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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file nos.: 001-15843
                                      333-48279

UNIVERSAL COMPRESSION HOLDINGS, INC.
UNIVERSAL COMPRESSION, INC.
(Exact name of Registrants as Specified in Their Charters)

Securities of Universal Compression Holdings, Inc. Registered Pursuant to Section 12(b) of the Act:

Securities of Universal Compression Holdings, Inc. Registered Pursuant to Section 12(g) of the Act:

Securities of Universal Compression, Inc. Registered Pursuant to Section 12(b) of the Act:

Securities of Universal Compression, Inc. Registered Pursuant to Section 12(g) of the Act:

UNIVERSAL COMPRESSION, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED DISCLOSURE FORMAT.

        Indicate by check mark whether each of the registrants (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 registrants were required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of each of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

        Indicate by check mark whether the registrants are accelerated filers (as defined in Rule 12b-2 of the Exchange Act).

Yes ý    No o (Universal Compression Holdings, Inc.)
Yes o    No ý (Universal Compression, Inc.)

        The aggregate market value of the Common Stock of Universal Compression Holdings, Inc. held by non-affiliates as of the last business day of the registrant's most recently completed second fiscal quarter (September 30, 2003) was approximately $362 million. For purposes of the above statements only, all directors, executive officers and 10% stockholders are assumed to be affiliates. This calculation does not reflect a determination that such persons are affiliates for any other purpose.

        The number of shares of the Common Stock of Universal Compression Holdings, Inc. outstanding as of June 7, 2004: 31,386,796 shares. All 4,910 outstanding shares of common stock of Universal Compression, Inc., par value $10.00 per share, are owned by Universal Compression Holdings, Inc.

Documents Incorporated by Reference

        Portions of Universal Compression Holdings, Inc.'s Proxy Statement for the Annual Meeting of Stockholders to be held on July 23, 2004 are incorporated by reference into Part III, as indicated herein.

The Index to Exhibits is on page 51.

Table of Contents

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PART I

        The terms "our," "Company," "we," and "us" when used in this report refer to Universal Compression Holdings, Inc. and its subsidiaries, including Universal Compression, Inc., as a combined entity, including its predecessors, except where it is made clear that such term means only the parent company. The term "Universal" refers to Universal Compression, Inc. and its subsidiaries, as a combined entity.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

        This report contains "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this report are forward-looking statements, including, without limitation, statements regarding future financial position, business strategy, proposed acquisitions, budgets, litigation, projected costs and plans and objectives of management for future operations. You can identify many of these statements by looking for words such as "believes," "expects," "will," "intends," "projects," "anticipates," "estimates," "continues" or similar words or the negative thereof.

        Such forward-looking statements in this report include, without limitation:

•

our business growth strategy and projected costs;



•

our future financial position;



•

the sufficiency of available cash flows to fund continuing operations;



•

the expected amount of our capital expenditures;



•

anticipated cost savings, future revenue, gross profits, EBITDA, as adjusted and other financial measures related to our business and our primary business segments;



•

the future value of our equipment; and



•

plans and objectives of our management for our future operations.

        Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. The risks related to our business described under "Risk Factors" and elsewhere in this report could cause our actual results to differ from those described in, or otherwise projected or implied by, the forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct. Important factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include, among other things:

•

conditions in the oil and gas industry, including a sustained decrease in the level of supply or demand for natural gas and the impact of the price of natural gas;



•

competition among the various providers of natural gas compression services;



•

changes in political or economic conditions in key operating markets, including international markets;



•

changes in safety and environmental regulations pertaining to the production and transportation of natural gas;



•

acts of war or terrorism or governmental or military responses thereto;



•

introduction of competing technologies by other companies;



•

our ability to retain and grow our customer base;

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•

our level of indebtedness and ability to fund our business;



•

our ability to recoup our investment by re-applying our compressors after typically short initial lease terms;



•

currency exchange rate fluctuations;



•

employment workforce factors, including loss of key employees; and



•

liability claims related to the use of our products and services.

        All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this report.

ITEM 1. Business

General

        We are the second largest natural gas compression services company in the world in terms of compressor fleet horsepower, with a fleet as of March 31, 2004 of approximately 7,100 compressor units comprising approximately 2.3 million horsepower. We provide a full range of natural gas compression services, sales, operations, maintenance and fabrication services and products to the natural gas industry, both domestically and internationally. These services and products are essential to the natural gas industry as gas must be compressed to be delivered from the wellhead to end-users.

        We operate in four primary business segments: domestic contract compression, international contract compression, fabrication and aftermarket services. Our core business, contract compression, involves providing compression equipment and service to customers. By outsourcing their compression needs, we believe our contract compression customers generally are able to increase their revenue by producing a higher volume of natural gas through decreased compressor downtime. In addition, outsourcing allows our customers to reduce their operating and maintenance costs and capital investments and more efficiently meet their changing compression needs.

        In addition to contract compression, we provide a broad range of compression services and products to customers who own their compression equipment or use equipment provided by our competitors. Our fabrication business involves the design, engineering and assembly of natural gas and air compressors for sale to third parties in addition to those that we use in our contract compression fleet. Our ability to fabricate compressors ranging in size from under 100 horsepower to over 5,000 horsepower enables us to provide compressors that are used in all facets of natural gas production, transmission and distribution. Our aftermarket services business sells parts and components, and provides maintenance and operations services to customers who own their compression equipment or have agreements with our competitors. Our ability to provide a full range of compression services and products broadens our customer relationships and helps us identify potential new customers and cross-selling opportunities for existing customers. As the compression needs of our customers increase due to the growing demand for natural gas throughout the world, we believe our geographic scope and broad range of compression services and products will enable us to participate in that growth.

        Financial information about our business segments is provided in Note 12 in the notes to the Company's financial statements at the end of this report.

        We are a Delaware corporation and a holding company that conducts operations through our wholly-owned subsidiary, Universal, a Texas corporation incorporated in 1954. We were formed on December 12, 1997 for the purpose of acquiring Universal's predecessor, Tidewater Compression

3

Service, Inc. ("TCS") from Tidewater, Inc. Upon completion of the acquisition on February 20, 1998, TCS became our wholly-owned subsidiary and changed its name to Universal Compression, Inc. Through this subsidiary, our gas compression service operations date back to 1954. We completed an initial public offering of shares of our common stock in June 2000.

        Since our initial public offering, we have completed several acquisitions, which have contributed significantly to our growth. Our most significant acquisition was that of Weatherford Global Compression Services, L.P. and certain related entities ("Weatherford Global"), former subsidiaries of Weatherford International Ltd. ("Weatherford"), in February 2001. This added approximately 950,000 horsepower to our fleet, more than doubling our size at that time.

        Our principal corporate office is located at 4444 Brittmoore Road, Houston, Texas 77041.

        We maintain a website at www.universalcompression.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available, without charge, on our website, www.universalcompression.com/invest/SECfrX.html, as soon as reasonably practicable after they are filed electronically with the Securities and Exchange Commission. Paper copies are also available, without charge, from Universal Compression Holdings, Inc., 4444 Brittmoore Road, Houston, Texas 77041, Attention: Investor Relations.

Key Operating and Financial Statistics

        The following table illustrates our key operating and financial statistics during the last three fiscal years:

(a)

EBITDA, as adjusted, is defined, reconciled to net income and discussed on page 19 of this report, within Item 6, Selected Financial Data.

Industry

Natural Gas Compression Overview

        Natural gas compression is a mechanical process whereby a volume of gas at an existing pressure is compressed to a desired higher pressure. We offer both slow and high speed reciprocating compressors driven either by internal combustion engines or electric motors. We also offer rotary screw and centrifugal compressors for specialized applications. Most natural gas compression applications involve compressing gas for its delivery from one point to another. Low pressure or aging natural gas wells require compression for delivery of produced gas into higher pressured gas gathering or pipeline

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systems. Compression at the wellhead is required because, over the life of an oil or gas well, natural reservoir pressure typically declines as reserves are produced. As the natural reservoir pressure of the well declines below the line pressure of the gas gathering or pipeline system used to transport the gas to market, gas no longer naturally flows into the pipeline. It is at this time that compression equipment is applied in both field and gathering systems to boost the well's pressure levels allowing gas to be brought to market. Compression is also used to reinject natural gas down producing oil wells to help lift liquids to the surface, known as gas lift operations. In secondary oil recovery operations, compression is used to inject natural gas into wells to maintain reservoir pressure. Compression is also used in gas storage projects to inject gas into underground reservoirs during off-peak seasons for withdrawal later during periods of high demand. Compressors may also be used in combination with oil and gas production equipment to process and refine oil and gas into more marketable energy sources. In addition, compression services are used for compressing feedstocks in refineries and petrochemical plants, and for refrigeration applications in natural gas processing plants.

        Typically, compression is required several times during the natural gas production cycle: at the wellhead, at the gathering lines, into and out of gas processing facilities, into and out of storage facilities and through the pipeline. Natural gas compression that is used to transport gas from the wellhead through the gathering system is considered "field compression." Natural gas compression that is used during the transportation of gas from the gathering systems to storage or the end-user is considered "pipeline compression." During the production phase, compression is used to boost the pressure of natural gas from the wellhead so that natural gas can flow into the gathering system or pipeline for transmission to end-users. Typically, these applications require portable, low to mid-range horsepower compression equipment located at or near the wellhead. The continually dropping pressure levels in natural gas fields require constant modification and variation of on-site compression equipment.

        Compression equipment is also used to increase the efficiency of a low capacity gas field by providing a central compression point from which the gas can be produced and injected into a pipeline for transmission to facilities for further processing. In an effort to reduce costs for wellhead operators, operators of gathering systems tend to keep the pressure of the gathering systems low. As a result, more pressure is often needed to force the gas from the low pressure gathering systems into the higher pressure pipelines. Similarly, as gas is transported through a pipeline, compressor units are applied all along the pipeline to allow the natural gas to continue to flow through the pipeline to its destination. These applications generally require larger horsepower compression equipment (600 horsepower and higher).

        Gas producers, transporters and processors have historically owned and maintained most of the compression equipment used in their operations. However, over the past several years, there has been a trend toward outsourcing compression equipment. Changing well and pipeline pressures and conditions over the life of a well often require producers to reconfigure their compressor units to optimize the well production or pipeline efficiency.

        Outsourcing contract compression equipment offers customers:

•

the ability to efficiently meet their changing compression needs over time while limiting their capital investments in compression equipment;



•

access to the compression service provider's specialized personnel and technical skills, including engineers, field service and maintenance employees, which generally leads to improved run-times and production rates; and



•

overall reduction in their compression costs through the reduction or elimination of capital investment in equipment, spare parts inventory and other expenditures associated with owning and maintaining compressor units.

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        Customers that elect to outsource compression equipment may vary their level of service for such equipment. Full maintenance calls for the compression service provider to be responsible for certain operational tasks, such as scheduled preventative maintenance, repair and general up-keep of the equipment, while the customer usually remains responsible for the day-to-day inspection of the equipment. Contract compression requires the compression service provider to be responsible for more of the operational tasks. Often, the contract compression service provider will inspect the equipment daily, provide consumables such as oil and antifreeze and, if necessary, be present at the site for several hours each day.

Natural Gas Industry Conditions

        A significant factor in the growth of the gas compression services market is the increasing demand and consumption of natural gas, both domestically and internationally. In the United States, natural gas is the second leading fuel in terms of total consumption. In recent years, natural gas has increased its market share of total domestic energy consumption. Domestic consumption of natural gas increased significantly from 1990 to 2000, before declining in the 2001 to 2003 time period due to an economic slowdown. Industry sources forecast increased consumption of natural gas in the United States in the remainder of the decade.

        Domestic field compression is estimated to be 17 million horsepower, up from 10 million in 1993. Additionally, the estimated amount of compression outsourced has grown over that same period, from approximately 2 million horsepower in 1993 to in excess of 5 million horsepower in 2002. We believe the domestic gas compression market will continue to grow due to the following factors:

•

higher natural gas consumption;



•

the aging of producing natural gas fields, which will require more compression to continue producing the same volume of natural gas; and



•

increased outsourcing by companies with compression needs in order to reduce operating costs, improve production and efficiency and reallocate capital to their core business activities.

