UNIVERSAL COMPRESSION HOLDINGS INC - 10-Q Quarterly Report

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

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2004
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Numbers:

001-15843
333-48279

UNIVERSAL COMPRESSION HOLDINGS, INC.
UNIVERSAL COMPRESSION, INC.
(Exact name of registrants as specified in their charters)

DELAWARE TEXAS (States or Other Jurisdictions of Incorporation or Organization)		13-3989167 74-1282680 (I.R.S. Employer Identification Nos.)
4444 BRITTMOORE ROAD HOUSTON, TEXAS (Address of Principal Executive Offices)		77041 (Zip Code)
(713) 335-7000 (Registrants' telephone number, including area code)

Indicate by check mark whether the registrants (1) have 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) have been subject to such filing requirements for the past 90 days.

Yes ý No o

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.)

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

As of July 28, 2004, there were 31,455,120 shares of Universal Compression Holdings, Inc.'s common stock, $0.01 par value, outstanding and 4,910 shares of Universal Compression, Inc.'s common stock, $10.00 par value, outstanding.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNIVERSAL COMPRESSION HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

(unaudited)

			June 30, 2004			March 31, 2004
ASSETS
Current assets:
	Cash and cash equivalents		$	38,122		$	121,189
	Accounts receivable, net of allowance for bad debts of $3,718 and $3,189 as of
		June 30, 2004 and March 31, 2004, respectively		93,414			79,587
	Current portion of notes receivable			162			709
	Inventories, net of reserve for obsolescence of $12,765 and $12,041 as of
		June 30, 2004 and March 31, 2004, respectively		96,286			89,968
	Current deferred tax asset			5,819			5,819
	Other			15,774			13,938

		Total current assets		249,577			311,210
Property, plant and equipment:
	Contract compression equipment			1,353,099			1,344,218
	Other property			122,794			117,128
	Accumulated depreciation and amortization			(235,053	)		(216,569	)

		Net property, plant and equipment		1,240,840			1,244,777
Goodwill				390,998			390,371
Notes receivable				1,060			444
Other non-current assets				24,404			25,649

		Total assets	$	1,906,879		$	1,972,451

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable, trade		$	44,992		$	44,948
	Accrued liabilities			44,045			40,765
	Unearned revenue			27,413			25,596
	Accrued interest			17,344			10,933
	Current portion of long-term debt and capital lease obligations			1,435			14,369

		Total current liabilities		135,229			136,611
Capital lease obligations				731			997
Long-term debt				790,499			869,076
Non-current deferred tax liability				154,946			149,554
Derivative financial instruments used for hedging purposes				7,668			14,423
Other liabilities				4,298			2,555

		Total liabilities		1,093,371			1,173,216
Commitments and contingencies (Note 7)
Stockholders' equity:
	Common stock			314			313
	Treasury stock			(11	)		(11	)
	Additional paid-in capital			737,270			734,124
	Deferred compensation			(2,749	)		(1,256	)
	Other comprehensive loss			(34,510	)		(35,344	)
	Retained earnings			113,194			101,409

		Total stockholders' equity		813,508			799,235

		Total liabilities and stockholders' equity	$	1,906,879		$	1,972,451

See accompanying notes to unaudited consolidated financial statements.

UNIVERSAL COMPRESSION HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)

			Three Months Ended June 30,
			2004			2003
Revenue:
	Domestic contract compression		$	70,973		$	69,199
	International contract compression			22,746			19,684
	Fabrication			57,362			29,260
	Aftermarket services			33,793			34,084

		Total revenue		184,874			152,227
Costs and expenses:
	Domestic contract compression—direct costs			26,265			24,624
	International contract compression—direct costs			4,913			4,199
	Fabrication—direct costs			53,336			29,056
	Aftermarket services—direct costs			26,612			26,149
	Depreciation and amortization			22,673			20,986
	Selling, general and administrative			18,215			15,926
	Interest expense, net			16,817			19,918
	Debt extinguishment costs			475			14,397
	Gain on termination of interest rate swaps			(3,197	)		—
	Foreign currency gain			(358	)		(1,049	)
	Other (income) loss, net			417			(181	)
	Facility consolidation costs			—			1,404

		Total costs and expenses		166,168			155,429

Income (loss) before income taxes				18,706			(3,202	)
Income tax expense (benefit)				6,921			(1,233	)

	Net income (loss)		$	11,785		$	(1,969	)

Weighted average common and common equivalent shares outstanding:
	Basic			31,248			30,775
	Diluted			31,880			30,775
Earnings (loss) per share—Basic			$	0.38		$	(0.06	)

Earnings (loss) per share—Diluted			$	0.37		$	(0.06	)

See accompanying notes to unaudited consolidated financial statements.

UNIVERSAL COMPRESSION HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

				Three Months Ended June 30,
				2004			2003
Cash flows from operating activities:
	Net income (loss)			$	11,785		$	(1,969	)
	Adjustments to reconcile net income to cash provided by operating activities,
		net of effect of acquisitions:
	Depreciation and amortization				22,673			20,986
	Non-cash gain from interest rate swap settlement				(3,197	)		—
	Loss on early extinguishment of debt				475			14,397
	Gain (loss) on asset sales				287			(12	)
	Amortization of debt issuance costs				1,038			1,041
	Amortization of deferred compensation				203			156
	Deferred taxes provision				5,142			(4,876	)
		(Increase) decrease in receivables			(13,208	)		211
		(Increase) decrease in inventories			(4,898	)		400
		Decrease in accounts payables			(136	)		(6,541	)
		Increase in accrued liabilities			2,649			1,517
		Increase in unearned revenue			1,817			3,300
		Increase in accrued interest			6,411			8,034
		Increase (decrease) in other current assets and liabilities			(4,206	)		3,099
		Other			(2,768	)		(327	)

			Net cash provided by operating activities		24,067			39,416

Cash flows from investing activities:
	Additions to property, plant and equipment				(20,345	)		(16,741	)
	Proceeds from sale of property, plant and equipment				1,910			1,207
	Cash paid for acquisitions				(3,099	)		—

			Net cash used in investing activities		(21,534	)		(15,534	)

Cash flows from financing activities:
	Principal repayments of long-term debt				(85,000	)		(229,750	)
	Proceeds from issuance of debt				—			175,000
	Debt extinguishment premium and costs				(400	)		(12,492	)
	Debt issuance costs				—			(4,640	)
	Proceeds from common stock issuance				1,094			—
	Payments on capital lease agreements				(1,294	)		—

			Net cash used in financing activities		(85,600	)		(71,882	)

Net decrease in cash and cash equivalents					(83,067	)		(48,000	)
Cash and cash equivalents at beginning of period					121,189			71,693

Cash and cash equivalents at end of period				$	38,122		$	23,693

See accompanying notes to unaudited consolidated financial statements.

