Natural Gas Services Group, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed March 14, 2012. The company rents, manufactures and sells natural-gas compression equipment and provides related service and maintenance, primarily for U.S. unconventional gas production.
Financial performance and position
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Revenue | $65.2 million | $53.9 million | +20.9% |
| Operating income | $14.9 million | $11.4 million | +30.8% |
| Net income | $9.8 million | $7.0 million | +38.9% |
| Diluted EPS | $0.80 | $0.58 | +$0.22 |
| Gross margin (company-defined, non-GAAP) | $34.8 million; 53.3% | $29.2 million; 54.1% | Margin down 0.8 percentage points |
| EBITDA (company-defined, non-GAAP) | $29.7 million | $23.4 million | +26.7% |
| Cash from operations | $33.6 million | $28.8 million | +$4.8 million |
| Capital expenditures | $36.5 million | $21.9 million | +$14.6 million |
- Revenue growth reflected rental revenue of $48.6 million (+19.5%), equipment and other sales of $15.4 million (+24.6%), and service and maintenance revenue of $1.1 million (+29.0%). Rental activity represented about 74.6% of revenue.
- Overall gross margin percentage declined as rental margin fell to 57.3% from 60.2%, largely because of higher maintenance and service costs. Sales margin improved to 40.3% from 35.3%.
- Operating income included higher depreciation and amortization of $14.0 million, up 17.6%, associated with fleet additions. Other income was $0.8 million, primarily a gain on sale of the former headquarters; interest expense declined to $55,000.
- At year-end, cash was $16.4 million, current assets $49.5 million, current liabilities $12.3 million, and working capital $37.2 million. Total assets were $212.2 million and equity $161.5 million.
- Debt was approximately $1.0 million, due in 2014, under a secured revolving facility with a $30 million commitment, subject to collateral availability. The company reported compliance with loan covenants. Cash declined $2.7 million during 2011; operating cash flow less capital expenditures was approximately negative $2.9 million.
Fourth-quarter results
Unaudited Q4 2011 revenue was $18.6 million versus $16.2 million in Q4 2010; operating income was $4.7 million versus $3.4 million; net income was $3.0 million versus $2.0 million; and diluted EPS was $0.25 versus $0.16.
Material changes and business developments
- Rental-fleet utilization improved to 74.3% from 67.9%. The fleet grew to 2,120 compressors and approximately 287,764 horsepower; 1,575 units were rented at year-end, versus 1,297 a year earlier.
- Sales backlog rose to approximately $8.4 million from $1.9 million and was expected to be fulfilled in 2012.
- Natural gas prices remained weak: the filing cites $2.98/MMBtu at December 31, 2011, down from $4.19 a year earlier. Management attributed cautious gas-sector spending partly to low gas prices, economic uncertainty and tighter credit.
- Inventory increased to $27.0 million from $21.5 million, reflecting higher fabrication activity. Accounts receivable rose by about $0.4 million.
- Subsequent event: on March 12, 2012, the company agreed to sell 48 used rental compressors to an existing customer for $10.7 million. The units had $964,000 of expected rental income over their remaining contract periods.
Outlook, risks and contingencies
- Management expected 2012 activity to only modestly exceed 2011, with industry capital spending flat to moderately higher and fabrication production likely at a similar level. It anticipated rental growth if the economic recovery continued, but provided no specific earnings or revenue guidance.
- Management expected 2012 capital expenditures to depend on customer demand and believed operating cash flow and available borrowing capacity would support planned needs; it also noted that unanticipated spending or acquisitions could require additional capital.
- Key exposures include volatile natural-gas prices and customer spending, short initial rental terms and month-to-month renewals, competition, potential restrictions on hydraulic fracturing, environmental and safety liabilities, and access to financing.
- Customer concentration is material: EOG and Devon accounted for 17% and 16% of 2011 revenue. EOG, Devon and Linn represented 39%, 20% and 11% of year-end receivables, respectively.
- The company reported no material expected environmental expenditures under current requirements and no litigation expected to materially affect financial results. It identified potential environmental cleanup, warranty, indemnification and insurance shortfall exposures. Goodwill impairment testing in 2011 found no impairment.
- The 2011 financial statements received an unqualified audit opinion from BDO; management and the auditor concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- Whether improved fleet utilization, rental pricing and the $8.4 million backlog convert into sustained revenue and cash generation.
- Whether rental maintenance costs and depreciation from fleet investment continue to pressure margins and returns on capital.
- The cash, working-capital and earnings effects of the $10.7 million compressor sale, including foregone rental income and subsequent reinvestment needs.
- Customer concentration, receivable collectability, and renewal or re-rental rates for the largely short-term rental contracts.
- Borrowing-base availability, covenant compliance and funding capacity as capital expenditures and customer demand change.