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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________________
FORM 10-Q
____________________
FORM
10-Q
(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, 2023March 31, 2024
OR
☐
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
_____________ to _____________
to
Commission File Number:
001-41732
____________________
Kodiak Gas Services, Inc.
(Exact Name of Registrant as Specified in its Charter)
____________________
Delaware83-3013440
Delaware
83-3013440
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
9950 Woodloch Forest Drive, Suite 1900
The Woodlands, Texas
77380
15320 Highway 105 W, Suite 210
Montgomery, Texas
77356
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including
area
code: (936)
539-3300
____________________
Securities
registered
pursuant
to Section 12(b) of the Act:
Title of each class
eachTrading
class
Symbol(s)
Trading
Symbol(s)
Name of each exchange
on which registered
Common stock, par value $0.01 per share
KGS
KGS
New York Stock Exchange
____________________
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 ☐    
xNo
☒o
Indicate by check mark whether the registrant h
as
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§ (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒x No ☐o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
Large accelerated filero☐Accelerated filer☐o
Non-accelerated
filer		x☒Smaller reporting company☐o
Emerging growth company☒x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐o
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act). Yes ☐o No ☒x
As of August
10
, 2023,May 9, 2024, the registrant had 77,400,00084,294,141 shares of common stock, par value $0.01 per share, outstanding.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Report”) contains and our officers and representatives may from time to time make, “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Forward-looking statements can be identified by words such as: “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “project,” “estimate,” “expect,” “strategy,” “future,” “likely,” “may,” “should,” “will” and similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding:

•Expected operating results, such as revenue growth and earnings;

earnings, and our ability to service our indebtedness;

•Anticipated levels of capital expenditures and uses of capital;

•Current or future volatility in the credit markets and future market conditions;

•Potential or pending acquisition transactions or other strategic transactions, the timing thereof, the receipt of necessary approvals to close such transactions, our ability to finance such transactions, and our ability to achieve the intended operational, financial and strategic benefits from any such transactions;

•Expected synergies and efficiencies to be achieved as a result of the CSI Acquisition;
•Expectations regarding leverage and dividend profile as a result of the CSI Acquisition, including the amount and timing of future dividend payments;
•Expectations of the effect on our financial condition of claims, litigation, environmental costs, contingent liabilities, and governmental and regulatory investigations and proceedings;

•Production and capacity forecasts for the natural gas and oil industry;

•Strategy for customer retention, growth, fleet maintenance, market position and financial results; and

The amount and timing of future dividend payments;

•Our interest rate hedges; and

•Strategy for risk management.

Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not relyplace undue reliance on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

•A reduction in the demand for natural gas and oil;

•The loss of, or the deterioration of the financial condition of, any of our key customers;

•Nonpayment and nonperformance by our customers, suppliers or vendors;

•Competitive pressures that may cause us to lose market share;

•The structure of our Compression Operations contracts and the failure of our customers to continue to contract for services after expiration of the primary term;

•Our ability to make acquisitions on economically acceptable terms;

successfully integrate any acquired businesses, including CSI Compressco, and realize the expected benefits thereof;

•Our ability to fund purchases of additional compression equipment;

•A deterioration in general economic, business, geopolitical or industry conditions, including as a result of the conflict between Russia and Ukraine and the Israel-Hamas War, inflation and slow economic growth in the United States;

•A downturn in the economic environment, as well as inflationary pressures;

•Tax legislation and administrative initiatives or challenges to our tax positions;

•The loss of key management, operational personnel or qualified technical personnel;

•Our dependence on a limited number of suppliers;


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•The cost of compliance with existing governmental regulations and proposednew governmental regulations, including climate change legislation andlegislation;
•The cost of compliance with regulatory initiatives and stakeholderstakeholders’ pressures, including ESGenvironmental, social and governance scrutiny;

•The inherent risks associated with our operations, such as equipment defects and malfunctions;

•Our reliance on third-party components for use in our ITinformation technology systems;

•Legal and reputational risks and expenses relating to the privacy, use and security of employee and client information;

•Threats of cyber-attacks or terrorism;

Our credit agreement contains•Agreements that govern our debt contain features that may limit our ability to operate our business and fund future growth and also increasesincrease our exposure to risk during adverse economic conditions;

•Volatility in interest rates;

•Our ability to access the capital and credit markets or borrow on affordable terms to obtain additional capital that we may require;

•The effectiveness of our disclosure controls and procedures; and

•Such other factors as discussed throughoutset forth in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the “Risk Factors”fiscal year ended December 31, 2023, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of our final prospectus filed with the U.S Securities and Exchange Commission (the “SEC”) on June 30, 2023 pursuant to Rule 424(b)(4) and the “throughout Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of such prospectus and and Part II, Item 1A. Risk Factors of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2023.

this Report.

Any forward-looking statement made by us in this Report is based only on information currently available to us and speaks only as of the date on which it is made. Except as may be required by applicable law, we undertake no obligation to publicly update any forward-looking statement whether as a result of new information, future developments or otherwise.




PART I—FINANCIAL INFORMATION
Item 1.    Financial Statements.
1


Item 1.
Financial Statements.
KODIAK GAS SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share data)
As of March 31,
2024		As of December 31,
2023
Assets
Current assets:
Cash and cash equivalents$9,306 $5,562 
Accounts receivable, net143,237 113,192 
Inventories, net82,906 76,238 
Fair value of derivative instruments4,226 8,194 
Contract assets18,330 17,424 
Prepaid expenses and other current assets5,250 10,353 
Total current assets263,255 230,963 
Property, plant and equipment, net2,561,558 2,536,091 
Operating lease right-of-use assets, net32,444 33,716 
Goodwill305,553 305,553 
Identifiable intangible assets, net120,520 122,888 
Fair value of derivative instruments32,465 14,256 
Other assets636 639 
Total assets$3,316,431 $3,244,106 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$60,721 $49,842 
Accrued liabilities108,851 97,078 
Contract liabilities68,332 63,709 
Total current liabilities237,904 210,629 
Long-term debt, net of unamortized debt issuance cost1,828,259 1,791,460 
Operating lease liabilities33,901 34,468 
Deferred tax liabilities69,009 62,748 
Other liabilities2,385 2,148 
Total liabilities$2,171,458 $2,101,453 
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, par value $0.01 par value; 50,000,000 shares of preferred stock authorized, zero issued as of March 31, 2024, and December 31, 2023, respectively— — 
Common stock, par value $0.01 per share; 750,000,000 shares of common stock authorized, 77,434,577 and 77,400,000 shares of common stock issued and outstanding as of March 31, 2024, and December 31, 2023, respectively774 774 
Additional paid-in capital965,732 963,760 
Retained earnings178,467 178,119 
Total stockholders’ equity1,144,973 1,142,653 
Total liabilities and stockholders’ equity$3,316,431 $3,244,106 
 
   
As of June 30,

2023
   
As of December 31,

2022
 
Assets
    
Current assets:          
Cash and cash equivalents  $41,371   $20,431 
Accounts receivable, net   119,254    97,551 
Inventories, net   76,813    72,155 
Fair value of derivative instruments   —      823 
Contract assets   4,513    3,555 
Prepaid expenses and other current assets   20,201    9,520 
           
Total current assets   262,152    204,035 
Property, plant and equipment, net   2,486,846    2,488,682 
Operating lease
right-of-use
assets, net
   34,799    9,827 
Goodwill   305,553    305,553 
Identifiable intangible assets, net   127,625    132,362 
Fair value of derivative instruments   43,811    64,517 
Other assets   577    564 
           
Total assets  $3,261,363   $3,205,540 
           
Liabilities and Stockholders’ Equity
          
Current liabilities:          
Accounts payable  $35,100   $37,992 
Accrued liabilities   88,440    93,873 
Contract liabilities   86,258    57,109 
           
Total current liabilities   209,798    188,974 
Long-term debt, net of unamortized debt issuance cost   2,769,355    2,720,019 
Operating lease liabilities   29,970    6,754 
Deferred tax liabilities   57,916    57,155 
Other liabilities   1,449    3,545 
           
Total liabilities   3,068,488    2,976,447 
 
 
 
 
 
 
 
 
 
Commitments and contingencies (Note 13)        
Stockholders’ Equity:          
Common stock, par value $0.01 per share; 750,000,000 shares of common stock authorized, 59,000,000
shares
 
of common stock issued and outstanding as of June 30, 2023 and December 31, 2022
   590    590 
Additional
paid-in
capital
   —      33,189 
Retained earnings   192,285    195,314 
           
Total stockholders’ equity   192,875    229,093 
           
Total liabilities and stockholders’ equity  $        3,261,363   $3,205,540 
           
See accompanying notes to the unaudited condensed consolidated financial statements.
1

2


KODIAK GAS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except share and per share data)
For the Three Months Ended March 31,
20242023
Revenues:
Compression Operations$193,399 $177,697 
Other Services22,093 12,415 
Total revenues215,492 190,112 
Operating expenses:
Cost of operations (exclusive of depreciation and amortization shown below):
Compression Operations65,882 62,770 
Other Services17,684 8,988 
Depreciation and amortization46,944 44,897 
Selling, general and administrative24,824 13,085 
Loss on sale of property, plant and equipment— 17 
Total operating expenses155,334 129,757 
Income from operations60,158 60,355 
Other income (expenses):
Interest expense, net(39,740)(68,662)
Gain (loss) on derivatives19,757 (7,995)
Other expense(68)(31)
Total other expenses, net(20,051)(76,688)
Income (loss) before income taxes40,107 (16,333)
Income tax expense (benefit)9,875 (3,990)
Net income (loss)$30,232 $(12,343)
Basic and diluted earnings per share
Basic net earnings (loss) per share$0.39 $(0.21)
Diluted net earnings (loss) per share$0.39 $(0.21)
Basic weighted average shares of common stock outstanding77,432,28359,000,000
Diluted weighted average shares of common stock outstanding78,102,45059,000,000
   
For the Three Months

Ended June 30,
  
For the Six Months

Ended June 30,
 
   
2023
  
2022
  
2023
  
2022
 
Revenues:     
Compression
O
perations
  $181,619  $162,808  $359,316  $320,303 
Other
S
ervices
   21,687   14,343   34,102   25,189 
                 
Total revenues   203,306   177,151   393,418   345,492 
Operating expenses:     
Cost of operations (exclusive of depreciation and amortization shown below):     
Compression
O
perations
   65,017   58,336   127,787   111,273 
Other
S
ervices
   18,099   11,774   27,087   20,601 
Depreciation and amortization   45,430   43,397   90,327   85,802 
Selling, general and administrative expenses   13,438   11,740   26,523   21,570 
Gain on sale of fixed assets   (738)   —     (721)   (7) 
                 
Total operating expenses   141,246   125,247   271,003   239,239 
                 
Income from operations   62,060   51,904   122,415  
106,253 
Other income (expenses):     
Interest expense, net   (60,964)   (36,829)   (119,687)   (62,469) 
Realized gain on derivatives   25,835   —     25,835   —   
Unrealized (loss) gain on derivatives   (3,595)   (3,386)  (21,529)   32,822 
Other income (expense)   32   (7)   1   9 
                 
Total other expenses   (38,692)   (40,222)   (115,380)  
(29,638) 
                 
Income before income taxes   23,368   11,682   7,035   76,615 
Income tax expense   5,851   2,781   1,861   18,159 
                 
Net income  $17,517  $8,901  $5,174  $58,456 
                 
Earnings per share:     
Basic and diluted earnings per share  $0.30  $0.15  $0.09  $0.99 
Weighted-average shares outstanding - basic and diluted   59,000,000   59,000,000   59,000,000   59,000,000 
See accompanying notes to the unaudited condensed consolidated financial statements.
2

3


KODIAK GAS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(in thousands, except share data)
Common Shares
SharesAmountAdditional Paid- In CapitalRetained EarningsTotal Stockholders’ Equity
Balance, January 1, 202359,000,000$590 $33,189 $195,314 $229,093 
Equity compensation - profits interests—— (193)879 686 
Net loss—— — (12,343)(12,343)
Balance, March 31, 202359,000,000$590 $32,996 $183,850 $217,436 
Balance, January 1, 202477,400,000$774 $963,760 $178,119 $1,142,653 
Equity compensation - profits interests, net of forfeitures——— 161 161 
Equity compensation - Omnibus Plan, net of forfeitures——2,687 — 2,687 
Offering costs——(421)— (421)
Dividends and dividend equivalents paid to stockholders ($0.38 per common share)———(30,052)(30,052)
Restricted Stock Units vested under the Omnibus Plan, net of 14,698 shares withheld for taxes34,577 — (294)— (294)
Net income———30,232 30,232 
Other— — — 7 7 
Balance, March 31, 202477,434,577 $774 $965,732 $178,467 $1,144,973 

   
Common Stock
           
   
Shares
   
Amount
   
Additional Paid-In

Capital
  
Retained
Earnings
  
Total
Stockholders’
Equity
 
Balance, January 1, 2022
   59,000,000   $590   $871,403  $88,078  $960,071 
Equity compensation    —    —    (136)   619   483 
Net income, as restated    —    —     —   49,555   49,555 
                        
Balance, March 31, 202
2, as restated
   59,000,000   $590   $871,267  $138,252  $1,010,109 
                        
Distribution to parent   —     —     (838,000)   —   (838,000) 
Net income   —     —      —   8,901   8,901 
                        
Balance, June 30, 2022
   59,000,000   $590   $33,267  $147,153  $181,010 
                        
Balance, January 1, 2023
   59,000,000   $590   $33,189  $195,314  $229,093 
Equity compensation   —    —    (193)   879   686 
Net loss   —    —     —   (12,343)   (12,343) 
                        
Balance, March 31, 2023
   59,000,000   $590   $32,996  $183,850  $217,436 
                        
Distribution to parent            (33,189)   (9,111)   (42,300) 
Equity compensation   —     —    193   29   222 
Net income   —     —     —   17,517   17,517 
                        
Balance, June 30, 2023
   59,000,000   $590   $—    $192,285  $192,875 
                        
See accompanying notes to the unaudited condensed consolidated financial statements.
3

4
KODIAK GAS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Three Months Ended March 31,
20242023
Cash flows from operating activities:
Net income (loss)$30,232 $(12,343)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization46,944 44,897 
Stock-based compensation expense2,848 879 
Amortization of debt issuance costs2,643 5,445 
Non-cash lease expense1,200 774 
Provision for credit losses85 2 
Inventory reserve126 125 
Loss on sale of property, plant and equipment— 17 
Change in fair value of derivatives(14,241)17,934 
Deferred tax provision (benefit)6,261 (2,521)
Changes in operating assets and liabilities:
Accounts receivable(30,130)(20,935)
Inventories(6,794)(2,993)
Contract assets(906)2,504 
Prepaid expenses and other current assets5,103 (7,522)
Accounts payable(2,324)(839)
Accrued and other liabilities5,872 (9,741)
Contract liabilities4,623 7,607 
Net cash provided by operating activities51,542 23,290 
Cash flows from investing activities:
Purchase of property, plant and equipment(60,153)(48,581)
Proceeds from sale of property, plant and equipment— 32 
Other3 (25)
Net cash used in investing activities(60,150)(48,574)
Cash flows from financing activities:
Borrowings on debt instruments1,008,476 248,300 
Payments on debt instruments(957,975)(197,569)
Payment of debt issuance cost(7,594)(31,878)
Offering costs(446)— 
Cash paid for shares withheld to cover taxes(294)— 
Dividends paid to stockholders(29,815)— 
Net cash provided by financing activities12,352 18,853 
Net increase (decrease) in cash and cash equivalents3,744 (6,431)
Cash and cash equivalents - beginning of period5,562 20,431 
Cash and cash equivalents - end of period$9,306 $14,000 
Supplemental cash disclosures:
Cash paid for interest$32,023 $67,419 
Cash paid for taxes$— $— 
Supplemental disclosure of non-cash investing activities:
(Increase) decrease in accrued capital expenditures$(9,890)$7,962 
Supplemental disclosure of non-cash financing activities:
Dividends equivalent$(237)$— 
Accrued debt issuance cost$(8,752)$— 
   
For the Six Months

Ended June 30,
 
   
2023
  
2022
 
Cash flows from operating activities:
   
Net income  $5,174  $58,456 
Adjustments to reconcile net income to net cash provided by operating activities:         
Depreciation and amortization expense   90,327   85,802 
Stock-based compensation expense   908   619 
Amortization of debt issuance costs   11,071   5,212 
Non-cash
lease expense
   1,786   1,365 
Provision for credit losses   2   85 
Inventory reserve   250   250 
Gain on sale of fixed assets   (721)   (7) 
Unrealized loss (gain) on derivatives   21,529   (32,822) 
Deferred tax provision   761   14,974 
Changes in operating assets and liabilities:         
Accounts receivable, net   (21,705)   (11,367) 
Inventories   (4,907)   (5,302) 
Contract assets   (958)   (3,051) 
Prepaid expenses and other current assets   (10,681)   (314) 
Accounts payable   10,954   6,436 
Accrued and other liabilities   (14,971)   854 
Contract liabilities   29,149   6,457 
          
Net cash provided by operating activities   117,968   127,647 
          
Cash flows from investing activities:
         
Purchase of capital assets   (94,034)   (145,952) 
Proceeds from sale of capital assets   1,055   13 
Investment in fund   (24)   (24) 
Other   10   13 
          
Net cash used in investing activities   (92,993)   (145,950) 
          
Cash flows from financing activities:
         
Borrowings on debt instruments   499,279   1,221,161 
Payments on debt instruments   (428,812)   (345,465) 
Payment of debt issuance cost   (32,202)   (27,561) 
Distributions to parent   (42,300)   (838,000) 
          
Net cash (used in) provided by financing activities   (4,035)   10,135 
          
Net increase (decrease) in cash and cash equivalents   20,940   (8,168) 
Cash and cash equivalents - beginning of period   20,431   28,795 
          
Cash and cash equivalents - end of period  
$

41,371  
$

20,627 
          
Supplemental cash disclosures:
         
Cash paid for interest  
$

116,370  $52,204 
Cash paid for taxes  
$

5,726  $1,836 
Supplemental disclosure of
non-cash
investing activities:
         
Change in accrued capital expenditures  
$

9,946  
$

1,931 
See accompanying notes to the unaudited condensed consolidated financial statements.
4

5


KODIAK GAS SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Description of Business
Kodiak Gas Services, Inc. (together with its subsidiaries, referred to as(the “Company” or “Kodiak” or the “Company”) began its operations in 2011. On February 8, 2019, Kodiak was acquired by entities affiliated with EQT AB Group. On October 24, 2019, the Company acquired Pegasus Optimization Managers, LLC, a provider of natural gas compression operations.
The Company is an operator of contract compression infrastructure and related services in the U.S, primarily in the Permian Basin and Eagle Ford Shale with additional operations in the Powder River Basin,
Mid-Continent
Region, DJ Basin, Appalachian Basin, Barnett Shale / East Texas Region and Black Warrior Basin.U.S. The Company operates its compression units under stable, fixed-revenue contracts with upstream and midstream customers. The Company manages its business through two operating segments: Compression Operations and Other Services. Compression Operations consists of operating Company-owned and customer-owned compression infrastructure for its customers to enable the production, gathering and transportation of natural gas and oil. Other Services consists of station construction, maintenance and overhaul, andplus other ancillary time and material-based offerings.

