processing
equipment fabrication was 22% during the six months ended June 30, 2000 and was
26% during the six months ended June 30, 1999.
Selling, general and administrative expenses increased $4.6 million, or
30%, to $20.0 million during the six months ended June 30, 2000 from $15.4
million during the six months ended June 30, 1999. The increase was attributable
to increased personnel and other administrative and selling expenses associated
with increased activity in the Company's rentals, parts and service and
compressor equipment fabrication business segments as described above as well as
recent acquisitions.
The Company believes that earnings before interest, leasing expense,
distributions on mandatorily redeemable convertible preferred securities, income
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 six months ended
June 30, 2000 increased 40% to $84.2 million from $60.2 million for the six
months ended June 30, 1999 primarily due to the increase in the Company's rental
revenue for reasons previously discussed. EBITDA should not be considered in
isolation from, or a substitute for, net income, cash flows from operating
activities or other consolidated income or cash flow data prepared in accordance
with generally accepted accounting principles.
Depreciation and amortization increased by $3.2 million to $22.7 million
during the six months ended June 30, 2000 compared to $19.5 million during the
six months ended June 30, 1999. The increase in depreciation was due to the
additions to the rental fleet which were partially offset by the sale of
compressor equipment in the Equipment Leases (As defined below under "LIQUIDITY
AND CAPITAL RESOURCES").
The Company incurred leasing expense of $18.1 million during the six
months ended June 30, 2000 compared to $7.6 million during the six months ended
June 30, 1999 resulting from the Equipment Leases entered into in June 1999
and March 2000.
Interest expense decreased by $3.4 million to $2.6 million during the six
months ended June 30, 2000 from $6.0 million for the six months ended June 30,
1999. The decrease in interest expense was due in part to utilization of
proceeds from the Equipment Lease and proceeds from private stock offering
<PAGE>
which were used to reduce indebtedness under the Bank Credit Agreement.
Income Taxes
The provision for income taxes increased by $3.6 million, or 36%, to $13.7
million during the six months ended June 30, 2000 from $10.1 million during the
six months ended June 30, 1999. The increase resulted primarily from the
corresponding increase in income before income taxes. The average effective
income tax rates during the six months ended June 30, 2000 and 1999 were 36.4%
and 37.0%, respectively.
Net Income
Net income increased $6.8 million, or 40%, to $23.9 million during the six
months ended June 30, 2000 from $17.1 million during the six months ended June
30, 1999 for the reasons discussed above.
Liquidity and Capital Resources
The Company's cash balance amounted to $13.7 million at June 30, 2000
compared to $5.8 million at December 31, 1999. Primary sources of cash during
the six months ended June 30, 2000 were proceeds of $100 million from the
Equipment Lease and proceeds of $59.4 million from a private placement of 2
million newly-issued shares of restricted common stock to an institutional
investor. Principal uses of cash during the six months ended June 30, 2000
were capital expenditures of $155.3 million and business acquisitions.
Working capital increased to $199.0 million at June 30, 2000 from $108.0
million at December 31, 1999, primarily as a result of increases in accounts
receivable, inventories, and net cost in excess of billings. The increase in the
balances was due to increased level of activity in the Company's lines of
business over 1999 as well as from recent acquisitions. These increases were
offset by an increase in current liabilities.
The amounts invested in property, plant and equipment during 2000 was
$128.9 million which resulted in the addition of approximately 127,000
horsepower to the rental fleet. At June 30, 2000, the rental fleet consisted of
1,269,000 horsepower domestically and 316,000 in the international rental fleet.
