Natural Gas Services Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. NGS manufactures, rents, sells, and services natural gas compression equipment, with rental operations its primary business.
Financial performance
- Revenue: $26.6 million, up 30.9%. Rental revenue rose 32.7% to $22.7 million; sales increased 3.5% to $3.0 million; service and maintenance revenue increased to $0.9 million from $0.3 million.
- Profitability: Operating income was $0.4 million versus $0.4 million; net income was $0.37 million versus $0.34 million. Diluted EPS was $0.03 in both periods. Operating margin was approximately 1.5% versus 1.9%; net margin was approximately 1.4% versus 1.7%.
- Adjusted EBITDA: $7.8 million, up 13.9% from $6.8 million. This is a non-GAAP measure; the filing cautions it is not a substitute for GAAP results or cash flow.
- Cash flow and investment: Operating cash flow was $18.2 million versus $5.0 million. Investing cash outflow was $47.8 million, primarily for rental and other equipment; financing provided $33.7 million, including $36.0 million of loan proceeds. Cash ended at $7.4 million, up from $3.4 million at year-end.
- Liquidity: Working capital was $17.6 million at March 31, down from $23.7 million at December 31, 2022. Current assets were $59.7 million and current liabilities $42.0 million.
- Debt: Long-term debt was $61.0 million, compared with $25.0 million at year-end. The company reported an 8.55% weighted-average borrowing rate, approximately $77 million of additional borrowing availability subject to the borrowing base, and compliance with financial covenants.
- Assets and equity: Total assets were $376.8 million versus $328.2 million at year-end; net rental equipment was $287.2 million versus $246.5 million. Stockholders’ equity was $230.7 million.
Material changes and operating trends
- Rental growth reflected increased high-horsepower rentals and rate increases intended to offset inflation. Rented horsepower rose 9.3% year over year, while rented compressor units fell 2.4%; horsepower utilization increased to 77.4% from 72.8%.
- Rental costs increased 26.2%, less than rental revenue growth, but the company cited inflation in labor and parts and higher quarter-end make-ready charges. Cost of sales rose 62.8%, partly due to higher parts sales at lower-than-historical margins.
- SG&A increased 82.3% to $4.6 million, including $1.0 million in severance-related expense, increased stock-option compensation, and executive recruiting charges. Adjusted EBITDA included $0.6 million of severance expenses.
- The February 2023 amended and restated credit agreement replaced the prior facility with a five-year revolving facility initially committed at $175 million, subject to borrowing-base availability; maturity is February 2028. The borrowing base was approximately $138 million at quarter-end.
Outlook, risks, and other notable items
- Management expects compressor sales to remain low for the rest of 2023 as customers favor rentals over purchases. It expects demand growth for large-horsepower compression and plans to prioritize fleet additions responsive to market requirements.
- Management said forecast capital expenditures for the rest of 2023 are not expected to exceed internally generated cash, cash on hand, and borrowing availability. Additional demand or spending beyond available resources could require expanded borrowing capacity or equity financing; no assurance was given that expanded borrowing would be available.
- Risks include the cyclical energy-services market and sensitivity to oil and gas activity, commodity prices, customer capital spending, inflation and component lead times, competition, and potential regulatory requirements. The company noted that continued cost increases could hurt results if rental rates and sales prices cannot keep pace.
- Material weakness: Internal control over financial reporting was deemed ineffective at March 31, 2023 because of inventory-control issues involving work-in-process classification, physical counts, and review and approval of inventory adjustments. Management described remediation efforts, including revised procedures, staff training, stronger reviews, and a third-party controls assessment; the weakness remained unresolved at quarter-end.
- The company reported no material legal proceedings, no identified material subsequent events, and no rental-equipment impairment at March 31, 2023. It adopted the credit-loss accounting standard effective January 1, 2023, with no material financial-statement impact.
Important facts for investors to verify
- Whether rental demand, utilization, and rate increases continue to support revenue growth and offset higher operating costs.
- Actual fleet capital spending, cash generation, borrowing-base availability, and compliance with credit-agreement covenants as investment expands.
- Progress in remediating the inventory-control material weakness and whether future filings report effective controls.
- The sustainability of margins given lower parts-sales margins, inflation, repair costs, and the company’s expectation of subdued compressor sales.
- The effects of oil and gas market conditions and customer spending decisions on rental demand and equipment utilization.