See Note 18 (“Segments”). to the Company’s condensed consolidated financial statements.
Stock Split
Merger with CSI Compressco
On June 20, 2023, Kodiak’s board of directors approved a
590,000-for-1
splitApril 1, 2024 (the “Stock Split”)
of the Company’s
common stock. Prior to the consummation of the initial public offering of the Company’s common stock (the “IPO”“Closing Date”), the Company was 100%completed its acquisition of CSI Compressco LP (“CSI Compressco” and such acquisition, the “CSI Acquisition”), pursuant to the terms of that certain Agreement and Plan of Merger, dated as of December 19, 2023, by and among the Company; Kodiak Gas Services, LLC (“Kodiak Services”), a Delaware limited liability company and then wholly owned by its Parent, Frontier TopCo Partnership, L.P.subsidiary of Kodiak; Kick Stock Merger Sub, LLC, a Delaware limited liability company and indirect, wholly owned subsidiary of Kodiak; Kick GP Merger Sub, LLC, a Delaware limited liability company and wholly owned subsidiary of Kodiak Services; Kick LP Merger Sub, LLC, a Delaware limited liability company and wholly owned subsidiary of Kodiak Services; CSI Compressco LP, a Delaware limited partnership; and CSI Compressco GP LLC (“Kodiak Holdings”CSI Compressco GP”). The Stock Split became effective upon filing, a Delaware limited liability company and the general partner of CSI Compressco (the “Merger Agreement”), See Note 20 (“Subsequent Events”) to the Company’s Amended and Restated Certificate of Incorporation on June 28, 2023 in connection with the IPO. The par value of the Company’s common stock was not adjusted as a result of the Stock Split, however, the number of shares that the Company is authorized to issue increase
d to
750,000,000
. As a result of the Stock Split, 
59,000,000
shares of common stock were outstanding. All share and per share data shown in the accompanying condensed consolidated financial statements and related notes has been retroactively revised to give effect to the Stock Split for all periods presented.
more information.
IPO
On June 28, 2023, Kodiak’s Registration Statement on Form
S-1
relating to the IPO was declared effective by the U.S. Securities and Exchange Commission (“SEC”) and the shares of its common stock began trading on the New York Stock Exchange on June 29, 2023. On July 3, 2023, Kodiak
issued and sold 16,000,000 shares of common stock at a price to the public of $16.00 per share. Kodiak received net proceeds of approximately $231.4 million,
after deducting expenses and underwriting discounts and commissions payable by the Company.
2. Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared on the accrual basis usingin accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuantwith the instructions to the rulesForm 10-Q and regulationsArticle 10 of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP are not required in theseRegulation S-X for interim financial statements and have been condensed or omitted. Management believes that the information furnished reflects all normal recurring adjustments necessary to fairly present the Company’s consolidated financial position, results of operations and cash flows for the periods indicated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements presented in Kodiak’s latest annual financial statements included in Kodiak’s final prospectus filed with the SEC on June 30, 2023 pursuant to Rule 424(b)(4) (the "IPO Prospectus"), which contain a more comprehensive summary of the Company’s accounting policies. The interim results reported herein are not necessarily indicative of results for a full year.
information. These unaudited condensed consolidated financial statements include the accounts of Kodiak and its wholly
owned
subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation.
RestatementIt is the Company’s opinion that all adjustments (consisting of Previously Issued Financial Statements
Duringnormal recurring adjustments) considered necessary for a fair presentation have been included. The Company’s results of operations for the preparation and reviewinterim periods presented are not necessarily indicative of the unaudited interim condensed consolidated financial statementsresults that may be expected for the three and six month periods ended June 30, 2023 and 2022, the Company identified a previously corrected adjusting entry that should have been recorded in the three months ended March 31, 2022. This entry was specificfull year. For further information, refer to the unrealized (loss) gain on derivatives and does not impact the six month period ended June 30, 2022 financial statements and does not impact the Company’s Consolidated Financial Statements as of and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. See Note 10—Derivative Instruments.
The
foregoing error had no effect on2023. Certain prior period amounts have been reclassified to conform to the Company’s revenue and financial covenants. The error does not impact the Company’s cash or liquidity. Similarly, the error did not have an impact on the Company’s operations or business fundamentals.current period presentation.
The Company assessed the materiality of the error in its historical unaudited interim condensed consolidated financial statements in accordance with Accounting Standards Codification (“ASC”) 250, Accounting Changes and Error Corrections, and concluded that the previously issued unaudited condensed consolidated financial statements for the three months ended March 31, 2022 should be restated. The Company corrected for the error by restating amounts previously presented and disclosed in the unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2022. A summary of the effect of the restatements on the unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2022 is as follows (
in thousands, except per share data
):
Unaudited Condensed Consolidated Statement of Operations
For the three months ended March 31, 2022
  As Previously
Reported		   Restatement
Adjustments		   As Restated 
Unrealized gain on derivatives
  $7,838   $28,370   $36,208 
Income Tax Expense
   8,624    6,754    15,378 
  
 
 
   
 
 
   
 
 
 
Net Income
   27,939    21,616    49,555 
  
 
 
   
 
 
   
 
 
 
Basic and diluted earnings per share
  $   279,390   $216,160   $   495,550 
  
 
 
   
 
 
   
 
 
 
Unaudited Condensed Consolidated Statement of Shareholders’ Equity
As of March 31, 2022
  As Previously
Reported		   Restatement
Adjustments		   As Restated 
Retained Earnings
  $116,636   $21,616   $138,252 
  
 
 
   
 
 
   
 
 
 
Total stockholder’s equity
  $   988,493   $     21,616   $1,010,109 
  
 
 
   
 
 
   
 
 
 
Unaudited Condensed Consolidated Statement of Cash Flows
For the three months ended March 31, 2022
 As Previously
Reported		  Restatement
Adjustments		  As Restated 
Net income
 $27,939  $21,616  $49,555 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
   
Unrealized loss (gain) on derivatives
  (7,838)   (28,370)   (36,208) 
Deferred tax provision
  7,104   6,754   13,858 
Changes in Operating assets and liabilities
   
Prepaid Expenses and other current assets
  1,032   (14,185)   (13,153) 
Accrued and other liabilities
  (6,713)   14,185   7,472 
 
 
 
  
 
 
  
 
 
 
Net cash provided by operating activities
 $54,796  $—    $54,796 

5

Table of Contents
Recently AdoptedIssued Accounting Pronouncements
In June 2016,November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-13,
Financial Instruments—Credit Losses ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“Topic 326”ASU 2023-07”): Measurement of Credit Losses, which improves reportable segment disclosure requirements through enhanced disclosures about significant segment expenses. The amendments in this update are effective for annual periods beginning after December 15, 2023, and interim periods within annual periods beginning after December 15, 2024. Early adoption is permitted. ASU 2023-07 is to be applied on Financial Instruments
which changes the impairment model for financial assets measured at amortized cost and certain other instruments, including trade and other receivables,
held-to-maturity
debt securities and loans, and requires entities to use a new current expected credit loss model that will result in earlier recognition of allowance for losses.retrospective basis. The Company adopted this Topic 326 on January 1, 2023. The adoptionis currently evaluating the impact of this amendment did not have a material impactstandard on its disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), which is intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in ASU 2023-09 require the annual financial statements to include consistent categories, greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for the Company’s con
solid
ated financial statements.annual reporting periods beginning after December 15, 2024, with early adoption permitted, and should be applied on a prospective basis, with a retrospective option. The Company is currently evaluating the impact of this standard on its disclosures.
6


3. Revenue Recognition
The following table disaggregates the Company’s revenue by type and timing of provision of services or transfer of goods
(in thousands)
:
Three Months Ended March 31,
20242023
Services provided over time:
Compression Operations$191,719 $174,876 
Other Services18,553 5,399 
Total services provided over time210,272 180,275 
Services provided or goods transferred at a point in time:
Compression Operations1,680 2,821 
Other Services3,540 7,016 
Total services provided or goods transferred at a point in time5,220 9,837 
Total revenue$215,492 $190,112 
   
Three Months Ended June 30,
 
   
2023
   
2022
 
Services provided over time:          
Compression
O
perations
  $179,740   $159,788 
Other
S
ervices
   18,357    13,422 
           
Total services provided over time   198,097    173,210 
           
Services provided or goods transferred at a point in time:          
Compression
O
perations
   1,879    3,020 
Other
S
ervices
   3,330    921 
           
Total services provided or goods transferred at a point in time   5,209    3,941 
           
Total revenue  $203,306   $177,151 
           
   
Six Months Ended June 30,
 
   
2023
   
2022
 
Services provided over time:          
Compression
O
perations
  $354,616   $315,361 
Other
S
ervices
   28,275    22,770 
           
Total services provided over time   382,891    338,131 
           
Services provided or goods transferred at a point in time:          
Compression
O
perations
   4,700    4,942 
Other
S
ervices
   5,827    2,419 
           
Total services provided or goods transferred at a point in time   10,527    7,361 
           
Total revenue  $393,418   $345,492 
           
The Company derives its revenue from contracts with customers, which comprise the following revenue streams:
Compression Operations
Compression Operations consists of operating Company-owned and customer-owned compression infrastructure for the Company’s customers, pursuant to fixed-revenue contracts, enabling the production, gathering and transportation of natural gas and oil.
Compression Operations for Company-owned,Kodiak-owned, as well as customer-owned, compressors are generally satisfied over time, as services are rendered atfor selected customer locations on a monthly basis and based upon specific performance criteria identifiedset forth in the applicable contract. Terms are typically one to seven years, and at the end of the term, transition to a
month-to-month
contract term if not cancelled by either party. The monthly service for eacha location is substantially the same service month-to-monthmonth to month and is promised consecutively over the service contract term. The progress and performance of the service are measured consistently using a straight-line, time-based method as each month passes, becausemethod; the performance obligations are satisfied evenly over the contract term as the customer simultaneously receives and consumes the benefits provided by the service.
6

Table Consistent with Kodiak's satisfaction of Contents
its performance obligations, the customer renders payment for services over time in accordance with the terms of the contract.
If variable consideration exists, it is allocated to the distinct monthly service within the series to which such variable consideration relates. The Company has elected to apply the invoicingright to invoice practical expedient to recognize revenue for such variable consideration, as the invoice corresponds to the value transferred to the customer based on the Company’s performance completed to date.
Service revenue earned primarily on freight and crane charges that are directly reimbursable by the Company’s customers is recognized at the point in time the service is provided, and control is transferred to the customer. At such time, the customer has the ability to direct the use of the benefits of such service after the performance obligation is satisfied. The amount of consideration the Company receives and the amount of revenue the Company recognizes is based upon the invoice amount.
There are typically no material obligations for returns, refunds or warranties. The Company’s standard contracts do not usually include
non-cash
consideration.
Other Services
This revenue stream primarily relates toOther Services consists of compressor station construction services provided to certain customers and services provided based on time, parts and/or materials with customers.
For most of the Company’s construction contracts, the customer contracts with the Company integratesto provide a service of integrating a significant set of tasks and components into a single contract for its customers.contract. Hence, the entire contract is accounted for as one performance obligation. The Company recognizes revenue over time as the CompanyCompany’s performance creates or enhances an asset that the customer, controls.in turn, controls as the asset is created or enhanced. For construction contracts,
For construction services, 7


revenue is recognized using an input method. Measure of the progress towards satisfaction of the performance obligation is based on the actual amount of labor and material costs incurred. The amount of the transaction price recognized as revenue each reporting period is determined by multiplying the transaction price by the ratio of actual costs incurred to date to total estimated costs expected for the construction services. Payment terms and conditions vary by contract, but contract terms generally include a requirement of payment upon completion of a milestone. Judgment is involved in the estimation of the progress towardto completion. Any adjustments to the measure of the progress towardto completion is accounted for on a prospective basis. Changes to the scope of service are recognized as an adjustment to the transaction price in the period in which the change occurs.order is agreed upon and executed. Losses on construction contracts, if any, are recognized in the period when the estimated loss is determined. There have been no losses recognized in the three months ended March 31, 2024 and 2023.
Services provided based on time spent, parts and/or materials isare generally short-term in nature and labor rates and parts pricing isare agreed upon prior to commencing the service. AsThe Company applies an estimated gross margin percentage, which is fixed based on historical time and materials-based service, to actual costs incurred. Since revenue is recognized when time passes,is incurred, this revenue is recognized at thea point and time when the service is rendered.
Contract Assets and Liabilities
The Company recognizes a contract asset when the Company has the right to consideration in exchange for goods or services transferred to a customer. Contract assets are transferred to trade receivables when the rights become unconditional.Company has right to bill. The Company had contract assets of $
4.5
million, $1.1$18.3 million and $
3.6 
$17.4 million as of June 30, 2023, March 31, 20232024, and December 31, 20222023, respectively. There was a $3.6 million contract asset balance as of January 1, 2023.
, respectively.
The Company records contract liabilities when cash payments are received or due in advance of performance. The Company’s contract liabilities w
ere
 $
86.3were $68.3 million and $57.1 
$63.7 million as of June 30, 2023March 31, 2024, and December 31, 2022, respectively.2023. As of January 1, 20232024, and 2022,January 1, 2023, the beginning balance
s
balances for contract
liabilities were
$57.1 $63.7 million and $51.2
$57.1 million, respectively, all of which was recognized as revenue in the sixthree months ended June 30,March 31, 2024, and March 31, 2023, and 2022, respectively.
Performance Obligations
As of June 30, 2023,March 31, 2024, the aggregate amount of transaction price allocated to unsatisfied
p
erformance performance obligations related to the Company’s revenue for the Compression Operations segment is $1.1$1.0 billion.
The Company expects to recognize these remaining performance obligations as follows
(in thousands)
:
   
Remainder of

2023
   
2024
   
2025
   
2026
   
2027 and

thereafter
   
Total
 
Remaining performance obligations  $312,116   $461,662   $221,345   $94,796   $50,984   $1,140,903 
Remainder of
2024		2025202620272028 and
thereafter		Total
Remaining performance obligations$469,869 $344,515 $151,988 $52,650 $10,535 $1,029,556 
7

As of March 31, 2024, the aggregate amount of transaction price allocated to unsatisfied performance obligations related to the Company’s revenue for the Other Services segment is $20.4 million, of which $19.2 million is expected to be recognized by December 31, 2024.
Table of Contents
4. Accounts Receivable, net
Accounts receivable, net consist of the following (
in thousands):
As of March 31,
2024		As of December 31,
2023
Accounts receivable$151,287 $121,242 
Allowance for credit losses8,050 8,050 
Accounts receivable, net$143,237 $113,192 
8
):



   
As of June 30,
   
 As of December 31, 
 
   
2023
   
2022
 
Accounts receivable  $120,203   $98,500 
Allowance for credit losses   949    949 
           
Accounts receivable, net  $              119,254   $97,551 
           
The allowances for credit losses were $8.1 million and $8.1 million as of March 31, 2024, and December 31, 2023, respectively, which represents the Company’s best estimate of the amount of probable credit losses included within the Company’s existing accounts receivable balance.
The changes in the Company’s allowance for credit losses are as follows (in thousands):
Allowances for Credit Losses
Balance at January 1, 2023$949 
Current-period provision for expected credit losses7,101
Write-offs charged against allowance— 
Balance at December 31, 2023$8,050 
Current-period provision for expected credit losses85 
Write-offs charged against allowance(85)
Balance at March 31, 2024$8,050 
5. Inventories,
net
Inventories consist of the following (
in thousands
):
As of March 31,
2024		As of December 31,
2023
Non-serialized parts$65,494 $62,784 
Serialized parts17,412 13,454 
Total inventories, net$82,906 $76,238 

   
As of June 30,
   
 As of December 31, 
 
   
2023
   
2022
 
Non-serialized
parts
 $66,252  $61,082 
Serialized parts  10,561   11,073 
         
Total inventories $                76,813  $72,155 
         
6. Property, Plant and Equipment, Net
net
Property, plant and equipment, net consist of the following (
in thousands
):

   
As of June 30,
     
As of December 31,
 
   
2023
     
2022
 
Compression equipment  $3,049,309       $2,973,599 
Trailers and vehicles   8,341        7,193 
Field equipment   17,919        15,501 
Technology hardware and software   9,736        6,698 
Leasehold improvements   2,646        1,947 
Shipping containers   3,267        3,137 
Furniture and fixtures   1,564        1,519 
Capital lease   683        981 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total property and equipment, gross   3,093,465        3,010,575 
Less: accumulated depreciation   (606,619)        (521,893) 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net  $           2,486,846       $2,488,682 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of March 31,
2024		As of December 31,
2023
Compression equipment$3,230,227 $3,166,214 
Field equipment19,945 19,286 
Buildings and shipping containers14,102 11,942 
Technology hardware and software11,404 11,161 
Trailers and vehicles10,366 9,885 
Leasehold improvements9,949 8,093 
Furniture and fixtures2,594 2,053 
Land743 743 
Other216 374 
Total property, plant and equipment, gross3,299,546 3,229,751 
Less: accumulated depreciation(737,988)(693,660)
Property, plant and equipment, net$2,561,558 $2,536,091 
Depreciation expense was $43.0$44.6 million and $85.6$42.5 million for the three and six months ended June 30,March 31, 2024, and March 31, 2023, respectively, and is recorded within depreciation and amortization on the accompanying condensed consolidated statements of operations. Depreciation expense was $41.0 million and $81.1 million for the three and six months ended June 30, 2022, respectively.
9


7. Goodwill and Identifiable Intangible Assets, Net
net
There were no changes in the carrying amount of goodwill duringfor the sixthree months ended June 30, 2023.March 31, 2024. All of the goodwill was allocated to the Company’s Compression Operations reporting unit.
8

The Company’s identifiable intangible assets consist of the following as of June 30, 2023March 31, 2024, and December 31, 20222023 (
in thousands
):
As of March 31, 2024
Original Cost
Accumulated
Amortization
Net AmountRemaining Weighted
Average Amortization
Period (years)
Trade name$13,000 $(3,343)$9,657 14.9
Customer relationships150,000 (39,137)110,863 12.6
Total identifiable intangible assets$163,000 $(42,480)$120,520  
  
As of June 30, 2023
 
  
Original Cost
   
Accumulated

Amortization
   
Net Amount
   
Remaining Weighted

Average Amortization

Period (years)
 
As of December 31, 2023As of December 31, 2023
Original CostOriginal CostAccumulated
Amortization		Net AmountRemaining Weighted
Average Amortization
Period (years)
Trade name  
$

13,000   $(2,856)   $10,144    15.6 Trade name$13,000 $$(3,181)$$9,819 15.115.1
Customer relationships   150,000    (32,519)    117,481    13.3 Customer relationships150,000 (36,931)(36,931)113,069 113,069 12.812.8
               
Total identifiable intangible assets  
$

163,000   
$

(35,375)   
$

127,625    Total identifiable intangible assets$163,000 $$(40,112)$$122,888   
               
   
As of December 31, 2022
 
   
Original Cost
   
Accumulated

Amortization
   
Net Amount
   
Remaining Weighted

Average Amortization

Period (years)
 
Trade name  $13,000   $(2,531)   $10,469    16.1 
Customer relationships   150,000    (28,107)    121,893    13.8 
                     
Total identifiable intangible assets  $163,000   $(30,638)   $132,362      
                     
Amortization expense was $2.4 million and $4.7$2.4 million for each of the three and six months ended June 30,March 31, 2024, and March 31, 2023, and 2022respectively, and is recorded within depreciation and amortization on the condensed consolidated statements of operations.
At June 30, 2023,As of March 31, 2024, the following is a summary of future minimum amortization expense for identified in
t
angibleintangible assets (
in thousands
):
 Amount
Years ending December 31,
Remainder of 2024$7,105 
20259,474 
20269,474 
20279,474 
20289,474 
Thereafter75,519 
Total$120,520 
   
Amount
 
Years ending December 31,     
Remainder of 2023  $4,737 
2024   9,474 
2025   9,474 
2026   9,474 
2027   9,474 
Thereafter   84,992 
      
Total  $127,625 
      
8. Long-Lived and Other Asset Impairment
Long-lived assets, including property, plant and equipment and other finite-lived identifiable intangible assets, are reviewed for impairment whenever events or changes in circumstances, including the removal of compressors from the active fleet, indicate that the carrying amount of an asset may not be recoverable. Such events and changes may include significant changes in performance relative to expected operating results, significant changes in asset use, significant negative industry or economic trends, and changes in the Company’s business strategy, among others. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to estimated future undiscounted net cash flows expected to be generated by the asset. Impairment losses are recognized in the period in which the impairment occurs and represent the excess of the asset carrying value over its estimated future discounted net cash flows. No impairment was recorded, and no triggering events were identified for the six monthsthree-month periods ended June 30, 2023March 31, 2024, and 2022. For the six months ended June 30, 2023 and 2022, no triggering event for any long-lived assets was identified.
March 31, 2023.
9

10


9. Debt and Credit Facilities
Debt consists of the following
(in thousands)
:
As of March 31, 2024As of December 31, 2023
ABL Facility$1,130,846 $1,830,346 
2029 Senior Notes750,000 — 
Total debt outstanding1,880,846 1,830,346 
Less: unamortized deferred financing costs(52,587)(38,886)
Long-term debt, net of unamortized debt issuance cost$1,828,259 $1,791,460 

   
As of June 30,
   
As of December 31,
 
   
2023
   
2022
 
ABL Facility  $1,824,691   $1,754,224 
Term loan   1,000,000    1,000,000 
           
Total debt outstanding   2,824,691    2,754,224 
Less: unamortized debt issuance cost   (55,336)    (34,205) 
           
Long-term debt, net of unamortized debt issuance cost  $        2,769,355   $2,720,019 
           
