Natural Gas Services Group, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. The company fabricates, sells, rents, and services natural-gas compression equipment, with rental operations its primary focus.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total revenue | $24.0 million | $26.4 million; down 9.1% |
| Sales revenue | $7.8 million | $12.4 million; down 37.0% |
| Rental income | $16.0 million | $13.7 million; up 16.5% |
| Operating income | $6.1 million | $5.6 million |
| Operating margin | 25%, per management | 21% |
| Net income | $4.0 million | $3.5 million |
| Diluted EPS | $0.32 | $0.29 |
| Cash from operations | $10.9 million | $14.8 million |
| Capital expenditures | $7.7 million | $1.8 million |
| Cash and cash equivalents | $31.3 million at March 31 | $28.1 million at December 31, 2012 |
| Working capital | $53.1 million at March 31 | $50.3 million at December 31, 2012 |
| Debt | $0.9 million, all under the line of credit | Unchanged from December 31, 2012 |
Revenue declined because lower equipment sales more than offset rental growth. Management attributed weaker sales primarily to project timing and a prior-year one-time sale from the rental fleet. Higher rental demand, especially for low- to mid-horsepower compression, supported rental growth. The rental fleet totaled 2,328 compressors and 319,686 horsepower; utilization was 78.7%, versus 2,135 compressors and 75.0% a year earlier. Depreciation and amortization rose to $4.2 million from $3.8 million as the fleet expanded.
Operating cash flow was lower year over year despite higher net income, with working-capital movements contributing to the difference. Cash from operations and cash on hand funded fleet and service-vehicle investment. Current assets were $61.9 million and current liabilities $8.8 million at quarter-end. The company reported $29.0 million of borrowing-base availability under its revolving facility; the facility matures December 31, 2014, and the company was in compliance with its covenants. Its weighted-average borrowing rate for the quarter was 1.45%.
Outlook, risks, and unusual items
- Management expected 2013 capital expenditures to depend on customer compression needs, not exceed internally generated cash flow, and be funded by operating cash flow. It believed cash flows would meet capital and liquidity needs through 2013 and into early 2014.
- Management planned to monitor costs, build rental equipment in response to market requirements, market idle compressors, and limit borrowing. It described the long-term market outlook as favorable, while noting weak natural-gas prices, economic uncertainty, and uncertain demand in conventional natural-gas markets.
- The company identified exposure to oil and gas activity and commodity prices, competition and competing technologies, potential component-cost increases, and new safety, health, or environmental regulations that could require significant investment. It noted major compressor components typically require two to three months’ lead time, but said it believed alternative suppliers were available.
- A $223,000 gain was recorded after a $275,000 economic-development liability was settled for $52,000 based on job-growth performance. This increased other income and net income for the quarter.
- Purchase obligations totaled $3.6 million, including a paint-and-coating purchasing commitment; the related vendor-fee liability was $222,000 at quarter-end. The filing said ordinary-course legal matters were not expected to have a material adverse effect and reported no material legal proceedings.
- Management said disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Reconcile the rental-income presentation: the income statement reports $16.007 million, while the MD&A narrative cites approximately $15.8 million.
- Assess whether rental utilization and fleet growth can sustain rental-revenue gains, and whether lower equipment sales were temporary or signal weaker customer capital spending.
- Review the planned pace and returns of fleet capital expenditures, cash-flow conversion, and the company’s reliance on operating cash flow to fund investment.
- Confirm borrowing-base availability, covenant compliance, and the December 2014 credit-facility maturity; availability is collateral-dependent and the lender may adjust borrowing-base components.
- Consider the impact of commodity prices, customer activity, component costs and supply lead times, regulatory requirements, and contractual purchase commitments on future results.