        The international gas compression services market currently is substantially smaller than the domestic market. However, we estimate significant growth opportunities in international demand for compression services and products due to the following factors:

•

higher natural gas consumption;



•

implementation of international environmental and conservation laws preventing the practice of flaring natural gas and recognition of natural gas as a clean air fuel;



•

a desire by a number of oil exporting nations to replace oil with natural gas as a fuel source in local markets to allow greater export of oil;



•

increasing development of pipeline infrastructure, particularly in Latin America and Asia necessary to transport natural gas to local markets;



•

growing demand for electrical power generation, for which the fuel of choice tends to be natural gas; and



•

privatization of state-owned energy producers, resulting in increased outsourcing due to the focus on reducing capital expenditures and enhancing cash flow and profitability.

        In contrast to the domestic compression market, the international compression market is comprised primarily of large horsepower compressors. A significant portion of this market involves comprehensive installation projects, which include the design, fabrication, delivery, installation, operation and maintenance of compressors and related gas treatment equipment by the contract

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compression service provider. In these projects, the customer's only responsibility is to provide fuel gas within specifications. As a result of the full service nature of these projects and that these compressors generally remain on-site for three to seven years, we are able to achieve higher revenue and margins on these projects.

Operations

Contract Compressor Fleet

        As of March 31, 2004, our fleet consisted of 7,093 compressors, with an average of 327 horsepower per unit, as reflected in the following table:

        For the year ended March 31, 2004, the average horsepower utilization rate for our fleet was approximately 85.8%, which reflects average horsepower utilization based upon our total average fleet horsepower. For the quarter ended March 31, 2004, this average rate was approximately 86.4%. Over the last several years, we have undertaken to standardize our compressor fleet around major components and key suppliers. Our standardized fleet:

•

enables us to minimize our fleet operating costs and maintenance capital requirements;



•

enables us to minimize inventory costs;



•

facilitates low-cost compressor resizing; and



•

allows us to develop technical proficiency in our maintenance and overhaul operations, which enables us to achieve high run-time rates while maintaining low operating costs.

Contract Compression

        We provide comprehensive contract compression services, which include operation and maintenance services for our domestic and international fleet. When providing full contract compression service, we work closely with a customer's field service personnel so that the compressor can be adjusted to efficiently match changing characteristics of the gas produced. We provide maintenance services on substantially all of our fleet units. Maintenance services include the scheduled preventive maintenance, repair and general up-keep of compressor equipment. As a complement to our maintenance business, we offer supplies and services such as antifreeze and lubricants to the job site. We also may offer installation services, which for our typical mid-range and smaller horsepower units involves significantly less engineering and cost than the comprehensive service concept prevalent in the international markets. We also routinely repackage or reconfigure some of our existing fleet to adapt to our customers' needs.

        We generally operate the large horsepower compressors under comprehensive compression services contracts and include the operations fee as part of the contract compression rate. Large horsepower units are more complex and, by operating the equipment ourselves, we reduce maintenance and overhaul expenses. Generally, we train our customers' personnel in fundamental compressor operations

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of smaller horsepower units so that they can assume responsibility for the day-to-day inspection of the equipment and certain operational tasks.

        Our field compression equipment is maintained in accordance with daily, weekly, monthly and annual maintenance schedules. These maintenance procedures are updated as technology changes and as our operations group develops new techniques and procedures. In addition, because our field technicians provide maintenance on substantially all of our contract compression equipment, they are familiar with the condition of our equipment and can readily identify potential problems. In our experience, these procedures maximize equipment life and unit availability and minimize avoidable downtime. Generally, each of our units undergoes a major overhaul once every six to eight years. A major overhaul involves the rebuilding of the unit in order to materially extend its useful life or to enhance the unit's ability to fulfill broader or different contract compression applications.

        We believe that our fabrication and aftermarket services businesses provide us with opportunities to cross-sell our contract compression services.

        We have standard contracts for rates and terms on the compressors in our fleet. Through negotiations, these rates and contracts may be modified. Optional items such as oil, antifreeze, freight, insurance and other items may be either itemized or included in the basic monthly contract compression rate. Initial contract compression terms are usually six months, with some projects committed for as long as five years. At the end of the initial term, contract compression services can continue at the option of the customer on a month-to-month basis or the compressor may be returned or replaced with a different compressor.

        Domestic Operations.    As of March 31, 2004, we operated the second largest domestic fleet of compressors in terms of horsepower with approximately 6,560 units comprising approximately 1.9 million horsepower. We operate sales and service locations in the primary onshore and offshore natural gas producing regions of the United States. For the year ended March 31, 2004, 40.8% of our total revenue was generated from domestic contract compression operations.

        We maintain 18 field service locations throughout the United States at which we can service and overhaul our compression equipment.

        International Operations.    We operate internationally in Argentina, Australia, Brazil, Canada, China, Colombia, Indonesia, Mexico, Peru, Thailand, and Venezuela. As of March 31, 2004, we had approximately 540 units comprising approximately 417,000 horsepower, in the aggregate, in these markets. We intend to continue to expand our presence in these markets and pursue opportunities in other strategic international areas. For the year ended March 31, 2004, 12.0% of our total revenue was generated from international contract compression operations.

        International compression service projects usually generate higher gross profit margins than domestic projects. Our international operations are focused on large horsepower compressor markets and frequently involve longer-term and more comprehensive service projects than our domestic projects. International projects generally require us to provide complete engineering and design. International service agreements differ significantly from domestic service agreements as individual contracts are negotiated for each project. We believe our extensive engineering and design capabilities and reputation for high quality fabrication provide us a competitive advantage in these markets.

        Risks associated with our foreign operations are described herein under "Risk Factors."

Fabrication

        As a complement to our contract compression service operations, we design, engineer, fabricate and sell natural gas compressors and air compressors to engineering and construction firms, exploration and production companies, as well as pipeline and gas transmission companies, both domestically and

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internationally. We also fabricate compressor units for our own fleet. Our primary fabrication facilities are located in Houston, Texas and Calgary, Alberta, Canada.

        Generally, compressors sold to third parties are assembled according to each customer's specifications. We purchase components for these compressors from third party suppliers, and are original equipment manufacturer representatives for several major engine, compressor, and electric motor manufacturers in the industry. We also sell prepackaged compressor units. For the year-ended March 31, 2004, 26.7% of our total revenue was generated from fabrication operations.

        We do not incur material research and development expenditures, as these activities are not a significant aspect of our business. All research and development costs are expensed as incurred.

Aftermarket Services

        Our aftermarket services business sells parts and components, and provides maintenance to customers who own their compression equipment or use equipment provided by our competitors.

        Our inventory of parts is available either on an over-the-counter basis through our 18 service locations in the United States and 5 in Canada, on a bid basis for larger orders, or as part of our compressor maintenance service. Our maintenance services are available on an individual call basis, on a contract basis (which may cover a particular unit, an entire compression project or all of the customer's compression projects) or as part of our comprehensive operation and maintenance service. We also provide offshore maintenance and service. In addition, we provide overhaul and reconfiguration services for customer-owned compression equipment, either on-site or in our overhaul shops. For the year ended March 31, 2004, 20.5% of our total revenue was generated from aftermarket services operations.

Business Strategy

        Our business strategy is to meet the evolving needs of our customers by providing consistent and dependable services and products, and to take advantage of our size and broad geographic scope to expand our customer base. The key elements of our business strategy are described below:

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Provide a wide range of quality compression services and products. We plan to continue to leverage our field compression capabilities to provide services and products to customers in all segments of the natural gas compression market, including field and pipeline compression, fabrication and aftermarket services.



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Seek opportunities for preferred relationships. We intend to continue to enter into strategic alliances, preferred vendor and similar long-term relationships to provide this full range of services and products to our customers.



•

Seek opportunities in select international markets. We plan to expand our existing operations in Latin America, Canada and Asia Pacific and offer our services in other key markets. We believe that our experience in international markets and our reputation for providing reliable contract compression services and fabricating high quality, specifically-engineered compressors provides us with a solid foundation from which to further expand our business internationally.



•

Expand and leverage our fabrication and aftermarket services business. We have significant fabrication and aftermarket services operations and we intend to expand these segments of our business. In addition to providing additional sources of revenue, these segments also provide us with an opportunity to cross-sell our contract compression services and products.



•

Continue to expand beyond field compression. In addition to our field compression services, we have expanded our large horsepower compression capabilities in gathering, pipeline, processing,

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storage and offshore markets. We believe the pipeline compression market has significant growth potential for our services.

•

Maintain financial flexibility. We intend to maintain ample financial flexibility to be able to take advantage of opportunities as we identify them. Historically, during periods of growth, we have utilized our cash flow from operations as well as borrowings under available debt facilities to fund capital expenditures and acquisitions. This spending has allowed us to significantly grow our business and the amount of cash we generate while maintaining our debt at levels we believe are appropriate for our stable business. During the last fiscal year, we exercised disciplined capital spending and we intend to continue to focus on reducing our operating costs and managing our working capital. We believe our financial flexibility positions us to take advantage of future growth opportunities without incurring debt beyond appropriate levels.

Competitive Strengths

        We believe that we have the following key competitive strengths:

•

Comprehensive range of services and products. We provide a wide range of compression services and products to meet the changing compression needs of our customers in the diverse geographic markets that we serve, whether they outsource or own their compression equipment. For those customers who outsource, we believe our contract compression services and products generally allow our customers to achieve higher run-times than they would achieve with owned equipment, resulting in increased production and revenue for our customers. In addition, outsourcing allows our customers flexibility with regard to their changing compression needs while limiting their capital requirements. We continually expand, upgrade and reconfigure our contract compression fleet and provide our operations and maintenance personnel with extensive training. We are able to fabricate compression units ranging in size from under 100 horsepower to over 5,000 horsepower that meet the varying needs of our customers. Additionally, we sell parts and components and provide maintenance and operations services to customers who own their compression equipment or have agreements with our competitors. This broad range of compression services and products allows us to expand our customer base and gives us the opportunity to cross-sell our services and products.



•

Size and geographic scope. We operate in the primary onshore and offshore natural gas producing regions of the United States and select international markets. As the second largest provider of natural gas compression services, we have sufficient fleet size, personnel, logistical capabilities, geographic scope, fabrication capabilities and range of compression service and product offerings to meet the full service needs of our customers in the domestic and international markets we serve on a timely and cost-effective basis. Our size, geographic scope and customer base provide us with improved fleet utilization opportunities. By increasing our fleet utilization, we are able to improve our operating leverage and increase returns. As a result, we believe we have relatively lower operating costs and higher margins than most companies with smaller fleets due to economies of scale.



•

Standardization of our compressor fleet. We have undertaken to standardize our fleet of contract compressors around major components and key suppliers. Standardization enables us to develop extensive expertise in operating and maintaining our compressors, efficiently resizing and reconfiguring our compressors and reducing our operating costs by minimizing inventory costs. Natural gas compressors are long-lived assets with an expected economic life of 25 to 40 years. Our preventive maintenance program is designed to maximize the efficient operation of our fleet and to maintain their economic useful life.



•

Experienced management team. Our management team has extensive experience in the compression services business. We believe our management team has successfully demonstrated

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its ability to maintain our quality standards and commitment to customer service. Our management team has a substantial financial interest in our continued success through direct stock ownership, and participation in our incentive stock option and bonus programs which are linked to our performance.

Oil and Gas Industry Cyclicality and Volatility

        Our financial performance is generally less affected by the short-term market cycles and oil and gas price volatility than the financial performance of companies operating in other sectors of the oilfield services industry because

•

compression is necessary in order for gas to be delivered from the wellhead to end-users;



•

our operations are tied primarily to natural gas consumption, which is generally less cyclical in nature than exploration activities;



•

outsourcing of compression is often economically advantageous for natural gas production, gathering and transportation companies;



•

we have a broad customer base; and



•

we operate in diverse geographic regions.