ABL Facility
As of January 1, 2022, a wholly-owned subsidiary of Kodiak had a revolving-asset backed loan credit facility (the “ABL Facility”) with unaffiliated secured lenders and JPMorgan Chase Bank, N.A., as administrative agent.
On May 19, 2022, wholly-owned subsidiaries of Kodiak entered into the Third Amendment to the Third Amended and Restated Credit Agreement which mainly served to amend the applicable rate from LIBOR to the Secured Overnight Financing Rate (“SOFR”) and allow for the return of capital to the stockholders of Kodiak 
in the amount of $838 million by increasing borrowings on the ABL Facility by $225 million, increasing the Term Loan by $600 million and utilizing $13 million of cash on hand. In addition
, the ABL Facility size was increased
from $1.875 billion to $2.050 billion to increase available liquidity under the facility. New lender fees and costs totaling $13.2 
million were incurred as a result of the amendment and will be amortized over the life of the loans to interest expense. 
On March 22, 2023, wholly-ownedwholly owned subsidiaries of Kodiak entered into the Fourth Amended and Restated Credit Agreement with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (as amended or restated from time to time, the “ABL Credit Agreement” or “ABL Facility”), which mainly served to extend the maturity date from June 2024 to March 2028. The total facility size was increased
from $2.050$2.1 billion to $2.200$2.2 billion to increase available liquidity under the facility. New lender fees and costs totaling $31.8 million were incurred and will be amortized over the life of the loansloan to interest expense. An additional $4.2 million in accrued interest related to exiting lenders was expensed and paid in the period. The remaining unamortized deferred financingdebt issuance costs of $1.2 million associated with the exiting lenders was
written-off
written off in interest expense, net in the period. On May 31, 2023, the ABL Credit Agreement was amended to, among other things, permit distributions of overallotment proceeds from the Initial Public Offering (“IPO”) and revise the terms related to the payment and prepayment of the Term Loan (as defined below). On June 27, 2023, the ABL Credit Agreement was further amended to remove the ability to make distributions related to overallotment proceeds from the IPO and to instead require prepayment of the obligations upon the issuance of any equity interests by Kodiak pursuant to the overallotment in the IPO. In connection with the IPO, the Company became a borrower under the ABL Facility. As of March 31, 2024, there were $1.0 million in letters of credit outstanding under the ABL Facility.
Pursuant to the ABL Credit Agreement, the Company must comply with certain restrictive covenants, including a minimum fixed chargeinterest coverage ratio of 1.1x2.5x and a maximum
Leverage Ratio
. The maximum
Leverage Ratio
(calculated (calculated based on the ratio of Consolidated Total Debt to Consolidated EBITDA, each as defined in the ABL Credit Agreement). The maximum Leverage Ratio is 7.25x through(i) 5.25 to 1.00 for the firstfiscal quarters ending September 30, 2023, and December 31, 2023, (ii) 5.00 to 1.00 for the fiscal quarter of 2023; 7.00x thereafter throughending March 31, 2024, (iii) 4.75 to 1.00 for the thirdfiscal quarter of 2023; 6.75x thereafter through the first quarter of 2024; and 6.50
x in the second quarter ofending June 30, 2024, and thereafter.(iv) 4.50 to 1.00 for each fiscal quarter ending on or after September 30, 2024. All loan amounts are collateralized by essentially all the assets of the Company. The Company was in compliance with all covenants as of June 30, 2023March 31, 2024, and December 31, 2022.
2023.
The ABL Credit Agreement also restricts the Company’s ability to: incur additional indebtedness and guarantee indebtedness; pay certain dividends or make other distributions or repurchase or redeem equity interests; prepay, redeem or repurchase certain debt; issue certain preferred units or similar equity securities; make loans and investments; sell, transfer or otherwise dispose of assets; incur liens; enter into transactions with affiliates; enter into agreements restricting the Company’s restricted subsidiaries’ ability to pay dividends; enter into certain swap agreements; amend certain organizational documents; enter into sale and leaseback transactions; and consolidate, merge or sell all or substantially all of the Company’s assets.
The applicableweighted average interest ratesrate as of June 30, 2023 were 10.25% (prime rate
 plus 2.00%
)March 31, 2024, and 8.34% (Term SOFR rate plus 0.10% plus 3.00%). The applicable interest rates as of December 31, 2022 were 9.50% (prime2023, was 7.68% and 8.08%, respectively, excluding the effect of interest rate
 plus 2.00%
) swaps. The Company pays an annualized commitment fee of 0.25% on the unused portion of its ABL Facility if borrowings are greater than 50% of total commitments and 7.60% (Term SOFR rate plus 0.10% plus 3.00%).
1
0
Table0.50% on the unused portion of Contentsthe ABL Facility if borrowings are less than 50% of total commitments.
The ABL Facility is a “revolving credit facility” that includes a lock box arrangement whereby, under certain events, remittances from customers are forwarded to a bank account controlled by the administrative agent and are applied to reduce borrowings under the facility. One such event includes “Cash Dominion” and occurs whenif availability under the agreementABL Credit Agreement falls below a specified threshold (i.e., the greater of $200.0$200 million or 10% of the aggregate commitments at suchthe time of event)measurement). As of June 30, 2023March 31, 2024, and December 31, 2022,2023, availability under the agreementABL Facility was in excess of the specified threshold, and, as such, the entire balance was classified as long-termlong term in accordance with its maturity.
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Third Amendment to Fourth Amended and Restated Credit Agreement
On January 22, 2024, Kodiak entered into the Third Amendment to the ABL Credit Agreement (the “Third Amendment”). The Third Amendment, among other things, amended certain provisions of the ABL Facility (i) to accommodate the consummation of the transactions contemplated by the Merger Agreement and (ii) to account for the Company’s organizational structure after giving effect to the transactions contemplated by the Merger Agreement. Fees and costs totaling $2.9 million were incurred related to the Third Amendment and will be amortized over the life of the loan to interest expense. During the three months ended March 31, 2024, $2.0 million of the total amount was paid, with the remaining amount included in the accrued liabilities in the Company’s unaudited condensed consolidated balance sheet.
In addition, the Third Amendment amended the ABL Facility to (i) include a maximum secured leverage ratio, which will begin to be tested after the Company issues any unsecured indebtedness, to (x) 3.75 to 1.00 for the first four fiscal quarters after the Company issues any unsecured indebtedness and (y) 3.25 to 1.00 for each fiscal quarter thereafter, (ii) modify the triggers for commencing a “cash dominion” period (i.e., a period when the Administrative Agent applies proceeds in the deposit accounts to reduce borrowings under the ABL Credit Agreement), such that a “cash dominion” period will commence if availability under the ABL Credit Agreement is less than $125 million for five consecutive business days or if certain types of events of default occur, (iii) include customary provisions relating to the designation of “unrestricted subsidiaries” (i.e., subsidiaries that are not required to become loan parties or be bound by the covenants contained in the ABL Credit Agreement), (iv) provide that only material domestic restricted subsidiaries are required to become guarantors and collateral grantors under the ABL Facility, and (v) permit the Company and its restricted subsidiaries to incur additional indebtedness and liens and to make additional investments, dividends, distributions, redemptions and dispositions.
Term Loan
As of January 1, 2022, a wholly-ownedA wholly owned subsidiary of Kodiak had a term loan (the “Term Loan”), pursuant to a credit agreement with unaffiliated unsecured lenders and Wells Fargo Bank, N.A., as administrative agent.
In May 2022, the Company completed a recapitalization and return of
capitaldistribution of $838 million to stockholdersthe parent of Kodiak, primarily by increasing the borrowings from the ABL Facility by $225$225.0 million and the Term Loan by $600 million, perpursuant to the Amended and Restated Term Loan Credit Agreement entered into by the Company on May 19, 2022 (as amended from time to time, the “Term Loan Credit
Agreement”) and utilizing $13 million of cash on hand.
New lender fees and costs totaling $14.6 million were incurred for this amendment and will bewere amortized over the life of the loansloan to interest expense.
On March 31, 2023, the Company’s wholly-ownedwholly owned subsidiary entered into the First Amendment to the Amended and Restated Term Loan Credit Agreement pursuant to which the maturity date was extended to September 22, 2028. Lender fees and costs totaling $0.75$0.8 million were incurred for this amendment and will bewere amortized over the life of the loansloan to interest expense.
Pursuant to the First Amendment to the Amended and Restated Term Loan Credit Agreement,On June 29, 2023, the Company must comply with certain restrictive covenants, including a maximum
Leverage Ratio
. The maximum
Leverage Ratio
 (calculated based on the ratio of Consolidated Total Debtterminated all interest rate swaps and collars attributable to Consolidated EBITDA, each as defined in the Term Loan, Credit Agreement) was 7.50x throughrecognized a gain on derivatives and received cash of $25.8 million during the first quarter of 2023; 7.25x thereafter through the third quarter of 2023; 7.00x thereafter through the first quarter of 2024; 6.75x thereafter through the first quarter of 2025; 6.50x thereafter through the first quarter of 2026; 6.25x thereafter through the fourth quarter of 2026; and 6.00x in the first quarter of 2027 and thereafter. The Company was in compliance with all financial covenants as ofperiod ended June 30, 2023 and December 31, 2022.
Borrowings under the Term(the “Term Loan
bear
the following applicable rates: interest rates
are
based on 6.00% plus an alternate base rate and 7.00% plus an adjusted eurocurrency rate for alternate base rate loans and eurocurrency loans, respectively.
The applicable interest rates were 
12.16% and 10.67% as of June 30, 2023 and December 31, 2022, respectively.
Commencing with the fiscal year ending December 31, 2023, an excess cash flow payment that would reduce the principal balance of the Term Loan would have potentially been due 120
 days following the end of each fiscal year. This excess cash flow payment was based on the Leverage Ratio (calculated based on the ratio of Consolidated Total Debt to Consolidated EBITDA, each as defined in the Term Loan Credit Agreement) at year end. Based on the calculated ratio, a payment percentage would have been applied to the excess cash flow to determine the amount, if any, due. 
The Term Loan Credit Agreement
restricts
certain of Kodiak’s wholly-owned subsidiaries’ ability to
:
incur additional indebtedness and guarantee indebtedness; pay dividends or make other distributions or repurchase or redeem equity interests; prepay, redeem or repurchase certain debt; issue certain preferred units or similar equity securities; make loans and investments; sell, transfer or otherwise dispose of assets; incur liens; enter into transactions with affiliates; enter into agreements restricting such restricted subsidiaries’ ability to pay dividends; enter into certain swap agreements; amend certain organizational documents; enter into sale and leaseback transactions; and consolidate, merge or sell all or substantially all of such subsidiaries’ assets.
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As of June 30, 2023, the scheduled maturities, without consideration of potential mandatory prepayments, of the long-term debt were as follows (
in thousands
Derivative Settlement”):
   
Amount
 
Years ended December 31,     
Remainder of 2023  $—   
2024   —   
2025   —   
2026   —   
2027   —   
Thereafter   2,824,691 
      
Total  $2,824,691 
      
. On July 3, 2023, in connection with the IPO, the Company used the net proceeds from the IPO, together with the proceeds resulting from the Term Loan Derivative Settlement and borrowings under the ABL Facility, to repay $300 million of borrowings outstanding under the Term Loan. Additionally, a subsidiary of Kodiak entered into a Novation, Assignment and Assumption Agreement (“Novation Agreement”) with Frontier TopCo Partnership, L.P., an affiliate of EQT AB and holder of record of Kodiak Holdings,Gas Services, Inc. common stock (“Kodiak Holdings”), pursuant to which all of the Company’s remaining obligations under the Term Loan were assumed by Kodiak Holdings, and the Company’s obligations thereunder were terminated effective July 3, 2023.terminated. The Company is no longer a borrower or guarantor under norand is not otherwise obligated with respect to the debt outstanding under the Term Loan. See Note 19 (“Subsequent Events”) for further details.
Deferred Financing Costs
There wereAs part of the $300 million repayment of the Term Loan, unamortized debt issuance costs of $55.3$4.4 million and $34.2fees of $2.4 million at June 30, 2023 andwere recorded to loss on extinguishment for the year ended December 31, 2022, respectively, which2023. The carrying value of the Term Loan novated under the Novation Agreement of $689.8 million (comprised of $700.0 million of principal balance less $10.2 million of unamortized debt issuance costs) was considered an equity transaction with the parent and recorded to additional paid-in capital in the statement of stockholder's equity for the year ended December 31, 2023.
2029 Senior Notes
On February 2, 2024, Kodiak Services issued $750,000,000 aggregate principal amount of 7.25% senior notes due 2029 (the “2029 Senior Notes”), pursuant to an indenture, dated February 2, 2024, by and among the Company, and certain other subsidiary guarantors party thereto, and U.S. Bank Trust Company, National Association, as trustee. The Company’s 2029
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Senior Notes are not subject to any mandatory redemption or sinking fund requirements. The 2029 Senior Notes are subject to redemption at a make-whole redemption price, inclusive of accrued and unpaid interest. This make-whole redemption price is determined as the higher of 100% of the principal amount of the notes or the present value of remaining principal and interest payments discounted semi-annually to the redemption date using the applicable treasury rate plus 0.50%. Before February 15, 2026, the Company has the option to redeem up to 40% of the aggregate principal amount of the Notes issued under this Indenture, limited to the net cash proceeds of one or more equity offerings. Following February 15, 2026, the Company retains the right to redeem all or a portion of the 2029 Senior Notes, with redemption prices expressed as percentages of the principal amount, along with accrued and unpaid interest.
The optional redemption percentages for the 2029 Senior Notes are as follows:
Percentage
2026103.625%
2027101.813%
2028 and thereafter100.000%
The indenture governing the Company’s 2029 Senior Notes contain covenants that, among other things, limit the Company’s ability to create liens securing certain indebtedness, enter into certain sale-leaseback transactions, or consolidate, merge or transfer certain assets. The covenants are subject to a number of important exceptions and qualifications. The Company was in compliance with these covenants at March 31, 2024. Fees and costs totaling $13.4 million were incurred related to the 2029 Senior Notes and will be amortized over the life of the loan to interest expense. During the three months ended March 31, 2024, $5.6 million of the total amount was paid, with the remaining amount included in the accrued liabilities in the Company’s unaudited condensed consolidated balance sheet.
The proceeds from the 2029 Senior Notes were used to repay a portion of the outstanding indebtedness under the ABL Facility and to pay related fees and expenses in connection with the 2029 Senior Notes offering. In connection with the close of the CSI Acquisition on April 1, 2024, the Company used proceeds from additional draws on the ABL Facility to repay, terminate and/or redeem all of the CSI Compressco’s existing long-term indebtedness and pay fees, costs, premiums and expenses related to the prepayment, notes offering and acquisition. See Note 20 (“Subsequent Events”) to the Company’s condensed consolidated financial statements for more details.
As of March 31, 2024, the scheduled maturities, without consideration of potential mandatory prepayments, of the Company’s long-term debt were as follows (in thousands):
Amount
Years ended December 31,
2024$— 
2025— 
2026— 
2027— 
20281,130,846 
Thereafter750,000 
Total$1,880,846 
Debt Issuance Costs
Debt issuance costs of $52.6 million, as of March 31, 2024, are being amortized over the respective terms of the ABL Facility and Term Loan.2029 Senior Notes. As of December 31, 2023, $38.9 million was amortized over the term of the ABL Facility. Amortization expense related to these costs of $5.6$2.6 million and $11.1$5.4 million for the three and six months ended June 30,March 31, 2024, and 2023, respectively, are included in interest expense in the accompanying condensed consolidated statements of operations. Amortization expense was $3.4 million and $5.2 million for the three and six months ended June 30, 2022.
10. Derivative Instruments
The Company has entered into interest rate swaps, exchanging variable interest rates for fixed interest rates andrates. In prior periods, the Company entered into interest rate collars that fixfixed interest rates within a range through the simultaneous
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purchase of an interest rate cap and sale of an interest rate floor. The Company has not designated any derivative instruments as hedges for accounting purposes and does not enter into such instruments for speculative or trading purposes. The Company’s cash flow is only impacted whenderivative instruments are recognized on the actual settlements underunaudited condensed consolidated balance sheets at fair value and classified as current or long-term depending on the maturity date of the derivative contracts resultinstrument and whether the net carrying value is in a net asset or net liability position. Realized and unrealized gains and losses associated with the Company making a payment to or receiving a payment fromderivative instruments are recognized in gain (loss) on derivatives within the counterparty. Cash flows from all derivative activity for the periods presented appear in the operating section on theunaudited condensed consolidated statements of cash flows.operations.
As a result of the increase to the ABL Facility and Term Loan during the year ended 2022, the Company entered into an additional $975.0 million notional amounts of interest rate swaps to comply with hedging requirements set forth in the credit agreements.
On June 29, 2023, the Company terminated all interest rate swaps and collars attributable to the Term Loan and recognized a realized gain of $25.8 million during the period ended June 30, 2023 (the “Term Loan Derivative Settlement”).
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The table below summarizes information related to the notional amount and maturity dates for interest rate swaps at June 30, 2023:
March 31, 2024:
Notional AmountEffective dateMaturities
Notional Amount
$225,000,000		12/14/2022
Maturities
12/5/2024
$125,000,000200,000,0006/16/202212/4/20246/14/2025
$225,000,000125,000,0005/2/202412/5/20249/2/2025
$200,000,000125,000,00012/6/202412/6/14/2025
$125,000,00075,000,0006/15/202212/6/202514/2026
$175,000,000125,000,0006/22/20226/14/22/2026
$125,000,00012/6/202412/6/22/2026
$125,000,000100,000,0005/2/202412/6/20263/2/2027
$75,000,0006/14/20225/18/2027
$100,000,0006/21/20225/19/2027
$200,000,0007/8/20225/19/2027
$125,000,00012/6/202412/6/2027
Of the total notional amount of $1.6 
b
i
l
l
i
o
n
, $0.4 
b
i
llion
 is related to forward dated interest rate swaps with an effective date after June 30, 2023.
The following tables set forth the Company’s assets that were measured at fair value on a recurring basis during the period, by level, within the fair value hierarchy and classification of the Company’s derivative instruments not designated as hedging instruments on the accompanying condensed consolidated balance sheets (
in thousands
):
   
As on June 30, 2023
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Current assets:                    
Interest rate swaps  $—     $—     $—     $—   
                     
Total current assets  $—     $—     $—     $—   
                     
Non-current
assets:
                    
Interest rate swaps  $—     $43,811   $—     $43,811 
                     
Total
non-current
assets
  $—     $43,811   $—     $43,811 
                     
Total  $—     $43,811   $—     $43,811 
                     
   
As of December 31, 2022
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Current assets:                    
Interest rate swaps  $—     $823   $—     $823 
                     
Total current assets  $—     $823   $—     $823 
                     
Non-current
assets:
                    
Interest rate swaps  $—     $48,955   $—     $48,955 
Interest rate collars   —      15,562    —      15,562 
                     
Total
non-current
assets
  $—     $64,517   $—     $64,517 
                     
Total  $—     $65,340   $—     $65,340 
                     
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Table of Contents
The following table summarizes the effects of the Company’s derivative instruments in the condensed consolidated statements of operations (
in thousands
):

Derivative Instruments Not
Designated as
Hedging Instrument
 
Location of Gain (Loss) Recognized
  
 
Three Months Ended June 30,
 
2023
   
2022
 
LocationLocationMarch 31,
20242023
Interest rate collars
Interest rate swaps Unrealized (loss) gain on derivatives  $8,863   $(7,459)
Interest rate collars Unrealized (loss) gain on derivatives   (12,458)    4,073 
 
 
 
 
 
 
 
 
Total unrealized loss on derivative     (3,595)   (3,386
)

 
 
 
 
 
 
 
 
Interest rate swaps Realized gain on derivatives   13,350    —   
Interest rate collars Realized gain on derivatives   12,485     — 
         
Total realized gain on derivatives    25,835    —   
 
 
 
 
 
 
 
 
Total   $22,240   $(3,386)
         
Total gain (loss) on derivatives
Derivative Instruments Not
Designated as
Hedging Instrument
 
Location of Gain (Loss) Recognized
  
 
Six Months Ended June 30,
 
  
2023
   
2022
 
Interest rate swaps Unrealized (loss) gain on derivatives  $(5,967)   $16,413 
Interest rate collars Unrealized (loss) gain on derivatives   (15,562)    16,409 
 
 
 
 
 
 
 
 
 
 
 
Total unrealized (loss) gain on derivative     (21,529)    32,822 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps Realized gain on derivatives   13,350    — 
Interest rate collars Realized gain on derivatives   12,485    — 
 
 
 
 
 
 
 
 
 
 
 
Total realized gain on derivatives     25,835    —   
 
 
 
 
 
 
 
 
 
 
 
             
Total    $4,306   $32,822 
             
The following table summarizes the effects of correcting the restatement in the condensed consolidated statement of operations for the period ended March 31, 2022, as disclosed in Note 2 – Basis of Presentation and Consolidation:
Derivative Instruments Not
Designated as
Hedging Instrument
  
Location of Gain Recognized
   
 
Three Months Ended March 31,
 
  As Previously
Reported		   Restatement
Adjustments		   As Restated 
Interest rate swaps
   Unrealized gain on derivatives   $4,371   $19,501   $23,872 
Interest rate collars
   Unrealized gain on derivatives    3,467    8,869    12,336 
    
 
 
   
 
 
   
 
 
 
Total
    $  7,838   $28,370   $36,208 
    
 
 
   
 
 
   
 
 
 
11. Fair Value Measurements
The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, derivative instruments and long-term debt. The carrying amounts of cash and cash equivalents, accounts receivable accrued liabilities, and accounts payable are representative of their respective Level 1 fair values due to the short-term maturity of these instruments.
The Company’s ABL Facility applies floating interest rates to outstanding amounts; therefore, the carrying amount of the ABL Facility approximates its Level 3 fair value. The fair value of debt and contingent consideration are consideredthe 2029 Senior Notes is determined using Level 3 measurements. These2 inputs, relying on quoted prices in less active markets.
The Company records derivative instruments at fair value measurementsusing Level 2 inputs of the fair value hierarchy. The interest rate swaps are valued using a discounted cash flow analysis based on unobservable inputs. The fair valueavailable market data on the expected cash flows of variableeach derivative using observable inputs, including interest rate long-term debt is based upon the current market ratescurves and credit spreads. See Note 10 (“Derivative Instruments”) for debt with similar credit risk and maturity which approximates fair value. Debt includes the ABL Facility and the Term Loan and is shown net of unamortized debt issuance cost in the tables below. more details.
The contingent consideration liability from a prior year acquisition is measured at fair value each reporting period, using Level 3 unobservable inputs (such as probability assessments of future cash flows), and changes in estimates of fair value are recognized in earnings.
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The fair value estimate reflects the contractual terms of the purchase agreement (e.g., potential payment amounts, length of measurement periods, manner of calculating any amounts due) and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate. Depending on the contractual terms of the purchase agreement, the probability of achieving future cash flows generally represents the only significant unobservable input. There was
no change infollowing table summarizes the fair value of the Company’s interest rate swaps and contingent consideration during the three(in thousands):
Carrying ValueAs of March 31, 2024
Level 1Level 2Level 3Total
Interest rate swap- current$4,226 $— $4,226 $— $4,226 
Interest rate swap- non-current32,465 — 32,465 — 32,465 
Contingent consideration— — — 3,673 3,673 
2029 Senior Notes(1)750,000 — 764,048 — 764,048 
Carrying ValueAs of December 31, 2023
Level 1Level 2Level 3Total
Interest rate swap- current$8,194 $— $8,194 $— $8,194 
Interest rate swap- non-current14,256 — 14,256 — 14,256 
Contingent consideration3,673 — — 3,673 3,673 
(1) Carrying value and six months ended June 30, 2023. See fair value tables below (in thousands):

   
As on June 30, 2023
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Debt  $—     $—     $2,769,355   $2,769,355 
Contingent Consideration   —      —      3,700    3,700 
                     
Total  $—     $—     $2,773,055   $2,773,055 
                     
exclude the deduction for the unamortized debt issuance costs, see Note 9 (“Debt and Credit Facility”) for details.
   