UNIVERSAL COMPRESSION HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2004

1. Basis of Presentation

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements presented in the Universal Compression Holdings, Inc. (the "Company") Annual Report on Form 10-K for the year ended March 31, 2004. That report contains a more comprehensive summary of the Company's major accounting policies. In the opinion of management, the accompanying unaudited consolidated financial statements contain all appropriate adjustments, all of which are normally recurring adjustments unless otherwise noted, considered necessary to present fairly the financial position of the Company and its consolidated subsidiaries and the results of operations and cash flows for the respective periods. Operating results for the three-month period ended June 30, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2005.

Earnings per share

Net income (loss) per share, basic and diluted, is calculated in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per share."

The dilutive effect of stock options outstanding for the three months ended June 30, 2004 and 2003 were 632,000 shares and zero shares, respectively. For the three months ended June 30, 2004 and 2003, outstanding stock options of 0.6 million and 2.1 million shares, respectively, were excluded from the computation of diluted earnings per share as the options' exercise prices were greater than the average market price of the common stock for such periods.

Reclassifications

Certain reclassifications have been made to the prior period amounts to conform to the current period classification.

Stock Options

In electing to follow Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees" for expense recognition purposes, the Company is obligated to provide the expanded disclosures required under SFAS No. 123, "Accounting for Stock Based Compensation" and SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS No. 123" for stock-based compensation granted in 1998 and thereafter. In addition, if materially different from reported results, the Company is obligated to disclose pro forma net income and earnings per share had compensation expense relating to the three months ended June 30, 2004 and 2003 grants been measured under the fair value recognition provisions of SFAS No. 123.

The weighted-average fair value at date of grant for options granted during the three months ended June 30, 2004 was $14.91. The weighted-average fair value at date of grant for options granted

during the three months ended June 30, 2003 was $12.01. Fair values were estimated using the Black-Scholes option valuation model with the following assumptions:

	Three Months Ended June 30,
	2004		2003
Expected life in years	7		8
Interest rate	4.11	%	3.10	%
Volatility	41.80	%	50.34	%
Dividend yield	0.00	%	0.00	%

The following table summarizes results as if the Company had recorded compensation expense under the provisions of SFAS No. 123 for the three months ended June 30, 2004 and 2003 (in thousands, except per share amounts):

		Three Months Ended June 30,
		2004		2003
Net income (loss), as reported		$	11,785	$	(1,969	)
Additional compensation expense, net of tax		$	601	$	899
Pro forma net income (loss)		$	11,184	$	(2,868	)
Basic earnings (loss) per share:
	As reported	$	0.38	$	(0.06	)
	Pro forma	$	0.36	$	(0.09	)
Diluted earnings (loss) per share:
	As reported	$	0.37	$	(0.06	)
	Pro forma	$	0.35	$	(0.09	)

2. Inventories, Net

Inventories, net consisted of the following (in thousands):

		June 30, 2004			March 31, 2004
Raw materials		$	62,472		$	60,064
Work-in-progress			43,818			37,510
Finished goods			2,761			4,435

	Total inventories		109,051			102,009
Reserve			(12,765	)		(12,041	)

	Inventories, net	$	96,286		$	89,968

3. Long-Term Debt

As of June 30, 2004, the Company had approximately $790.5 million in outstanding long-term debt obligations consisting primarily of $522.2 million outstanding under the seven-year term senior secured notes operating lease facility, consisting of 8⁷/8% senior notes due 2008 and term loan due 2008,

$170.6 million outstanding of 7¹/4% senior notes due 2010, and $95.0 million outstanding under the asset-backed securitization lease facility (the "ABS lease facility").

In the first quarter of fiscal 2004, Universal Compression, Inc. ("Universal"), our wholly-owned subsidiary, purchased or redeemed all of the outstanding $229.8 million aggregate principal amount of its 9⁷/8% senior discount notes due 2008. Due to the early extinguishment of this debt, the Company recognized expenses of $14.4 million in the first quarter of fiscal year 2004 resulting primarily 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.

In April 2004 we repurchased an additional $5.0 million of our 8⁷/8% senior notes due 2008. In June 2004, the Company paid $80.0 million to reduce the amount outstanding under the ABS lease facility.

Maturities of long-term debt as of June 30, 2004 are as follows (in thousands):

2005		$	446
2006			14,884
2007			14,912
2008			537,115
2009			14,816
Thereafter			208,772

	Total debt	$	790,945

4. Accounting for Interest Rate Swaps

In accordance with SFAS No. 133, as amended by SFAS Nos. 137 and 138 (collectively referred to as SFAS No. 133), all derivative instruments must be recognized on the balance sheet at fair value, and changes in such fair values are recognized in earnings unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged item pending recognition in earnings.

In June 2004, the Company reduced the notional amount of interest rate swaps that convert variable interest payments under the ABS lease facility to fixed interest payments. The notional amount of the swaps was reduced from $175.0 million to $90.3 million in connection with a debt repayment of $80.0 million under the ABS lease facility. In accordance with SFAS No. 133, the Company recorded a gain of $3.2 million to earnings that had previously been recorded in other comprehensive income as a result of the reduction in the notional amount of such interest rate swaps. As of June 30, 2004, the Company had interest rate swaps related to $90.3 million of the $95.0 million outstanding under the ABS lease facility. The swaps terminate in February 2013 and have a weighted average fixed rate of 5.2%. In accordance with SFAS No. 133, the Company's balance sheet at June 30, 2004 includes a $3.2 million noncurrent liability related to the interest rate swaps. The swaps, which the Company has designated as cash flow hedging instruments, meet the specific hedge criteria and any changes in their fair values were recognized in other comprehensive income or loss. Because the terms of the hedged item and the swaps substantially coincide, the hedge is expected to exactly offset changes in expected cash flows due to fluctuations in the variable rate and, therefore, the Company currently does not expect any ineffectiveness.

In March 2004, the Company entered into interest rate swap agreements to hedge $100 million of the Company's $175.0 million 7¹/4% senior notes due 2010. The swaps are used to hedge the change in fair value of the debt and, in effect, convert the fixed interest payment to a variable interest payment based on the six-month LIBOR rate. The swaps are accounted for in accordance with SFAS No. 133 and, as such, are recorded at fair value on the balance sheet. The Company's balance sheet at June 30, 2004 includes a $4.4 million noncurrent liability related to the interest rate swaps. The change in the debt's fair value is also recorded with the offset being recorded to income. The swaps, which the Company has designated as fair value hedging instruments, meet the specific hedge criteria and any changes in their fair values were recognized in income. For the quarter ended June 30, 2004, the change in the debt's fair value and the change in the swaps' fair value exactly offset and did not impact net income. Because the terms of the hedged item and the swaps substantially coincide, the hedge is expected to exactly offset changes in fair values due to fluctuations in the variable rate and, therefore, the Company currently does not expect any ineffectiveness.