        Adding to this stability is the fact that, while compressors often must be specifically engineered or reconfigured to meet the unique demands of our customers, the fundamental technology of compression equipment has not experienced significant technological change.

Customers

        Our current customer base consists of over 1,000 domestic and international companies engaged in all aspects of the oil and gas industry, including major integrated oil and gas companies, international state-owned oil and gas companies, large and small independent producers, natural gas processors, gatherers and pipelines. We have entered into strategic alliances with some of our customers. These alliances are essentially preferred vendor arrangements and give us preferential consideration for the compression needs of these customers. In exchange, we provide these customers with enhanced product availability, product support and favorable pricing.

        In the fiscal year ended March 31, 2004, no single customer accounted for as much as 10% of our total revenue. Our top 20 customers accounted for approximately 34.7% of our contract compression revenue in fiscal year 2004.

Suppliers

        Our principal suppliers include Caterpillar and Waukesha for engines, Air Xchangers for coolers, and Ariel and Gemini for compressors. We also purchase Cooper parts and compressors in Canada for sale to customers. Although we rely primarily on these suppliers, we believe alternative sources are generally available. We have not experienced any material supply problems to date, and we believe our relations with our suppliers are good, except as expressed below.

        In December 1999, Weatherford Global sold the assets and properties of its Gemini compressor business in Corpus Christi, Texas to GE Packaged Power, L.P., or GEPP. As part of that sale, Weatherford Global entered into an agreement to purchase from GEPP $38.0 million of compressor components over five years and $3.0 million of parts over three years, and GEPP agreed to provide compressors to Weatherford Global during that time period at negotiated prices. We assumed this obligation in connection with our acquisition of Weatherford Global in February 2001. As of March 31, 2004, approximately $25.9 million of components and approximately $13.5 million of parts have been

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purchased from GEPP. As a result of GEPP product performance issues, we have been unable to satisfy and have not satisfied in full our purchase commitment in respect of components under this agreement with GEPP. The unsatisfied portion of the purchase commitment is approximately $12.1 million. GEPP could assert its right to enforce this obligation, but has not indicated any interest to do so at this time. However, if GEPP should seek to enforce this obligation, we believe we have valid defenses and counter claims and would aggressively defend against such enforcement and pursue such counter claims.

Backlog

        As of March 31, 2004, we had a compressor unit fabrication backlog for sale to third parties of approximately $88.2 million, compared to $55.7 million as of March 31, 2003. As of June 8, 2004, our backlog was approximately $88.9 million compared to approximately $81.1 at June 30, 2003. A majority of the backlog is expected to be completed within a 180-day period.

Insurance

        We believe that our insurance coverage is customary for the industry and adequate for our business. As is customary in the natural gas service operations industry, we review our safety equipment and procedures and carry insurance against some, but not all, risks of our business.

        Losses and liabilities not covered by insurance would reduce our revenue and increase our costs. The natural gas service operations business can be hazardous, involving unforeseen circumstances such as uncontrollable flows of gas or well fluids, fires and explosions or environmental damage. To address the hazards inherent in our business, we maintain insurance coverage that includes physical damage coverage, third party general liability insurance, employer's liability, environmental and pollution and other coverage, although coverage for environmental and pollution-related losses is subject to significant limitations. In addition, many of our service contracts shift certain risks to our customers, including requirements to have insurance coverage.

Competition

        The natural gas contract compression, fabrication and aftermarket services businesses are highly competitive. We face competition from large national and multinational companies with greater financial resources and, on a regional basis, from numerous smaller companies.

        Our main competitors in the contract compression business, based on horsepower, are Hanover Compressor Company, Compressor Systems, Inc. and J-W Operating Company. In addition, Weatherford and its subsidiaries may continue to compete with us as they are not contractually restricted from doing so. In our fabrication activities, we currently compete primarily with Hanover Compressor Company, Compressor Systems, Inc., Enerflex Systems, Ltd, Toromont Industries LTD and Collicut Energy Services LTD. Our aftermarket services business faces competition from manufacturers including Cooper Energy Services, Dresser-Rand, Hanover Compressor Company, from distributors of Caterpillar and Waukesha engines, from a number of smaller companies and, in Canada, from Enerflex Systems, Ltd, Toromont Industries LTD and Collicut Energy Services LTD.

        We believe that we compete effectively on the basis of customer service, including the availability of our personnel in remote locations, price, technical expertise, parts service system, flexibility in meeting customer needs and quality and reliability of our compressors and related services.

Environmental and Other Regulations

        We are subject to stringent and complex foreign, federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to protection of human

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health and safety and the environment. Compliance with these laws and regulations may affect the costs of our operations. Moreover, failure to comply with these environmental laws and regulations may result in the assessment of administrative, civil, and criminal penalties, imposition of remedial obligations, and the issuance of injunctions delaying or prohibiting operations. We believe that our operations are in substantial compliance with applicable environmental requirements. As part of the regular evaluation of our operations, we update the environmental condition of our existing and acquired properties as necessary. We further believe that the phasing in of more stringent emission controls and other known regulatory requirements at the rate currently contemplated by environmental laws and regulations will not have a material adverse effect on our business, financial condition or results of operations.

        Primary federal environmental laws that our operations are subject to include the Clean Air Act and regulations thereunder, which regulate air emissions, the Clean Water Act, and regulations thereunder, which regulate the discharge of pollutants in industrial wastewater and storm water runoff, and the Resource Conservation and Recovery Act, referred to as "RCRA," and regulations, thereunder, which regulate the management and disposal of solid and hazardous waste. In addition, we are also subject to regulation under the federal Comprehensive Environmental Response, Compensation, and Liability Act, and regulations thereunder, known more commonly as "Superfund," which regulates the release of hazardous substances in the environment. Analogous state laws and regulations may also apply.

        The Clean Air Act and related regulations establish limits on the levels of various substances which may be emitted to the atmosphere during the operation of our fleet of natural gas compressors. These substances are regulated in permits, which are applied for and obtained through the various regulatory agencies, either state or federal depending on the level of emissions. While our standard contract typically provides that the customer will assume the permitting responsibilities and environmental risks related to compressor operations, we have in some cases obtained air permits as the owner and operator of the compressors. Under most of our contract compression service agreements, our customers must indemnify us for certain losses or liabilities we may suffer as a result of the failure of the compressors to comply with applicable environmental laws, including permit conditions. Increased obligations of operators to reduce air emissions of nitrogen oxides and other pollutants from internal combustion engines in transmission service are anticipated. Any new regulations requiring the installation of more sophisticated emission control equipment on such smaller portable sources potentially could have a material adverse impact on us. However, we believe that in most cases, these obligations would be allocated to our clients under the above-referenced contracts. In any event, we expect that such requirements would not have any more significant effect on our operations or financial condition than on any similarly situated company providing contract compression services.

        The Clean Water Act and related regulations prohibit the discharge of industrial wastewater without a permit and establish limits on the levels of pollutants contained in these discharges. In addition, the Clean Water Act, regulates storm water discharges associated with industrial activities depending on a facility's primary standard industrial classification. Many of our facilities have applied for and obtained industrial wastewater discharge permits as well as sought coverage under local wastewater ordinances. In addition, many of our facilities have filed notices of intent for coverage under statewide storm water general permits and developed and implemented storm water pollution prevention plans, as required.

        The RCRA and related regulations, regulate the management and disposal of solid and hazardous waste. These laws and the regulations govern the generation, storage, treatment, transfer and disposal of wastes that we generate. These wastes include, but are not limited to, used oil, antifreeze, filters, sludges, paint, solvents, and sandblast materials. The Environmental Protection Agency and various state agencies have limited the approved methods of disposal for these types of wastes.

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        Under the Comprehensive Environmental Response, Compensation, and Liability Act, referred to as "CERCLA," and comparable state laws and regulations, strict and joint and several liability can be imposed without regard to fault or the legality of the original conduct on certain classes of persons that contributed to the release of a hazardous substance into the environment. These persons include the owner and operator of a contaminated site where a hazardous substance release occurred and any company that transported, disposed of, or arranged for the transport or disposal of hazardous substances released at the site. Under CERCLA, such persons may be liable for the costs of remediating the hazardous substances that have been released into the environment and for damages to natural resources. In addition, where contamination may be present it is not uncommon for the neighboring landowners and other third parties to file claims for personal injury, property damage and recovery of response costs.

        We currently own or lease, and have in the past owned or leased, a number of properties that have been used, some for many years and some by third parties over whom we have no control, in support of natural gas compression services or other industrial operations. As with any owner or operator of property, we may be subject to remediation costs and liability under CERCLA, RCRA or other environmental laws for hazardous waste, asbestos or any other toxic or hazardous substance that may exist on or under any of our properties, including waste disposed or groundwater contaminated by prior owners or operators. We have performed in the past, are currently performing, and may perform in the future, certain remediation activities governed by environmental laws. The cost of this remediation has not been material to date and we currently do not expect it to be material in the future. We are currently undertaking groundwater monitoring at certain of our facilities, which may further define remedial obligations. Certain of our acquired properties may also warrant groundwater monitoring and other remedial activities. We believe that former owners and operators of many of these properties may be wholly or partly responsible under environmental laws and contractual agreements to pay for or perform remediation, or to indemnify us for our remedial costs. These other entities may fail to fulfill their legal or contractual obligations, which could result in imposing response obligations and material costs to us.

        Any new regulations requiring the installation of more sophisticated emission control equipment on such smaller portable sources potentially could have a material adverse impact on us. However, we believe that in most cases, these obligations would be allocated to our clients under the above-referenced contracts. In any event, we expect that such requirements would not have any more significant effect on our operations or financial condition than on any similarly situated company providing contract compression services.

        Stricter standards in environmental legislation or regulations that may affect us may be imposed in the future, such as proposals to make hazardous wastes subject to more stringent and costly handling, disposal and remediation requirements. Accordingly, new environmental laws or regulations or amendments to existing environmental laws or regulations (including, but not limited to, regulations concerning ambient air quality standards, waste water and storm water discharges, and global climate changes) could require us to undertake significant capital expenditures and could otherwise have a material adverse effect on our business, results of operations and financial condition.

        Our international operations are potentially subject to similar governmental controls and restrictions relating to the environment. We believe that we are in substantial compliance with any such foreign requirements pertaining to the environment.

        Since 1992, there have been various proposals to impose taxes with respect to the energy industry, none of which have been enacted and all of which have received significant scrutiny from various industry lobbyists. At the present time, given the uncertainties regarding the proposed taxes, including the uncertainties regarding the terms which the proposed taxes might ultimately contain and the

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industries and persons who may ultimately be the subject of such taxes, it is not possible to determine whether any such tax will have a material adverse effect on us.

Employees and Labor Relations

        As of March 31, 2004, we had approximately 2,370 employees worldwide. We believe our relationship with our employees is good. Approximately 240 of our employees in Canada, 60 of our employees in Argentina, 40 of our employees in Brazil and 20 of our employees in Mexico are covered by collective bargaining agreements.

ITEM 2. Properties

        The following table describes our material facilities owned or leased as of March 31, 2004:

        None of the above referenced facilities are pledged as collateral, except for the Schulenberg, Texas facility, which has been pledged as collateral to secure a $790,000 loan assumed as part of the acquisition of Gas Compression Services Inc. in 2000.

ITEM 3. Legal Proceedings

        From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We do not believe we are party to any legal proceedings which, if determined adversely to us, individually or in the aggregate, would have a material adverse effect on our results of operations or financial position.

ITEM 4. Submission of Matters to a Vote of Security Holders

        There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 2004.

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PART II

ITEM 5. Market for Registrants' Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        Our common stock is traded on the New York Stock Exchange under the symbol "UCO." The following table sets forth the range of high and low sale prices for our common stock for the periods indicated.

        On June 7, 2004, the closing price of our common stock was $30.00 per share. As of June 7, 2004, there were approximately 569 holders of record of our common stock.