As of December 31, 2022
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Debt  $—     $—     $2,720,019   $2,720,019 
Contingent Consideration   —      —      3,700    3,700 
                     
Total  $—     $—     $2,723,719   $2,723,719 
                     
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12. Stockholders’ Equity
Holders
of the Company’s common stock are entitled to one vote for each share. As of June 30, 2023March 31, 2024, and December 31, 2022,2023, there were
59,000,000
77,434,577 and 77,400,000 shares of common stock issued and outstanding. Holders of common stock are entitled to receive, inoutstanding, respectively. In the event of a liquidation, dissolution or winding up, holders of common stock are entitled to receive, ratably, the assets available for distribution to the stockholders after payment of all liabilities.
As stated in Note 19 (“Subsequent Events”), onOn July 3, 2023, 16,000,000 shares of common stock were issued and sold as part of the closing of the IPO, resulting in net proceeds of $230.8 million, after deducting expenses and onunderwriting discounts and commissions payable by the Company. On July 13, 2023, the underwriters exercised in full their option to purchase additional shares of common stock, pursuant to the underwriting agreement relating to the IPO. On July 13, 2023, the Company issued and sold an additional 2,400,000 shares of common stock. The Company received net proceeds of approximately $36.2 million, after deducting underwriting discounts and commissions payable. The net proceeds of each issuance and sale were used for repayment of existing indebtedness and general corporate purposes. After giving effect to these transactions, Kodiak had 77,400,000 shares of common stock issued and outstanding.
Class B and C Profits Interests
Prior to the IPO, Kodiak Holdings issued incentive awards to certain employees of Kodiak Gas Services LLC (a wholly-owned subsidiary of the Company) in the form of Class B incentive units (“Class B Units”). The Company records a stock-based compensation expense associated with the Class B Units because of the employment relationship of the grantees with Kodiak Gas Services, LLC.Services.
On March 6,16, 2019, 61,098.4 Class B Units were authorized under the Kodiak Holdings 2019 Class B Unit Incentive Plan for grants to certain employees and
non-employee
board members. These Class B Units are intended to constitute “profits interests” for federal income tax purposes, but they constitute a substantive class of equity under GAAP. As of June 30, 2023March 31, 2024, and December 31, 2022,2023, there were 61,068.060,406.9 authorized Class B Units, and 60,363.4 outstanding Class B Units, respectively.57,058.5 were outstanding. There were no Class B Units granted in the sixthree months ended June 30, 2023March 31, 2024, or 2022.in 2023. Twenty-five percent
(25
% (25%) of the Class B Units are subject to time vesting (the “Time-Vesting Units”), and the remaining 75%seventy-five percent (75%) of the Class B Units are subject to performance-vestingperformance vesting (the “Performance-Vesting Units”). Time-Vesting Units vest in equal annual installments on each of the first five anniversaries of the applicable vesting commencement date,dates, subject to the Class B Unit holder’s continuous service through each of the applicable vesting date.dates. Performance-Vesting Units vest based on the achievement of certain investor return metrics, subject to the Class B Unit holder’s continuous service through the applicable vesting date.dates. Holders of Class B Units are entitled to distributions on vested awards in accordance with the Kodiak Holdings distribution waterfall. Class B Units are not subject to any conversion rights other than an automatic conversion to Class C incentive units (“Class C Units”) in connection with certain terminations of employment. Each Class C Unit holder is eligible to receive distributions up to an amount equal to the fair market value of the corresponding converted Class B Unit on the date of conversion. As of June 30, 2023March 31, 2024, no material conversions had occurred.
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There are no performance hurdles associated with the Time-Vesting Units. The fair value of each incentive award was estimated on its applicable grant date using an option pricing model.
Stock compensation expense is recognized ratably over the vesting period of the awards. During the sixthree months ended June 30,March 31, 2024, and 2023, and 2022, approximately $0.9$0.2 million and $0.6$0.9 million, respectively, in stock compensation expense was recognized in selling, general and administrative expenses. As of June 30, 2023,March 31, 2024, there were 3,170.7319.4 unvested Time-Vesting Units, representing $1.3$0.1 million in unrecognized stock compensation expense.
Preferred stock
Preferred stock consists of 50,000,000 authorized shares as of March 31, 2024, of which none were issued.
2023 Omnibus Incentive Plan
On June 20, 2023, Kodiak’s boardBoard of directorsDirectors authorized and adopted the Kodiak Gas Services, Inc. Omnibus Incentive Plan (the “Omnibus Plan”) for employees, consultants and directors. The Omnibus Plan enables Kodiak’s boardBoard of directorsDirectors (or a committee authorized by Kodiak’s boardBoard of directors)Directors) to award incentive and
non-qualified
stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents, other stock-based awards, cash awards and substitute awards intended to align the interests of service providers, including the Company’s named executive officers, with those of the Company’s stockholders. A total of 6,375,000 shares of common stock have been reserved for issuance pursuant to awards under the Omnibus Plan.
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On June 29, 2023, Kodiak granted 1,297,188 shares of common stock equity awards to certain employees, including Kodiak’s named executive officers, pursuant to awards under the Omnibus Plan. Additionally, on March 8, 2024, Kodiak granted 718,820 shares of common stock equity awards to certain employees, including Kodiak's named executive officers, pursuant to awards under the Omnibus Plan.
Restricted Stock Units
Of the total shares of common stock equity awards granted on June 29, 2023, and March 8, 2024, 985,313 of theand 457,053 shares, respectively, were granted pursuant to awards of time-based restricted stock units (“RSUs”) that vest ratably over a three-year period, subject to continuous service through each vesting date.date and other conditions precedent.
On December 8, 2023, the Company provided employees who were eligible to receive cash payments of long-term incentive awards granted in January 2023 under the Company’s 2020 Long-Term Incentive Plan (the “LTIP Plan”) the opportunity to make an election to receive a grant of RSUs that vest ratably over a three-year period in lieu of cash payments. Upon exercising the employees’ elections to convert the cash payments into RSUs, 138,430 RSUs were granted.
Performance Stock Units
Of the total shares of common stock equity awards granted on June 29, 2023, and March 8, 2024, 311,875 of theand 261,767 shares, respectively, were granted pursuant to awards of performance stock units (“PSUs”) that cliff vest at the end of a three-year performance period, with the ultimate number of shares earned and issued ranging from
0-190%
0 - 190% of the number of shares subject to the PSU award, subject to continuous service through the end of the performance period.period and other conditions precedent. The performance criteria for the PSUs are a combination of: (1) Discretionary Cash Flow (“DCF”) (30% weight); (2) Consolidated Net Leverage Ratio (“CNLR”) (30% weight); (3) Absolute Total Shareholders' Return (“ATSR”) (30% weight); and (4) and ESG Scorecard (10% weight) (each as defined below), in each case, during the Performance Period.
DCF is calculated based on the three-year cumulative Adjusted EBITDA less net cash taxes, less net cash interest, less maintenance capital expenditures, all as reported in the financial statement reconciliations provided in the Company’s public filings, measured over the performance period; CNLR is calculated as of the last day of the fiscal quarter at the end of the performance period, as the ratio of (a) Total Indebtedness (as defined in the ABL Credit Agreement) minus Cash, in each case, as of such date to (b) LQA Adjusted EBITDA (defined as EBITDA (as defined in the ABL Credit Agreement) for the fiscal quarter ending at the end of the performance period, multiplied by four). ATSR is determined on an annualized basis over the relevant performance period for the beginning and ending 20-day volume-weighted average price, as adjusted for dividends paid.
•The vesting of the PSUs based on DCF, CNLR, and ATSR will each be (i) 200% if the Company achieves performance at maximum; (ii) 100% if the Company achieves performance at target; (iii) 50% if the Company achieves performance at threshold level; and (iv) 0% if the Company achieves performance below threshold; and
16


•The vesting of the PSUs based on ESG Scorecard will be (i) 100% if the Company achieves ESG targets and (ii) 0% if the Company does not achieve ESG Scorecard.
With respect to each PSU, each PSU holder is granted associated dividend equivalents rights. In the event that the Company declares and pays a regular cash dividend, and on the record date for such dividend, the Company will accrue a dividend equivalent based on the number of PSUs expected to vest.
The following table summarizes award activity under the Omnibus Plan for the
six-month
three-month period ending June 30, 2023:March 31, 2024:
RSUsPSUs
Number of
RSUs		Weighted-
Average Price		Number of
PSUs		Weighted-
Average Price
Outstanding at January 1, 20241,079,603$16.29 311,875$16.99 
Granted457,05325.13 261,76728.88 
Vested or exercised(34,577)18.20 —— 
Forfeited or cancelled(28,307)17.14 —— 
Outstanding at March 31, 20241,473,772$18.97 573,642$22.42 
Stock awards expected to vest1,473,772$18.97 573,642$22.42 
   
RSUs
   
PSUs
 
   
Number of

RSUs
   
Weighted-

Average Price
   
Number of

PSUs
   
Weighted-

Average Price
 
Outstanding at December 31, 2022   —      —      —      —   
Granted   985,313   $16.00    311,875   $16.00 
Vested or exercised   —      —      —      —   
Forfeited   —      —      —      —   
                     
Outstanding at June 30, 2023   985,313   $16.00    311,875   $16.00 
                     
Restricted stock awards expected to vest   985,313   $16.00    311,875   $16.00 
                     
As of June 30, 2023,March 31, 2024, the total future compensation cost related to unvestednon-vested equity awards was approximately $20.8$33.2 million, assuming the performance-based restricted stock units vest at 100% per, pursuant to the terms of the applicable award. During the three months ended March 31, 2024, approximately $2.7 million in stock compensation expense was recognized in selling, general and administrative expenses. There was no such expense recorded for the three months ended March 31, 2023.
Dividends
The following table summarizes the Company’s dividends declared and paid in each of the quarterly periods of 2024 and 2023:
Dividends per Common ShareDividends Paid
(in thousands)
2024
Q1$0.38 $29,815 
2023
Q4$0.38 $29,793 
On May 2, 2024, the Company’s Board of Directors declared a cash dividend of $0.38 per share for the quarterly period ended March 31, 2024, which is payable on May 20, 2024, to shareholders of record as of the close of business on May 13, 2024 (the “Common Stock Dividend”) and, in conjunction with the Common Stock Dividend, Kodiak Gas Services declared a distribution on its units of $0.38 per unit payable on May 20, 2024 to all unitholders of record of Kodiak Services as of the close of business on May 16, 2024.
13. Commitments and Contingencies
Accrued Capital Expenditures
As of March 31, 2024, and December 31, 2023, the Company has accrued capital expenditures of $40.4 million and $30.5 million, respectively. These amounts were included in accounts payable or accrued liabilities on the consolidated balance sheets.
17


Purchase Commitments
Purchase commitments of $129.2 million primarily consist of future commitments to purchase new compression units
that
are have been ordered but not yet received. As of March 31, 2024, these commitments amounted to $106.6 million, all of which is expected to be settled within the next twelve months.
Contingent Consideration
The Company agreed to pay, as contingent consideration, up to $3.7 million of certain past due accounts receivable acquired in connection with a prior acquisition in 2019, if collected, to the seller if collected.in that transaction. The Company records contingent consideration at the acquisition and end of reporting periods at fair value in accrued liabilities. As of June 30, 2023March 31, 2024, and December 31, 2022,2023, none of the outstanding receivables had been collected.
Sales Tax Contingency
Between October 2019 and April 2023, the Company received notices from the Texas Comptroller’s office in regards to audits for periods ranging from December 2015 through December 2022.2023. The audits pertain to whether the Company may owe sales tax on certain of its compression equipment that it had purchased during that time period. As of December 31, 2022,2023, the Company had accrued a total amount of $27.8$28.8 million for this contingent liability. During the sixthree months ended June 30, 2023,March 31, 2024, based on current information, the Company accrued an additional $0.6 million and as$0.4 million. As of June 30, 2023,March 31, 2024, the Company had accrued a total of $28.4$29.2 million for this contingent liability.included as accrued liabilities on the condensed consolidated balance sheets.
Legal Matters
From time to time, the Company may become involved in various legal matters. Management believes that as of March 31, 2024, there are no legal matters as of June 30, 2023 whose resolution could have a material adverse effect on the unaudited condensed consolidated financial statements.
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14. Prepaid Expenses and Other Current Assets
The prepaidPrepaid expenses and other current assets consis
t
consist of the following (
in thousands):
As of March 31, 2024As of December 31, 2023
Prepaid insurance$995 $2,353 
Interest rate swap receivable1,296 2,025 
Prepaid vehicle allowance1,149 1,130 
Deferred project costs— 737 
Prepaid rent532 532 
Other1,278 3,577 
Total prepaid expenses and other current assets$5,250 $10,353 
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):
   
As of

June 30, 2023
   
As of

December 31,

2022
 
Prepaid insurance  $6,047   $3,997 
Prepaid rent   799    589 
Deferred IPO issuance costs   8,462    3,047 
Other   4,893    1,887 
           
Total prepaid expenses and other current assets  $20,201   $9,520 
           


15. Accrued Liabilities
Accrued liabilities consist of the following (
in thousands
):
As of March 31, 2024As of December 31, 2023
Sales tax liability$29,171 $28,847 
Accrued bonus6,957 13,259 
Accrued accounts payable28,577 15,506 
Accrued interest13,393 8,313 
Station project accrual5,284 7,797 
Accrued taxes10,280 6,415 
Accrued professional fees3,015 6,015 
Contingent consideration3,673 3,673 
Accrued payroll1,519 3,321 
Accrued insurance— 856 
Lease liabilities - current portion3,065 — 
Other3,917 3,076 
Total accrued liabilities$108,851 $97,078 
   
As of

June 30, 2023
   
As of

December 31,

2022
 
Sales tax liability  $28,406   $27,820 
Accrued interest   7,678    16,347 
Accrued bonus   9,034    7,764 
Accrued taxes   10,534    9,667 
Accrued payroll   2,674    2,744 
Accrued legal fee   4,183    1,906 
Lease liabilities - current portion   4,853    3,090 
Contingent consideration   3,673    3,673 
Accrued accounts payable   13,549    14,080 
Accrued insurance   710    2,231 
Other   3,146    4,551 
           
Total accrued liabilities  $88,440   $93,873 
           
16. Income Taxes
For the three and six months ended June 30, 2023,March 31, 2024, the Company recorded income tax expense of $5.9$9.9 million, and $1.9 million, respectively. Income tax expense for the three and six months ended June 30, 2022 was $2.8
million and $18.2 million, respectively.March 31, 2023, the Company recorded income tax benefit of $4.0 million. The effective tax rate was approximately 25.0% and 26.5%24.6% for the three and six months ended June 30, 2023,March 31, 2024, compared to 23.8% and 23.7%24.4% for the three and six months ended June 30, 2022.March 31, 2023. The difference between the Company’s effective tax rates for the three and six months ended June 30,March 31, 2024, and 2023 and 2022 and the U.S. statutory tax rate of 21% was primarily due to state income taxes.
In August 2022, the U.S. Inflation Reduction Act of 2022 and the CHIPS and Science Act of 2022 were signed into law. These acts include, among other provisions, a corporate alternative minimum tax of 15%, an excise tax on the repurchase of corporate stock, various climate and energy provisions and incentives for investment in semiconductor manufacturing. These provisions are not expected to have a material impact on the Company’s results of operations or financial position.
The Company did not have any uncertain tax benefits as of June 30, 2023March 31, 2024, and December 31, 2022.2023. For the three and six months ended June 30,March 31, 2024 and 2023, and 2022, the Company had no accrued interest or penalties related to uncertain tax positions, and no amounts had been recognized in the condensed consolidated statementstatements of operations.
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17. Defined Contribution Plan
The Company maintains a defined contribution savings plan for its employees. The Company contributed $0.8$0.9 million and $1.6$0.8 million to the plan for the three and six months ended June 30,March 31, 2024, and 2023, respectively. The Company contributed $0.7 million and $1.4 million to the plan for the three and six months ended June 30, 2022, respectively.
18. Segments
The Company manages its business through two operating segments: Compression Operations and Other Services. Compression Operations consists of operating Company-owned and customer-owned compression infrastructure, for its customers, pursuant to fixed-revenue contracts to enable the production, gathering and transportation of natural gas and oil. Other Services consists of a full range of contract services to support the needs of customers, including station construction, maintenance and overhaul, and other ancillary time and material basedmaterial-based offerings.
The Company evaluates performance and allocates resources based on the gross margin of each segment, which includesconsists of revenues directly attributable to the specific segment and(less all costs of service directly attributable to the specific segment, which includes cost of operations and depreciation and amortization.amortization). Depreciation and amortization for the Compression Operations segment was $
90.3$46.9 million and $85.8$44.9 million for the sixthree months ended June 30,March 31, 2024, and 2023, and 2022,
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respectively. Revenue includes only sales to external customers.
The following table represents financial metrics by segment (
in thousands
):
   
Compression

Operations
   
Other

Services
   
Total
 
Three Months Ended June 30, 2023
               
Revenue  $181,619   $21,687   $203,306 
Gross margin   71,172    3,588    74,760 
Total assets   3,219,556    41,807    3,261,363 
Capital expenditures   45,453    —      45,453 
Three Months Ended June 30, 2022
               
Revenue  $162,808   $14,343   $177,151 
Gross margin   61,075    2,569    63,644 
Total assets   3,051,426    17,743    3,069,169 
Capital expenditures   74,129    —      74,129 
  
Compression

Operations
   
Other

Services
   
Total
 
Six Months Ended June 30, 2023
         
Compression
Operations		Compression
Operations		Other
Services		Total
Three Months Ended March 31, 2024
Revenue
Revenue
Revenue  $359,316   $34,102   $393,418 
Gross margin   141,202    7,015    148,217 
Total assets   3,219,556    41,807    3,261,363 
Capital expenditures   94,034    —      94,034 
Six Months Ended June 30, 2022
         
Three Months Ended March 31, 2023
Revenue
Revenue
Revenue  $320,303   $25,189   $345,492 
Gross margin   123,228    4,588    127,816 
Total assets   3,051,426    17,743    3,069,169 
Capital expenditures   145,952    —      145,952 
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The following table reconciles total gross margin to income before income taxes (
in thousands
):
Three Months Ended March 31,
20242023
Total gross margin$84,982 $73,457 
Selling, general and administrative expenses(24,824)(13,085)
Loss on sale of property, plant and equipment— (17)
Interest expense, net(39,740)(68,662)
Gain (loss) on derivatives19,757 (7,995)
Other expense(68)(31)
Income (loss) before income taxes$40,107 $(16,333)
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2023
   
2022
   
2023
   
2022
 
Total gross margin  $74,760   $63,644   $148,217   $127,816 
Selling, general and administrative expenses   (13,438)    (11,740)    (26,523)    (21,570) 
Gain on sale of fixed assets   738    —      721    7 
Interest expense, net   (60,964)    (36,829)    (119,687)    (62,469) 
Realized gain on derivatives   25,835    —      25,835    —   
Unrealized (loss) gain on derivatives   (3,595)    (3,386)   (21,529)    32,822 
Other (expense) income   32    (7)    1    9 
                     
Income before income taxes  $23,368   $11,682   $7,035   $76,615 
                     
19. Subsequent Events
Earnings Per Share of Common Stock
The following events occurred subsequent toBasic earnings per share is computed using the date the condensed financial statements were available to be issued:
On July 3, 2023, the Company issued and sold 16,000,000weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock is computed by using the weighted average shares of common stock outstanding, including the dilutive effect of restricted shares based on an average share price during the period. For the three months ended March 31, 2024, 99,015 unvested performance stock units were not included in the calculation of the potential dilutive common shares for the period because to do so would be anti-dilutive. For the three months ended March 31, 2023, there were no anti-dilutive shares. The computations of basic and diluted earnings per share for the three months ended March 31, 2024, and 2023 are as partfollows:
Three Months Ended March 31,
(in thousands, except share and per share data)20242023
Net income (loss)$30,232 $(12,343)
Basic weighted average shares of common stock77,432,28359,000,000
Effect of dilutive securities670,167—
Diluted weighted average shares of common stock78,102,45059,000,000
Basic earnings (loss) per share of common stock$0.39 $(0.21)
Diluted earnings (loss) per share of common stock$0.39 $(0.21)
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20. Subsequent Events
On April 1, 2024 (the “Closing Date”), the Company completed the acquisition of 100% of the issued and outstanding partnership interests of CSI Compressco pursuant to the terms of the Merger Agreement for a total aggregated purchase price of $994.1 million, including the issuance of the equity shares described below and the repayment of $651.8 million of debt assumed in the acquisition using proceeds from the Company’s ABL Facility. Under the Merger Agreement, CSI Compressco unitholders received 0.086 shares of Kodiak common stock for each CSI Compressco common unit owned and certain CSI Compressco unitholders meeting specified requirements (the “Electing Unitholders”) elected to receive limited liability company units representing economic interests in Kodiak Services (“OpCo Units”) (along with an equal number of shares of Kodiak’s non-economic voting preferred stock), for each CSI Compressco common unit they held. Each OpCo Unit will be redeemable at the option of the holder for (i) one share of Kodiak common stock (along with cancellation of a corresponding share of preferred stock) or (ii) cash at Kodiak Services’ election, following a six-month post-closing lock-up and subject to certain conditions. On or after April 1, 2029, Kodiak shall have the right to effect redemption of OpCo Units. The OpCo Units represent and will be accounted for as noncontrolling interests in Kodiak Services. Each share of preferred stock entitles the holder to one vote per share, voting proportionally with holders of Common Stock. The preferred stock lacks economic benefits beyond its par value of $0.01 per share (with a maximum value of $50,000), as it does not participate in earnings or cash dividends of Kodiak. Rather, it solely represents a voting share. Pursuant to the Merger Agreement, the Company issued 6,785,673 shares of common stock and 5,562,273 shares of preferred stock with an equal number of OpCo Units with an estimated fair value of $342.3 million based on the Company’s stock price on April 1, 2024. Transaction costs of $7.9 million associated with the acquisition are included within selling, general and administrative expenses for the three months ended March 31, 2024. The Company will apply the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations to account for the transaction and expect to record any purchase price accounting adjustments in the second quarter of 2024. The Company will record the assets acquired and liabilities assumed at their fair values as of the acquisition date. Due to the limited time since the closing of the IPO, resulting in net proceedsacquisition, the valuation efforts and related acquisition accounting is incomplete at the time of approximately $231.4 million, after deducting expensesthe filing of these unaudited condensed consolidated financial statements. As a result, the Company is unable to provide amounts recognized as of the acquisition date for major classes of assets and underwriting discountsliabilities acquired, including goodwill and commissions payable by us. other intangible assets. In addition, because the acquisition accounting is incomplete, the Company is unable to provide the supplemental pro forma revenue and earnings for the combined entity, as the pro forma adjustments are expected to primarily consist of estimates for the depreciation of property, plant and equipment acquired, amortization of identifiable intangible assets acquired and related income tax effects, which will result from the purchase price allocation and determination of the fair values for the assets acquired and liabilities assumed.
The Company subsequently usedentered into the net proceeds, togetherfollowing agreements concurrently with the proceeds resulting fromclosing of the Term Loan Derivative Settlement and borrowings underacquisition.
Registration Rights Agreement
On the ABL Facility, to repay $300 million of borrowings outstanding underClosing Date, the Term Loan. Additionally, a subsidiary of KodiakCompany entered into a Novation, Assignment, and Assumption Agreementregistration rights agreement with Kodiak Holdings,the Electing Unitholders (the “Registration Rights Agreement”), pursuant to which, allamong other things, the Electing Unitholders were granted customary rights to require us to file and maintain the effectiveness of the Company’s remaining obligations under the Term Loan were assumed by Kodiak Holdings, and the Company’s obligations thereunder were terminated. The Company is no longer a borrower or guarantor under, nor otherwise obligatedshelf registration statement with respect to the debt outstandingresale of the Kodiak common stock received by the Electing Unitholders, and under certain circumstances, to require us to undertake underwritten offerings of such Kodiak common stock.
OpCo LLC Agreement
On the Term Loan.Closing Date, the Company entered into the Sixth Amended and Restated Limited Liability Company Agreement of Kodiak Services (the “OpCo LLC Agreement”) with Kodiak Services and the Electing Unitholders. The Company will continue to operate its’ business through Kodiak Services, which will continue to directly or indirectly hold all of the assets and operations of Kodiak and CSI Compressco. The Company is the sole managing member of Kodiak Services and are responsible for all operational, management and administrative decisions relating to Kodiak Services’ business and will consolidate financial results of Kodiak Services and its subsidiaries. Kodiak Services is governed by the OpCo LLC Agreement.
Certificate of Designation
On July 1
3
, 2023,March 28, 2024, the underwriters exercised in full their option to purchase additional sharesCompany filed the Certificate of common stock pursuant toDesignation of Series A Preferred Stock (the “Certificate of Designation”) with the Underwriting Agreement relating toDelaware Secretary of State. On the IPO. On July 13, 2023,Closing Date of the CSI Acquisition, the Company issued and sold an additional 2,400,0005,562,273 shares of common stock at a priceSeries A Preferred Stock to the publicElecting Unitholders. The rights of $16.00 per share. Theholders of Series A Preferred Stock will be governed by the Company’s charter and bylaws, the Certificate of Designation and Delaware law.
Supplemental Indenture
21


In connection with the CSI Acquisition, on April 2, 2024, the Company, received net proceedsKodiak Services, the existing subsidiary guarantors and certain subsidiaries of approximately $36.2 million, after deducting underwriting discounts and commissionsKodiak Services acquired in connection with the CSI Acquisition (the “New Subsidiary Guarantors”) entered into a supplemental indenture with U.S. Bank Trust Company, National Association, as trustee under the Indenture (as defined below), pursuant to which the New Subsidiary Guarantors agreed to guarantee the obligations under the Indenture.
payable. The net proceeds were used for repayment of existing indebtedness and general corporate purposes.
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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Report. The following discussion includes forward-looking statements that involve certain risks and uncertainties. For further information on items that could impact our future operating performance or financial condition, see the sections entitled “Risk Factors” insection of our Annual Report on Form 10-K for the IPO Prospectusfiscal year ended December 31, 2023, and “Cautionary StatementNote Regarding Forward-Looking Statements” elsewhere in this Report. We assume no obligation to update any of these forward-looking statements, except as required by law. Unless otherwise indicated or the context otherwise requires, the historical financial information in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” reflects only the historical financial results of Kodiak Gas Services, Inc. and its consolidated subsidiaries and references to the “Company,” “we,” “our,” or “us” are to Kodiak Gas Services, Inc. and its consolidated subsidiaries.

