Natural Gas Services Group, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. The company fabricates, sells, rents and services natural-gas compression equipment, with rental operations as its primary focus. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $17.7 million | $14.2 million | $46.5 million | $37.7 million |
| Operating income | $3.6 million | $3.4 million | $10.2 million | $8.0 million |
| Net income | $2.2 million | $2.2 million | $6.7 million | $5.1 million |
| Diluted EPS | $0.18 | $0.18 | $0.55 | $0.41 |
| Operating margin, as reported by management | 20.6% | 23.6% | 21.9% | 21.2% |
- Q3 revenue rose 24.7%; sales grew 30.1% and rental revenue 22.7%. Nine-month revenue rose 23.3%, led by sales growth and higher rental revenue.
- Q3 operating margin declined as compressor sales costs, custom-project complexity, depreciation and SG&A increased. Nine-month margin improved, which management attributed mainly to higher flare-sale margins and a larger flare-sales contribution.
- Nine-month operating cash flow was $24.1 million, versus $22.2 million in 2010. Investing cash outflow was $26.9 million, including $27.8 million of property and equipment purchases, principally for rental equipment and service vehicles. Cash declined to $16.5 million from $19.1 million at year-end 2010.
- At September 30, working capital was $34.9 million, down from $40.4 million at December 31, 2010. Total assets were $202.7 million; total liabilities were $44.3 million; stockholders’ equity was $158.3 million.
- Debt was $1.9 million, entirely drawn on the revolving credit line; the company reported no long-term debt. The $20 million secured facility had a 1.98% interest rate and a December 31, 2011 maturity. The company said it was reviewing a replacement facility and expected one before expiration; it was in covenant compliance at quarter-end.
Material changes and unusual items
- The rental fleet grew to 2,076 compressor packages from 1,849 a year earlier; utilization rose to 74.4% from 68.5%. The company reported 1,545 compressors, totaling 215,704 horsepower, rented to 99 third parties, compared with 1,266 units rented to 101 third parties a year earlier.
- Nine-month other income included a $0.7 million gain from the sale of the former headquarters. Lower interest expense reflected the payoff of the former credit facility and lower borrowing costs and balances.
- Inventory increased to $23.9 million from $21.5 million at year-end. The filing reports different September 30 inventory-obsolescence allowances in different sections: $833,000 on the balance sheet and $883,000 in the inventory note.
Outlook, risks and contingencies
- Management said 2011 capital spending was not expected to exceed internally generated cash, and that operating cash flow should cover capital and liquidity needs through 2011 and early 2012. Spending was to be tied to customer demand; the company planned to monitor expenses, market idle equipment and limit bank borrowing.
- Management described near-term compression demand as uncertain: natural-gas prices had stalled and remained too low to encourage some customer investment, while the broader economy remained weak. It viewed the longer-term market trend favorably and cited year-to-date revenue growth.
- Key risks include commodity-price-driven reductions in customer drilling and spending, competition, customer credit and retention, component cost or supply disruptions, and new safety, health or environmental requirements. The revolving facility’s imminent maturity and covenant/default provisions are liquidity considerations.
- The company disclosed no material legal proceedings or known threatened litigation. It reported a $275,000 development incentive liability contingent on staffing requirements through April 9, 2016, and a remaining $253,000 liability tied to a vendor purchase arrangement. Contractual obligations totaled $7.0 million, including purchase obligations and leases.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Status, terms and availability of the replacement credit facility, given the December 31, 2011 maturity of the existing facility.
- Whether fleet utilization and rental demand can be sustained if natural-gas prices and customer activity remain weak.
- Whether elevated capital spending, depreciation and custom-project costs will affect margins and cash generation.
- The inventory allowance discrepancy ($833,000 versus $883,000) and the reported nine-month sales-growth percentage: the revenue figures imply approximately 52.6%, while MD&A states 53.6%.
- Progress toward the staffing conditions on the $275,000 incentive and remaining commitments under the vendor purchase agreement.