        We have never declared or paid any cash dividends to our stockholders and do not plan to pay any cash dividends in the foreseeable future. We currently intend to retain our earnings for use in the operation and expansion of our business.

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ITEM 6. Selected Financial Data

SELECTED HISTORICAL FINANCIAL DATA
UNIVERSAL COMPRESSION HOLDINGS, INC.

        The following selected historical consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included elsewhere in this report. The selected historical financial and operating data for each of the five years in the period ended March 31, 2004 have been derived from the respective audited financial statements. The consolidated financial statements and report thereon, as of March 31, 2004 and 2003 and for the years ended March 31, 2004, 2003 and 2002 are included elsewhere in this report.

(1)

Gross profit is defined as total revenue less direct costs.

(2)

Operating lease expense related to the operating lease facilities has been recognized as interest expense subsequent to consolidation of the operating lease facilities on December 31, 2002.

(3)

Debt extinguishment costs in 2001 were previously reported as an extraordinary loss of $9.5 million, net of $5.7 million income tax benefit.

(4)

EBITDA, as adjusted, is defined, reconciled to net income and discussed on page 19 of this report, within this Item 6, Selected Financial Data.

(5)

Working capital is defined as current assets minus current liabilities.

(6)

Includes capital lease obligations.

(7)

Excludes $708.5 million and $527.5 million outstanding under our operating lease facilities as of March 31, 2002 and 2001, respectively. See Note 4 to the consolidated financial statements for a discussion related to the operating lease facilities.

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SELECTED HISTORICAL FINANCIAL DATA
UNIVERSAL COMPRESSION, INC.

        The following selected historical consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated audited financial statements and related notes included elsewhere in this report. The selected historical financial and operating data for each of the five years in the period ended March 31, 2004 have been derived from the respective audited financial statements. The consolidated audited financial statements and report thereon, as of March 31, 2004 and 2003 and for the years ended March 31, 2004, 2003 and 2002 are included elsewhere in this report.

(1)

Gross profit is defined as total revenue less direct costs.

(2)

Operating lease expense related to the operating lease facilities has been recognized as interest expense subsequent to the consolidation of the operating lease facilities on December 31, 2002.

(3)

Debt extinguishment costs in 2001 were previously reported as an extraordinary loss of $6.6 million, net of $4.0 million income tax benefit.

(4)

EBITDA, as adjusted, is defined, reconciled to net income and discussed on page 19 of this report, within this Item 6, Selected Financial Data.

(5)

Working capital is defined as current assets minus current liabilities.

(6)

Includes capital lease obligations.

(7)

Excludes $708.5 million and $527.5 million outstanding under Universal's operating lease facilities as of March 31, 2002 and 2001, respectively. See Note 4 to the consolidated financial statements for a discussion related to the operating lease facilities.

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THE COMPANY'S DEFINITION, RECONCILIATION
AND USE OF EBITDA, AS ADJUSTED

        EBITDA, as adjusted, is defined as net income plus income taxes, interest expense (including debt extinguishment costs), operating lease expense, management fees, depreciation and amortization, foreign currency gains or losses, excluding non-recurring items (including facility consolidation costs) and extraordinary gains or losses. Beginning with the quarter ended September 30, 2002, the Company changed its definition of EBITDA, as adjusted, to exclude foreign currency gains or losses. All periods prior to September 30, 2002 have been recalculated from amounts previously disclosed by the Company to be consistent with this new definition of EBITDA, as adjusted.

        EBITDA, as adjusted, represents a measure upon which management assesses performance and, as such, we believe that the generally accepted accounting principle ("GAAP") measure most directly comparable to it is net income or net loss. The manner in which management uses EBITDA, as adjusted, to evaluate our business follows.

        EBITDA, as adjusted, as a supplemental measure to review current period operating performance.    Management uses EBITDA, as adjusted, as a supplemental measure to evaluate the current period operating performance of our business. We believe that EBITDA, as adjusted, when viewed with our GAAP results and the accompanying reconciliations and other financial and non-financial measures, provides a more useful additional perspective on, and a more complete understanding of, our performance than our GAAP results alone.

•

Management uses EBITDA, as adjusted, to evaluate current operating performance and management decisions made during the reporting period, excluding certain expenses that are driven less by current period operating performance and management decisions than by our capital structure and asset base. These excluded expenses, which are primarily financial costs, include depreciation, interest, taxes and foreign currency exchange costs and more reflect prior period transactions and decisions. The operational factors highlighted in the evaluation using EBITDA, as adjusted, include pricing, marketing, utilization rates, maintenance and repair costs and staffing. EBITDA, as adjusted, presents an assessment of the performance and changes in the profitability driven by these operational factors irrespective of changes in the other factors noted, namely interest, taxes and foreign currency exchange costs. See below for further discussion of each of the items excluded from our calculation of EBITDA, as adjusted.



•

EBITDA, as adjusted is not the only measure used by management to evaluate performance, but rather a supplemental one used in conjunction with other measures. Management uses several measures to evaluate performance, including both financial and non-financial measures, as well as GAAP and non-GAAP measures, including utilization rates, maintenance and growth capital expenditures, gross margin and return on invested capital.



•

Management uses EBITDA, as adjusted, as well as certain other measures, as an intermediate performance measure, similar to the manner in which management uses gross profit, not as an ultimate performance measure, such as net income. Management does not view or use EBITDA, as adjusted, or any other intermediate measure or item in the Company's financial statements, including revenue, gross profit, gross margin or net cash provided by operating activities, as a measure of the Company's full results of operations or as a substitute for net income. Rather, analyzing an intermediate measure such as EBITDA, as adjusted, allows management to evaluate better the reasons underlying net income results. We urge users of our reports and financial statements to read such reports and financial statements in their entirety and not to use any one measure in isolation to evaluate our results or an investment in the Company.

        EBITDA, as adjusted, as a comparability measure.    Management uses EBITDA, as adjusted, to compare the Company's performance with that of our competitors. Although our competitors may calculate EBITDA differently, the measure will usually present operating performance on a basis that is

19

meaningful for comparative purposes. We urge the readers of our reports and financial statements, including our disclosure of EBITDA, as adjusted, to review carefully the reconciliation of the non-GAAP measure to net income or loss set forth in the table below.

•

Despite definitional differences, management believes that EBITDA, as adjusted, is a meaningful measure to evaluate and compare the performance of one company against another because of the impact of management estimates on the items that are excluded from EBITDA, as adjusted. For example, depreciation expense is dependent upon, among other things, the estimated depreciable lives of a company's assets, which may vary from company to company depending on management's maintenance practices and operating philosophies, as we have noted through our prior acquisition activity. EBITDA, as adjusted, provides a measure to review operating performance independent of this management estimate.



•

Management believes that EBITDA, as adjusted, is a meaningful measure to evaluate performance because the amount of depreciation expense in a company's financial statements may not accurately reflect the costs required to maintain and replenish a company's operational usage of its assets. Rather, depreciation expense reflects the systematic allocation of the historical fixed asset values over the estimated useful lives of those assets. For example, for the year ended March 31, 2004, the Company recorded depreciation and amortization expense of $85.7 million, substantially all of which was depreciation expense, and had capital expenditures of $27.9 million for compressor overhauls, our primary maintenance capital expenditure. By excluding depreciation and certain related or consequential costs, including amortization and taxes, EBITDA, as adjusted, provides a measure with which to evaluate the performance independent of, and in a manner that allows one to assess, whether depreciation accurately captures the costs to maintain and replenish the Company's operational usage of its assets.



•

We have observed that both equity and debt analysts utilize EBITDA to evaluate the on-going performance of and valuation metrics for a company both over time and relative to its peers. We have observed that several of the analysts who review our company utilize EBITDA as one of the primary valuation metrics. By providing EBITDA, as adjusted, we believe we are providing information and calculations to aid these analysts in more accurately understanding the Company's performance for the benefit of our investors.

        EBITDA, as adjusted, as a performance measure for period to period comparisons.    Management uses EBITDA, as adjusted, as a measure of the performance of our business over time and as a tool in identifying key trends.

•

EBITDA, as adjusted, by excluding items that are infrequent or uncommon in nature, assists management in identifying and understanding changes in performance from period to period that may not be apparent from solely viewing GAAP measures.



•

By excluding infrequent or uncommon items, management believes EBITDA, as adjusted, enhances the transparency of the disclosure regarding our performance. As such, the measure allows management to be more accountable to investors' expectations by providing the market with additional information with which to assess our performance and make investment decisions.

        EBITDA, as adjusted, as a valuation measure.    Just as investors monitor and review a variety of financial and performance indicators, such as the market stock price to earnings ratio and the enterprise value to EBITDA ratio, management monitors these ratios to better understand the value of the Company and how to increase that value for our investors. For example, management has routinely utilized an EBITDA measure as a method to value companies when considering potential acquisition targets. This measure is utilized for the reasons discussed above; it allows for an evaluation of the target independent of its historical capital structure, depreciation estimates, tax position, and incurrence of infrequent or more uncommon items. Moreover, management believes investors that desire to

20

evaluate the Company as a potential target will also utilize the Company's EBITDA, as adjusted, as part of their evaluation.

        The following table reconciles our EBITDA, as adjusted, to net income or (loss):

        Below are the items excluded from net income in the calculation of EBITDA, as adjusted, and the reasons for the exclusion:

•

Interest expense is excluded from the calculation of EBITDA, as adjusted. Although interest expense is a material expense for the Company and it reflects an important component of our overall performance, as it reflects costs incurred to finance our operations, interest expense also reflects the performance of our financial arrangements in ways that are unrelated to the shorter-term performance of our operations. For example, the amount of interest expense incurred in any period reflects, among other things, market availability of funds at separate and historical points in time, the overall historical cost of debt and the results of how management, at a past point in time, decided to capitalize the business through the issuance of debt or equity. EBITDA, as adjusted, removes the effect of the performance of these past historical financial transactions, whether beneficial or detrimental to the Company's GAAP results, both in the current period and from period-to-period, so that the performance of the core operations can be more transparently evaluated. For example, despite how management decided to capitalize the Company either through debt or equity in the past, the measure of EBITDA, as adjusted, would not be impacted and would continue to reflect a consistent measure of the operational performance of the business.



•

Income tax expense is excluded from the calculation of EBITDA, as adjusted. Management does not consider tax expense, which is materially impacted by other items excluded from the measure (such as interest expense and depreciation and amortization expense) as well as numerous tax regulations and the Company's tax planning, to be a part of the core operations and are not considered directly within the control of operational management and is therefore excluded from the measure.



•

Depreciation and amortization is excluded from the calculation of EBITDA, as adjusted. Although, we are a capital-intensive business and depreciation expense is a material expense for the Company, this expense may not accurately reflect the costs required to maintain and replenish the Company's operational usage of its assets and therefore may not portray the costs from current operational transaction activity. Rather, depreciation expense reflects the systematic allocation of the historical fixed asset values over the estimated useful lives of those assets.

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•

Operating lease expense is related to the operating lease facilities that, until December 31, 2002, were not included in the Company's consolidated balance sheet and substantively reflected the cost of debt (interest expense) related to these financing arrangements. We excluded the lease expense from EBITDA, as adjusted, as it represents the equivalent of interest expense.    It would potentially be misleading to exclude interest expense from EBITDA, as adjusted, but include leasing expense as they both reflect a financial arrangement, not an operational one.



•

Foreign currency gains and losses are primarily attributable to foreign currency exchange rate fluctuations relating to our international operations and are impacted by foreign currency risk mitigation strategies the business may or may not undertake. Although these gains or losses have not been significant, they are not viewed by management as part of the core operations and are not considered directly within the control of operational management. Accordingly, these gains or losses are excluded from the measure for these reasons.



•

Facility consolidation costs relate to the transfer of the Tulsa, Oklahoma fabrication activity to the Houston fabrication facility. These costs were primarily for severance, personnel and relocation costs. We do not consider these costs to be part of our core operations and the consolidation was disclosed in the footnotes to the financial statements related to the period in which they were incurred. We do not expect to incur similar costs within the two-year period ending September 30, 2005.