Overview

We are a leading operator of contract compression infrastructure in the U.S. Our compression operations (“Compression
Operations”) and related services are critical to our customers’ ability to reliably produce, gather and transport natural gas and oil to support growing global energy demand.oil. We are a market leader in the Permian Basin, which is the largest producing natural gas and oil basin in the U.S. We operate our large horsepower compression units under stable, fixed-revenue contracts with blue-chipmany upstream and midstream customers. Our compression assets have long useful lives consistent with the expected production lives of the key regions where we operate. We believe our partnership-focusedcustomer-centric business model positions us as the preferred contract compression operator for our customers and creates long-standing relationships. We strategically invest in the training, development and retention of our highly skilled and dedicated employees and believe their expertise and commitment to excellence enhances and differentiates our business model. Furthermore, we maintain an intense focus on being one of the most sustainable and responsible operators of contract compression infrastructure.

We manage our business through two operating segments: Compression Operations and Other Services. Compression Operations consists of operating Company-owned and customer-owned compression infrastructure for our customers, pursuant to fixed-revenue contracts to enable the production, gathering and transportation of natural gas and oil. Other Services consists of a full range of contract services to support the needs of our customers, including station construction, maintenance and overhaul, andplus other ancillary time and material basedmaterial-based offerings. Our Other Services offerings are often cross-soldcross sold with Compression Operations.

Trends and Outlook

We provide

Recent Developments
CSI Acquisition
On April 1, 2024, we completed the acquisition of CSI Compressco, pursuant to the terms of the definitive merger agreement executed on December 19, 2023, creating the industry’s largest contract compression infrastructurefleet with revenue-generating horsepower of approximately 4.3 million. CSI Compressco unitholders received 0.086 shares of Kodiak common stock for customerseach CSI Compressco common unit owned. The Electing Unitholders elected to receive 0.086 limited liability company units representing economic interests in Kodiak Services (along with an equal number of shares of non-economic voting preferred stock of Kodiak) for each CSI Compressco common unit they held. At the option of the holder, each such unit will be redeemable for one share of Kodiak common stock (along with cancellation of a corresponding share of preferred stock), following a six-month post-closing lock-up and subject to certain conditions. See Note 20 (“Subsequent Events”) to our condensed consolidated financial statements for more information.
Enhancement and Standardization of Climate-Related Disclosures
In March 2024, the SEC adopted rules to enhance and standardize climate-related disclosures. The final rules require disclosure of the following information in the oil and gas industry. Our assets are specifically utilized in natural gas compression applications in the Permian Basin, Eagle Ford Shalefootnotes to financial statements, subject to certain materiality thresholds:
•Financial statement effects of severe weather events and other U.S. regions. Our customers are dependent on these applicationsnatural conditions;
•Impacts to estimates and assumptions used to produce financial statements associated with severe weather events and other natural gasconditions or any disclosed climate-related targets or transition plans; and oil and transport it
•Financial statement effects related to end markets. Our assets are centralcarbon offsets or renewable energy credits/certificates used as part of plans to meeting growing global natural gas and oil demand. Furthermore,achieve climate-related goals.
In addition, registrants will be required to disclose outside of financial statements information about the long-life nature of our assets and our fixed-revenue contracts help to protect our business from thematerial impact of industryclimate-related risks on strategy, business model and broader macroeconomic cycles.

Unconventional resources, large-scale centralized gatheringoutlook; risk management processes for, and multi-well pad operations require more horsepower than conventional resources, driving demand for our large horsepower compression units. Upstreamgovernance and midstream companies have increasingly prioritized capital disciplineoversight activities of those risks; and return of capital to stockholders. We believe that our customers will increasingly continue to outsource their compression infrastructure needs to reduce capital expenditures outside of their core business and benefit from our technical skill and expertise.

We believe that the industry is facing uncertainties and continued pressures from regulators and shifting sentiments from investors and other stakeholders, primarilymaterial climate-related targets or goals. Information related to broader adoption of emission reduction targets and other sustainability initiatives. Many energy companies, including some of our customers, have announced significant GHG emission reduction initiatives. We expect to partially benefit from this trend as 96% of our current fleet is capable of operating in the most stringentmaterial greenhouse gas emissions regulatory environments in the U.S., which require emissions of 0.5g/bhp-hr NOx or less. A growing number of our customers are evaluating potential opportunities in electric compression infrastructure and we are well positioned to support them in these strategic initiatives.

Eighty-four percent of our compression assets are strategically deployed in the Permian Basin and Eagle Ford Shale, which the United States Energy Information Administration (“EIA”) expects to maintain significant production volumes through at least 2050. We believe these two regions have the largest and lowest-cost unconventional resources in the U.S. exhibiting strong recent growth of natural gas and crude oil production from the two regions of 13% and 12%, respectively, on an average annual basis from 2017 to 2022. Additionally, there are significant U.S. liquefied natural gas (“LNG”) export projects in development, and overall LNG export capacity is expected to meaningfully grow over the next decade, in particular

20

along the U.S. Gulf Coast with liquefaction capacity expected to grow 41% from 14.5 MTPA in 2022 to 20.5 MTPA in 2025 from projects that have declared final investment decisions as of June 30, 2023. We expect this to translate into Permian Basin and Eagle Ford Shale natural gas production growth, requiring substantial additional compression horsepower. We believe these regions will play an increasingly important role in global energy security as the world continues to require reliable and growing natural gas and oil production to support increasing global energy demand.

Ultimately, the extent to which our business will be impacted by the factors described above, as well as future developments beyond our control, cannotrequired for certain registrants but will not be predicted with reasonable certainty. However, we continue to believe in the long-term demandrequired for our compression operations given the necessity of compression in gathering, processing and transportation of natural gas and centralized gas lift of oil.

The foregoing market data and certain other statistical information is based on the EIA’s Annual Energy Outlook 2023, released on March 16, 2023 (the “EIA Report”). Although we believe the EIA Report is reliable as of its date, we have not independently verified the accuracy or completeness of the information contained therein. Some data is alsous based on our good faith estimatescurrent filer status.

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The final rules include a phased-in compliance period for all registrants, with the compliance date dependent on the registrant’s filer status and the content of the disclosure. Based on our management’s understandingcurrent filer status, we will be required to comply with the final rules beginning with our annual report for the fiscal year beginning January 1, 2027. We are assessing the new climate-related disclosure rules, awaiting decisions on their legal status and determining an implementation plan to comply with the disclosure requirements in accordance with the prescribed timeline.

Operational Highlights
The following table summarizes certain horsepower, unit count and horsepower utilization percentages for our fleet for the periods presented.
As of March 31,Percentage Change
20242023
Operating Data (at period end):
Fleet horsepower (1)3,2913,1753.7 %
Revenue-generating horsepower (2)3,2863,1693.7 %
Fleet compression units3,0913,0411.6 %
Revenue-generating compression units3,0643,0331.0 %
Revenue-generating horsepower per revenue-generating compression unit (3)1,0721,0452.6 %
Horsepower utilization (4)99.8 %99.8 %— %
(1)Fleet horsepower includes revenue-generating horsepower and idle horsepower, which is comprised of industry conditions. The industry in which we operate iscompression units that do not have a signed contract or are not subject to a high degreefirm commitment from our customer(s) and are no longer generating revenue. Fleet horsepower excludes 27,663 and 58,645 of uncertaintynon-marketable or obsolete horsepower as of March 31, 2024, and risk due to a variety of factors, including those described in the section entitled “Risk Factors”2023, respectively.
(2)in the IPO Prospectus. Those and other factors could cause results to differ materially from those expressed in these publications.

How We Evaluate Our Operations

Revenue-Generating Horsepower

Revenue-generating horsepower growth is the primary driver of our revenue growth, and it is the base measure for evaluating our efficiency of capital deployed. Revenue-generating horsepower includes (x) compression units that are operating under contract and generating revenue and (y) compression units which are available to be deployed, and for which we havepursuant to a signed contract, or are subject to a firm commitment from our customer.

(3)Calculated as (i) revenue-generating horsepower divided by (ii) revenue-generating compression units at period end.
(4)Horsepower Utilization

We calculate horsepower utilization is calculated as (i) revenue-generating horsepower divided by (ii) fleet horsepower.

Horsepower
The primary reason for tracking and analyzing our horsepower utilization is to determine the percentage of our fleet that is currently generating revenue for future cash flow generation and the efficiency of our capital deployed.

Revenue-Generating Horsepower per Revenue-Generating Compression Unit

We calculate revenue-generating horsepower per revenue-generating compression unit as (i) total revenue-generating horsepower divided by (ii) total revenue-generating compression units. The primary reason for tracking and analyzing our revenue-generating horsepower per revenue-generating compression unit is to determine our expected operational and financial performance.

Revenue

One of our measures of financial performance is the amount of revenue generated quarterly and annually as revenue is an indicator of our overall business growth. We measure our revenue under two operating segments, Compression Operations and Other Services. We consider our Compression Operations revenue to be our core operations and it will continue to be the largest revenue source for the Company.

Adjusted Gross Margin

We track Adjusted Gross Margin on an absolute dollar basis and as a percentage of revenue. We define Adjusted Gross Margin as revenue less cost of operations, exclusive of depreciation and amortization expense. We believe that Adjusted Gross Margin is useful to external users as a supplemental measure of our operating profitability. Adjusted Gross Margin is impacted primarily by the pricing trends for service operations and cost of operations, including labor rates for service technicians, volume and per compression unit costs for lubricant oils, quantity and pricing of routine preventative maintenance on compression units and property tax rates on compression units.

Adjusted Gross Margin should not be considered an alternative to, or more meaningful than, gross margin or any other measure of financial performance presented in accordance with GAAP. Moreover, Adjusted Gross Margin as presented may not be comparable to similarly titled measures of other

21

companies. To compensate for the limitations of Adjusted Gross Margin as a measure of our performance, we believe that it is important to consider gross margin determined under GAAP, as well as Adjusted Gross Margin, to evaluate our operating profitability. See “—Non-GAAP Financial Measures.”

Adjusted EBITDA

We track Adjusted EBITDA on an absolute dollar basis and as a percentage of revenue. We define Adjusted EBITDA as net income before interest expense, net plus, (i) tax expense (benefit); (ii) depreciation and amortization; (iii) unrealized loss (gain) on derivatives; (iv) equity compensation expense; (v) transaction expenses; (vi) loss (gain) on sale of assets; and (vii) impairment of compression equipment. Adjusted EBITDA is used as a supplemental financial measure by our management and external users of our financial statements, such as investors, commercial banks and other financial institutions, to assess:

the financial performance of our assets without regard to the impact of financing methods, capital structure or historical cost basis of our assets;

the viability of capital expenditure projects and the overall rates of return on alternative investment opportunities;

the ability of our assets to generate cash sufficient to make debt payments and pay dividends; and

our operating performance as compared to those of other companies in our industry without regard to the impact of financing methods and capital structure.

We believe that Adjusted EBITDA provides useful information to investors because, when viewed with our GAAP results and the accompanying reconciliation, they provide a more complete understanding of our performance than GAAP results alone. We also believe that external users of our financial statements benefit from having access to the same financial measures that management uses in evaluating the results of our business.

Adjusted EBITDA should not be considered an alternative to, or more meaningful than, revenues, net income, operating income, cash flows from operating activities or any other measure of financial performance presented in accordance with GAAP as measures of operating performance and liquidity. Moreover, our Adjusted EBITDA as presented may not be comparable to similarly titled measures of other companies. See “—Non-GAAP Financial Measures.”

Sources of Our Revenues

Compression Operations

Compression Operations revenue consists of operating company-owned and customer-owned compression infrastructure for our customers, pursuant to fixed-revenue contracts to enable the production, gathering and transportation of natural gas and oil. Additionally, revenue from these fixed-revenue contracts can include mobilization and demobilization charges that are directly reimbursable by our customers.

Other Services

Other Services revenue consists of a full range of contract services to support the needs of our customers including station construction, maintenance and overhaul, and other ancillary time and material based offerings.

Principal Components of our Cost Structure

Compression Operations

Compression Operations expenses consist of direct and indirect expenses related to operating compression infrastructure assets, such as labor, supplies, machinery, freight, and crane expenses.

Other Services

Other Services expenses consist of compressor station construction and other ancillary expenses to support the needs of customers, including parts, labor, and materials.

22

Depreciation and Amortization

Depreciation expense consists primarily of depreciation on property, plant and equipment purchased and leasehold improvements. Amortization expense consists primarily of amortization of intangible assets related to trade name and customer relationships.

Selling, General and Administrative Expense

Selling, General and Administrative expenses primarily consist of compensation and benefits-related costs associated with our finance, legal, human resources, information technology, administrative, and sales and marketing functions. Selling, General, and Administrative costs also consist of third-party professional service fees for external legal, accounting and other consulting services, rent and lease charges, insurance costs, and software expense.

Long-lived Asset Impairment

Long-lived assets, including property, plant, and equipment, and other finite-lived identifiable intangible assets, are reviewed for impairment whenever events or changes in circumstances, including the removal of compression units from the active fleet, indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the asset. Impairment losses are recognized in the period in which the impairment occurs and represent the excess of the asset carrying value over its fair value. There were no indicators that the carrying amount may not be recoverable for the six months ended June 30, 2023 and 2022.

Interest Expense, Net

Interest expense, net relates to interest incurred on outstanding borrowings under our ABL Facility (as defined below), the Term Loan (as defined below), the impact of interest rate swaps, and amortization of debt issuance cost, net of interest income earned on cash balances.

Unrealized Gain (Loss) on Derivatives

Unrealized gain (loss) on derivatives results from changes in the mark-to-market valuation of derivative instruments related to interest rate swaps whereby we have exchanged variable interest rates for fixed interest rates and entered into interest rate collars which represent a simultaneous purchase of a cap rate with the sale of a floor rate. Derivative instruments are used to manage our exposure to fluctuations in the variable interest rate of the ABL Facility and the Term Loan and thereby mitigate the risks and costs associated with financing activities. We have not designated any derivative instruments as hedge for accounting purposes and we do not enter into such instruments for speculative trading purposes. Gains and losses on derivatives are presented in the other income and expense section of the consolidated statements of operations as unrealized gain or loss on derivatives.

Operational Highlights

The following table summarizes certain horsepower and horsepower utilization percentages for our fleet for the periods presented.

   As of June 30,  Percentage
Change		 
   2023  2022 

Operating Data (at period end):

    

Fleet horsepower(1)

   3,180,906   3,084,406   3.1% 

Revenue-generating horsepower(2)

   3,177,286   3,074,613   3.3% 

Fleet compression units

   3,038   2,994   1.5% 

Revenue-generating compression units

   3,023   2,987   1.2% 

Revenue-generating horsepower per revenue-generating compression unit(3)

   1,051   1,029   2.1% 

Horsepower utilization(4)

   99.9%   99.7%   0.2% 

(1)

Fleet horsepower includes revenue-generating horsepower and idle horsepower, which is compression units that do not have a signed contract or are not subject to a firm commitment from our customer and are no longer generating revenue. Fleet horsepower excludes 32,340 and 60,025 of non-marketable or obsolete horsepower as of June 30, 2023 and 2022, respectively.

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(2)

Revenue-generating horsepower includes compression units that are operating under contract and generating revenue and compression units which are available to be deployed and for which we have a signed contract or are subject to a firm commitment from our customer.

(3)

Calculated as (i) revenue-generating horsepower divided by (ii) revenue-generating compression units at period end.

(4)

Horsepower utilization is calculated as (i) revenue-generating horsepower divided by (ii) fleet horsepower.

Horsepower

The 3.1% and 3.3%3.7% increase in fleet horsepower and revenue-generating horsepower, respectively, were primarily attributable to an increase in the purchase and deployment of new compression units through organic growth with our existing customer base, as well as select new customers in the key regions in which we operate. The 2.1%2.6% increase in revenue-generating horsepower per revenue-generating compression unit was due to the purchase and deployment of new, large horsepower units.

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Financial Results of Operations

Three months ended June 30, 2023 comparedMonths Ended March 31, 2024, Compared to the three months ended June 30, 2022

Three Months Ended March 31, 2023

The following table presents selected financial and operating information for the periods presented (in thousandsthousands)):

   For the Three Months Ended June 30,   % Change 
   2023   2022 

Revenues:

      

Compression Operations

  $181,619   $162,808    11.6% 

Other Services

   21,687    14,343    51.2% 
  

 

 

   

 

 

   

 

 

 

Total revenues

   203,306    177,151    14.8% 

Operating expenses:

      

Cost of operations (exclusive of depreciation and amortization shown below)

      

Compression Operations

   65,017    58,336    11.5% 

Other Services

   18,099    11,774    53.7% 

Depreciation and amortization

   45,430    43,397    4.7% 

Selling, general and administrative expenses

   13,438    11,740    14.5% 

Loss (gain) on sale of fixed assets

   (738)    —      nm 
  

 

 

   

 

 

   

 

 

 

Total operating expenses

   141,246    125,247    12.8% 
  

 

 

   

 

 

   

 

 

 

Income from operations

   62,060    51,904   

Other income (expenses):

      

Interest expense, net

   (60,964)    (36,829)    65.5% 

Realized gain on derivatives

   25,835    —      nm 

Unrealized (loss) gain on derivatives

   (3,595)    (3,386)    6.2% 

Other (expense) income

   32    (7)    557.1% 
  

 

 

   

 

 

   

 

 

 

Total other expense

   (38,692)    (40,222)    (3.8)% 
  

 

 

   

 

 

   

 

 

 

Income before income taxes

   23,368    11,682   

Income tax expense

   5,851    2,781    110.4% 
  

 

 

   

 

 

   

 

 

 

Net income

  $17,517   $8,901    96.8% 
  

 

 

   

 

 

   

 

 

 

For the Three Months Ended March 31,% Change
20242023
Revenues:
Compression Operations$193,399 $177,697 8.8 %
Other Services22,093 12,415 78.0 %
Total revenues215,492 190,112 13.4 %
Operating expenses:
Cost of operations (exclusive of depreciation and amortization shown below):
Compression Operations65,882 62,770 5.0 %
Other Services17,684 8,988 96.8 %
Depreciation and amortization46,944 44,897 4.6 %
Selling, general and administrative expenses24,824 13,085 89.7 %
Loss on sale of property, plant and equipment— 17 (100.0)%
Total operating expenses155,334 129,757 19.7 %
Income from operations60,158 60,355 (0.3)%
Other income (expenses):
Interest expense, net(39,740)(68,662)(42.1)%
Gain (loss) on derivatives19,757 (7,995)(347.1)%
Other expense(68)(31)119.4 %
Total other expenses(20,051)(76,688)(73.9)%
Income (loss) before income taxes40,107 (16,333)(345.6)%
Income tax (benefit) expense9,875 (3,990)(347.5)%
Net income (loss)$30,232 $(12,343)(344.9)%
Revenues and Sources of Income

Compression Operations

Compression Operations revenue increased $18.8$15.7 million (11.6%(8.8%) for the three months ended June 30, 2023March 31, 2024, compared to the three months ended June 30, 2022. $20.0March 31, 2023, of which $16.8 million of the increase was the result of an increase in average revenue-generating horsepower as a result ofdue to increased demand for our compression operationsCompression Operations (consistent with increased operating activity in the oil and gas industry) and due to an increase in average monthly revenue per revenue-generating horsepower per month. This washorsepower; partially offset by a $1.2$1.1 million decrease in freight and crane charges that are directly reimbursable by our customers.

Other Services

Other Services revenue increased $7.3$9.7 million (51.2%(78.0%) for the three months ended June 30, 2023March 31, 2024, compared to the three months ended June 30, 2022.March 31, 2023. This increase was primarily due to a $4.9$9.5 million increase in revenuerevenues from station construction services, driven primarily by progress on new stations and a $2.4 millionmostly due to an increase in revenuedemand for and scope of station projects. Revenue also increased by $0.2 million from parts and service driven by increased customer demand.

sales.

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Operating Costs and Other Expenses

Compression Operations

Compression Operations expenses increased $6.7$3.1 million (11.5%(5.0%) for the three months ended June 30, 2023March 31, 2024, compared to the three months ended June 30, 2022.March 31, 2023. This was primarily due to a $2.7$1.9 million increase in direct labor expenses related to increased headcount and salaries, a $1.4 million increase in indirect expenses and a $0.7 million increase in direct expenses, driven by increases in pricing and volume of fluidslubricant oil and coolant and parts to support increased activity, a $3.8 million increase in direct labor expenses related to increased headcount and salaries, a $1.1 million increase in indirect expenses;activity; partially offset by a $0.9 million decrease in freight and crane charges that are directly reimbursable by our customers.

25

Other Services

Other Services expenseexpenses increased $6.3$8.7 million (53.7%(96.8%) for the three months ended June 30, 2023March 31, 2024, compared to the three months ended June 30, 2022. ThisMarch 31, 2023. Substantially all, or $8.7 million of the increase, was primarily due to a $4.4 millionan increase in expenses from station construction services, driven primarily by progress on new stations and a $1.9 millionmostly due to an increase in expenses from partsdemand for and service costs.

scope of station projects.

Depreciation and Amortization

Depreciation and Amortization increased $2.0 million (4.7%(4.6%) for the three months ended June 30, 2023March 31, 2024, compared to the three months ended June 30, 2022.March 31, 2023. This increase was primarily due to an increase in compression equipment purchased, which resulted in increased depreciation associated with that equipment.