The counterparties to the Company's interest rate swap agreements are major international financial institutions. The Company monitors the credit quality of these financial institutions and does not expect non-performance by them.

5. Comprehensive Income

Comprehensive income consisted of the following (in thousands):

		Three Months Ended June 30,
		2004			2003
Net income (loss)		$	11,785		$	(1,969	)
Other comprehensive income:
	Interest rate swap gain (loss)		4,529			(4,005	)
	Cumulative translation adjustment		(3,695	)		11,188

Comprehensive income		$	12,619		$	5,214

For the three months ended June 30, 2004 and June 30, 2003, the change in cumulative translation adjustment was primarily related to the translation of the balance sheets for the Company's Canada and Argentina subsidiaries.

6. Industry Segments

The Company has four principal business segments: domestic contract compression, international contract compression, fabrication and aftermarket services. The domestic contract compression segment provides natural gas compression to customers in the United States. The international contract compression segment provides natural gas compression to international customers. The fabrication segment provides services related to the design, engineering and assembly of natural gas and air compressors for sale to third parties and for use in the Company's contract compression fleet. The fabrication segment also provides construction of turn-key installation projects. The aftermarket services segment sells parts and components and provides maintenance to customers who own compression equipment and customers who utilize equipment from the Company's competitors. Fabrication revenue presented in the table below include only sales to third parties.

The Company's reportable segments are strategic business units that offer distinct products and services. They are managed separately since each business segment requires different marketing strategies due to customer specifications. The Company evaluates the performance of its reportable segments based on segment gross profit. Gross profit is defined as total revenue less direct costs. The Company has no material sales between segments and, accordingly, there is no inter-segment revenue to be reported.

The following table presents unaudited revenue and gross profit by business segment for the three months ended June 30, 2004 and 2003 (in thousands):

		Three Months Ended June 30,
		2004			2003
Revenue:
Domestic contract compression		$	70,973		$	69,199
International contract compression			22,746			19,684
Fabrication			57,362			29,260
Aftermarket services			33,793			34,084

	Total	$	184,874		$	152,227

Gross Profit:
Domestic contract compression		$	44,708		$	44,575
International contract compression			17,833			15,485
Fabrication			4,026			204
Aftermarket services			7,181			7,935

	Total	$	73,748		$	68,199

Depreciation and amortization			22,673			20,986
Selling, general and administrative			18,215			15,926
Interest expense, net			16,817			19,918
Debt extinguishment costs			475			14,397
Gain on termination of interest rate swaps			(3,197	)		—
Foreign currency gain			(358	)		(1,049	)
Other (income) loss, net			417			(181	)
Facility consolidation costs			—			1,404

	Income (loss) before taxes	$	18,706		$	(3,202	)

No one customer accounted for more than 10% of total revenue for any of the periods presented.

The table below presents unaudited revenue and gross profit by geographic location for the three months ended June 30, 2004 and 2003 (in thousands). The basis of attributing revenue and gross profit

to specific geographic locations is primarily based upon the geographic location of the sale, service or where the assets are utilized.

		Three Months Ended June 30,
		2004			2003
Revenue:
United States		$	127,091		$	115,967
Canada			19,057			15,097
Latin America			22,097			17,292
Asia Pacific			16,629			3,871

	Total	$	184,874		$	152,227

Gross Profit:
United States		$	52,072		$	50,746
Canada			4,590			3,446
Latin America			14,067			11,907
Asia Pacific			3,019			2,100

	Total	$	73,748		$	68,199

Depreciation and amortization			22,673			20,986
Selling, general and administrative			18,215			15,926
Interest expense, net			16,817			19,918
Debt extinguishment costs			475			14,397
Gain on termination of interest rate swaps			(3,197	)		—
Foreign currency gain			(358	)		(1,049	)
Other (income) loss, net			417			(181	)
Facility consolidation costs			—			1,404

	Income (loss) before taxes	$	18,706		$	(3,202	)

7. Commitments and Contingencies

In the ordinary course of business, the Company is involved in various pending or threatened legal actions. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not have a material adverse effect on the Company's consolidated financial position, operating results or cash flows.

Except as noted in footnote 11 in the Form 10-K for the year ended March 31, 2004, the Company has no other commitments or contingent liabilities, which, in the judgment of management, would result in losses that would materially affect the Company's consolidated financial position, operating results or cash flows.

8. Facility Consolidation Costs

On April 28, 2003, the Company announced the transfer of substantially all of its fabrication activities based in Tulsa, Oklahoma to its existing facility in Houston, Texas. Engineering, production and related support functions were consolidated with Houston-based functions. The Company did not incur additional costs related to this consolidation during the three months ended June 30, 2004 and

the Company does not expect to incur additional facility consolidation costs during the two-year period ending September 30, 2005. Total costs related to the facility consolidation were $1.4 million during the three months ended June 30, 2003 and are shown separately as facility consolidation costs in the consolidated statements of operations. The costs incurred were related to the fabrication segment. See below for further details of the costs incurred (in thousands):

		Three Months Ended June 30, 2003
Severance and personnel costs		$	934
Relocation costs			249
Other costs			221

	Total facility consolidation costs	$	1,404

UNIVERSAL COMPRESSION, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

(unaudited)

			June 30, 2004			March 31, 2004
ASSETS
Current assets:
	Cash and cash equivalents		$	38,122		$	121,189
	Accounts receivable, net of allowance for bad debts of $3,718 and $3,189 as of
		June 30, 2004 and March 31, 2004, respectively		93,414			79,587
	Current portion of notes receivable			162			709
	Inventories, net of reserve for obsolescence of $12,765 and $12,041 as of
		June 30, 2004 and March 31, 2004, respectively		96,286			89,968
	Current deferred tax asset			5,819			5,819
	Other			15,774			13,938

		Total current assets		249,577			311,210
Property, plant and equipment:
	Contract compression equipment			1,353,099			1,344,218
	Other property			122,794			117,128
	Accumulated depreciation and amortization			(235,053	)		(216,569	)

		Net property, plant and equipment		1,240,840			1,244,777
Goodwill				390,998			390,371
Notes receivable				1,060			444
Other non-current assets				24,404			25,649

		Total assets	$	1,906,879		$	1,972,451

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
	Accounts payable, trade		$	44,992		$	44,948
	Accrued liabilities			44,045			40,765
	Unearned revenue			27,413			25,596
	Accrued interest			17,344			10,933
	Current portion of long-term debt and capital lease obligations			1,435			14,369

		Total current liabilities		135,229			136,611
Capital lease obligations				731			997
Long-term debt				790,499			869,076
Non-current deferred tax liability				154,946			149,554
Derivative financial instruments used for hedging purposes				7,668			14,423
Other liabilities				4,298			2,555

		Total liabilities		1,093,371			1,173,216
Commitments and contingencies (Note 7)
Stockholder's equity:
	Common stock			49			49
	Additional paid-in capital			727,348			725,694
	Other comprehensive loss			(34,510	)		(35,344	)
	Retained earnings			120,621			108,836

		Total stockholder's equity		813,508			799,235

		Total liabilities and stockholder's equity	$	1,906,879		$	1,972,451

See accompanying notes to unaudited consolidated financial statements.