•

Management fees of approximately $3 million were incurred in fiscal 2000 pursuant to an agreement with Castle Harlan, Inc. in exchange for management services. In connection with our initial public offering in the quarter ended June 30, 2000, we terminated this agreement. Due to the nature of these expenses and services, the Company does not consider them as part of our core operations and therefore were excluded from EBITDA, as adjusted. These costs were disclosed in the footnotes to the financial statements related to the period in which they were incurred. The Company does not currently have any obligations to pay similar management fees and does not expect to have any similar exclusion to EBITDA, as adjusted, in future periods.



•

Debt extinguishment costs relate primarily to the early extinguishment of Universal's outstanding $229.8 million 9⁷/8% senior discount notes due 2008. The net proceeds from the offering of new 7¹/4% senior notes due 2010 and available funds were used to pay for the extinguishment of the 9⁷/8% senior discount notes due 2008.



•

Non-recurring charges were costs incurred in fiscal year 2001 primarily attributable to an early termination of the management agreement with Castle Harlan, Inc., discussed above, in connection with our initial public offering in the quarter ended June 30, 2000. Due to the nature of these expenses and services, the Company does not consider them as part of our core operations and therefore these costs are excluded from EBITDA, as adjusted. These costs were disclosed in the footnotes to the financial statements related to the period in which they were incurred. The Company does not currently have any obligations to pay similar non-recurring charges and does not expect to have any similar exclusion to EBITDA, as adjusted, in future periods.



•

Debt restructuring charges were incurred in fiscal year 2001 in relation to debt restructuring that occurred concurrently with the Company's initial public offering of its common stock and with debt restructuring that occurred concurrently with the Company's acquisition of Weatherford Global Compression Services and related entities. The company does not consider these costs to be a part of our core operations and therefore these costs were excluded from the measure. Further, these costs were disclosed in the footnotes to the financial statements related to the period in which they were incurred. The Company does not currently anticipate incurring similar charges and does not expect to have any similar exclusion to EBITDA, as adjusted, in future periods.

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        We believe disclosure of this non-GAAP measure provides useful information to investors because, when viewed with our GAAP results and accompanying reconciliations, it provides a more complete understanding of our performance than GAAP results alone. This is the case because this non-GAAP financial measure excludes from earnings financial and other items that have less bearing on operating performance. When using this measure to compare to other companies, which we believe can be a useful tool to evaluate the Company, please note that an EBITDA measure may be calculated differently between companies, as it is a non-GAAP measure. We cannot ensure that EBITDA, as adjusted, is directly comparable to other companies' similarly titled measures. We urge the readers of financial statements to review the reconciliation of the non-GAAP measure to the most comparable GAAP measure to understand any differences that may exist between companies. Nonetheless, we have shown EBITDA, as adjusted, its definition and its calculation in order to disclose how management uses it, to present the exclusions made and the limitations of it as a measure.

        EBITDA, as adjusted, has certain material limitations associated with its use as compared to net income. These limitations are primarily due to the exclusion of certain amounts that are material to the Company's consolidated results of operations, as follows:

•

EBITDA, as adjusted, does not include interest expense or operating lease expense. Because we have borrowed money in order to finance our operations, interest expense and operating lease expense are necessary elements of our costs and our ability to generate revenue. Therefore any measure that excludes interest expense or operating lease expense has this material limitation.



•

EBITDA, as adjusted, does not include income tax expense. Because the payment of taxes is a necessary element of our operations, any measure that excludes income tax expense has this material limitation.



•

EBITDA, as adjusted, does not include depreciation and amortization expense. Because we use capital assets, depreciation is a necessary element of our costs and our ability to generate revenue. Therefore any measure that excludes depreciation and amortization expense has this material limitation.



•

EBITDA, as adjusted, excludes the impact of foreign currency gains and losses. Because we operate in an international environment, foreign currency gains and losses have a real economic impact on our operations. Therefore any measure that excludes these effects has this material limitation.



•

EBITDA, as adjusted, excludes other costs and expenses, such as management fees, non-recurring charges and extraordinary losses, as discussed above. These costs were excluded primarily because the Company does not consider these costs to be part of our core operations. Because the Company will incur costs from time to time that are not part of our core operations, any measure that excludes these costs has this material limitation.

        Use of EBITDA, as adjusted, by itself and without consideration of other measures, is not an adequate measure of the Company's performance because this measure excludes certain material items, as noted above. Further, the measure has a limitation in that many users of financial statements believe that EBITDA is a measure of liquidity or of cash flows. We do not use EBITDA, as adjusted, in this way because it excludes interest payments and changes in working capital accounts and therefore we urge the readers of our financial statements to not use the measure in this way either. Management compensates for these limitations by using EBITDA, as adjusted, as a supplemental measure to other GAAP results to provide a more complete understanding of our performance without considering financial and other items that have less bearing on operating performance. The measure has a limitation, as it does not consider the amount of required reinvestment to maintain similar going forward results. Management mitigates this limitation by reviewing and disclosing the Company's capital and maintenance capital expenditures on a regular basis as yet another supplemental tool to evaluate the Company.

        EBITDA, as adjusted, is not a measure of financial performance under GAAP and should not be considered an alternative to operating income or net income as an indicator of our operating performance or to net cash provided by operating activities as a measure of our liquidity.

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ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

UNIVERSAL COMPRESSION HOLDINGS, INC.

        The following discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements, and the notes thereto, and the other financial information appearing elsewhere in this report. The following discussion includes forward-looking statements that involve certain risks and uncertainties. See "Part I. Disclosure Regarding Forward-Looking Statements" and "Risk Factors."

Overview

        We provide a full range of natural gas compression services, including sales, operations, maintenance and fabrication services and products to the natural gas industry, both domestically and internationally. Through our core business, contract compression, and our fleet as of March 31, 2004 of approximately 7,100 compressor units comprising approximately 2.3 million horsepower, we provide natural gas compression to domestic and international customers. Through our equipment fabrication business we design, engineer and assemble natural gas and air compressors for sale to third parties and for use in our contract compression fleet. Through our aftermarket services business, we sell parts and components and provide maintenance and operations services to customers who own their compression equipment or utilize equipment from our competitors. These services and products are essential to the natural gas industry as gas must be compressed to be delivered from the wellhead to end-users. Our customers consist primarily of domestic and international oil and gas companies, international state-owned oil and gas companies, large and small independent producers and natural gas processors, gatherers and pipelines.

        Generally, our overall business activity and revenue increase as the demand for compression services increases. In the United States, increases in compression demand are driven by growth in the production of natural gas and by declining reservoir pressure in maturing natural gas producing fields. In international markets, increases in compression demand are driven by growth in natural gas industry infrastructure, environmental initiatives encouraging the production and consumption of natural gas and the growth in the worldwide transportation of natural gas. The demand for compression services is also driven by general increases in the demand for energy fuel stocks, including, natural gas, which is generally driven by economic growth. In addition, the outsourcing of compression needs is driven by the expectation of our customers for improved operating efficiency, increased flexibility to replace compressors as field requirements change and reduced capital requirements.

        The compression industry experienced significant merger and acquisition activity in the 1990s and through 2001. The outsourcing of compression services increased as a percentage of total industry activity in the 1990s and early 2000s as leading compression companies increased in overall size. A high level of compression industry capital expenditures and reduced demand due to lackluster economic activity resulted in reduced utilization beginning in late 2001 and continued into 2002. Industry utilization stabilized in the second half of calendar 2002 and increased during calendar 2003 as a result of reduced capital expenditures and increasing demand due to improving economic activity. During calendar 2003 the industry did not materially increase the supply of contract compression units in the United States due to an emphasis on the redeployment of idle units while growth in international markets continued.

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Company Performance Trends

        During fiscal 2001 and fiscal 2002, we increased our natural gas compression fleet, expanded fabrication capabilities for large horsepower units, added complementary aftermarket services and broadened our international operations. Capital expenditures in fiscal 2003 and fiscal 2004 were significantly lower than fiscal 2002 levels as we emphasized the redeployment of idle fleet units.

        In fiscal 2004, we had improved natural gas compression fleet utilization and increased revenues in fabrication and aftermarket services due primarily to improved industry conditions and the implementation of our focused business strategy.

Fiscal 2004 Financial Highlights

        Net income for the fiscal year ended March 31, 2004 declined compared to the prior year by $2.7 million, or 8.1%, primarily as a result of debt extinguishment costs of $14.9 million ($9.4 million net of tax) related to our refinancing activity during the three months ended June 30, 2003. Significant items for the fiscal years are discussed as follows:

•

Higher Revenue. Total revenue was higher by $63.6 million, or 10.2%, for the fiscal year ended March 31, 2004 due primarily to higher levels of activity across all four of our business segments.



•

Debt Extinguishment Costs. The debt extinguishment costs of $14.9 million included in the fiscal year results primarily related to the May 2003 refinancing and consisted of the write-off of deferred financing costs of $1.9 million, premium costs of $12.0 million and $0.5 million in transaction expenses.



•

Lower Combined Operating Lease and Interest Expense. Compared to the prior fiscal year, on a combined basis, these items were lower by $9.0 million, or 10.9%, primarily as a result of the Company's refinancing of $175.0 million of long-term debt in May 2003, which both reduced the amount of the Company's long-term debt outstanding by approximately $55.0 million and lowered the interest rate on that debt to 7¹/4% from 9⁷/8%.



•

Higher Depreciation and Amortization Expense. Depreciation and amortization expense increased by $21.9 million, or 34.4%, due primarily to depreciation of on-going capital expenditures and the inclusion of additional compression equipment on the Company's balance sheet as of December 31, 2002.

Fiscal 2004 Operating Highlights

        The higher revenue for the fiscal year ended March 31, 2004, is attributable to increased industry activity and customer demand, which resulted in higher utilization in both the domestic and international contract compression fleets and increased sales in the fabrication and aftermarket services

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businesses. The following table summarizes total available horsepower, average contracted horsepower, horsepower utilization percentages and fabrication backlog.

        Domestic average contracted horsepower increased by 2.7% for the fiscal year ended March 31, 2004 compared to the fiscal year ended March 31, 2003. International average contracted horsepower increased by 15.8% for the fiscal year ended March 31, 2004 compared to the prior fiscal year. These increases were primarily attributable to higher customer demand.

        The decrease in domestic horsepower for the fiscal year ended March 31, 2004 from the prior year was primarily attributable to the sale of units to customers exercising purchase options on compression equipment. The increase in international horsepower was primarily attributable to horsepower that was added in Latin America.

        The backlog of fabrication projects at June 8, 2004 was approximately $88.9 million. A majority of the backlog is expected to be completed within a 180-day period.

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Financial Results of Operations

Fiscal Year Ended March 31, 2004 Compared to Fiscal Year Ended March 31, 2003

        The following table summarizes revenue, gross profit, gross margin, expenses and the respective percentages for each of our business segments:

        Revenue.    Total revenue increases were realized across all business segments for the fiscal year ended March 31, 2004 compared to the prior year. Domestic contract compression revenue increased due to higher average contract rates and improved utilization, both of which contributed equally to the increase. International contract compression revenue increased primarily as a result of additional compression business in Brazil and Argentina, which contributed increases of $10.3 million and $3.8 million, respectively. Fabrication revenue increased due to additional projects for customers in our United States and Canadian regions resulting in increases of $24.5 million and $11.0 million, respectively. These increases were partially offset by declines in the Asia Pacific region of $7.9 million and the Latin American region of $6.6 million. Revenue from fabrication fluctuates quarter to quarter due to the timing of receipt of orders placed by customers and due to the timing of recognition of revenue, which occurs at the time of shipment. Aftermarket services revenue was higher due primarily to increased customer demand in the United States ($3.8 million), Canada ($3.2 million) and the Asia Pacific region ($2.8 million).