Selling, General and Administrative Expense

Expenses

Selling, General and Administrative expensesExpenses increased $1.7$11.7 million (14.5%(89.7%) for the three months ended June 30, 2023March 31, 2024, compared to the three months ended June 30, 2022.March 31, 2023. This increase was primarily due to a $1.1$8.5 million increase in professional fees, mainlyprimarily related to transactiontransactions costs andassociated with the CSI Acquisition, a $0.6$2.0 million increase in stock compensation expense related to equity compensation plans, a $1.0 million increase in other overhead expenses, primarily as a resultmostly consisting of insurance, advertising, entertainment and office expenses.

expenses, a $0.1 million increase in labor and benefits and a $0.1 million increase in bad debt expense.

Interest Expense, Net

Interest expense increased $24.2Expense, Net decreased $28.9 million (65.5%(42.1%) for the three months ended June 30, 2023March 31, 2024, compared to the three months ended June 30, 2022.March 31, 2023. This increase isdecrease was primarily due (i) to the full period impactextinguishment of the Term Loan (as defined below) in July 2023, partially offset by an increase in borrowings under the ABL Facility and Term Loan, of which $825 million of which was related to the May 2022 recapitalization (as discussed in Note 9 (“Debt and Credit Facilities”) to the Condensed Consolidated Financial Statements included elsewhere in this Report) and (ii) increased effective interest ratesrate on the ABL Facility, and Term Loan.

Realized as well as interest on the 2029 Senior Notes.

Gain (Loss) on Derivatives

On June 29, 2023, the Company terminated its interest rate swaps and collars attributable to the Term Loan, resulting in the realization of $25.8

Gain (Loss) on Derivatives increased $27.8 million in gains resulting from changes in the market value of such swaps and collars since their inception due to an increase in LIBOR rates. No such gains were realized in the three months ended June 30, 2022.

Unrealized (Loss) Gain on Derivatives

Unrealized (loss) gain on derivatives decreased $0.2 million (6.2%(347.1%) for the three months ended June 30, 2023March 31, 2024, compared to the three months ended June 30, 2022.March 31, 2023. This isincrease was primarily related to a $24.8$14.3 million unrealized loss on settlement ofincrease in the interest rate swaps and collars from the term loan; offset by a $21.2 million unrealized gain on the change in marketfair value of our interest rate swapsderivatives and collars duringan increase in cash received on derivatives of $5.5 million for the three months ended June 30, 2023March 31, 2024, due to an increase in the long-term SOFRSecured Overnight Financing Rate (“SOFR”) yield curve, as compared to a $3.4$17.9 million unrealized loss ondecrease in the change in marketfair value of our interest rate swapsderivatives and collars duringcash received on derivatives of $9.9 million for the three months ended June 30, 2022March 31, 2023, due to ana decrease in the long-term SOFR and LIBOR yield curves.

curve.

Income tax expense

Tax (Benefit) Expense

Income tax expenseTax Expense increased by $3.1$13.9 million (110.4%(347.5%) for the three months ended June 30, 2023March 31, 2024, compared to the three months ended June 30, 2022.March 31, 2023. This increase was primarily due to an increase in pre-tax income of $11.7$56.4 million for the three months ended June 30, 2023March 31, 2024, compared to pre-tax income loss for the three months ended June 30, 2022.

26

March 31, 2023.

Financial Results of Operations

Six months ended June 30, 2023 compared to the six months ended June 30, 2022

The following table presents selected financial and operating information for the periods presented (in thousands):

   For the Six Months Ended June 30,   % Change 
   2023   2022 

Revenues:

      

Compression Operations

  $359,316   $320,303    12.2% 

Other Services

   34,102    25,189    35.4% 
  

 

 

   

 

 

   

 

 

 

Total revenues

   393,418    345,492    13.9% 

Operating expenses:

      

Cost of operations (exclusive of depreciation and amortization shown below)

      

Compression Operations

   127,787    111,273    14.8% 

Other Services

   27,087    20,601    31.5% 

Depreciation and amortization

   90,327    85,802    5.3% 

Selling, general and administrative expenses

   26,523    21,570    23.0% 

Loss (gain) on sale of fixed assets

   (721)    (7)    nm 
  

 

 

   

 

 

   

 

 

 

Total operating expenses

   271,003    239,239    13.3% 
  

 

 

   

 

 

   

 

 

 

Income from operations

   122,415    106,253    15.2% 

Other income (expenses):

      

Interest expense, net

   (119,687)    (62,469)    91.6% 

Realized gain on derivatives

   25,835    —      nm 

Unrealized (loss) gain on derivatives

   (21,529)    32,822    (165.6)% 

Other income

   1    9    (88.9)% 
  

 

 

   

 

 

   

 

 

 

Total other expense

   (115,380)    (29,638)    289.3% 
  

 

 

   

 

 

   

 

 

 

Income before income taxes

   7,035    76,615    (90.8)% 

Income tax expense

   1,861    18,159    (89.8)% 
  

 

 

   

 

 

   

 

 

 

Net income

  $5,174   $58,456    (91.1)% 
  

 

 

   

 

 

   

 

 

 

Revenues and Sources of Income

Compression Operations

Compression Operations revenue increased $39.0 million (12.2%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. $39.2 million of the increase was the result of an increase in average revenue-generating horsepower as a result of increased demand for our compression operations (consistent with increased operating activity in the oil and gas industry) and due to an increase in average revenue per revenue-generating horsepower per month. This was partially offset by a $0.2 million decrease in freight and crane charges that are directly reimbursable by our customers.

Other Services

Other Services revenue increased $8.9 million (35.4%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This increase was primarily due to a $5.5 million increase in revenue from station construction services driven primarily by progress on new stations and $3.4 million from parts and service.

Operating Costs and Other Expenses

Compression Operations

Compression Operations expenses increased $16.5 million (14.8%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This was primarily due to a $7.0 million increase in direct expenses, driven by increases in pricing and volume of fluids and parts to support increased activity, a $6.8 million increase in direct labor expenses related to increased headcount and salaries, a $2.9 million increase in indirect expenses; partially offset by a $0.2 million decrease in freight and crane charges that are directly reimbursable by our customers.

27

Other Services

Other Services expense increased $6.5 million (31.5%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This was primarily due to a $3.9 million increase in expenses from station construction services driven primarily by progress on new stations and $2.6 million from parts and service costs, driven by increased customer demand.

Depreciation and Amortization

Depreciation and Amortization increased $4.5 million (5.3%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This was primarily due to an increase in compression equipment purchased, which resulted in increased depreciation associated with that equipment.

Selling, General and Administrative Expense

Selling, General and Administrative expenses increased $5.0 million (23.0%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This was primarily due to a $2.3 million increase in labor and benefit expenses (including $0.3 million of equity compensation), a $1.5 million increase in other overhead expenses, primarily as a result of increased travel, advertising, entertainment and office expenses and insurance, and a $1.2 million increase in professional fees mainly associated with transaction costs.

Interest Expense, Net

Interest expense increased $57.2 million (91.6%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This is primarily due to (i) an increase in borrowings under the ABL Facility and Term Loan, of which $825 million was related to the May 2022 recapitalization (as discussed in Note 9 (“Debt and Credit Facilities”) to the Condensed Consolidated Financial Statements included elsewhere in this Report) and (ii) increased effective interest rates on the ABL Facility and Term Loan.

Realized Gain on Derivatives

On June 29, 2023, the Company terminated its interest rate swaps and collars attributable to the Term Loan, resulting in the realization of $25.8 million in gains resulting from changes in the market value of such swaps and collars since their inception due to an increase in LIBOR rates. No such gains were realized in the six months ended June 30, 2022.

Unrealized (Loss) Gain on Derivatives

Unrealized (loss) gain on derivatives decreased $54.4 million (-165.6%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This is primarily related to a $24.8 million unrealized loss on the settlement of the interest rate swaps and collars from the Term Loan; offset by a $21.2 million unrealized gain on the change in market value of our existing interest rate swaps and collars during the six months ended June 30, 2023 due to an increase in the long-term SOFR yield curve, as compared to a $32.8 million unrealized gain on the change in market value of our interest rate swaps and collars during the six months ended June 30, 2022 due to an increase in the long-term SOFR and LIBOR yield curves.

Income tax expense

Income tax expense decreased by $16.3 million (-89.8%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This was primarily due to a decrease in pre-tax income of $69.6 million for the six months ended June 30, 2023 compared to pre-tax income for the six months ended June 30, 2022.

Liquidity and Capital Resources

Overview

Our ability to fund operations, finance capital expenditures, service our debt and pay dividends depends on the levels of our operating cash flows and access to the capital and credit markets. Our primary sources of liquidity are cash flows generated from our operations and our borrowing availability under the ABL Facility. Our cash flow is affected by numerous factors, including prices and demand for our compression infrastructure compression assets and services, conditions in the financial markets and various other factors. We believe cash generated by operating activities will be sufficient to service our debt, fund working capital,
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fund our estimated capital expenditures and, as our boardBoard of directorsDirectors may determine from time to time in its discretion, pay dividends.

28

Cash Requirements

Capital Expenditures

The compression infrastructure business is capital intensive, requiring significant investment to expand, maintain and upgrade existing operations. Our capital requirements have consisted primarily of, and we anticipate that our capital requirements will continue to consist primarily of, the following:

•

Growth Capital Expenditures: (1) capital expenditures made to expand the operating capacity or operating income capacity of assets by acquisition of additional compression units, (2) capital expenditures made to maintain the operating capacity or operating income capacity of assets by acquisition of replacement compression units and (3) capital expenditures not related to our compression units—such as trucks, wash trailers, crane trucks, leasehold improvements, technology hardware and software and related implementation expenditures, furniture and fixtures, and other general items that are typically capitalized to operate the business that have a useful life beyond one year. We make capital expenditures not related to our compression units (as described in clause (3) above) if and when necessary to support the operations of our revenue generating horsepower.

•

Maintenance Capital Expenditures: periodic capital expenditures incurred at predetermined operating intervals to maintain consistent and reliable operating capacity of our assets over the near term. Such maintenance capital expenditures typically involve overhauls of significant components of our compression units, such as the engine and compressor, pistons, rings, heads, and bearings. These maintenance capital expenditures are predictable and the majority of these expenditures are tied to a detailed, unit-by-unit schedule based on hours of operation or age. We utilize a disciplined and systematic asset management program whereby we perform major unit overhauls and engine replacements on a defined schedule based on hours of operation. As a result, our maintenance capital expenditures may vary considerably from year to year based on when such assets were added to the fleet. Maintenance capital expenditures along with regularly scheduled preventive maintenance expenses are typically sufficient to sustain operating capacity of our assets over the full expected useful life of the compression units. Maintenance capital expenditures do not include expenditures to replace compression units when they reach the end of their useful lives.

•Growth Capital Expenditures: (1) capital expenditures made to expand the operating capacity or operating income capacity of assets by acquisition of additional compression units, (2) capital expenditures made to maintain the operating capacity or operating income capacity of assets by acquisition of replacement compression units and (3) capital expenditures on assets other than compression units required to operate the business—such as trucks, wash trailers, crane trucks, leasehold improvements, technology hardware and software and related implementation expenditures, furniture and fixtures, and other general items that are typically capitalized and have a useful life beyond one year. We make capital expenditures unrelated to our compression units (as described in clause (3) above) if and when necessary to support the operations of our revenue-generating horsepower.
•Maintenance Capital Expenditures: periodic capital expenditures incurred at predetermined operating intervals to maintain consistent and reliable operating capacity of our assets over the near term. Such maintenance capital expenditures typically involve overhauls of significant components of our compression units, such as the engine and compressor, pistons, rings, heads and bearings. These maintenance capital expenditures are predictable, and the majority of these expenditures are tied to a detailed, unit-by-unit schedule based on hours of operation or age. We utilize a disciplined and systematic asset management program whereby we perform major unit overhauls and engine replacements on a defined schedule based on hours of operation. As a result, our maintenance capital expenditures may vary considerably from year to year based on when such assets were added to the fleet. Maintenance capital expenditures, along with regularly scheduled preventive maintenance expenses, are typically sufficient to sustain the operating capacity of our assets over the full expected useful life of the compression units. Maintenance capital expenditures do not include expenditures to replace compression units when they reach the end of their useful lives.
The majority of our growth capital expenditures are related to the acquisition cost of new compression units. Maintenance capital expenditures are related to overhauls of significant components of our compression equipment, such as the engine and compressor, which return the components to a like-new condition but do not modifywithout modifying the application for which the compression equipment was designed.

For the sixthree months ended June 30, 2023,March 31, 2024, growth capital expenditures were $68.3$59.4 million and maintenance capital expenditures were $15.7$10.6 million. For the sixthree months ended June 30, 2022,March 31, 2023, growth capital expenditures were $126.6$35.8 million and maintenance capital expenditures were $17.4$4.8 million. The decreaseincrease in growth capital expenditures was primarily related to the timing of new compressor equipmentcompression unit purchases necessary to support organic growth.operating capacity demand. The decreaseincrease in maintenance capital expenditures was primarily a result of a decreasedue to an increase in scheduled unit overhauls that occurredscheduled based on the age and operating hours of such units.

Dividends

Our boardBoard of directorsDirectors may elect to declare cash dividends on our common stock, subject to our compliance with applicable law, and depending on, among other things, economic conditions, our financial condition, results of operations, projections, liquidity, earnings, legal requirements and restrictions in the agreements governing our indebtedness (as further discussed herein). If and to the extent our board of directors were to declare a cash dividend to our stockholders, we expect the dividend to be paid from our Discretionary Cash Flow. The timing, amount and financing of dividends, if any, will beare subject to the discretion of our boardBoard of directorsDirectors from time to time.

On May 2, 2024, our Board of Directors declared a quarterly cash dividend, which was paid on May 20, 2024, to stockholders of record, determined as of close of business on May 13, 2024 (the “Common Stock Dividend”) and, in conjunction with the Common Stock Dividend, Kodiak Gas Services declared a distribution on its units of $0.38 per unit, payable on May 20, 2024, to all unitholders of record of Kodiak Services as of the close of business on May 16, 2024.
Over the long-term, we expect to fund any dividends and our budgeted growth capital expenditures using our Discretionary Cash Flow. In the event our Discretionary Cash Flow is insufficient for the purpose of funding any such dividends and our budgeted growth capital expenditures for such period, we may fund such shortfall (i) with additional borrowings under our ABL Facility, which, as of June 30, 2023March 31, 2024, had $375$1,068.1 million available (subject to the requirement that our availability, under
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in the borrowing basecase of dividends, under the ABL Facility exceeds the greater of (x) 10% of the total commitments under the facility of $2.2 billion or (y) $200 millionmillion) or (ii) reduce our growth capital expenditures for such period. Any such additional borrowings under our ABL Facility will result in an increase in our interest expense for such period. Any such reduction in our growth capital expenditures may result in lower growth in our revenue-generating horsepower in future periods.

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Contractual Obligations

Our material contractual obligations as of June 30, 2023March 31, 2024, consisted of the following:

•Long-term debt of $2.8$1.9 billion, of which $1.1 billion is due in 2028. See Note 19 (“Subsequent Events”) to the Condensed Consolidated Financial Statements included elsewhere2028 and $750.0 million is due in this Report;

2029.

•Purchase commitments of $129.2$106.6 million, are dueall of which is expected to be settled within 12 months,the next twelve months; primarily consisting of future commitments to purchase new compression units.units that have been ordered but not yet received. See Note 13 (“Commitments and Contingencies”) to the Condensed Consolidated Financial Statementscondensed consolidated financial statements included elsewhere in this Report.

Other Commitments

As of June 30,March 31, 2024, other commitments include operating lease payments totaling $33.9 million.
As of December 31, 2023, other commitments include operating lease payments totaling $58.5$34.5 million.

Sources of Cash

Cash Flows

The following table summarizes our cash flows for the sixthree months ended June 30,March 31, 2024, and 2023 and 2022 (in thousands):

   Six Months Ended June 30,     
   2023   2022   $ Variance 

Net cash provided by operating activities

  $117,968   $127,647   $(9,679) 

Net cash used in investing activities

   (92,993)    (145,950)    52,957 

Net cash provided by (used in) financing activities

   (4,035)    10,135    (14,170) 
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  $20,940   $(8,168)   $29,108 
  

 

 

   

 

 

   

 

 

 

Three months ended March 31,
20242023
$ Variance
Net cash provided by operating activities$51,542 $23,290 $28,252 
Net cash used in investing activities(60,150)(48,574)(11,576)
Net cash provided by financing activities12,352 18,853 (6,501)
Net increase (decrease) in cash and cash equivalents$3,744 $(6,431)$10,175 
Operating Activities

The $9.7$28.3 million decreaseincrease in net cash provided by operating activities for the sixthree months ended June 30, 2023March 31, 2024, compared to the sixthree months ended June 30, 2022March 31, 2023, was primarily due to a $53.3$26.1 million decrease in interest expense, net income, adjusted for non-cash items which is mainly related toof debt issuance cost amortization, and a $54.4$6.6 million increase in unrealized loss on derivative instruments,income from operations adjusted for non-cash operating activity and working capital changes. This increase was partially offset by a $6.8$4.4 million decrease in working capital primarily consisting of an increase in accounts receivable due to an increase in revenue from compression operations, an increase in prepaid expenses and other current assets due to an increase in deferred IPO costs, a decrease in accrued liabilities due to payment made to vendors during the year; partially offset by an increase in accounts payable, contract liabilities.

cash received on derivatives.

Investing Activities

The $53.0$11.6 million decreaseincrease in net cash used in investing activities for the sixthree months ended June 30, 2023March 31, 2024, compared to the sixthree months ended June 30, 2022 was primarily due to lower levels of both maintenance and growth capital expenditures.

Financing Activities

The $14.2 million increase in net cash used in financing activities for the six months ended June 30,March 31, 2023, compared to the six months ended June 30, 2022 was primarily due to a $5.8 million increase in maintenance capital expenditures and a $5.8 million increase in growth capital expenditures, net of accrued capital expenditures.

Financing Activities
The $6.5 million decrease in net cash provided by financing activities for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, was primarily due to an increase in dividends paid to stockholders of $29.8 million, $0.4 million increase in cash payments related to offering cost, an increase in net payments over borrowings on debt instruments of $721.9 million, an increase in payments on debt instruments of $83.3$0.3 million and an increase in paymentscash paid for shares withheld to cover taxes of debt issuance cost of $4.6$0.3 million. This was offset by a decrease in equity distributionpayments of $795.7debt issuance costs of $24.3 million.

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Description of Indebtedness
ABL Facility

Asset Based Lending Facility

As of January 1, 2022, a wholly-ownedwholly owned subsidiary of Kodiak had an ABL Facilitya revolving asset-based loan credit facility (the “ABL Facility”) with unaffiliated secured lenders and JPMorgan Chase Bank, N.A., as administrative agent. On March 22, 2023, wholly-ownedwholly owned subsidiaries of Kodiak entered into the Fourth Amended and Restated ABL Credit Agreement with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (as amended or restated from time to time, the “ABL Credit Agreement”), whereby the total facility (among other things) was increased to $2.2 billion and certain changes were made to our financial covenants and maturity date. On May 31, 2023, the ABL Credit Agreement was amended to, among other things, permit distributions of overallotment proceeds from the IPO and revise the terms related to the payment and prepayment of that certain Amended and Restated Credit Agreement, dated as of May 19, 2022, as amended by that certain First Amendment, dated March 31, 2023, among Kodiak Services, Frontier Intermediate Holding, LLC, Wells Fargo Bank, N.A., as Administrative Agent, and the lenders party thereto (the “Term Loan”). On June 27, 2023, the ABL Credit Agreement was further amended to remove the ability to make distributions related to overallotment proceeds from the IPO and to instead require prepayment of the obligations and cash collateralization of any letter of credit exposure upon the issuance of any equity interests by Kodiak pursuant to the overallotment in the IPO. In connection with the IPO, the Company became a borrower under the ABL Facility. As of March 31, 2024, there was $1.0 million in letters of credit outstanding under the ABL Facility. The maturity date of the ABL Facility is March 22, 2028. See Note 9 (“Debt and Credit Facilities”) to the Condensed Consolidated Financial Statementscondensed consolidated financial statements included elsewhere in this Report. The ABL Credit Agreement requires that we meet certain financial ratios.

30

Commencing with the first fiscal quarter ending after the completion of the IPO, our fixed charge coverage ratio will be replaced byended March 31, 2024, we must maintain an interest coverage ratio (as defined in the ABL Credit Agreement) that mayof not be less than 2.50 to 1.00, determined as of the last day of each fiscal quarter.

Commencing with the first fiscal quarter ending after the completion of the IPO but prior to the occurrence of certain issuances of unsecured debt (for purposes of this description, an “Unsecured Debt Issuance”),

Additionally, our Leverage Ratio (as defined in the ABL Credit Agreement), determined quarterly as of the last day of each fiscal quarter, may not exceed (i) 5.25 to 1.00 for the fiscal quarters ending September 30, 2023, and December 31, 2023, (ii) 5.00 to 1.00 for the fiscal quarter ending March 31, 2024, (iii) 4.75 to 1.00 for the fiscal quarter ending June 30, 2024, and (iv) 4.50 to 1.00 for each fiscal quarter ending on or after September 30, 2024.

Commencing with the first fiscal quarter ending after both the completion of the IPO and the occurrence of an unsecured debt issuance, (a) our Leverage Ratio, determined quarterly as of the last day of each fiscal quarter, may not exceed (x) 5.75 to 1.00 for the first four fiscal quarters ending after the occurrence of the unsecured debt issuance and (y) 5.25 to 1.00 for each fiscal quarter ending thereafter; and (b) our Secured Leverage Ratio (as defined in the ABL Credit Agreement), determined quarterly as of the last day of each fiscal quarter, may not exceed (x) 3.50 to 1.00 for the first four fiscal quarters ending after the occurrence of the unsecured debt issuance and (y) 3.00 to 1.00 for each fiscal quarter ending thereafter.

All obligations under the ABL Facility are collateralized by essentially all the assets of the Company. We were in compliance with all covenants as of June 30, 2023March 31, 2024, and December 31, 2022.

2023.

The ABL Credit Agreement also restricts the Company’s ability to: incur additional indebtedness and guarantee indebtedness; pay certain dividends or make other distributions or repurchase or redeem equity interests; prepay, redeem or repurchase certain debt; issue certain preferred units or similar equity securities; make loans and investments; sell, transfer or otherwise dispose of assets; incur liens; enter into transactions with affiliates; enter into agreements restricting the Company’s restricted subsidiaries’ ability to pay dividends; enter into certain swap agreements; amend certain organizational documents; enter into sale and leaseback transactions; and consolidate, merge or sell all or substantially all of the Company’s assets.