UNIVERSAL COMPRESSION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(unaudited)

			Three Months Ended June 30,
			2004			2003
Revenue:
	Domestic contract compression		$	70,973		$	69,199
	International contract compression			22,746			19,684
	Fabrication			57,362			29,260
	Aftermarket services			33,793			34,084

		Total revenue		184,874			152,227
Costs and expenses:
	Domestic contract compression—direct costs			26,265			24,624
	International contract compression—direct costs			4,913			4,199
	Fabrication—direct costs			53,336			29,056
	Aftermarket services—direct costs			26,612			26,149
	Depreciation and amortization			22,673			20,986
	Selling, general and administrative			18,215			15,926
	Interest expense, net			16,817			19,918
	Debt extinguishment costs			475			14,397
	Gain on termination of interest rate swaps			(3,197	)		—
	Foreign currency gain			(358	)		(1,049	)
	Other (income) loss, net			417			(181	)
	Facility consolidation costs			—			1,404

		Total costs and expenses		166,168			155,429

Income (loss) before income taxes				18,706			(3,202	)
Income tax expense (benefit)				6,921			(1,233	)

	Net income (loss)		$	11,785		$	(1,969	)

See accompanying notes to unaudited consolidated financial statements.

UNIVERSAL COMPRESSION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

			Three Months Ended June 30,
			2004			2003
Cash flows from operating activities:
	Net income (loss)		$	11,785		$	(1,969	)
	Adjustments to reconcile net income to cash provided by operating activities, net of
		effect of acquisitions:
	Depreciation and amortization			22,673			20,986
	Non-cash gain from interest rate swap settlement			(3,197	)		—
	Loss on early extinguishment of debt			475			14,397
	Gain (loss) on asset sales			287			(12	)
	Amortization of debt issuance costs			1,038			1,041
	Deferred taxes provision			5,142			(4,876	)
	(Increase) decrease in receivables			(13,208	)		211
	(Increase) decrease in inventories			(4,898	)		400
	Decrease in accounts payable			(136	)		(6,541	)
	Increase in accrued liabilities			2,852			1,673
	Increase in unearned revenue			1,817			3,300
	Increase in accrued interest			6,411			8,034
	Increase (decrease) in other current assets and liabilities			(4,206	)		3,099
	Other			(2,768	)		(327	)

		Net cash provided by operating activities		24,067			39,416

Cash flows from investing activities:
	Additions to property, plant and equipment			(20,345	)		(16,741	)
	Proceeds from sale of property, plant and equipment			1,910			1,207
	Cash paid for acquisitions			(3,099	)		—

		Net cash used in investing activities		(21,534	)		(15,534	)

Cash flows from financing activities:
	Principal repayments of long-term debt			(85,000	)		(229,750	)
	Proceeds from issuance of debt			—			175,000
	Debt extinguishment premium and costs			(400	)		(12,492	)
	Debt issuance costs			—			(4,640	)
	Investment in subsidiary by parent			1,094			—
	Payments on capital lease agreements			(1,294	)		—

		Net cash used in financing activities		(85,600	)		(71,882	)

Net decrease in cash and cash equivalents				(83,067	)		(48,000	)
Cash and cash equivalents at beginning of period				121,189			71,693

Cash and cash equivalents at end of period			$	38,122		$	23,693

See accompanying notes to unaudited consolidated financial statements.

UNIVERSAL COMPRESSION, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2004

1. Basis of Presentation

These unauditedconsolidated financial statements should be read in conjunction with the consolidated financial statements presented in the Universal Compression, Inc. ("Universal") Annual Report on Form 10-K for the year ended March 31, 2004. That report contains a more comprehensive summary of Universal's major accounting policies. In the opinion of management, the accompanying unaudited consolidated financial statements contain all appropriate adjustments, all of which are normally recurring adjustments unless otherwise noted, considered necessary to present fairly the financial position of Universal and its consolidated subsidiaries and the results of operations and cash flows for the respective periods. Operating results for the three-months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2005.

Reclassifications

Certain reclassifications have been made to the prior period amounts to conform to the current period classification.

2. Inventories, Net

Inventories, net consisted of the following (in thousands):

		June 30, 2004			March 31, 2004
Raw materials		$	62,472		$	60,064
Work-in-progress			43,818			37,510
Finished goods			2,761			4,435

	Total inventories		109,051			102,009
Reserve			(12,765	)		(12,041	)

	Inventories, net	$	96,286		$	89,968

3. Long-Term Debt

As of June 30, 2004, Universal had approximately $790.5 million in outstanding long-term debt obligations consisting primarily of $522.2 million outstanding under the seven-year term senior secured notes operating lease facility, consisting of 8⁷/8% senior notes due 2008, and term loan due 2008, $170.6 million outstanding of 7¹/4% senior notes due 2010, and $95.0 million outstanding under the asset-backed securitization lease facility (the "ABS lease facility").

In the first quarter of fiscal 2004, Universal purchased or redeemed all of the outstanding $229.8 million aggregate principal amount of its 9⁷/8% senior discount notes due 2008. Due to the early extinguishment of this debt, Universal recognized expenses of $14.4 million in the first quarter of fiscal year 2004 resulting primarily 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.

In April 2004 we repurchased an additional $5.0 million of our 8⁷/8% senior notes due 2008. In June 2004, Universal paid $80.0 million to reduce the amount outstanding under the ABS lease facility.

Maturities of long-term debt as of June 30, 2004 are as follows (in thousands):

2005		$	446
2006			14,884
2007			14,912
2008			537,115
2009			14,816
Thereafter			208,772

	Total debt	$	790,945

4. Accounting for Interest Rate Swaps

In June 2004, Universal reduced the notional amount of interest rate swaps that convert variable interest payments under the ABS lease facility to fixed interest payments. The notional amount of the swaps was reduced from $175.0 million to $90.3 million in connection with a debt repayment of $80.0 million under the ABS lease facility. In accordance with SFAS No. 133, Universal recorded a gain of $3.2 million to earnings that had previously been recorded in other comprehensive income as a result of the reduction in the notional amount of such interest rate swaps. As of June 30, 2004, Universal had interest rate swaps related to $90.3 million of the $95.0 million outstanding under the ABS lease facility. The swaps terminate in February 2013 and have a weighted average fixed rate of 5.2%. In accordance with SFAS No. 133, Universal's balance sheet at June 30, 2004 includes a $3.2 million noncurrent liability related to the interest rate swap. The swaps, which Universal has designated as cash flow hedging instruments, meet the specific hedge criteria and any changes in their fair values were recognized in other comprehensive income or loss. Because the terms of the hedged item and the swaps substantially coincide, the hedge is expected to exactly offset changes in expected cash flows due to fluctuations in the variable rate and, therefore, Universal currently does not expect any ineffectiveness.

