Natural Gas Services Group, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports unaudited fourth-quarter results. The company manufactures, fabricates, rents, and services natural-gas compression equipment, primarily for U.S. unconventional production.
Financial performance
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $93.7 million | $65.2 million |
| Gross margin, excluding depreciation (non-GAAP) | $43.8 million; 46.7% | $34.8 million; 53.3% |
| Operating income | $20.2 million | $14.9 million |
| Net income | $12.7 million | $9.8 million |
| Diluted EPS | $1.03 | $0.80 |
| EBITDA (non-GAAP) | $35.9 million | $29.7 million |
| Operating cash flow | $35.4 million | $33.6 million |
| Capital expenditures | $23.8 million | $36.5 million |
Revenue rose 43.8%. Sales increased 135.9% to $36.4 million, including a large, one-time sale of rental units to one customer; rental revenue rose 16.2% to $56.5 million. Service and maintenance revenue declined 22.3% to $0.9 million. Sales grew to 38.8% of revenue from 23.7%, contributing to the lower overall gross-margin percentage. Rental margin improved to 58.0% from 57.3%. SG&A increased 33.6% to $7.9 million, and depreciation and amortization rose 12.2% to $15.7 million.
Fourth quarter: Revenue was $23.5 million versus $18.6 million in Q4 2011; operating income was $5.5 million versus $4.7 million; net income was $3.6 million versus $3.0 million; diluted EPS was $0.29 versus $0.25.
Liquidity, debt, and operating position
- Year-end cash was $28.1 million, current assets $62.0 million, current liabilities $11.8 million, and working capital $50.3 million.
- Debt under the revolving credit facility was $0.9 million, due December 31, 2014. The $30 million facility was subject to borrowing-base availability; reported availability was $29.0 million. The company said it was in compliance with covenants at year-end.
- Operating cash flow of $35.4 million funded 2012 capital expenditures. Cash increased $11.7 million during the year.
- The rental fleet grew to 2,279 compressors and 311,401 horsepower; 77.1% of fleet capacity was utilized, compared with 74.3% in 2011. A total of 1,756 compressors were rented at year-end.
- Sales backlog was $6.6 million, down from $8.4 million, and was expected to be fulfilled in 2013.
Outlook, risks, and unusual items
- Management expected 2013 business activity to be flat or grow moderately, with industry capital spending flat to moderately higher. It anticipated similar fabrication production and possible growth in rental operations, but cautioned that these expectations were uncertain.
- Demand remains sensitive to natural-gas prices, customer spending and access to credit; management described gas prices as depressed and anticipated a slow recovery in customer capital spending.
- Customer concentration is material: EOG accounted for 32% and Devon for 12% of FY2012 revenue. EOG represented 17% of year-end receivables.
- Most rented units were on short initial terms or month-to-month arrangements, exposing revenue and equipment-cost recovery to cancellations, nonrenewals, utilization, and rental-rate changes.
- Other disclosed risks include competition, potential restrictions on hydraulic fracturing, environmental compliance and remediation, equipment and warranty claims, supplier lead times and costs, skilled-labor availability, and credit-facility covenants and renewal.
- A $645,000 inventory adjustment for obsolete inventory was recorded following the annual review. The company also reported a one-time rental-fleet equipment sale that boosted sales revenue.
- No goodwill impairment was recorded. Management concluded the qualitative review indicated impairment was not more likely than not. The auditor gave unqualified opinions on the financial statements and internal controls; management also reported effective internal control over financial reporting.
- The company had an effective $150 million shelf registration statement and stated it had no immediate plans to issue securities. It did not pay dividends and did not anticipate cash dividends in the foreseeable future.
Important facts for investors to verify
- How much of 2012 sales growth and earnings was attributable to the nonrecurring fleet-unit sale, and whether sales levels are repeatable.
- Whether rental utilization, rental pricing, and fleet growth support margins and returns on substantial equipment investment.
- Whether customer concentration—particularly EOG and Devon—and receivable exposure have changed since year-end.
- Whether management’s flat-to-moderate 2013 outlook and the $6.6 million backlog translated into subsequent results and orders.
- Borrowing-base availability, covenant headroom, and refinancing or renewal plans ahead of the December 2014 credit-facility maturity.
- Potential inventory obsolescence, environmental or warranty liabilities, and the timing and cash implications of deferred taxes.