The applicable interest rate under the ABL Facility is (i) in the case of SOFR-based borrowings, the Term SOFR or Daily Simple SOFR rate then in effect (subject to a floor of 0%) plus 0.10% plus a spread that depends on our Leverage Ratio as of the most recent determination date, ranging from 2.00% if our Leverage Ratio is less than or equal to 3.00:1.00 to 3.00% if our Leverage Ratio is greater than 5.50:1.00 and (ii) in the case of prime rate-based borrowings, the prime rate (subject to a floor of 2.5%) plus a spread that depends on our Leverage Ratio as of the most recent determination date, ranging from 1.00% if our Leverage Ratio is less than or equal to 3.00:1.00 to 2.00% if our Leverage Ratio is greater than 5.50:1.00.

The applicableweighted average interest ratesrate as of June 30, 2023 were 10.25% (prime rate plus 2.00%)March 31, 2024 and 8.34% (Term SOFR rate plus 0.10% plus 3.00%). The applicable interest rates as of December 31, 2022 were 9.50% (prime2023, was 7.68% and 8.08%, respectively, excluding the effect of interest rate plus 2.00%)swaps. The Company pays an annualized commitment fee of 0.25% on the unused portion of its ABL Facility if borrowings are greater than 50% of total commitments and 7.60% (Term SOFR rate plus 0.10% plus 3.00%).

Term Loan

As0.50% on the unused portion of the ABL Facility if borrowings are less than 50% of total commitments.

Third Amendment to ABL Credit Agreement
On January 1, 2022, a wholly-owned subsidiary22, 2024, Kodiak, Kodiak Services and certain other subsidiaries of Kodiak had a term loan (the “Term Loan”) pursuant to a credit agreement with unaffiliated unsecured lenders and Wells Fargo Bank, N.A., as administrative agent. On May 19, 2022, we entered into the Term Loan Credit Agreement (as amended from time to time, the “Term Loan Credit Agreement”) whereby we increased the aggregate commitments under the Term Loan from $400 million to $1 billion and made certain changes to our financial covenants, including (i) the financial covenants were not measured for the second quarter of 2022 and (ii) the maximum Leverage Ratio (calculated based on the ratio of Consolidated Total Debt to Consolidated EBITDA, each as defined in the Term Loan Credit Agreement) was increased to 7.50x through the first quarter of 2023; 7.25x thereafter through the third quarter of 2023; 7.00x thereafter through the first quarter of 2024; 6.75x thereafter through the first quarter of 2025; 6.50x thereafter through the first quarter of 2026; 6.25x thereafter through the fourth quarter of 2026; and 6.00x in the first quarter of 2027 and thereafter. We were in compliance with all financial covenants as of June 30, 2023 and December 31, 2022.

31

On March 31, 2023, our wholly-owned subsidiary entered into the FirstThird Amendment to the Term LoanABL Credit Agreement (the “Third Amendment”), which extendedamends the maturity dateExisting ABL Credit Agreement. The Third Amendment, among other things, amended certain provisions of the Existing ABL Credit Agreement (i) to September 22, 2028. Lenderaccommodate the consummation of the transactions contemplated by the Merger Agreement, (ii) to account for Kodiak’s organizational structure after giving effect to the transactions contemplated by the Merger Agreement and (iii) include a maximum

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secured leverage ratio of (x) 3.75 to 1.00 for the first four fiscal quarters after the Company issues any unsecured indebtedness and (y) 3.25 to 1.00 for each fiscal quarter thereafter,.
2029 Senior Notes
On February 2, 2024, Kodiak Services issued $750,000,000 aggregate principal amount of Kodiak Services’ 7.250% senior notes due 2029 (the “2029 Senior Notes”), pursuant to an indenture, dated February 2, 2024, by and among the Company, and certain other subsidiary guarantors party thereto, and U.S. Bank Trust Company, National Association, as trustee.
The proceeds from the 2029 Senior Notes were used to repay a portion of the outstanding indebtedness under the ABL Facility and to pay related fees and costs totaling $0.75 million were incurred for this amendment and will be amortized overexpenses in connection with the lifenotes offering. In connection with the close of the loans to interest expense. Borrowings underCSI Acquisition on April 1, 2024, the Term Loan incurred interest atCompany used proceeds from additional draws on the following applicable rates: interest rates were based on 6.00% plus an alternate base rate and 7.00% plus an adjusted eurocurrency rate for alternate base rate loans and eurocurrency loans, respectively. The interest rates were 12.16% and 10.67% as of June 30, 2023 and December 31, 2022, respectively.

As disclosed in Note 19 - (“Subsequent Events”) to the Condensed Consolidated Financial Statements included elsewhere in this Report, we used the net proceeds of our IPO, together with the proceeds resulting from the Term Loan Derivative Settlement and borrowings under our ABL Facility to repay $300$651.8 million of borrowings outstanding underexisting long-term indebtedness assumed in the Term Loan on July 3, 2023. In connection with the IPO, all of the Company’s and its subsidiaries’ remaining obligations under the Term Loan were assumed by a parent entity of Kodiak Holdings, and the Company’s obligations thereunder were terminated. As a result, the Company is no longer a borrower or guarantor under, nor otherwise obligated with respect to the debt outstanding under the Term Loan.

CSI Acquisition.

Derivatives and Hedging Activities

To mitigate a portion of the exposure to fluctuations in the variable interest rate of the ABL Facility and the Term Loan, we have entered into various derivative instruments.

Our interest rate swaps exchange variable interest rates for fixed interest rates. We have not designated any derivative instruments as hedges for accounting purposes and do not enter into such instruments for speculative or trading purposes. See Note 10 (“Derivative Instruments”) to the Condensed Consolidated Financial Statementscondensed consolidated financial statements included elsewhere in this Report.

Parent Entity Distribution

On June 27, 2023, we made a cash distribution of $42.3 million to a parent entity of Kodiak Holdings prior to the consummation of the IPO, of which $11.0 million was funded with cash on hand and $31.3 million was funded with borrowings under the ABL Facility.

Non-GAAP Financial Measures

Management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include the non-GAAP financial measures of Adjusted Gross Margin, Adjusted Gross Margin Percentage, Adjusted EBITDA, Adjusted EBITDA Percentage, Discretionary Cash Flow and Free Cash Flow.

Adjusted Gross Margin and Adjusted Gross Margin Percentage

Adjusted Gross Margin is a non-GAAP financial measure. We define Adjusted Gross Margin as revenue less cost of operations, exclusive of depreciation and amortization expense. We define Adjusted Gross Margin Percentage as Adjusted Gross Margin divided by total revenues. We believe that Adjusted Gross Margin is useful as a supplemental measure toof our operating profitability. Adjusted Gross Margin is impacted primarily by the pricing trends for service operations and cost of operations, including labor rates for service technicians, volume and per compression unit costs for lubricant oils and coolants, quantity and pricing of routine preventative maintenance on compression units and property tax rates on compression units. Adjusted Gross Margin should not be considered an alternative to, or more meaningful than, gross margin or any other measure of financial performance presented in accordance with GAAP. Moreover, Adjusted Gross Margin as presented may not be comparable to similarly titled measures of other companies. Because we capitalize assets, depreciation and amortization of equipment is a necessary element of our costs. To compensate for the limitations of Adjusted Gross Margin as a measure of our performance, we believe that it is important to consider gross margin determined under GAAP, as well as Adjusted Gross Margin, to evaluate our operating profitability.

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Adjusted Gross Margin for Compression Operations
Three Months Ended March 31,
20242023
(in thousands)
Total revenues$193,399 $177,697 
Cost of sales (excluding depreciation and amortization)(65,882)(62,770)
Depreciation and amortization(46,944)(44,897)
Gross margin$80,573 $70,030 
Gross margin percentage41.7%39.4%
Depreciation and amortization46,944 44,897 
Adjusted Gross Margin$127,517 $114,927 
Adjusted Gross Margin Percentage(1)65.9%64.7%
(1)

   Three Months Ended June 30,  Six Months Ended June 30, 
   2023  2022  2023  2022 
              
   (in thousands)  (in thousands) 

Total revenues

  $181,619  $162,808  $359,316  $320,303 

Cost of operations (excluding depreciation and amortization)

   (65,017)   (58,336)   (127,787)   (111,273) 

Depreciation and amortization

   (45,430)   (43,397)   (90,327)   (85,802) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Gross margin

  $71,172  $61,075  $141,202  $123,228 
  

 

 

  

 

 

  

 

 

  

 

 

 

Gross Margin Percentage

   39.2%   37.5%   39.3%   38.5% 

Depreciation and amortization

   45,430   43,397   90,327   85,802 
  

 

 

  

 

 

  

 

 

  

 

 

 

Adjusted Gross Margin

  $116,602  $104,472  $231,529  $209,030 

Adjusted Gross Margin Percentage(1)

   64.2%   64.2%   64.4%   65.3% 

(1)

Calculated using Adjusted Gross Margin for Compression Operations as a percentage of total Compression Operations revenues.

Calculated using Adjusted Gross Margin for Compression Operations as a percentage of total Compression Operations revenues.

Adjusted Gross Margin for Other Services
Three Months Ended March 31,
20242023
(in thousands)
Total revenues$22,093 $12,415 
Cost of sales (excluding depreciation and amortization)(17,684)(8,988)
Depreciation and amortization——
Gross margin$4,409$3,427
Gross margin percentage20.0%27.6%
Depreciation and amortization——
Adjusted Gross Margin$4,409$3,427
Adjusted Gross Margin Percentage(1)20.0%27.6%
(1)

   Three Months Ended June 30,  Six Months Ended June 30, 
   2023  2022  2023  2022 
              
   (in thousands)  (in thousands) 

Total revenues

  $21,687  $14,343  $34,102  $25,189 

Cost of operations (excluding depreciation and amortization)

   (18,099)   (11,774)   (27,087)   (20,601) 

Depreciation and amortization

   —     —     —     —   
  

 

 

  

 

 

  

 

 

  

 

 

 

Gross margin

  $3,588  $2,569  $7,015  $4,588 
  

 

 

  

 

 

  

 

 

  

 

 

 

Gross Margin Percentage

   16.5%   17.9%   20.6%   18.2% 

Depreciation and amortization

   —     —     —     —   
  

 

 

  

 

 

  

 

 

  

 

 

 

Adjusted Gross Margin

  $3,588  $2,569  $7,015  $4,588 
  

 

 

  

 

 

  

 

 

  

 

 

 

Adjusted Gross Margin Percentage(1)

   16.5%   17.9%   20.6%   18.2% 

(1)

Calculated using Adjusted Gross Margin for Other Services as a percentage of total Other Services revenues.

Calculated using Adjusted Gross Margin for Other Services as a percentage of total Other Services revenues.

Adjusted EBITDA and Adjusted EBITDA Percentage

We define Adjusted EBITDA as net income (loss) before interest expense, net plus, (i)net; income tax expense (benefit); (ii)and depreciation and amortization; (iii) realizedplus (i) loss on extinguishment of debt; (ii) loss (gain) on derivatives; (iv) unrealized loss (gain) on derivatives; (v)(iii) equity compensation expense; (vi)(iv) transaction expenses; (vii)(v) loss (gain) on sale of assets; and (viii)(vi) impairment of compression equipment. We define Adjusted EBITDA Percentage as Adjusted EBITDA divided by total revenues. Adjusted EBITDA and Adjusted EBITDA Percentage are used as supplemental financial measures by our management and external users of our financial statements, such as investors, commercial banks and other financial institutions, to assess:

•the financial performance of our assets without regard to the impact of financing methods, capital structure or historical cost basis of our assets;

•the viability of capital expenditure projects and the overall rates of return on alternative investment opportunities;

•the ability of our assets to generate cash sufficient to make debt payments and pay dividends; and

•our operating performance as compared to those of other companies in our industry without regard to the impact of financing methods and capital structure.

We believe that Adjusted EBITDA and Adjusted EBITDA Percentage provide useful information because, when viewed with our GAAP results and the accompanying reconciliation, they provide a more complete understanding of our
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performance than GAAP results alone. We also believe that external users of our financial statements benefit from having access to the same financial measures that management uses in evaluating the results of our business.

Adjusted EBITDA and Adjusted EBITDA Percentage should not be considered as alternatives to, or more meaningful than, revenues, net income, operating income, cash flows from operating activities or any other measure of financial performance presented in accordance with GAAP as measures of operating performance and liquidity. Moreover, our Adjusted EBITDA and Adjusted EBITDA Percentage as presented may not be comparable to similarly titled measures of other companies.

33

Given we are a capital intensivecapital-intensive business, depreciation, impairment of compression equipment and the interest cost of acquiring compression equipment are necessary elements of our costs. To compensate for these items, we believe that it is important to consider both net income and net cash provided by operating activities determined under GAAP, as well as Adjusted EBITDA and Adjusted EBITDA Percentage, to evaluate our financial performance and our liquidity. Our Adjusted EBITDA and Adjusted EBITDA Percentage exclude some, but not all, items that affect net income and net cash provided by operating activities, and these measures may vary among companies. Management compensates for the limitations of Adjusted EBITDA and Adjusted EBITDA Percentage as an analytical tool by reviewing the comparable GAAP measures, understanding the differences between the measures and incorporating this knowledge into management’s decision-making processes.

The following table reconciles net income (loss), the most directly comparable GAAP financial measure, to Adjusted EBITDA, its most directly comparable Non-GAAP financial measure, for each of the periods presented (in thousands):

   Three Months Ended June 30,  Six Months Ended June 30, 
   2023  2022  2023  2022 

Net income

  $17,517  $8,901  $5,174  $58,456 

Interest expense, net

   60,964   36,829   119,687   62,469 

Tax expense

   5,851   2,781   1,861   18,159 

Depreciation and amortization

   45,430   43,397   90,327   85,802 

Realized (gain) on derivatives

   (25,835)   —     (25,835)   —   

Unrealized loss (gain) on derivatives

   3,595   3,386   21,529   (32,822) 

Equity compensation expense(1)

   29   —     908   619 

Transaction expenses(2)

   1,072   1,600   1,273   1,600 

Gain on sale of assets

   (738)   —     (721)   (7) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Adjusted EBITDA

  $107,885  $96,894  $214,203  $194,276 
  

 

 

  

 

 

  

 

 

  

 

 

 

Adjusted EBITDA Percentage

   53.1%   54.7%   54.4%   56.2% 

(1)

For the six months ended June 30,

Three Months Ended March 31,
20242023
Net income (loss)$30,232 $(12,343)
Interest expense, net39,740 68,662 
Income tax expense (benefit)9,875 (3,990)
Depreciation and amortization46,944 44,897 
(Gain) loss on derivatives(19,757)7,995 
Equity compensation expense(1)2,848 879 
Transaction expenses(2)7,880 201 
Gain on sale of property, plant and equipment— 17 
Adjusted EBITDA$117,762 $106,318 
Adjusted EBITDA Percentage54.6 %55.9 %
(1)For the three months ended March 31, 2024, and March 31, 2023, and 2022 there were $2.8 million and $0.9 million and $0.6 million, respectively, of non-cash adjustments for equity compensation expense.
(2)Represents certain costs associated with non-recurring professional services, primarily related to the CSI Acquisition for the three months ended March 31, 2024, and other costs.
32


non-cash adjustments for equity compensation expense related to the Time-Vesting Units.

(2)

Represents certain costs associated with non-recurring professional services, our equity owners’ expenses and other costs.

The following table reconciles net cash provided by operating activities to Adjusted EBITDA for each of the periods presented (in thousands):

   Three Months Ended June 30,   Six Months Ended June 30, 
   2023   2022   2023   2022 

Net cash provided by operating activities

  $94,678   $72,851   $117,968   $127,647 

Interest expense, net

   60,964    36,829    119,687    62,469 

Tax expense

   5,851    2,781    1,861    18,159 

Deferred tax provision (benefit)

   (3,282)    (1,116)    (761)    (14,974) 

Realized gain on derivatives

   (25,835)    —      (25,835)    —   

Transaction expenses(1)

   1,072    1,600    1,273    1,600 

Other(2)

   (6,763)    (4,315)    (13,109)    (6,912) 

Change in operating assets and liabilities

   (18,800)    (11,736)    13,119    6,287 
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $107,885   $96,894   $214,203   $194,276 
  

 

 

   

 

 

   

 

 

   

 

 

 

(1)

Represents certain costs associated with non-recurring professional services, our equity owners’ expenses and other costs.

(2)

Includes amortization of debt issuance costs, non-cash lease expense, provision for credit losses and inventory reserve.

34

Three Months Ended March 31,
20242023
Net cash provided by operating activities    $51,542 $23,290 
Interest expense, net    39,740 68,662 
Income tax expense (benefit)    9,875 (3,990)
Deferred tax provision    (6,261)2,521 
Cash received paid on derivatives(5,516)(9,939)
Transaction expenses(1)    7,880 201 
Other(2)(4,054)(6,346)
Change in operating assets and liabilities    24,556 31,919 
Adjusted EBITDA    $117,762 $106,318 

(1)Represents certain costs associated with non-recurring professional services, primarily related to the CSI Acquisition for the three months ended March 31, 2024, and other costs.

(2)Includes amortization of debt issuance costs, non-cash lease expense, provision for credit losses and inventory reserve.

Discretionary Cash Flow

We define Discretionary Cash Flow as net cash provided by operating activities less (i) maintenance capital expenditures, transaction expenses,expenditures;(ii) gain (loss) on sale of property, plant and equipment; (iii) certain changes in operating assets and liabilitiesliabilities; and (iv) certain other expenses; plus (x) transaction expenses. We believe Discretionary Cash Flow is a useful liquidity and performance measure and supplemental financial measure for us in assessing our ability to pay cash dividends to our stockholders, make growth capital expenditures and assess our operating performance. Our ability to pay dividends is subject to limitations due to restrictions contained in our ABL Credit Agreement, as further described elsewhere herein. Discretionary Cash Flow is presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP, such as revenues, net income, operating income (loss) or cash flows from operating activities. Discretionary Cash Flow as presented may not be comparable to similarly titled measures of other companies.

Free Cash Flow

We define Free Cash Flow as net cash provided by operating activities less (i) maintenance capital expenditures; (ii) gain (loss) on sale of property, plant and growth capital expenditures, transaction expenses,equipment; (iii) certain changes in operating assets and liabilities andliabilities; (iv) certain other expenses.expenses; and (v) net growth capital expenditures; plus (x) transaction expenses; and (z) proceeds from sale of property, plant and equipment. We believe Free Cash Flow is a liquidity measure and useful supplemental financial measure for us in assessing our ability to pursue business opportunities and investments to grow our business and to service our debt. Free Cash Flow is presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP, such as revenues, net income (loss), operating income (loss) or cash flows from operating activities. Free Cash Flow as presented may not be comparable to similarly titled measures of other companies.

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The following table reconciles net cash provided by operating activities, to Discretionary Cash Flow and Free Cash Flow, for each of the periods presented (in thousands):

   Three Months Ended June 30,   Six Months Ended June 30, 
   2023   2022   2023   2022 

Net cash provided by operating activities

  $94,678   $72,851   $117,968   $127,647 

Maintenance capital expenditures(1)

   (10,940)    (9,320)    (15,743)    (17,431) 

Transaction expenses(2)

   1,072    1,600    1,273    1,600 

Gain on sale of assets

   (738)    —      (721)    (7) 

Change in operating assets and liabilities

   (18,800)    (11,736)    13,119    6,287 

Other(3)

   (399)    (898)    (1,317)    (1,693) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Discretionary Cash Flow

  $64,873   $52,497   $114,579   $116,403 

Growth capital expenditures(4)(5)

   (32,529)    (54,689)    (68,344)    (126,590) 

Proceeds from sale of assets

   1,023    1    1,055    13 
  

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow

  $33,367   $(2,191)   $47,290   $(10,174) 
  

 

 

   

 

 

   

 

 

   

 

 

 

(1)

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources —Cash Requirements —Capital Expenditures” for information regarding amounts designated as maintenance capital expenditures.

(2)

Three Months Ended March 31,
20242023
Net cash provided by operating activities$51,542 $23,290 
Maintenance capital expenditures(1)(10,642)(4,803)
Transaction expenses(2)7,880 201 
Gain on sale of property, plant and equipment— 17 
Change in operating assets and liabilities24,556 31,919 
Other(3)(1,411)(918)
Discretionary Cash Flow$71,925 $49,706 
Growth capital expenditures(4)(5)(59,401)(35,816)
Proceeds from sale of property, plant and equipment— 32 
Free Cash Flow$12,524 $13,922 
(1)See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Cash Requirements—Capital Expenditures” for information regarding amounts designated as maintenance capital expenditures.
(2)Represents certain costs associated with non-recurring professional services, primarily related to the CSI Acquisition for the three months ended March 31, 2024, and other costs.
(3)Includes non-cash lease expense, provision for credit losses and inventory reserve.
(4)For the three months ended March 31, 2024, and 2023, growth capital expenditures include a $9.9 million increase and a $8.0 million decrease in accrued capital expenditures, respectively.
(5)For the three months ended March 31, 2024, and 2023, there were $5.8 million and $2.4 million of non-unit growth capital expenditures, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Cash Requirements—Capital Expenditures” for information regarding amounts designated as growth capital expenditures.
non-recurring professional services, our equity owners’ expenses and other costs.

(3)

Includes non-cash lease expense, provision for credit losses and inventory reserve.

(4)

For the three months ended June 30, 2023 and 2022, growth capital expenditures include a $2.0 million and a $10.1 million decrease in accrued capital expenditures, respectively. For the six months ended June 30, 2023 and 2022, growth capital expenditures includes a $10.0 million and a $1.9 million decrease in accrued capital expenditures, respectively.

(5)

For the three months ended June 30, 2023 and 2022, there were $4.8 million and $1.7 million of non-unit growth capital expenditures, respectively. For the six months ended June 30, 2023 and 2022, there were $7.2 million and $2.2 million of non-unit growth capital expenditures, respectively. Remaining amounts for the six months ended June 30, 2023 and 2022 represent growth capital expenditures to expand our operating capacity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Cash Requirements—Capital Expenditures” for information regarding amounts designated as growth capital expenditures.

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The following table reconciles net income (loss) to Discretionary Cash Flow and Free Cash Flow, for each of the periods presented (in thousands):

   Three Months Ended June 30,   Six Months Ended June 30, 
   2023   2022   2023   2022 
   (in thousands)   (in thousands) 

Net income

  $17,517   $8,901   $5,174   $58,456 

Depreciation and amortization

   45,430    43,397    90,327    85,802 

Unrealized loss (gain) on derivatives

   3,595    3,386    21,529    (32,822) 

Deferred tax provision (benefit)

   3,282    1,116    761    14,974 

Amortization of debt issuance costs

   5,626    3,417    11,071    5,212 

Equity compensation expense(1)

   29    —      908    619 

Transaction expenses(2)

   1,072    1,600    1,273    1,600 

Gain on sale of assets

   (738)    —      (721)    (7) 

Maintenance capital expenditures(3)

   (10,940)    (9,320)    (15,743)    (17,431) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Discretionary Cash Flow

  $64,873   $52,497   $114,579   $116,403 

Growth capital expenditures(4)(5)

   (32,529)    (54,689)    (68,344)    (126,590) 

Proceeds from sale of assets

   1,023    1    1,055    13 
  

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow

  $33,367   $(2,191)   $47,290   $(10,174) 
  

 

 

   

 

 

   

 

 

   

 

 

 

(1)

For the six months ended June 30, 2023 and 2022, there were $0.9 million and $0.6 million, respectively, of non-cash adjustments for equity compensation expense related to the Time Vesting Units.