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        Gross Profit.    The changes to gross profit (defined as total revenues less direct costs) for the fiscal year ended March 31, 2004 compared to the prior year were primarily attributable to revenue increases discussed above for domestic contract compression, international contract compression and aftermarket services. Fabrication gross profit decreased due to higher costs in the first fiscal quarter primarily as a result of cost overruns related to several highly customized fabrication projects for customers in the Asia Pacific region.

        EBITDA, as adjusted.    EBITDA, as adjusted, for the fiscal year ended March 31, 2004 was $223.8 million. The increase in EBITDA of 11.3% from the prior year is primarily attributable to the revenue increases discussed above for domestic contract compression, international contract compression and aftermarket services. EBITDA, as adjusted is defined, discussed and reconciled to net income on page 19 of this report, within Item 6, Selected Financial Data.

        Depreciation and Amortization.    The increase in depreciation and amortization expense for the fiscal year ended March 31, 2004 compared to the prior year resulted from on-going capital additions which increased depreciation by approximately $14.6 million and the inclusion of additional compression equipment on the balance sheet as of December 31, 2002 due to the consolidation of the operating lease facilities. Depreciation expense related to this equipment began January 1, 2003 and was partially offset by the change in estimated useful lives of the compressor fleet discussed below. The combined impact of the consolidation of the compressor equipment in the operating lease facilities and the extension of the useful lives of the compressor fleet at December 31, 2002 increased depreciation expense by approximately $7.8 million.

        In fiscal 2003, we evaluated the estimated useful lives used for book depreciation purposes for our compressor fleet based upon equipment type, key components and industry experience of the actual useful life in the field. The evaluation was finalized in the fourth quarter of fiscal year 2003. Based upon the findings of the evaluation, the estimated useful lives of the majority of the existing compressor units were extended to 25 years from 15 years. In addition, a portion of the units remained at the previous 15 years or less and a portion of the units were extended to 30 years. The change in useful lives was effective January 1, 2003.

        Combined Operating Lease Expense and Interest Expense.    Taking into account the effect of the consolidation of the lease facilities on December 31, 2002, the combined operating lease expense and interest expense, for the fiscal year ended March 31, 2004 decreased by $9.0 million, or 10.9% compared to the prior year. This decrease is primarily attributable to May 2003 refinancing activities, which reduced outstanding long-term debt by approximately $55.0 million and lowered the interest rate on $175.0 million of indebtedness to 7¹/4% from 9⁷/8%. Interest expense decreased $4.8 million as a result of the $55.0 million reduction in debt and decreased $4.0 million due to the lower interest rate on the $175.0 million of indebtedness.

        Operating Lease Expense.    As a result of the consolidation of the lease facilities, there was no operating lease expense related to the operating lease facilities during the fiscal year ended March 31, 2004. The operating lease expense related to the operating lease facilities has been recognized as interest expense subsequent to the consolidation of the lease facilities on December 31, 2002.

        Interest Expense, Net.    Interest expense, net, increased for the fiscal year ended March 31, 2004 compared to the prior year primarily due to the consolidation of the operating lease facilities as of December 31, 2002 which resulted in the classification of operating lease expense subsequent to December 31, 2002 as interest expense.

        Debt Extinguishment Costs.    Debt extinguishment costs incurred during the fiscal year ended March 31, 2004 were primarily due to the early extinguishment of Universal's outstanding $229.8 million 9⁷/8% senior discount notes due 2008 in May 2003. The net proceeds from the offering

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by Universal of new 7¹/4% senior discount notes due 2010 and available funds were used to pay for the extinguishment of the 9⁷/8% senior discount notes due 2008. As a result of the early extinguishment of debt, a charge of $14.4 million was recognized resulting from the redemption and tender premiums of $12.0 million, write-off of unamortized debt issuance costs of $1.9 million and $0.5 million of other costs. Additional debt extinguishment costs of $0.5 million resulted from the buyback of $5.0 million of our 8⁷/8% Senior Notes during the three months ended March 31, 2004.

        Other Income, Net.    Other income, net of other expenses, for both the fiscal year ended March 31, 2004 and the prior year, was primarily comprised of gains from the sale of domestic contract compression equipment, primarily due to customers exercising purchase options.

        Facility Consolidation Costs.    Facility consolidation costs related to the transfer of the Tulsa, Oklahoma fabrication operations to the Houston fabrication facility were $1.8 million during the year ended March 31, 2004. These costs were primarily for severance, personnel costs and relocation costs. The Company does not expect to incur additional facility consolidation costs during the two-year period ending September 30, 2005.

Fiscal Year Ended March 31, 2003 Compared to Fiscal Year Ended March 31, 2002

        The following table summarizes revenue, gross profit, gross margin, expenses and the respective percentages for each of our business segments:

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        Revenue.    Total revenue for the fiscal year ended March 31, 2003 decreased $54.8 million, or 8.1%, to $625.2 million, compared to $680.0 million for the fiscal year ended March 31, 2002 largely as a result of declines in fabrication and aftermarket services. Domestic contract compression revenue decreased by $2.1 million, or 1%, to $265.5 million during the fiscal year ended March 31, 2003 from $267.6 million during the fiscal year ended March 31, 2002. International contract compression revenue increased by $6.3 million, or 10.5%, to $66.5 million during the fiscal year ended March 31, 2003 from $60.2 million during the fiscal year ended March 31, 2002. The decrease in domestic contract compression revenue was a result of lower horsepower utilization in a period of reduced energy industry activity that resulted in a reduced demand for contract compression services. The increase in international contract compression revenue resulted from new contract settlements negotiated with our Argentina customers in the first quarter of fiscal year 2003 and expansion of our business in the Latin America and Asia Pacific regions.

        Domestic average contracted horsepower for the fiscal year ended March 31, 2003 decreased slightly to approximately 1,602,000 horsepower from approximately 1,603,000 horsepower for the fiscal year ended March 31, 2002 primarily due to the general decline in energy industry activity in the United States. International average contracted horsepower for the fiscal year ended March 31, 2003 increased by 2.6% to approximately 311,000 horsepower from approximately 303,000 horsepower for the fiscal year ended March 31, 2002, primarily through expansion of the international contract compression fleet. The combined average horsepower utilization rate for the fiscal year ended March 31, 2003 was approximately 83.3%, down from 88.8% in the fiscal year ended March 31, 2002. As of March 31, 2003, Universal had approximately 2.3 million available horsepower with an average horsepower utilization rate for the quarter then ended of 83.5% and for the same period one year earlier of approximately 86.8%.

        Fabrication revenue decreased to $162.7 million from $211.3 million, a decrease of 23% due to lower demand for customer-owned compressors in a period of reduced energy industry activity. Backlog of fabrication projects at the fiscal year ended March 31, 2003 was approximately $55.7 million, compared with a backlog of $80.0 million at March 31, 2002. From December 31, 2002 to March 31, 2003, backlog decreased $0.6 million. The backlog as of May 12, 2003 was approximately $75 million.

        Aftermarket services revenue decreased to $130.6 million during the fiscal year ended March 31, 2003 from $141.0 million during the fiscal year ended March 31, 2002, a decrease of 7.4%. The decrease resulted from reduced repair and maintenance activity from Universal's North American customer base in a period of reduced energy industry activity.

        Gross Profit.    Gross profit for the fiscal year ended March 31, 2003 decreased $0.4 million, or 0.1%, to $268.0 million from gross profit of $268.3 million for the fiscal year ended March 31, 2002 reflecting declines in fabrication and aftermarket services that were partially offset by an increase in international contract compression. Fabrication gross profit for the fiscal year ended March 31, 2003 decreased $8.3 million, or 34.0%, to $16.1 million compared to a gross profit of $24.3 million for the fiscal year ended March 31, 2002. Fabrication gross profit decreased primarily due to lower demand during the fiscal year. Aftermarket services gross profit for the fiscal year ended March 31, 2003 decreased $2.4 million or 7.9%, to $28.3 million compared to a gross profit of $30.7 million for the fiscal year ended March 31, 2002. Aftermarket services gross profit decreased primarily due to the overall slowdown in energy industry activity.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased by $7.1 million to $67.9 million for the fiscal year ended March 31, 2003, compared to $60.9 million for the fiscal year ended March 31, 2002. Selling, general and administrative expenses represented 10.9% of revenue for the fiscal year ended March 31, 2003 compared to 9.0% of revenue for the fiscal year ended March 31, 2002. The increase was primarily due to a greater presence in

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international markets, which carries higher administration costs and severance costs related to staff reductions.

        EBITDA as adjusted.    EBITDA, as adjusted, for the fiscal year ended March 31, 2003 decreased 3.0% to $201.2 million from $207.3 million for the fiscal year ended March 31, 2002, primarily due to increases in the selling, general and administrative costs. EBITDA, as adjusted, is defined, discussed and reconciled to net income on page 19 of this report, within Item 6, Selected Financial Data.

        Depreciation and Amortization.    Depreciation and amortization increased by $15.1 million to $63.7 million during the fiscal year ended March 31, 2003, compared to $48.6 million during the fiscal year ended March 31, 2002. Depreciation expense increased due to a full twelve months of depreciation of fiscal 2002 capital additions and capitalized overhauls. In addition, depreciation expense increased due to the three months of depreciation of gas compressor units that were not previously recorded on Universal's balance sheet until December 31, 2002, when the lessors under the operating lease facilities became fully consolidated entities. Depreciation expense related to these assets began January 1, 2003 and increased depreciation expense for the fiscal year ended March 31, 2003 by approximately $5.6 million.

        In fiscal 2003, Universal evaluated the estimated useful lives used for book depreciation purposes for its compressor fleet based upon equipment type, key components and industry experience of the actual useful life in the field. The evaluation was finalized in the fourth quarter of fiscal year 2003. Based upon the findings of the evaluation, the estimated useful lives of the majority of the existing compressor units were extended to 25 years from 15 years. In addition, a portion of the units remained at the previous 15 years or less and a portion of the units were extended to 30 years. The change in useful lives was effective January 1, 2003. The impact from extending the estimated useful lives of the equipment that was recorded on Universal's balance sheet on December 31, 2002 (excluding the gas compression equipment related to the operating lease facilities) reduced depreciation expense by approximately $3.0 million for the year ended March 31, 2003.

        The combined impact as a result of the consolidation of the compressor equipment in the operating lease facilities and the extension of the estimated useful lives was an increase to depreciation expense of approximately $2.6 million and a decrease to net income of $1.6 million for the year ended March 31, 2003.

        Operating Lease Expense.    Operating lease expense decreased to $46.1 million during the fiscal year ended March 31, 2003 compared to $55.4 million during the fiscal year ended March 31, 2002. Operating lease expense related to the operating lease facilities has been recognized as interest expense subsequent to the consolidation of the lease facilities on December 31, 2002. As a result, Universal recognized no operating lease expense for the quarter ended March 31, 2003.

        Interest Expense, Net.    Interest expense, net, increased $13.4 million to $36.4 million for the fiscal year ended March 31, 2003 from $23.0 million for the fiscal year ended March 31, 2002 primarily due to the consolidation of the operating lease facilities as of December 31, 2002 which resulted in the classification of operating lease expense subsequent to December 31, 2002 as interest expense.

        Net Income.    Net income decreased $15.9 million to $33.5 million for the fiscal year ended March 31, 2003 compared to a net income of $49.4 million for the fiscal year ended March 31, 2002 for the reasons noted above.

Effects of Inflation

        In recent years, inflation has been modest and has not had a material impact upon the results of our operations.

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Liquidity and Capital Resources

        Our primary uses of cash are operating expenditures, capital expenditures and long-term debt repayments.

        Operations.    Net cash provided by operating activities exceeded net cash used in investing and financing activities by $49.5 million and $65.5 million for the fiscal years ended March 31, 2004 and 2003, respectively. Based on current market conditions, we expect that net cash provided by operating activities will continue to be sufficient to finance our operating expenditures, capital expenditures and debt repayments through the 2005 fiscal year. Working capital, net of cash, was $53.4 million and $86.7 million at March 31, 2004 and March 31, 2003, respectively.