In March 2004, Universal entered into interest rate swap agreements to hedge $100 million of our $175.0 million 7¹/4% senior notes due 2010. The swaps are used to hedge the change in fair value of the debt and, in effect, convert the fixed interest payment to a variable interest payment based on the six-month LIBOR rate. The swaps are accounted for in accordance with SFAS No. 133 and, as such, are recorded at fair value on the balance sheet. Universal's balance sheet at June 30, 2004 includes a $4.4 million noncurrent liability related to the interest rate swaps. The change in the debt's fair value is also recorded with the offset being recorded to income. The swaps, which Universal has designated as fair value hedging instruments, meet the specific hedge criteria and any changes in their fair values were recognized in income. For the quarter ended June 30, 2004, the change in the debt's fair value and the change in the swaps' fair value exactly offset and did not impact net income. Because the terms of the hedged item and the swaps substantially coincide, the hedge is expected to exactly offset changes in fair values due to fluctuations in the variable rate and, therefore, Universal currently does not expect any ineffectiveness.

The counterparties to Universal's interest rate swap agreements are major international financial institutions. Universal monitors the credit quality of these financial institutions and does not expect non-performance by them.

5. Comprehensive Income

Comprehensive income consisted of the following (in thousands):

		Three Months Ended June 30,
		2004			2003
Net income (loss)		$	11,785		$	(1,969	)
Other comprehensive income:
	Interest rate swap gain (loss)		4,529			(4,005	)
	Cumulative translation adjustment		(3,695	)		11,188

Comprehensive income		$	12,619		$	5,214

For the three months ended June 30, 2004 and June 30, 2003, the change in cumulative translation adjustment was primarily related to the translation of the balance sheets for Universal's Canada and Argentina subsidiaries.

6. Industry Segments

Universal has four principal business segments: domestic contract compression, international contract compression, fabrication and aftermarket services. The domestic contract compression segment provides natural gas compression to customers in the United States. The international contract compression segment provides natural gas compression to international customers. The fabrication segment provides services related to the design, engineering and assembly of natural gas and air compressors for sale to third parties and for use in Universal's contract compression fleet. The fabrication segment also provides construction of turn-key installation projects. The aftermarket services segment sells parts and components and provides maintenance to customers who own compression equipment and customers who utilize equipment from Universal's competitors. Fabrication revenue presented in the table below include only sales to third parties.

Universal's reportable segments are strategic business units that offer distinct products and services. They are managed separately since each business segment requires different marketing strategies due to customer specifications. Universal evaluates the performance of its reportable segments based on segment gross profit. Gross profit is defined as total revenue less direct costs. Universal has no material sales between segments and, accordingly, there is no inter-segment revenue to be reported.

The following table presents unaudited revenue and gross profit by business segment for the three months ended June 30, 2004 and 2003 (in thousands):

		Three Months Ended June 30,
		2004			2003
Revenue:
Domestic contract compression		$	70,973		$	69,199
International contract compression			22,746			19,684
Fabrication			57,362			29,260
Aftermarket services			33,793			34,084

	Total	$	184,874		$	152,227

Gross Profit:
Domestic contract compression		$	44,708		$	44,575
International contract compression			17,833			15,485
Fabrication			4,026			204
Aftermarket services			7,181			7,935

	Total	$	73,748		$	68,199

Depreciation and amortization			22,673			20,986
Selling, general and administrative			18,215			15,926
Interest expense, net			16,817			19,918
Debt extinguishment costs			475			14,397
Gain on termination of interest rate swaps			(3,197	)		—
Foreign currency gain			(358	)		(1,049	)
Other (income) loss, net			417			(181	)
Facility consolidation costs			—			1,404

	Income (loss) before taxes	$	18,706		$	(3,202	)

No one customer accounted for more than 10% of total revenue for any of the periods presented.

The table below presents unaudited revenue and gross profit by geographic location for the three months ended June 30, 2004 and 2003 (in thousands). The basis of attributing revenue and gross profit

to specific geographic locations is primarily based upon the geographic location of the sale, service or where the assets are utilized.

		Three Months Ended June 30,
		2004			2003
Revenue:
United States		$	127,091		$	115,967
Canada			19,057			15,097
Latin America			22,097			17,292
Asia Pacific			16,629			3,871

	Total	$	184,874		$	152,227

Gross Margin:
United States		$	52,072		$	50,746
Canada			4,590			3,446
Latin America			14,067			11,907
Asia Pacific			3,019			2,100

	Total	$	73,748		$	68,199

Depreciation and amortization			22,673			20,986
Selling, general and administrative			18,215			15,926
Interest expense, net			16,817			19,918
Debt extinguishment costs			475			14,397
Gain on termination of interest rate swaps			(3,197	)		—
Foreign currency gain			(358	)		(1,049	)
Other (income) loss, net			417			(181	)
Facility consolidation costs			—			1,404

	Income (loss) before taxes	$	18,706		$	(3,202	)

7. Commitments and Contingencies

In the ordinary course of business, Universal is involved in various pending or threatened legal actions. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not have a material adverse effect on Universal's consolidated financial position, operating results or cash flows.

Except as noted in footnote 10 in the Form 10-K for the year ended March 31, 2004, Universal has no other commitments or contingent liabilities, which, in the judgment of management, would result in losses that would materially affect Universal's consolidated financial position, operating results or cash flows.

8. Facility Consolidation Costs

On April 28, 2003, Universal announced the transfer of substantially all of its fabrication activities based in Tulsa, Oklahoma to its existing facility in Houston, Texas. Engineering, production and related support functions were consolidated with Houston-based functions. Universal did not incur additional costs related to this consolidation during the three months ended June 30, 2004 and Universal does not expect to incur additional facility consolidation costs during the two-year period ending September 30, 2005. Total costs related to the facility consolidation were $1.4 million during the three months ended June 30, 2003 and are shown separately as facility consolidation costs in the consolidated statements of

operations. The costs incurred were related to the fabrication segment. See below for further details of the costs incurred (in thousands):

		Three Months Ended June 30, 2003
Severance and personnel costs		$	934
Relocation costs			249
Other costs			221

	Total facility consolidation costs	$	1,404

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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, and 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 or operational 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 in our Annual Report on Form 10-K for the year ended March 31, 2004 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;
•: our level of indebtedness and ability to fund our business;
•: our ability to recoup our investment by re-leasing 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.