(2)

Represents certain costs associated with non-recurring professional services, our equity owners’ expenses and other costs.

(3)

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Cash Requirements—Capital Expenditures” for information regarding amounts designated as maintenance capital expenditures.

(4)

For the three months ended June 30, 2023 and 2022, growth capital expenditures include a $2.0 million and a $10.1 million decrease in accrued capital expenditures, respectively. For the six months ended June 30, 2023 and 2022, growth capital expenditures include a $10.0 million and a $1.9 million decrease in accrued capital expenditures, respectively.

(5)

For the three months ended June 30, 2023 and 2022, there were $4.8 million and $1.7 million of non-unit growth capital expenditures, respectively. For the six months ended June 30, 2023 and 2022, there were $7.2 million and $2.2 million of non-unit growth capital expenditures, respectively. Remaining amounts for the six months ended June 30, 2023 and 2022 represent growth capital expenditures to expand our operating capacity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Cash Requirements—Capital Expenditures” for information regarding amounts designated as growth capital expenditures.

36

Three Months Ended March 31,
20242023
Net income (loss)$30,232 $(12,343)
Depreciation and amortization46,944 44,897 
Change in fair value of derivatives(14,241)17,934 
Deferred tax provision6,261 (2,521)
Amortization of debt issuance costs2,643 5,445 
Equity compensation expense(1)2,848 879 
Transaction expenses(2)7,880 201 
Gain on sale of property, plant and equipment— 17 
Maintenance capital expenditures(3)(10,642)(4,803)
Discretionary Cash Flow$71,925 $49,706 
Growth capital expenditures (4)(5)(59,401)(35,816)
Proceeds from sale of property, plant and equipment— 32 
Free Cash Flow$12,524 $13,922 
(1)For the three months ended March 31, 2024, and 2023, there were $2.8 million and $0.9 million of non-cash adjustments for equity compensation expense, respectively.
(2)Represents certain costs associated with non-recurring professional services, primarily related to the CSI Acquisition for the three months ended March 31, 2024, and other costs.
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(3)See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Cash Requirements—Capital Expenditures” for information regarding amounts designated as maintenance capital expenditures.
(4)For the three months ended March 31, 2024, and 2023, growth capital expenditures include a $9.9 million increase and a $8.0 million decrease in accrued capital expenditures, respectively.
(5)For the three months ended March 31, 2024, and 2023, there were $5.8 million and $2.4 million of non-unit growth capital expenditures, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Cash Requirements—Capital Expenditures” for information regarding amounts designated as growth capital expenditures.
Critical Accounting Policies and Estimates

The

For a discussion and analysis of our financial conditioncritical accounting estimates, see “Part II – Item 7. Management’s Discussion and resultsAnalysis of operations is based upon certain financial estimates, judgmentsFinancial Condition and assumptions that affect the reported amountsResults of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. We base our estimates on historical experience, available information and various other assumptions we believe to be reasonable under the circumstances. On an ongoing basis, we evaluate our estimates; however, actual results may differ from these estimates under different assumptions or conditions. The accounting policies that we believe require management’s most difficult, subjective or complex judgments and are the most critical to its reporting of results of operations and financial position are as follows:

Business Combinations and Goodwill

Goodwill acquired in connection with business combinations represents the excess of consideration over the fair value of net assets acquired. Certain assumptions and estimates are employed in determining the fair value of assets acquired and liabilities assumed. Goodwill is not amortized, but is reviewed for impairment annually, or more frequently if impairment indicators arise that suggest the carrying value of goodwill may not be recovered.

Goodwill - Impairment Assessments

We evaluate goodwill for impairment annually and whenever events or changes indicate that it is more likely than not that the fair value at the reporting unit level could be less than its carrying value (including goodwill). We estimate the fair value based on a number of factors, including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and Company specific events. Estimating projected cash flows requires us to make certain assumptions as it relates to future operating performance.

Application of the goodwill impairment test requires judgments, including a qualitative assessment to determine whether there are any impairment indicators, and determining the fair value of the reporting unit. A number of significant assumptions and estimates are involved in the application of the income approach to forecast future cash flows, including revenue and operating income growth rates, discount rates and other factors. While we believe that our estimates of current value are reasonable, if actual results differ from the estimates and judgments used including such items as future cash flows and the volatility inherent in markets which we serve, impairment charges against the carrying value of those assets could be required in the future.

No events or circumstances occurring that indicated that the fair value of the entity may be below its carrying amount. No goodwill impairment was recorded for the three and six months ended June 30, 2023 and 2022.

Impairment of Long-Lived Assets

Long-lived assets, including property, plant, and equipment, and other finite-lived identifiable intangible assets, are reviewed for impairment whenever events or changes in circumstances, including the removal of compression units from our active fleet, indicate that the carrying amount of an asset may not be recoverable. Such events and changes may include significant changes in performance relative to expected operating results, significant changes in asset use, significant negative industry or economic trends, and changes in our business strategy, among others. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to estimated future undiscounted net cash flows expected to be generated by the asset.

Impairment losses are recognized in the period in which the impairment occurs and represent the excess of the asset carrying value over its fair value estimated future undiscounted net cash flows. No impairment was recorded for the three and six months ended June 30, 2023 and 2022.

Estimated Useful Lives of Property, Plant and Equipment

Property, plant and equipment is carried at cost. Depreciation is computed on a straight-line basis using useful lives that are estimated based on assumptions and judgments that reflect both historical experience and expectations regarding future useOperations – Critical Accounting Estimates” of our assets. The use of different assumptions and judgments in the calculation of depreciation, especially those involving useful lives, would likely result in significantly different net book values of our assets and results of operations.

Commitments and Contingencies

From time to time, we may be involved in various claims and litigation arising in the ordinary course of business. Additionally, our compliance with state and local sales tax regulations is subject to audit by various taxing authorities. Certain taxing authorities have either claimed or issued an assessment that specific operational processes, which we and others in our industry regularly conduct, result in transactions that are subject to state sales taxes. We and others in our industry have disputed these claims and assessments basedAnnual Report on either existing tax statutes or published guidance by the taxing authorities.

37

We utilize both internal and external counsel in evaluating our potential exposure to adverse outcomes from orders, judgments or settlements. While we are unable to predict the ultimate outcome of these actions, the accounting standardForm 10-K for contingencies requires management to make judgments about future events that are inherently uncertain. We are required to record a loss during any period in which we believe a contingency is probable and can be reasonably estimated. To the extent that actual outcomes differ from our estimates, or additional facts and circumstances cause us to revise our estimates, our earnings will be affected. We record legal costs as incurred, and all recorded legal liabilities are revised, as required, as better information becomes available to us.

As of June 30, 2023, based on the information currently available, we have accrued a contingent liability of approximately $28.4 million relating to the Sales Tax Audit for the periods currently under audit classified in accrued liabilities on the consolidated balance sheet.

For the year ended December 31, 2020, we wrote off an outstanding receivable balance of $3.7 million, due2023. There have been no significant changes to us from a previous acquisition, to bad debt expense. Additionally, we recorded a contingent liability of $3.7 million related to the remaining 50% of the receivable balance due to the seller in accrued liabilities. As of June 30, 2023, none of the outstanding receivables had been collected.

As of June 30, 2023, there are no other legal matters for which resolution could have a material adverse effectour critical accounting estimates since our Annual Report on the consolidated financial statements.

Fair Value of Derivative Instruments

We use any of three valuation approaches to measure fair value: the market approach, the income approach, and the cost approach in determining the appropriate valuation methodologies based on the nature of the asset or liability being measured and the reliability of the inputs used in arriving at fair value.

We record derivative instruments at fair value using level 2 inputs of the fair value hierarchy. The interest rate swaps and interest rate collars are valued using a discounted cash flow analysis on the expected cash flows of each derivative using observable inputs including interest rate curves and credit spreads.

As of June 30, 2023, $43.8 million was recordedForm 10-K for the fair value of the asset of the derivative instruments compared to $65.3 million asset of the derivative instruments recorded as ofyear ended December 31, 2022.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (“Topic 326”): Measurement of Credit Losses on Financial Instruments which changes the impairment model for financial assets measured at amortized cost and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new current expected credit loss model that will result in earlier recognition of allowance for losses. The Company adopted this Topic 326 on January 1, 2023. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements.

38

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk

Our primary exposure to interest rate risk results from outstanding borrowings under the ABL Facility, which has a floating interest rate component. We use interest rate derivative instruments to manage our exposure to fluctuations in these variable interest rate components.

As of June 30, 2023March 31, 2024, and December 31, 2022,2023, we had $1.82$1.1 billion and $1.75$1.8 billion, respectively, outstanding under the ABL Facility and $1.225$1.0 billion and $1.325$1.2 billion outstanding and effective notional amounts of floating to fixed interest rate swaps, respectively, which we attribute to our borrowings under our ABL Facility. Excluding the effect of interest rate swaps, the average annualized interest rate incurred on the ABL Facility for borrowings during the sixthree months ended June 30, 2023March 31, 2024, was approximately 8.10%8.22% and we estimate that a 1.0% increase in the applicable average interest ratesrate for the sixthree months ended June 30, 2023March 31, 2024, would have resulted in an estimated $8.8$3.4 million increase in ABL-related interest expense.

As of June 30, 2023, we had $1.0 billion outstanding under the Term Loan. During the six months ended June 30, 2023 we had $350.0 million notional amounts of floating to fixed interest rate swaps and a $400.0 million notional amount interest rate collar with a floor of 1.70% and a cap of 2.00% that we attribute to our Term Loan. On June 29, 2023 we terminated these positions resulting in proceeds of $26.9 million. Excluding the effect of interest rate derivatives, the average annualized interest rate incurred on the Term Loan for borrowings during the six months ended June 30, 2023 was 11.92%, and we estimate that a 1.0% increase in the applicable average interest rates for the six months ended June 30, 2023 would have resulted in an estimated $5.0 million increase in interest expense related to Term Loan.

Counterparty Risk

Our credit exposure generally relates to receivables for services provided.provided and a counterparty’s failure to meet its obligations under a derivatives contract with the Company. If any significant customer of ours should have credit or financial problems resulting in a delay or failure to pay the amount it owes us,due, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. Additionally, if any significant vendor of ours should have financial problems or operational delays, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. For example, an affiliate of one of our customers in the Powder River Basin has been undergoing a bankruptcy proceeding since 2019. Such customer has from time to time been late in remitting payment for our compression services,Compression Operations, which we have continued to deliver, and we are pursuing prompt payment of the amount owed. We do not expect the amount owed presents any material concentration risk. If payment is not timely remitted, we expect to suspend services to such customer.

The Company uses credit and other financial criteria to evaluate the credit standing of, and to select, counterparties to its derivative instruments. Although the Company does not obtain collateral or otherwise secure the fair value of its derivative instruments, associated credit risk is mitigated by the Company’s risk management policies and procedures.
Concentration Risk

For the sixthree months ended June 30, 2023March 31, 2024, and year ended December 31, 2022,2023, our four largest customers accounted for approximately 38% and 39%37%, respectively, of our recurring revenues, with no single customer accounting for more than 14% for botheither ending periods.period. If any significant customer of ours should discontinue their partnershiprelationship with us, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Commodity Price Risk

Market risk is the risk of loss arising from adverse changes in market rates and prices. We do not take title to any natural gas or oil in connection with our services and, accordingly, have no direct exposure to fluctuating commodity prices. However, the demand for our compression operationsCompression Operations depends upon the continued demand for, and production of, natural
35


gas and oil. Sustained low natural gas or oil prices over the long term could result in a decline in the production of natural gas or oil, which could result in reduced demand for our compression operations.

Compression Operations.
Item 4.

Controls and Procedures.

Item 4.    Controls and Procedures.
Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by

As of March 31, 2024, an issuer in the reports that it files or submitsevaluation was performed under the Exchange Act is accumulatedsupervision and communicated to the issuer’s management, including its principal executive and financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation and supervision of our management, including the Chief Executive Officer and our Chief Financial Officer, have evaluatedof the effectiveness of the design and operation of our disclosure controls and procedures, (asas defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q.amended. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were not effective due to the material weakness in our internal control over financial reporting described below. However, after giving full consideration to such material weakness, and the additional analyses and other procedures that we performed to ensure that our condensed consolidated financial statements included in this Quarterly Report were prepared in accordance with U.S. GAAP, our management has concluded that our consolidated financial statements present fairly, in all material respects, our financial position, resultsas of operations and cash flows for the periods disclosed in conformity with U.S. GAAP.

Management has determined that the Company had a material weakness in its internal control over financial reporting. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We did not maintain effective internal control over the proper inclusion of an out of period adjustment in the preparation of comparable interim unaudited condensed consolidated financial statements, which resulted in an adjustment to our derivative interest rate swaps for the period ended March 31, 2022.

Remediation Plan

We have begun the process of, and we are focused on, measures to remediate the material weakness related to out of period adjustments in the comparable interim unaudited condensed financial statements. Our internal control remediation efforts include the following:

2024.

We have evaluated closing entries within each respective historical period and account balance by formally documenting and tracking out of period adjustments.

We have enhanced our assessment of out of period adjustments for inclusion in comparable interim unaudited condensed financial statements to ensure transactions are recorded in the appropriate reporting period.

We engaged an outside firm to assist management with (i) reviewing our current processes, procedures, and systems and assessing the design of controls to identify opportunities to enhance the design of controls that would address relevant risks identified by management, and (ii) enhancing and implementing protocols to retain sufficient documentary evidence of operating effectiveness of such controls.

We cannot provide any assurance that such remedial measures, or any other remedial measures we take, will be effective.

Changes in Internal Control Over Financial Reporting

We are taking actions to remediate the material weaknesses relating to our internal control over financial reporting. Except as otherwise described above, there

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)that occurred during the quarter ended June 30, 2023March 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1.

Legal Proceedings.

Item 1.    Legal Proceedings.
From time to time, we and our subsidiaries may be involved in various claims and litigation arising in the ordinary course of business. In management’s opinion, the resolution of such matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows.

Between October 2019 and April 2023, we received notices from the Texas Comptroller’s office See Note 13 (“Sales Tax Contingency”) to our unaudited condensed consolidated financial statements in regards to auditsPart I, Item 1 “Financial Statements” of this Report for periods ranging from December 2015 through December 2022. Basedmore information on the timing and nature of a previous settlement, we may receive similar treatment on settlement of our sales tax liability. We are actively in settlement discussions with the Comptroller, and if necessary, we will exhaust our administrative remedies to the maximum extent possible.

certain litigation.
Item 1A.

Risk Factors.

Except as set forth below, there

Item 1A.    Risk Factors.
There have been no material changes to the risk factors previously disclosed under the headingin Part I, Item 1A, “Risk Factors” in the IPO Prospectus.

We have identified a material weakness inof our internal controls, and we cannot provide assurances that this weakness will be effectively remediated, or that additional material weaknesses will not occur in the future.

If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud, or file our periodic reports in a timely manner.

During the preparation and review of the unaudited interim condensed consolidated financial statementsAnnual Report on Form 10-K for the three and six month periodsfiscal year ended June 30, 2023 and 2022, the Company identified a previously corrected adjusting entry that was erroneously recorded in the three months ended June 30, 2022 and should have been recorded in the three months ended MarchDecember 31, 2022. This entry was specific to the unrealized (loss) gain on derivatives and did not impact the six-month period ended June 30, 2022 financial statements.

While we are in the process of remedial action to address the material weakness, we cannot provide any assurance that such remedial measures, or any other remedial measures we take, will be effective. The material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are designed and operating effectively. Any failure to design or maintain effective internal control over financial reporting or any difficulties encountered in their implementation or improvement could increase compliance costs, negatively impact the market price of our common stock, or otherwise harm our operating results or cause us to fail to meet our reporting obligations.

40

2023.

Item 2.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.

Use of Proceeds

Proceeds.

During the three months ended March 31, 2024, there were no unregistered sales of equity securities. On June 28, 2023, our Registration Statement on Form S-1 (File No. 333-271050) relating to our IPO was declared effective byApril 1, 2024, in connection with the SEC. On July 3, 2023, we completedCSI Acquisition, the IPO, pursuant to which weCompany issued and sold 16,000,000 5,562,273 shares at a priceof Series A Preferred Stock to the public of $16.00 per share. Goldman Sachs & Co. LLC, J.P. Morgan and Barclays served as lead book-running managers for the IPO. BofA Securities, Raymond James, RBC Capital Markets, Stifel, Truist Securities and TPH&Co., the energy business of Perella Weinberg Partners, served as book-running managers for the IPO. Comerica Securities, Fifth Third Securities, Inc., Regions Securities LLC, Texas Capital Securities, AmeriVet Securities, Guzman & Company, R. Seelaus & Co., LLC and Siebert Williams Shank served as co-managers for the IPO. We received net proceeds of approximately $231.4 million, after deducting expenses and underwriting discounts and commissions payable by us. There has been no material change in the planned use of proceeds from our IPO as described in the IPO Prospectus.

On July 11, 2023, the underwriters of the IPO exercised in full their option to purchase additional shares of common stockElecting Unitholders. The foregoing securities were issued pursuant to the underwriting agreement relating toexemption from registration provided by Section (4)(a)(2) of the IPO. The transaction resulted in our issuing and selling an additional 2,400,000 sharesSecurities Act of common stock at a price to the public of $16.00 per share on July 13, 2023. We received net proceeds of approximately $36.2 million therefrom, after deducting underwriting discounts and commissions payable by us. The proceeds were used for repayment of existing indebtedness and general corporate purposes.

1933, as amended.
Item 3.

Defaults Upon Senior Securities.

Item 3.    Defaults Upon Senior Securities.
None.

Item 4.

Mine Safety Disclosures.

Item 4.    Mine Safety Disclosures.
Not Applicable.

Item 5.

Other Information.

Item 5.    Other Information.
Securities Trading Plans of Directors and Executive Officers

During the quarter covered by this Report,three months ended March 31, 2024, none of our directors or “officers” (as such term is defined in Rule16a-1(f) under the Exchange Act) adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule“non-Rule 10b5-1 trading arrangement” (as each term is defined in Item 408(a) of Regulation S-K).

Resignation of Board Member

Effective as of August 7, 2023, Teresa Mattamouros resigned from her position as director of the Company and member of the Personnel & Compensation Committee of the Board. Ms. Mattamouros did not resign due to any disagreement with the Company on any matter relating to its operations, policies or practices. The Company thanks Ms. Mattamouros for her service to the Company and its stockholders.

Appointment of Board Member

Effective August 8, 2023, Nirav Shah was elected a director of the Company and a member of the Nominating, Governance & Sustainability Committee of the Board. Mr. Shah will serve as a Class III director with a term expiring at the Company’s third annual meeting of stockholders following the Company’s initial public offering. The Board has determined that Mr. Shah meets the independence standards established under the New York Stock Exchange corporate governance listing standards. There is no arrangement or understanding between Mr. Shah and any other person pursuant to which he was appointed to the Board or the Nominating, Governance & Sustainability Committee, and there are currently no transactions in which Mr. Shah has an interest requiring disclosure under Item 404(a) of Regulation S-K. There are no family relationships between Mr. Shah and any director or executive officer of the Company.

In connection with Mr. Shah’s appointment to the Board, the Company entered into an indemnification agreement with Mr. Shah, pursuant to which the Company will indemnify Mr. Shah to the fullest extent permitted under Delaware law against liability that may arise by reason of his service to the Company, and to advance certain expenses incurred as a result of any proceeding against him as to which he could be indemnified. The forgoing description of the indemnification agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the indemnification agreement, which is filed herewith as Exhibit 10.11 and is incorporated into this Item 5 by reference.

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Item 6.    Exhibits.
Item 6.
Exhibit
 Number

Exhibits.

Description

Exhibit

  Number  

2.1

Description

3.1
3.2
3.3
    4.1
3.4
37
Table of Contents


4.1
4.2
  10.14.3
  10.24.4
  10.3Form of Restricted Stock Unit Grant Notice for Non-Employee Directors (incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-8 (File No. 333-273118) filed with the SEC on July 5, 2023).
  10.4Form of Performance Stock Unit Grant Notice for Executives (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-8 (File No. 333-273118) filed with the SEC on July 5, 2023).
  10.5Novation, Assignment and Assumption Agreement, dated as of July 3, 2023, by and among Kodiak Gas Services, LLC, Frontier Intermediate Holding, LLC, Frontier TopCo Partnership, L.P., as the new borrower the other parties thereto, and Wells Fargo Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.310.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on July 5, 2023)April 1, 2024).
  10.610.1
  10.7*Second Amendment to Fourth Amended and Restated Credit Agreement, dated as of June 27, 2023, among Frontier Intermediate Holding, LLC, Kodiak Gas Services, LLC, the other obligors party thereto, the lenders party thereto, and JP Morgan Chase Bank, N.A., as administrative agent.
  10.8Form of Indemnification Agreement between Kodiak Gas Services, Inc. and each of the directors and officers thereof (incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1 (File No. 333-271050) filed with the SEC on March 31, 2023).
  10.9Executive Severance Plan of Kodiak Gas Services, Inc. (incorporated by reference to Exhibit 10.1710.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on July 5, 2023)January 23, 2024).
  10.1010.2
14.1*
  10.11*Indemnification Agreement, dated August 8, 2023, by and among Kodiak Gas Services, Inc. and Nirav Shah.
31.1*
  31.1*
31.2*
32.1**
32.2**
101.INS*Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
101.SCH*Inline XBRL Taxonomy Extension Schema Document
101.CAL*Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*Cover Page Interactive Data File (embedded within the Inline XBRL document)

*

Filed herewith.

**

Furnished herewith.

42

__________
*Filed herewith.
**Furnished herewith.
38



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.

Kodiak Gas Services, Inc.
Date: August 10, 2023May 9, 2024By:By:

/s/ John B. Griggs

John B. Griggs
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: August 10, 2023May 9, 2024By:By:

/s/ Ewan W. Hamilton

Ewan W. Hamilton
Executive Vice President and Chief Accounting Officer
(Principal Accounting Officer)

43

39