        Capital expenditures.    Capital expenditures for the fiscal year ended March 31, 2004 were $86.6 million consisting of $47.6 million for fleet additions, $27.9 million for compressor overhauls, $4.9 million for service trucks and $6.2 million for machinery, equipment, information technology equipment and other items. We expect capital expenditures to be approximately $90 to $110 million for the fiscal year ending March 31, 2005, including approximately $30 million for compression fleet maintenance capital. Historically, we have financed capital expenditures with net cash provided by operations and financing activities.

        If we were to make significant additional acquisitions for cash, we might need to obtain additional debt or equity financing.

        Long-term debt.    As of March 31, 2004, we had approximately $881.3 million in outstanding debt obligations consisting primarily of $527.2 million outstanding under the seven-year term senior secured notes operating lease facility, consisting of senior notes due 2008 and term loan due 2008 (together, the "BRL lease facility"), $175.7 million outstanding of 7¹/4% senior notes due 2010, and $175.0 million outstanding under the asset-backed securitization lease facility (the "ABS lease facility"). The maturities of this debt are shown below. We expect to pay these principal payments through cash generated by operations and debt refinancing activity.

        Availability.    As of March 31, 2004, after giving effect to $9.1 million of outstanding letters of credit under our financing documents, we had an aggregate unused credit availability of approximately $140.9 million from our revolving credit facility and our ABS lease facility.

        Refinancing activity.    In May 2003, Universal commenced a tender offer to purchase the outstanding $229.8 million aggregate principal amount of its 9⁷/8% senior discount notes due 2008 at a price equal to 104.938% of the principal amount, plus a premium of 0.412%, for notes tendered prior to the early expiration date for the tender offer. Of these notes, $169.2 million were tendered on or before the early tender date, and Universal purchased those notes on May 27, 2003. On that date, Universal called for redemption of the remaining $60.6 million of its 9⁷/8% senior discount notes due 2008 at 104.938% of the principal amount in accordance with the terms of the indenture relating to the notes. This redemption price was 0.412% less than the total consideration offered pursuant to the

32

tender offer for notes tendered on or before the early tender date. During June 2003, the remaining $60.6 million of this debt was redeemed or repurchased.

        Also in May 2003, Universal issued $175.0 million of its 7¹/4% senior notes due 2010 in a private placement. The net proceeds from the sale, together with other available funds, were used to purchase the outstanding 9⁷/8% senior discount notes due 2008 as discussed above. Universal exchanged the private notes for publicly-traded notes during the second quarter of fiscal 2004. During the three months ended March 31, 2004 we repurchased $5.0 million of our 8⁷/8% Senior Notes due February 2008. We repurchased an additional $5.0 million of our 8⁷/8% Senior Notes in April 2004 and will continue to look at opportunistic repurchases subject to market conditions.

        Contractual Obligations.    The following table summarizes our cash contractual obligations as of March 31, 2004 (in thousands):

Critical Accounting Policies and Estimates

        Our discussion and analysis of our financial condition and results of operation is based upon our consolidated financial statements. We prepare these financial statements in conformity with GAAP. As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts 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 on-going basis, we evaluate our estimates; however, actual results may differ from these estimates under different assumptions or conditions. The accounting policies we believe require management's most difficult, subjective or complex judgments and are the most critical to our reporting of results of operations and financial position are as follows:

Allowances and Reserves

        Our customers are evaluated for credit worthiness prior to the extension of credit. We maintain an allowance for bad debts based on specific customer collection issues and historical experience. On an on-going basis, we conduct an evaluation of the financial strength of our customers based on payment history and make adjustments to the allowance as necessary. Since most of our customers are in the energy industry, their ability to pay balances due could be affected by dramatic changes in the price and demand for their products.

        We record a reserve against our inventory balance for estimated obsolescence. This reserve is based on specific identification and historical experience.

Depreciation

        Property, plant and equipment are carried at cost. Depreciation for financial reporting purposes is computed on the straight-line basis using estimated useful lives. For compression equipment, depreciation begins with the first compression service using a 20% salvage value. The estimated useful lives prior to January 1, 2003 for compression equipment was 15 years and for other properties and equipment from 2 to 25 years.

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        The Company evaluated the estimated useful life used for book depreciation purposes for its compressor fleet based upon equipment type, key components and industry experience of the actual useful life in the field. The evaluation was finalized in the fourth quarter of fiscal year 2003. Based upon the findings of the evaluation, the estimated useful lives of the majority of the existing compressor units were extended to 25 years from 15 years. In addition, a portion of the units remained at 15 years or less and a portion of the units were extended to 30 years.

Business Combinations and Goodwill

        Goodwill and intangible assets acquired in connection with business combinations represent the excess of consideration over the fair value of tangible net assets acquired. Certain assumptions and estimates are employed in determining the fair value of assets acquired and liabilities assumed, as well as in determining the allocation of goodwill to the appropriate reporting unit.

        In accordance with Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets," we no longer amortize goodwill. We perform an impairment test for goodwill assets annually, or earlier if indicators of potential impairment exist. Our goodwill impairment test involves a comparison of the fair value of each of our reporting units with their carrying value. The fair value is determined using discounted cash flows and other market-related valuation models. Certain estimates and judgments are required in the application of the fair value models. During the fourth quarter of fiscal year 2004, we performed an impairment analysis in accordance with SFAS No. 142 and determined that no impairment had occurred; however, if for any reason the fair value of our goodwill or that of any of our reporting units declines below the carrying value in the future, we may incur charges for the impairment.

Long-Lived Assets

        Long-lived assets, which include property, plant and equipment, definite-lived intangibles and other assets comprise a significant amount of our total assets. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets to be held and used by us are reviewed to determine whether any events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. For long-lived assets to be held and used, we base our evaluation on impairment indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate the carrying amount of the asset may not be recoverable, we determine whether an impairment has occurred through the use of undiscounted cash flows analysis of the asset at the lowest level for which identifiable cash flows exist. If an impairment has occurred, we recognize a loss for the difference between the carrying amount and the estimated fair value of the asset. The fair value of the asset is measured using quoted market prices or, in the absence of quoted market prices, is based on an estimate of discounted cash flows.

Self-Insurance

        We are self-insured up to certain levels for general liability, vehicle liability, group medical and for workers' compensation claims for certain of our employees. We record self-insurance accruals based on claims filed and an estimate for significant claims incurred but not reported. We regularly review estimates of reported and unreported claims and provide for losses through insurance reserves. Although we believe adequate reserves have been provided for expected liabilities arising from our self-insured obligations, it is reasonably possible our estimates of these liabilities will change over the near term as circumstances develop.

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Income Taxes

        We account for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, all expected future events are considered other than enactments of changes in the tax law or rates.

        We provide contract compression services to a global market. As such, we are subject to taxation not only in the United States but also in numerous foreign jurisdictions. Having to consider these different jurisdictions complicates the estimate of future taxable income, which in turn determines the realizability of our deferred tax assets. Numerous judgments and assumptions are inherent in the determination of future taxable income, including assumptions on future operating conditions and asset utilization. The judgments and assumptions used to determine future taxable income are consistent with those used for other financial statement purposes.

        Additionally, we must consider any prudent and feasible tax planning strategies that would minimize the amount of deferred tax liabilities recognized or the amount of any valuation allowance recognized against deferred tax assets. The principal tax planning strategy available to us relates to the permanent reinvestment of the earnings of foreign subsidiaries. The assumptions related to the permanent reinvestment of the foreign earnings are analyzed and reviewed annually for changes in our international and domestic business outlook.

Recent Accounting Pronouncements

        In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." An entity is subject to the consolidation rules of FIN 46 and is referred to as a variable interest entity ("VIE") if the entity's equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its operations without additional financial support. In December 2003, the FASB issued modifications to FIN 46 ("FIN 46R"), resulting in multiple effective dates based on the nature as well as the creation date of a VIE. The adoption of the provision of FIN 46 and FIN 46R did not have a material impact on the consolidated statements of operations, cash flows or financial position.

        In January 2003, the Emerging Issues Task Force (EITF) issued No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." This EITF establishes the criteria for recognizing revenue in arrangements when several items are bundled into one agreement. EITF 00-21 does not allow revenue recognition unless the fair value of the undelivered element(s) is available and the element has stand-alone value to the customer. EITF 00-21 also provides guidance on allocating the total contract revenue to the individual elements based upon the available fair value of each deliverable. The implementation of this pronouncement for revenue arrangements entered into after June 15, 2003 did not have a material impact on the Company's consolidated statements of operations, cash flows or financial position.

        On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. This statement is effective for contracts entered into or modified after June 20, 2003, for hedging relationships designated after June 30, 2003, and to certain preexisting contracts. Universal adopted SFAS No. 149 on a prospective basis at its effective date on July 1, 2003. SFAS No. 149 did not have a material impact on the Company's consolidated statements of operations, cash flows or financial position.

        In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer

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classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, except for mandatorily redeemable financial instruments. Mandatorily redeemable financial instruments are subject to the provisions of this statement beginning on January 1, 2004. SFAS No. 150 did not have an impact on the Company's consolidated financial statements.

Seasonal Fluctuations

        Our results of operations have not historically reflected any material seasonal tendencies.

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RISK FACTORS

        As described in "Part I. Disclosure Regarding Forward-Looking Statements," this report contains forward-looking statements regarding us, our business and our industry. The risk factors described below, among others, could cause our actual results to differ materially from the expectations reflected in the forward-looking statements. If any of the following risks actually occur, our business, financial condition and operating results could be materially adversely affected. Additional risks not currently known to us or which we currently consider immaterial may also adversely affect us.

We depend on strong demand for natural gas and a prolonged, substantial reduction in this demand could adversely affect the demand for our services and products.

        Gas contract compression operations are significantly dependent upon the demand for natural gas. Demand may be affected by, among other factors, natural gas prices, weather, demand for energy and availability of alternative energy sources. Any prolonged, substantial reduction in the demand for natural gas would, in all likelihood, depress the level of production, exploration and development activity and result in a decline in the demand for our contract compression services and products. Similarly, a decrease in capital spending by our customers could result in reduced demand for our fabrication and aftermarket services businesses. These events could materially adversely affect our business, results of operations and financial condition.

Our international operations subject us to risks that are difficult to predict.

        For the year ended March 31, 2004, we derived approximately 28.4% of our revenue from international operations. We intend to continue to expand our business in Latin America, and Asia Pacific and, ultimately, other international markets. This may make it more difficult for us to manage our business. Reasons for this include, but are not limited to, the following:

•

political and economic instability in foreign markets;



•

foreign governments' restrictive trade policies;



•

inconsistent product regulation or sudden policy changes by foreign agencies or governments;



•

the burden of complying with multiple and potentially conflicting laws;



•

the imposition of duties, taxes or government royalties;



•

foreign exchange rate risks;



•

difficulty in collecting international accounts receivable;



•

potentially longer payment cycles;



•

increased costs in maintaining international manufacturing and marketing efforts;



•

the introduction of non-tariff barriers and higher duty rates;



•

difficulties in enforcement of contractual obligations;



•

restrictions on repatriation of earnings or expropriation of property; and



•

the geographic, time zone, language and cultural differences between personnel in different areas of the world.

Any of these factors could materially adversely affect our business, financial condition or results of operations.

We face significant competition that may cause us to lose market share and harm our financial performance.

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        The contract compression, fabrication, and aftermarket services businesses are highly competitive and there are low barriers to entry for individual projects. In addition, some of our competitors are large national and multinational companies that provide contract compression and fabrication services to third parties; some of these competitors have greater financial and other resources than we do. If our competitors substantially increase the resources they devote to the development and marketing of competitive products and services, we may not be able to compete effectively.

We are dependent on particular suppliers and are vulnerable to product shortages and price increases.