General

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements, and the notes thereto, appearing elsewhere in this report, as well as the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" presented in our Annual Report on Form 10-K for the year ended March 31, 2004. See "Item 1. Financial Statements—footnote 1, Basis of Presentation" in this report.

UNIVERSAL COMPRESSION HOLDINGS, INC.

Overview

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 and other governmental 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.

Industry Conditions

General industry conditions improved in our first quarter of fiscal 2005, as evidenced by increased industry activity and customer demand for our contract compression services. Demand remained strong for our fabrication and aftermarket services.

Financial Highlights

Net income for the three months ended June 30, 2004 was higher by $13.8 million than net income for the prior year period. Significant items for the three-month period follow:

•: Higher Revenue. Compared to the prior year period, total revenue was higher by $32.6 million, or 21.4%, for the three months ended June 30, 2004. The increase in revenue for the three-

month period was due primarily to higher revenue in the fabrication and international contract compression segments.

•: Lower Interest Expense. Compared to the prior year period, interest expense was lower by $3.1 million, or 15.6%, for the three months ended June 30, 2004, 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 and lowered the interest rate on that debt.
•: Gain on termination of interest rate swaps. Included within net income for the current quarter is a $3.2 million gain on the termination of interest rate swaps related to the repayment of debt in June 2004.
•: Debt extinguishment and facility consolidation costs. The prior year quarter included $14.4 million of debt extinguishment costs as a result of the Company's May 2003 refinancing activity and $1.4 million of facility consolidation costs related to the transfer of substantially all of the Tulsa, Oklahoma fabrication operations to the Houston fabrication facility.
•: Refinancing Activity. We repaid or repurchased a total of $85.0 million of debt during the quarter, which is expected to reduce ongoing interest expense by approximately $0.01 per share per quarter on an after-tax basis for the remainder of fiscal 2005.

Operating Highlights

The higher revenue for the three-month period ended June 30, 2004 is attributable to increased industry activity and customer demand, which resulted in higher utilization in the international contract compression fleet and increased fabrication sales. The following table summarizes total available horsepower, average contracted horsepower, horsepower utilization percentages and fabrication backlog.

			Three Months Ended
			June 30, 2004		March 31, 2004		June 30, 2003
			(Horsepower in thousands)
Total Available Horsepower (at period end):
	Domestic contract compression		1,899		1,904		1,959
	International contract compression		424		417		408

		Total	2,323		2,321		2,367

Average Contracted Horsepower:
	Domestic contract compression		1,626		1,630		1,637
	International contract compression		388		372		344

		Total	2,014		2,002		1,981

Horsepower Utilization:
	Spot (at period end)		87.6	%	86.1	%	85.0	%
	Average		86.7	%	86.4	%	84.3	%

		June 30, 2004			March 31, 2004			June 30, 2003
		(In millions)
Fabrication Backlog		$	80.7		$	88.2		$	81.1

Domestic average contracted horsepower remained consistent for the quarter ended June 30, 2004 compared to the prior year quarter. International average contracted horsepower increased by 12.8% for the quarter ended June 30, 2004 compared to the prior year quarter. This increase was primarily attributable to higher customer demand.

The decrease in domestic horsepower for the quarter ended June 30, 2004 from the prior year period 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.

Fabrication backlog fluctuates quarter to quarter due to the timing of receipt of orders placed by customers and due to the timing of recognition of revenue. The backlog of fabrication projects at July 27, 2004 was approximately $85.1 million. A majority of the backlog is expected to be completed within a 180-day period.

Financial Results of Operations

Three months ended June 30, 2004 compared to three months ended June 30, 2003

The following table summarizes the results of operations:

		Three Months Ended June 30,
		2004			2003
		(Dollars in thousands)
Revenue:
Domestic contract compression		$	70,973		$	69,199
	% of revenue		38.4	%		45.5	%
International contract compression		$	22,746		$	19,684
	% of revenue		12.3	%		12.9	%
Fabrication		$	57,362		$	29,260
	% of revenue		31.0	%		19.2	%
Aftermarket services		$	33,793		$	34,084
	% of revenue		18.3	%		22.4	%

Total revenue		$	184,874		$	152,227
Gross profit:
Domestic contract compression		$	44,708		$	44,575
International contract compression			17,833			15,485
Fabrication			4,026			204
Aftermarket services			7,181			7,935

Total gross profit		$	73,748		$	68,199
Gross margin:
Domestic contract compression			63.0	%		64.4	%
International contract compression			78.4	%		78.7	%
Fabrication			7.0	%		0.7	%
Aftermarket services			21.2	%		23.3	%

Total gross margin			39.9	%		44.8	%
Expenses:
Depreciation and amortization		$	22,673		$	20,986
Selling, general and administrative			18,215			15,926
Interest expense, net			16,817			19,918
Foreign currency gain			(358	)		(1,049	)

Other (income) loss, net		417			(181	)
Debt extinguishment costs		475			14,397
Gain on termination of interest rate swaps		(3,197	)		—
Facility consolidation costs		—			1,404
Income tax (benefit) expense		6,921			(1,233	)

Net income (loss)	$	11,785		$	(1,969	)

Revenue. Domestic contract compression revenue increased due to higher average contract rates in the current quarter. International contract compression revenue increased primarily as a result of additional compression business in Brazil and Argentina, both of which contributed to increases of $1.4 million each. Fabrication revenue increased due to additional projects for customers in our Asia Pacific, United States and Canadian regions resulting in increases of $12.0 million, $10.8 million and $3.3 million, respectively. 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. Aftermarket services revenue was lower due primarily to a decline within the United States ($1.4 million), partially offset by increased customer demand in the Asia Pacific region ($0.7 million) and the Canadian region ($0.4 million).

Gross Profit. The changes to gross profit (defined as total revenues less direct costs) for the three months ended June 30, 2004 compared to the prior year period were primarily attributable to revenue increases discussed above for international contract compression and fabrication. The increase in fabrication gross profit was also partially attributable to improved margins compared to the prior year, which experienced margin deterioration primarily as a result of cost overruns related to several highly customized fabrication projects.

Depreciation and Amortization. The increase in depreciation and amortization expense for the three months ended June 30, 2004 compared to the prior year primarily resulted from on-going capital additions.

Selling, General, and Administrative Expenses. The increase in selling, general and administrative expenses for the three months ended June 30, 2004 relates to the increased expenses as a result of increased operating activity within the Latin America and Asia Pacific regions of $1.1 million and $0.8 million, respectively. Selling, general and administrative expenses represented 10% of total revenues for both periods.

EBITDA, as adjusted. EBITDA, as adjusted, for the three months ended June 30, 2004 was $55.1 million compared to $52.5 million for the prior year period. The increase in EBITDA of 5.1% from the prior year is primarily attributable to the revenue increases discussed above for international contract compression and fabrication. EBITDA, as adjusted is defined, discussed and reconciled to net income on page 27 of this report, within Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.

Interest Expense, Net. The decrease in interest expense for the three months ended June 30, 2004 as compared to the prior year partially is 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 $0.7 million as a result of the $55.0 million reduction in debt and decreased $1.6 million due to the lower interest rate on the $175.0 million of indebtedness.

Debt Extinguishment Costs. Debt extinguishment costs incurred during the three months ended June 30, 2003 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 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 in the prior year 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. For the three months ended June 30, 2004, debt extinguishment costs of $0.5 million resulted from the buyback of $5.0 million of our 8⁷/8% senior notes due 2008.

Gain on Termination of Interest Rate Swaps. A $3.2 million gain on the termination of interest rate swaps was recognized for the three months ended June 30, 2004. This gain was the result of reducing the notional amount of interest rate swaps by $84.8 million on our ABS lease facility in connection with a principal reduction of $ 80.0 million in June 2004.

Liquidity and Capital Resources

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

Operations. Net cash used in investing and financing activities exceeded net cash provided by operating activities by $83.1 million for the three months ended June 30, 2004 primarily as a result of $85.0 million in debt prepayments during the quarter. For the three months ended June 30, 2003, net cash used in investing and financing activities exceeded net cash provided by operating activities by $48.0 million primarily as a result of our debt refinancing in May 2003 which reduced outstanding debt by approximately $55.0 million. 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 scheduled debt repayments through the 2005 fiscal year. Working capital, net of cash, was $76.2 million and $77.9 million at June 30, 2004 and June 30, 2003, respectively.

Capital Expenditures. Capital expenditures for the three months ended June 30, 2004 were $20.3 million consisting of $6.8 million for fleet additions, $9.6 million for compressor overhauls, $0.6 million for service trucks and $3.3 million for machinery, equipment, information technology equipment and other items. We expect capital expenditures to be approximately $110 million to $130 million for the fiscal year ending March 31, 2005, including approximately $35 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 June 30, 2004, we had approximately $790.9 million in outstanding debt obligations consisting primarily of $522.2 million outstanding under the seven-year term senior secured notes operating lease facility, consisting of 8⁷/8% senior notes due 2008 and a term loan due 2008, $170.6 million outstanding of 7¹/4% senior notes due 2010, and $95.0 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.

		(In thousands)
2005		$	446
2006			14,884
2007			14,912
2008			537,115
2009			14,816
Thereafter			208,772

	Total debt	$	790,945

Availability. As of June 30, 2004, after giving effect to $15.4 million of outstanding letters of credit under our financing documents, we had an aggregate unused credit availability of approximately $109.6 million from our revolving credit facility.

Recent Refinancing Activity. During the three months ended March 31, 2004 we repurchased $5.0 million of our 8⁷/8% senior notes due February 2008. In April 2004 we repurchased an additional $5.0 million of our 8⁷/8% senior notes due 2008 and will continue to look at opportunistic repurchases, subject to market conditions. In June 2004, the Company paid $80.0 million to reduce the principal amount outstanding under the ABS lease facility. As of June 30, 2004, $95.0 million remained outstanding under the ABS lease facility.

UNIVERSAL COMPRESSION, INC.

Three months ended June 30, 2004 compared to three months ended June 30, 2003

The following table summarizes the results of operations:

		Three Months Ended June 30,
		2004			2003
		(in thousands)
Revenue:
Domestic contract compression		$	70,973		$	69,199
	% of revenue		38.4	%		45.5	%
International contract compression		$	22,746		$	19,684
	% of revenue		12.3	%		12.9	%
Fabrication		$	57,362		$	29,260
	% of revenue		31.0	%		19.2	%
Aftermarket services		$	33,793		$	34,084
	% of revenue		18.3	%		22.4	%

Total revenue		$	184,874		$	152,227
Gross profit:
Domestic contract compression		$	44,708		$	44,575
International contract compression			17,833			15,485
Fabrication			4,026			204
Aftermarket services			7,181			8,016

Total gross profit		$	73,748		$	68,199
Gross margin:
Domestic contract compression			63.0	%		64.4	%
International contract compression			78.4	%		78.7	%
Fabrication			7.0	%		0.7	%
Aftermarket services			21.2	%		23.3	%

Total gross margin			39.9	%		44.8	%
Expenses:
Depreciation and amortization		$	22,673		$	20,986
Selling, general and administrative			18,215			15,926
Interest expense, net			16,817			19,918
Foreign currency gain			(358	)		(1,049	)
Other (income) loss, net			417			(181	)
Debt extinguishment costs			475			14,397
Gain on termination of interest rate swaps			(3,197	)		—
Facility consolidation costs			—			1,404
Income tax (benefit) expense			6,921			(1,233	)

Net income (loss)		$	11,785		$	(1,969	)

services revenue was lower due primarily to a decline within the United States ($1.4 million), partially offset by increased customer demand in the Asia Pacific region ($0.7 million) and Canadian region ($0.4 million).

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 and gain on the termination of interest rate swaps), operating lease expense, depreciation and amortization, foreign currency gains or losses, excluding non-recurring items (including facility consolidation costs) and extraordinary gains or losses.

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

		Three Months Ended June 30,
		2004			2003
		(in thousands)
EBITDA, as adjusted		$	55,116		$	52,454
	Depreciation and amortization		(22,673	)		(20,986	)
	Interest expense		(16,817	)		(19,918	)
	Debt extinguishment costs		(475	)		(14,397	)
	Gain on termination of interest rate swaps		3,197			—
	Foreign currency gain		358			1,049
	Facility consolidation costs		—			(1,404	)
	Income tax expense (benefit)		(6,921	)		1,233

Net income (loss)		$	11,785		$	(1,969	)

Management believes disclosure of EBITDA, as adjusted, a 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. Management uses EBITDA, as adjusted, as a supplemental measure to review current period operating performance, a comparability measure, a performance measure for period to period comparisons and a valuation measure.

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. 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.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to some market risk due to the floating or variable interest rates under our financing arrangements. Some of the interest and lease payments under our financing arrangements are based on a floating rate plus an applicable margin. The variable interest rate under our revolving credit facility, which had no amounts outstanding as of June 30, 2004, is based upon either a base rate or LIBOR, at our option, and the applicable margin is a variable amount from 1.5% to 2.5% based on a leverage ratio. The variable interest rate under our $82.2 million term loan is based upon the one-month LIBOR rate and the applicable margin is a fixed 3.25%. The one-month LIBOR rate at July 28, 2004 was 1.4%. The variable interest rate applicable to $100 million of our 7¹/4% senior notes due 2010 pursuant to an interest rate swap is based upon the six-month LIBOR rate plus the applicable margin of 3.2%. The six-month LIBOR rate at July 28, 2004 was 1.9%. As of June 30, 2004, approximately $182.2 million of our outstanding indebtedness and other obligations bore interest at floating rates and a 1.0% increase in interest rates would result in an approximate $1.8 million annual increase in our interest expense.

