Natural Gas Services Group, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are unaudited. The company manufactures, fabricates, rents and services natural-gas compressors, with a primary focus on compressor rentals for U.S. unconventional gas production. It also sells engineered compressor equipment and flare systems.
Financial results and liquidity
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $89.2 million | $93.7 million | Down 4.8% |
| Operating income | $22.0 million | $20.2 million | Up 8.9% |
| Net income | $14.4 million | $12.7 million | Up 13.4% |
| Diluted earnings per share | $1.15 | $1.03 | Up 11.7% |
| Operating cash flow | $39.2 million | $35.4 million | Up 10.8% |
| Capital expenditures | $43.4 million | $23.8 million | Up substantially |
Annual gross margin, a company-defined non-GAAP measure excluding depreciation and amortization, was $48.3 million, or 54.1% of revenue, versus $43.8 million, or 46.7%, in 2012. Management attributed the improvement primarily to the higher share of rental revenue; rental margin was 58.0%, while sales margin increased to 40.5% from 29.0%. Operating margin was approximately 24.7%, compared with 21.6% in 2012.
Rental revenue rose 22.3% to $69.1 million; sales revenue fell 46.4% to $19.5 million, principally because 2012 included a large, non-recurring sale of rental units. Service and maintenance revenue was $0.7 million. The rental fleet grew to 2,556 compressors and 351,187 horsepower; utilization improved to 79.7% from 77.1%.
Fourth-quarter 2013 revenue was $23.1 million, operating income $5.0 million and net income $3.2 million, versus $23.5 million, $5.5 million and $3.6 million, respectively, in fourth-quarter 2012. Diluted EPS was $0.25 versus $0.29.
At year-end, cash and equivalents were $24.4 million, current assets $60.6 million, current liabilities $12.2 million and working capital $48.5 million. Total debt was $577,000, compared with $897,000 at year-end 2012; stockholders’ equity was $192.7 million. Operating cash flow less reported capital expenditures was approximately negative $4.2 million. The company funded 2013 fleet and vehicle investment primarily from operating cash flow.
Changes, outlook and risks
- Performance drivers: Lower total revenue reflected the absence of the prior-year fleet sale, while rental revenue, fleet utilization and earnings increased. Depreciation and amortization rose 15.5% to $18.1 million as new rental units were added.
- Outlook: Management expected 2014 activity to remain flat or grow moderately, with industry capital spending flat to moderately higher and fabrication production at a similar level. Rental activity was expected to increase, subject to market conditions. Planned 2014 capital spending was expected to be funded by internally generated cash and available bank borrowing.
- Debt and financing: The $30 million secured revolving credit facility matures December 31, 2014. The company reported $577,000 outstanding, compliance with covenants and approximately $29.3 million of borrowing-base availability. Renewal or replacement was not assured; the debt is secured by specified assets.
- Customer and market exposure: EOG and Devon represented 18% and 15% of 2013 revenue and 18% and 14% of year-end receivables, respectively. Results are sensitive to natural-gas prices, customer spending, short-term rental renewals and demand for unconventional gas production. A significant majority of rentals were on terms of six months or less; 1,614 units were rented month-to-month.
- Other risks and contingencies: Competition, customer credit, component supply and lead times, skilled labor, environmental and safety regulation, product liability, insurance limitations and potential financing needs could affect results. Management reported no current cleanup order, no material pending litigation known to it, and no material environmental compliance impact to date, while cautioning that future liabilities and costs cannot be ruled out.
- Unusual item: Other income included a $223,000 gain from settling a liability to the Midland Development Corporation for $52,000.
- Controls and audit: Management and the independent auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Assess whether rental growth and utilization can offset weak or volatile gas-sector demand and short-term contract renewals.
- Review customer concentration, receivable collectability and the company’s exposure to EOG and Devon.
- Verify renewal or refinancing of the credit facility before its December 2014 maturity and the availability of borrowing capacity under its collateral and covenants.
- Compare fleet capital spending with operating cash generation and monitor returns from the expanded rental fleet.
- Examine the quality and sustainability of margins, including the effect of the prior-year one-time equipment sale and the non-GAAP gross-margin definition.
- Monitor environmental, product-liability and insurance exposures, as well as any changes in customer spending or regulatory conditions.