Natural Gas Services Group, Inc. — Q1 2012 Form 10-Q
Business context and period: The company manufactures, sells, and rents natural-gas compressors and related equipment, with compressor rentals its primary focus. This unaudited report covers the three months ended March 31, 2012, compared with the same quarter of 2011; balance-sheet comparisons are to December 31, 2011. Amounts below are in U.S. dollars unless otherwise noted.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $26.4 million | $15.1 million; up 74.8% |
| Sales revenue | $12.4 million | $3.9 million; up 220.6% |
| Rental revenue | $13.7 million | $10.9 million; up 26.3% |
| Operating income | $5.6 million | $3.3 million |
| Net income | $3.5 million | $2.5 million |
| Basic / diluted EPS | $0.29 / $0.29 | $0.21 / $0.20 |
| Operating margin | 21% | 22%, as reported by management |
| Cash from operations | $14.8 million | $9.0 million |
| Cash and cash equivalents | $29.4 million at March 31 | $16.4 million at December 31, 2011 |
| Working capital | $45.2 million at March 31 | $37.2 million at December 31, 2011 |
| Debt | $1.0 million line-of-credit balance, classified as long-term | Unchanged from December 31, 2011 |
Reported investing cash outflow was $1.8 million. The company also disclosed a noncash $4.0 million transfer of rental equipment to inventory. Management separately said it invested $5.8 million in rental fleet equipment and service vehicles, exclusive of $4.0 million of rental equipment sold; the filing does not clearly reconcile these figures to the investing cash-flow line. The effective tax rate was 38% in both periods. Interest expense was $3,000, versus $9,000; other income was $36,000, versus $699,000.
The amended revolving facility has a $30 million commitment, subject to collateral availability, and reported borrowing-base availability of approximately $28.9 million. It matures December 31, 2014. The company reported compliance with its covenants at quarter-end.
Material changes versus Q1 2011
- Revenue growth reflected both higher rental income and a large, non-recurring sale of rental units to one customer. The first half of that order was delivered in March; the remaining half was scheduled for Q2 2012.
- Rental fleet utilization rose to 75% from 68%; the company reported 2,135 compressors rented to 103 third parties at quarter-end, compared with 1,399 units rented to 95 parties a year earlier.
- Operating margin declined to 21% from 22%, primarily due to higher compressor-sale costs, competitive bids, complexity on custom projects, and increased depreciation and SG&A.
- SG&A increased 30.6% to $1.8 million, reflecting higher commissions and salaries and increased staffing. Depreciation and amortization rose to $3.8 million from $3.3 million as the rental fleet expanded.
- Other income fell from $699,000 to $36,000, mainly because Q1 2011 included a gain on sale of the former headquarters and manufacturing facility.
Outlook, risks, and contingencies
- Management expected 2012 capital expenditures to remain within internally generated cash flow and believed operating cash flow would meet capital and liquidity needs through 2012 and the beginning of 2013. Plans included monitoring expenses, building rental equipment in response to customer requirements, marketing idle compressors, and limiting bank borrowing. These are expectations, not a formal earnings forecast.
- Management described natural-gas prices as weak and the economy as not fully recovered, while viewing the long-term market outlook favorably. Business demand is cyclical and sensitive to oil and gas prices, producer capital spending, and unconventional drilling activity.
- Risks include reduced customer demand from sustained low commodity prices, competition, customer credit and retention, supplier cost increases or delays, and potential new safety, health, or environmental regulations requiring capital spending. The company said major components generally have two-to-three-month lead times and it believes alternative suppliers are available.
- The credit agreement is secured and includes a maximum leverage ratio of 2.50 to 1.00, other restrictive covenants, and acceleration provisions upon default. A default could adversely affect liquidity and access to credit.
- Contingencies include a $275,000 economic-development incentive subject to staffing requirements through April 9, 2016; noncompliance could require repayment. A paint-and-coating purchase arrangement carries a remaining recorded liability of approximately $243,000 and commitments disclosed at $300,000 annually through 2016, with additional amounts thereafter.
- Management reported no material pending legal proceedings and did not expect ordinary-course proceedings to have a material adverse effect. Disclosure controls were assessed as effective; no material quarterly change in internal control over financial reporting was identified.
Key facts for investors to verify
- How much of Q1 revenue and earnings depended on the one-time rental-equipment sale, and whether the scheduled Q2 delivery occurred.
- Whether higher fleet utilization and rental growth continue, particularly under weak natural-gas pricing and uncertain producer spending.
- The cash-flow contribution from deferred income and working-capital movements, and the reconciliation of management’s $5.8 million investment statement with reported investing cash flows.
- Whether sale-project costs, competitive pricing, SG&A, and depreciation continue to pressure margins.
- Ongoing compliance with credit-facility covenants and collateral requirements, and fulfillment of the staffing and vendor-purchase commitments.