        Some of the components used in our products are obtained from a single source or a limited group of suppliers. Our reliance on these suppliers involves several risks, including price increases, inferior component quality and a potential inability to obtain an adequate supply of required components in a timely manner. The partial or complete loss of certain of these sources could have a material adverse effect on our results of operations and could damage our customer relationships. Further, a significant increase in the price of one or more of these components could have a material adverse effect on our results of operations.

Natural gas operations entail inherent risks and we do not insure against all potential losses and could be seriously harmed by unexpected liabilities.

        Natural gas service operations are subject to inherent risks such as equipment defects, malfunction and failures, and natural disasters that can result in uncontrollable flows of gas or well fluids, fires and explosions. These risks could expose us to substantial liability for personal injury, death, property damage, pollution and other environmental damages. Although we have obtained insurance against many of these risks, there can be no assurance that our insurance will be adequate to cover our liabilities. Further, insurance covering the risks we face or in the amounts we desire may not be available in the future or, if available, the premiums may not be commercially justifiable. If we were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if we were to incur liability at a time when we are not able to obtain liability insurance, our business, results of operations and financial condition could be materially adversely affected.

The sale of stock by Weatherford, which currently owns approximately 44% of our common stock, may depress our stock price.

        Weatherford has registered with the United States Securities and Exchange Commission, and may sell at any time, up to 7,000,000 of its shares of our common stock. In addition, the other 6,750,000 shares of our common stock owned by Weatherford are subject to registration rights and may be resold at any time. The sale of substantial amounts of our stock owned by Weatherford in the public market, or the belief that these sales may occur, could reduce the market price of our stock, making it more difficult for us to raise funds through future offerings of our common stock and to acquire businesses using our stock as consideration.

Weatherford's voting power may give it the ability to control the outcome of matters submitted to a vote of our stockholders.

        Weatherford's 13,750,000 shares, or approximately 44%, of our outstanding common stock may give it the ability to control the outcome of matters submitted to a vote of our stockholders. If Weatherford sells all of the 7,000,000 shares it has registered with the United States Securities and Exchange Commission, it would nonetheless continue to own beneficially approximately 22% of the outstanding shares of our common stock as of such date. In addition to its voting power, Weatherford and its affiliates are entitled to designate three persons to serve on our board of directors for so long as they own at least 20% of our outstanding common stock. If Weatherford's ownership falls below 20%, Weatherford may designate only two directors. If Weatherford's ownership falls below 10%, it will no longer have the right to designate directors to our board.

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        This significant stock ownership and board representation gives Weatherford the ability to exercise substantial influence over our ownership, policies, management and affairs and significant control over actions requiring approval of our stockholders. Weatherford's interests could conflict with our other stockholders.

We are a holding company and rely on our subsidiaries for operating income.

        We are a holding company and, as such, derive all of our operating income from our operating subsidiary, Universal Compression, Inc., and its subsidiaries. We do not have any significant assets other than the stock of our operating subsidiary. Consequently, we are dependent on the earnings and cash flow of our subsidiaries to meet our obligations. Our subsidiaries are separate legal entities that are not legally obligated to make funds available to us, and in some cases may be contractually restricted from doing so. We cannot assure you that our subsidiaries will be able to, or be permitted to, pay to us amounts necessary to meet our obligations.

We are highly leveraged, a significant portion of our cash flow must be used to service our obligations and we are vulnerable to interest rate increases.

        We have now and will continue to have a significant amount of debt. As of March 31, 2004, we had approximately $881.3 million in outstanding debt obligations consisting primarily of $527.2 million outstanding under the seven-year term senior secured notes operating lease facility, consisting of senior notes due 2008 and term loan due 2008, the BRL lease facility, and $175.7 million outstanding of 7¹/4% senior notes due 2010 and $175.0 million outstanding under the the ABS lease facility. This amount excludes approximately $9.1 million of letters of credit, as of March 31, 2004, issued under our $125 million senior secured revolving credit facility.

        As of March 31, 2004, approximately $182.2 million of our outstanding debt bore interest at floating rates. Changes in economic conditions could result in higher interest rates, thereby increasing our interest expense and reducing our funds available to make payments of interest and principal on the notes and for capital investment, operations or other purposes. Our significant leverage increases our vulnerability to general adverse economic and industry conditions.

Our credit facilities and lease facilities impose restrictions on us that may affect our ability to successfully operate our business.

        Our credit facilities and lease facilities include certain covenants that, among other things, restrict our ability to:

•

borrow money;



•

create liens, other than a lien securing the revolving credit facility, the BRL lease facility or the ABS lease facility;



•

sell or transfer any of our material property;



•

merge into or consolidate with any third party or sell or dispose of all or substantially all of our assets; and



•

make capital expenditures.

        We and our subsidiaries are also required by our credit facilities to maintain debt coverage ratios, interest coverage ratios and a specified tangible net worth. All of these covenants may restrict our ability to expand or to pursue our business strategies. Our ability to comply with these and other provisions of the indentures and the credit facilities may be affected by changes in our operating and financial performance, changes in business conditions or results of operation, adverse regulatory developments or other events beyond our control. The breach of any of these covenants could result in a default under our debt, which could cause those obligations to become due and payable. If any of our

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indebtedness were to be accelerated, there can be no assurance that we would be able to repay or refinance it.

We are exposed to exchange rate fluctuations.

        Our reporting currency is the U.S. dollar. Historically, our foreign operations, including assets and liabilities and revenues and expenses, have been denominated in various currencies other than the U.S. dollar, and we expect that our foreign operations will continue to be so denominated. As a result, the U.S. dollar value of our foreign operations has varied, and will continue to vary, with exchange rate fluctuations. In this respect, historically we have been primarily exposed to fluctuations in the exchange rate of the Argentine peso, Brazilian real, Thai baht, Mexican peso, Australian dollar and Canadian dollar against the U.S. dollar.

        A decrease in the value of any of these currencies relative to the U.S. dollar could reduce our profits from foreign operations and the value of the net assets of our foreign operations when reported in U.S. dollars in our financial statements. This could have a material adverse effect on our business, financial condition or results of operations as reported in U.S. dollars.

        In addition, fluctuations in currencies relative to currencies in which the earnings are generated may make it more difficult to perform period-to-period comparisons of our reported results of operations. For purposes of accounting, the assets and liabilities of our foreign operations, where the local currency is the functional currency, are translated using period-end exchange rates, and the revenues and expenses of our foreign operations are translated using average exchange rates during each period.

        Although we attempt to match costs and revenues in local currencies, we anticipate that there may be instances in which costs and revenues will not be matched with respect to currency denomination. As a result, to the extent we continue our expansion on a global basis, we expect that increasing portions of our revenues, costs, assets and liabilities will be subject to fluctuations in foreign currency valuations. We may experience economic loss and a negative impact on earnings or net assets solely as a result of foreign currency exchange rate fluctuations. Further, the markets in which we operate could restrict the removal or conversion of the local or foreign currency, resulting in our inability to hedge against these risks.

We intend to continue to make substantial capital investments to implement our business strategy, which may reduce funds available for other operations.

        We anticipate that we will continue to make substantial capital investments to expand and maintain our contract compression fleet. Capital expenditures for the fiscal year ended March 31, 2004 were $86.6 million consisting of $47.6 million for fleet additions, $27.9 million for compressor overhauls, $4.9 million for service trucks and $6.2 million for machinery, equipment, information technology equipment and other items. We expect to spend between $90 and $110 million on capital expenditures during fiscal year 2005, approximately $30 million of which would be used for compression fleet maintenance capital. Historically, we have paid for these investments through internally generated funds and external financings. These significant capital investments require cash that we could otherwise apply to other business needs. However, if we do not incur these expenditures while our competitors make substantial fleet investments, our market share may decline and our business may be adversely affected. In addition, if we are unable to generate sufficient cash internally or obtain alternative sources of capital to fund our proposed capital expenditures, it could materially adversely affect our results of operations, financial condition and growth.

Our ability to manage our business effectively will be weakened if we lose key personnel.

        We depend on the continuing efforts of our executive officers and senior management. The departure of any of our key personnel could have a material adverse effect on our business, operating

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results and financial condition. We do not maintain key man life insurance coverage with respect to our executive officers or key management personnel. We are not aware of the upcoming retirement of any of our executive officers or senior management personnel. In addition, we believe that our success depends on our ability to attract and retain additional qualified employees. If we fail to recruit other skilled personnel, we could be unable to compete effectively.

We are subject to substantial environmental regulation, and changes in these regulations could increase our costs or liabilities.

        We are subject to stringent and complex foreign, federal, state and local laws and regulatory standards, including laws and regulations regarding the discharge of materials into the environment, emission controls and other environmental protection and occupational health and safety concerns. Environmental laws and regulations may, in certain circumstances, impose strict liability for environmental contamination, rendering us liable for remediation costs, natural resource damages and other damages as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior owners or operators or other third parties. In addition, where contamination may be present, it is not uncommon for neighboring land owners and other third parties to file claims for personal injury, property damage and recovery of response costs. Remediation costs and other damages arising as a result of environmental laws and regulations, and costs associated with new information, changes in existing environmental laws and regulations or the adoption of new environmental laws and regulations could be substantial and could have a material adverse effect on our business, financial condition or results of operations. Moreover, failure to comply with these environmental laws and regulations may result in the imposition of administrative, civil and criminal penalties.

        We routinely deal with natural gas, oil and other petroleum products. As a result of our fabrication and aftermarket services operations, we generate, manage and dispose of or recycle hazardous wastes and substances such as solvents, thinner, waste paint, waste oil, washdown wastes and sandblast material. Although it is our policy to use generally accepted operating and disposal practices in accordance with applicable environmental laws and regulations, hydrocarbons or other hazardous substances or wastes may have been disposed or released on, under or from properties owned, leased or operated by us or on or under other locations where such substances or wastes have been taken for disposal. These properties may be subject to investigatory, remediation and monitoring requirements under foreign, federal, state and local environmental laws and regulations.

        We believe that our operations are in substantial compliance with applicable environmental laws and regulations. Nevertheless, the modification or interpretation of existing environmental laws or regulations, the more vigorous enforcement of existing environmental laws or regulations, or the adoption of new environmental laws or regulations may also negatively impact oil and natural gas exploration and production companies, which in turn could have a material adverse effect on us and other similarly situated service companies.

Future terrorist attacks or responses thereto could adversely affect our company.

        The impact that future events arising as a result of the terrorist attacks on the United States on September 11, 2001, or any terrorist attacks that may occur in the future, including military or police activities in the United States, Iraq or other foreign countries, future terrorist activities or threats of such activities, political unrest and instability, riots and protests, could have on the United States economy, the global economy, global financial markets and our business cannot currently be determined with any accuracy.

A third party could be prevented from acquiring control of us because of the anti-takeover provisions in our charter and bylaws.

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        There are provisions in our restated certificate of incorporation and bylaws that may make it more difficult for a third party to acquire control of us, even if a change in control would result in the purchase of your shares at a premium to the market price or would otherwise be beneficial to you. For example, our restated certificate of incorporation authorizes our board of directors to issue preferred stock without stockholder approval. If our board of directors elects to issue preferred stock, it could be more difficult for a third party to acquire us. In addition, provisions of our restated certificate of incorporation, such as a staggered board of directors and limitations on the removal of directors, no stockholder action by written consent and limitations on stockholder proposals at meetings of stockholders, could make it more difficult for a third party to acquire control of us. Delaware corporation law may also discourage takeover attempts that have not been approved by our board of directors.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

UNIVERSAL COMPRESSION, INC.

        The following discussion and analysis of financial condition and results of operations should be read in conjunction with Universal's financial statements, and the notes thereto, and the other financial information appearing elsewhere in this report. The following discussion includes forward-looking statements that involve certain risks and uncertainties. See "Part I. Disclosure Regarding Forward-Looking Statements" and "Risk Factors."

Financial Results of Operations.

Fiscal Year Ended March 31, 2004 Compared to Fiscal Year Ended March 31, 2003

        The following table summarizes revenue, gross profit, gross margin, expenses and the respective percentages for each of Universal's business segments: