Natural Gas Services Group, Inc. — Q3 2012 Form 10-Q
Business and period: The company designs, manufactures, sells, rents, and services natural gas compressors and related equipment, with rental operations as its primary focus. This unaudited quarterly report covers the three and nine months ended September 30, 2012; balance-sheet comparisons are to December 31, 2011. Amounts below are in millions except per-share data and operating statistics.
Financial results and liquidity
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $19.29 | $17.70 | $70.17 | $46.51 |
| Operating income | $4.24 | $3.64 | $14.69 | $10.19 |
| Net income | $2.61 | $2.23 | $9.11 | $6.74 |
| Diluted EPS | $0.21 | $0.18 | $0.74 | $0.55 |
| Operating margin | 22.0% | 20.6% | 20.9% | 21.9% |
- Revenue mix: Q3 rental income was $14.12 million, sales $4.94 million, and service and maintenance $0.24 million. For the first nine months, rental income was $41.53 million, sales $28.02 million, and service and maintenance $0.63 million.
- Cash flow: Nine-month cash from operations was $31.55 million, investing cash outflow $17.07 million, and financing cash inflow $0.06 million. Cash increased $14.53 million to $30.92 million. Cash capital expenditures were $17.07 million; the cash-flow statement separately reports an $8.69 million noncash transfer of rental equipment to inventory.
- Balance sheet and debt: At September 30, cash was $30.92 million, working capital $47.54 million, total assets $230.13 million, and total liabilities $58.23 million. Line-of-credit debt was $0.93 million, classified as long term. The company reported $29.0 million of borrowing-base availability and compliance with its credit covenants.
- Margins and costs: Management said operating margin was relatively flat year over year in both comparison periods. Nine-month SG&A rose 38.7% to $6.12 million, and depreciation and amortization increased to $11.56 million from $10.27 million. The effective tax rate was 38% in both periods.
Changes, outlook, and risks
- Q3 revenue increased 9% year over year, chiefly from 11.4% growth in rental revenue. Nine-month revenue rose 50.8%, including a nonrecurring sale of rental units to one customer; sales revenue increased 164.2% and rental revenue 17.9%.
- The rental fleet totaled 2,236 compressor packages at quarter-end, compared with 2,076 a year earlier; utilization was 75.1%, versus 74.4%. Management attributed rental growth to industry drilling activity and demand for low- to mid-horsepower compression.
- Management expected 2012 capital expenditures not to exceed internally generated cash flow and said operating cash flow should meet capital and liquidity needs through 2012 and into early 2013. It planned to monitor expenses, build rental equipment in response to market requirements, market idle units, and limit bank borrowing. No specific revenue or earnings guidance was provided.
- Management described natural-gas prices and the broader economy as weak, while viewing the long-term market outlook as favorable. Results are exposed to commodity prices and energy-sector activity, competition, competing technologies, supplier-cost increases, and potential new safety, health, or environmental regulations. The company noted that materially lower oil and gas prices could reduce demand.
- The revolving credit facility matures December 31, 2014, is secured by specified assets, and includes a maximum leverage ratio covenant of 2.50 to 1.00. A default could accelerate repayment. The company reported no material legal proceedings and no known threatened litigation; it believes ordinary-course claims will not materially affect its financial position or results.
Important facts to verify
- Size, timing, and recurrence of the rental-equipment sale to a single customer that materially affected nine-month sales growth.
- How the reported $8.69 million equipment transfer to inventory relates to management’s discussion of rental-fleet investment and equipment sold.
- Whether fleet utilization and customer demand support further rental-fleet spending amid weak natural-gas prices.
- Actual borrowing-base availability, covenant headroom, and the company’s capital-spending plans relative to its cash-flow outlook.
- Potential effects of energy prices, supplier costs, and regulatory changes on margins and demand.