We hold interest rate swaps related to the ABS operating lease facility. At June 30, 2004, the fair market value of these interest rate swaps was a liability of approximately $3.2 million, which was recorded as a noncurrent liability. The interest rate swaps terminate in February 2013. The weighted average fixed rate of these swaps is 5.2%.

To minimize any significant foreign currency credit risk, we generally contractually require that payment by our customers be made in U.S. dollars. If payment is not made in U.S. dollars, we generally utilize the exchange rate into U.S. dollars on the payment date and balance payments in local currency against local expenses.

ITEM 4. Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of 1934 (the "Exchange Act"), Company management, including the Chief Executive Officer and Chief Financial Officer of the Company and of Universal, evaluated as of the end of the period covered by this report, the effectiveness of their disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of the Company and Universal concluded that their disclosure controls and procedures, as of the end of the period covered by this report, were effective for the purpose of ensuring that material information required to be in this report is made known to management, including the Chief Executive Officer and Chief Financial Officer, by others on a timely basis. As required by Exchange Act Rule 13a-15(d) and Rule 15d-15(d), management, including the Chief Executive Officer and Chief Financial Officer of the Company and of Universal, also evaluated whether any change in their internal control over financial reporting that occurred during the quarter covered by this report has materially affected, or is reasonably likely to materially affect, their internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

None.

ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchase of Equity Securities

None.

ITEM 3. Defaults Upon Senior Securities

None.

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

None.

ITEM 5. Other Information

The Audit Committee has approved certain non-audit services to be performed by our independent auditors, none of which would be prohibited services under the Sarbanes-Oxley Act of 2002.

ITEM 6. Exhibits and Reports on Form 8-K

(a): Exhibits.

Exhibit No.		Description
4.1		Amendment Number 3 to Indenture, dated as of July 16, 2004, between BRL Universal Compression Funding I 2002, L.P., and Wells Fargo Bank, National Association (successor by merger to Wells Fargo Bank Minnessota, National Association), as Indenture Trustee with respect to the ABS operating lease facility.
10.1		Amendment Number 2 to the Head Lessee Security Agreement, dated as of July 16, 2004, between UCO Compression 2002 LLC, as Grantor, and BRL Universal Funding I 2002, L.P., as Secured Party, with respect to the ABS operating lease facility.
31.1		Certification of the Chief Executive Officer of Universal Compression Holdings, Inc. pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
31.2		Certification of the Chief Financial Officer of Universal Compression Holdings, Inc. pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
31.3		Certification of the Chief Executive Officer of Universal Compression, Inc. pursuant to Rule 15d-14 under the Securities Exchange Act of 1934.
31.4		Certification of the Chief Financial Officer of Universal Compression, Inc. pursuant to Rule 15d-14 under the Securities Exchange Act of 1934.
32.1		Certifications of the Chief Executive Officer and Chief Financial Officer of Universal Compression Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certifications of the Chief Executive Officer and Chief Financial Officer of Universal Compression, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b): Reports on Form 8-K.

On May 20, 2004, the Company filed a Current Report on Form 8-K reporting the issuance of a press release announcing earnings for the fourth quarter and fiscal year ended March 31, 2004.

On June 25, 2004, the Company filed a Current Report on Form 8-K reporting the sale by Weatherford International Ltd. of 3,000,000 shares of the Company's common stock.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.

	UNIVERSAL COMPRESSION HOLDINGS, INC.
Date: August 5, 2004
	By:	/s/ J. MICHAEL ANDERSON
			J. Michael Anderson, Senior Vice President and Chief Financial Officer (Principal Financial Officer)
	By:	/s/ DENNIS S. BALDWIN
			Dennis S. Baldwin, Controller (Principal Accounting Officer)
	UNIVERSAL COMPRESSION, INC.
	By:	/s/ J. MICHAEL ANDERSON
			J. Michael Anderson, Senior Vice President and Chief Financial Officer (Principal Financial Officer)
	By:	/s/ DENNIS S. BALDWIN
			Dennis S. Baldwin, Vice President and Controller (Principal Accounting Officer)

EXHIBIT INDEX

Exhibit No		Description
4.1		Amendment Number 3 to Indenture, dated as of July 16, 2004, between BRL Universal Compression Funding I 2002, L.P., and Wells Fargo Bank, National Association (successor by merger to Wells Fargo Bank Minnessota, National Association), as Indenture Trustee with respect to the ABS operating lease facility.
10.1		Amendment Number 2 to the Head Lessee Security Agreement, dated as of July 16, 2004, between UCO Compression 2002 LLC, as Grantor, and BRL Universal Funding I 2002, L.P., as Secured Party, with respect to the ABS operating lease facility.
31.1		Certification of the Chief Executive Officer of Universal Compression Holdings, Inc. pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
31.2		Certification of the Chief Financial Officer of Universal Compression Holdings, Inc. pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
31.3		Certification of the Chief Executive Officer of Universal Compression, Inc. pursuant to Rule 15d-14 under the Securities Exchange Act of 1934.
31.4		Certification of the Chief Financial Officer of Universal Compression, Inc. pursuant to Rule 15d-14 under the Securities Exchange Act of 1934.
32.1		Certifications of the Chief Executive Officer and Chief Financial Officer of Universal Compression Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certifications of the Chief Executive Officer and Chief Financial Officer of Universal Compression, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNIVERSAL COMPRESSION HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (In thousands) (unaudited)
UNIVERSAL COMPRESSION HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (unaudited)
UNIVERSAL COMPRESSION HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited)
UNIVERSAL COMPRESSION HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004
UNIVERSAL COMPRESSION, INC. CONSOLIDATED BALANCE SHEETS (In thousands) (unaudited)
UNIVERSAL COMPRESSION, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands) (unaudited)
UNIVERSAL COMPRESSION, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited)
UNIVERSAL COMPRESSION, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
UNIVERSAL COMPRESSION HOLDINGS, INC.
UNIVERSAL COMPRESSION, INC.
THE COMPANY'S DEFINITION, RECONCILIATION AND USE OF EBITDA, AS ADJUSTED

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

ITEM 4. Controls and Procedures

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchase of Equity Securities

ITEM 3. Defaults Upon Senior Securities

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

ITEM 5. Other Information

ITEM 6. Exhibits and Reports on Form 8-K

SIGNATURES
EXHIBIT INDEX