Natural Gas Services Group, Inc. — Q3 2013 Form 10-Q
Business context and period. Unaudited results cover the quarter and nine months ended September 30, 2013, compared with the corresponding 2012 periods. The company manufactures and sells compressors and related equipment, but primarily rents natural-gas compressors; it also provides service and maintenance and sells flare systems. Management reports one business segment.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $21.865 million, up 13% from $19.290 million | $66.106 million, down 5.8% from $70.174 million |
| Net income | $3.394 million vs. $2.606 million | $11.233 million vs. $9.114 million |
| Diluted EPS | $0.27 vs. $0.21 | $0.90 vs. $0.74 |
| Operating income | $5.088 million vs. $4.242 million | $17.070 million vs. $14.692 million |
| Operating margin | 23% vs. 22% | 26% vs. 21% |
Revenue mix and drivers. Q3 rental revenue rose 26% to $17.805 million, while sales fell 21% to $3.893 million; service and maintenance revenue was $0.167 million. For the nine months, rental revenue increased 21.7% to $50.533 million, but sales declined 46.3% to $15.057 million and service and maintenance fell to $0.516 million. Management attributed weaker sales principally to project timing and, for the nine-month comparison, a large one-time fleet sale in 2012. Higher rental revenue reflected industry activity and demand for low- to mid-horsepower compression. Rental-fleet utilization increased to 80.5% from 75.1%; the fleet included 2,466 packages, compared with 2,236 a year earlier.
Costs and margins. Depreciation and amortization increased to $4.652 million in Q3 and $13.326 million for nine months, largely reflecting rental-fleet additions. SG&A was $2.142 million for Q3 and $6.023 million for nine months. Management said the operating-margin improvement reflected a higher rental share of revenue and control of compressor-sales costs.
Cash, liquidity and debt
- At September 30, cash was $27.727 million, working capital was $52.700 million, and total assets were $249.900 million. Cash was $28.086 million and working capital $50.250 million at December 31, 2012.
- Nine-month operating cash flow was $28.397 million, versus $31.546 million in 2012. Investing cash use, all reported as property and equipment purchases, was $29.175 million versus $17.074 million. Cash declined by $0.359 million over the period.
- Capital spending was $29.2 million, primarily for rental equipment and service vehicles. The filing says operating cash flow and cash on hand funded this spending.
- Line-of-credit borrowings were $0.747 million, down from $0.897 million at year-end 2012. The secured revolving facility has a $30 million commitment, subject to collateral availability; reported borrowing-base availability was $28.9 million. The weighted-average borrowing rate for the nine-month period was 1.44%. The facility matures December 31, 2014, and the company reported compliance with its covenants.
Outlook, risks and unusual items
Management gave no specific revenue or earnings guidance. It planned to monitor costs, build rental equipment in response to market requirements, market idle compressors, and limit borrowing. Remaining-2013 capital expenditures were expected to depend on customer needs and not exceed internally generated cash flows and cash on hand; management said operating cash flow should meet foreseeable capital and liquidity needs. These are forward-looking expectations, not guarantees.
Management described the longer-term market outlook as favorable but noted that natural-gas prices remained insufficient to encourage some producer investment, the domestic economy remained weak, and conventional-market demand was uncertain. Results are exposed to industry cycles and commodity prices, competition, competing technologies, and potential safety, health and environmental regulation requiring additional investment. Component-price increases or supply constraints could also affect results; the company said it had alternative suppliers and no formal continuing supply contracts for major components.
A $0.223 million gain on extinguishment of a liability was recorded after settling a Midland Development Corporation obligation for $0.052 million; the related liability had been $0.275 million. The company also reported $0.206 million remaining under a vendor purchase agreement liability. It disclosed ordinary-course legal proceedings but no material pending or threatened litigation, and said it did not expect them to have a material adverse effect. Off-balance-sheet arrangements included operating leases and purchase agreements; management did not expect them to materially affect liquidity or capital resources.
Important facts for investors to verify
- Whether higher fleet utilization and rental growth continue to offset the volatility and decline in equipment sales.
- Actual rental-fleet utilization, additions, capital spending, and cash generation versus management’s conditional outlook.
- The extent to which the 2012 one-time fleet sale affects comparisons and whether sales recover as project timing changes.
- Availability and terms of the secured credit facility, covenant compliance, and the December 2014 maturity.
- Exposure to natural-gas and oil prices, customer capital spending, supplier costs, and regulatory requirements.