Current plans are to spend approximately $150 million during the remainder of
2000, exclusive of any major acquisition, in continued expansion of the rental
fleet. In addition, the Company acquired certain compression assets of Stewart &
Stevenson and entered into definitive agreements to buy the stock of OEC
Compression Corporation and various compression operations from Ingersoll-Rand
in July 2000. Historically, the Company has funded capital expenditures with a
combination of internally generated cash flow, borrowings under the revolving
credit facility, lease transactions and raising additional equity. As of June
30, 2000 the Company has approximately $137 million of credit capacity remaining
on its $200 million Bank Credit Agreement (7.94% rate at June 30, 2000) in
addition to the Equipment Lease. Under the March 2000 Equipment Lease, the
Company received $100 million in proceeds
<PAGE>
from the sale of compression equipment at closing and sold an additional $100
million of compression equipment in August 2000. In order to fund the estimated
levels of 2000 capital expenditures, the Company anticipates arranging
additional sources of debt and/or equity during 2000.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. Subsequently, the FASB delayed
the effective date by one year. In June 2000, the FASB issued SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities,
amending certain provisions of SFAS No. 133. The statements are effective for
the Company beginning in 2001 with early adoption permitted. SFAS No. 133, as
amended by SFAS No. 138, requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending upon whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. The gains and losses on the
derivative instrument that are reported in other comprehensive income will be
reclassified as earnings in the periods in which earnings are impacted by the
hedged item. The ineffective portion of all hedges will be recognized in
current-period earnings. However management does not believe the effect of
adoption will have a material effect on the Company's results of operations,
cash flows or financial position.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in
Financial Statements. SAB No. 101 summarizes certain of the staff's views in
applying generally accepted accounting principles to revenue recognition in the
financial statements. The statement is effective for Hanover's fourth quarter
of 2000 with early adoption encouraged. Management is currently evaluating the
effect SAB No. 101 implementation will have on the Company's financial
statements.
ITEM 3. QUANTITATIVE 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 June 30, 2000, the fair market value of
these interest rate swaps is approximately $3.1 million. The Company does not
use derivative financial instruments to mitigate foreign currency risk.
<PAGE>
PART II. OTHER INFORMATION
Item 4. As its Annual Meeting of Stockholders held on May 18, 2000, the Company
presented the following matters to the stockholders for action and the votes
cast are indicated below:
Matter For Withheld
------ --- --------
1. Re-election of Directors
Michael A. O'Connor 22,413,664 -
Michael J. McGhan 22,413,664 -
William S. Goldberg 22,413,664 -
Ted Collins, Jr. 22,413,664 -
Melvyn N. Klein 22,413,664 -
Alvin V. Shoemaker 22,413,664 -
Robert A. Fergason 22,413,664 -
Carl M. Koupal, Jr. 22,413,664 -
2. Amendment of the amended and
restated certificate of incorporation of
Hanover Compression, Inc.
For Against Abstain
--- ------- -------
20,112,455 1,002,582 4,377
3. Reappointment of PricewaterhouseCoopers LLP as Independent Accountants.
For Against Abstain
--- ------- -------
20,727,143 2,500 2,350
<PAGE>
II. OTHER INFORMATION
Item 6: Exhibits and reports on Form 8-K
(a) Exhibits
10.48 Agreement and Plan of Merger by and among Hanover Compressor Company, APSI
Acquisition Corporation and Applied Process Solutions, Inc. dated as of
May 3, 2000.
10.49 Amendment to Agreement and Plan of Merger by and among Hanover Compressor
Company, APSI Acquisition Corporation and Applied Process Solutions, Inc.
dated as of May 31, 2000.
27 Financial Data Schedule
(b) Reports submitted on Form 8-K;
(1) A report on Form 8-K was filed on May 5, 2000, which reported under
the the caption "Item 5--Other Events" that, on May 3, 2000, Hanover
Compressor company had signed a definitive agreement to acquire
Applied Process Solutions, Inc. in an all-stock transaction.
(2) A report on Form 8-K was filed on May 5, 2000, which reported under
the caption "Item 5--Other Events" Hanover Compressor Company's
financial results for the first quarter of 2000. This report included
a consolidated statement of income for the company for the three
months ended March 31, 2000 and 1999.
(3) A report on Form 8-K was filed on May 23, 2000, which reported under
the caption "Item 5--Other Events" that the Board of Directors of
Hanover Compressor Company had declared a two-for-one stock split of
its common stock in the form of a 100% stock dividend, to be paid to
stockholders of record as of May 30, 2000.
(4) A report of Form 8-K was filed on June 7, 2000, which reported under
the caption "Item 5--Other Events" that Hanover Compressor Company
had completed its acquisition of Applied Process Solutions, Inc.
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: August 14, 2000
By:
/s/ Michael J. McGhan
_______________________
Michael J. McGhan
President and Chief Executive Officer
Date: August 14, 2000
By:
/s/ William S. Goldberg
_______________________
William S. Goldberg
Executive Vice President,
Chief Financial Officer and Treasurer
