Natural Gas Services Group, Inc. — Q2 2012 Form 10-Q
Business context and period: The company designs and manufactures natural-gas compressors and flare equipment, and primarily rents compressors. This unaudited filing covers the quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods. Financial amounts below are in U.S. dollars, generally millions unless stated otherwise.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $24.51 | $13.76 | $50.88 | $28.81 |
| Operating income | $4.83 | $3.22 | $10.45 | $6.55 |
| Net income | $3.00 | $2.01 | $6.51 | $4.51 |
| Diluted EPS | $0.24 | $0.16 | $0.53 | $0.37 |
| Operating margin, as reported | 20% | 23% | 21% | 23% |
- Revenue rose 77.5% in Q2 and 76.7% in the first half. Sales revenue increased to $10.65 million in Q2 and $23.08 million in the first half; rental revenue rose to $13.67 million and $27.41 million, respectively.
- Sales growth included a large, non-recurring sale of rental equipment to one customer, delivered in two parts—one in March and the second in Q2. Management also cited stronger compressor demand associated with activity in unconventional plays.
- Profit increased, but reported operating margin declined, principally because of higher compressor-sale costs, competitive bids, and complexity in certain custom projects. SG&A also rose, reflecting higher commissions, salaries, and staffing.
- Six-month operating cash flow was $20.35 million, versus $16.03 million in 2011. Investing activities used $6.32 million, and cash increased to $30.47 million from $16.39 million at year-end 2011. The cash-flow statement reports $8.69 million of rental equipment transferred to inventory as a non-cash transaction.
- At June 30, cash was $30.47 million, working capital was $49.63 million, and total assets were $223.83 million. The company reported $1.02 million outstanding on its revolving credit line, classified as non-current, and $28.9 million of borrowing-base availability. It reported compliance with credit covenants.
Changes, outlook, and risks
- The rental fleet totaled 2,167 compressor packages, up from 2,031 a year earlier; utilization was 74.4%, versus 72.1%. The filing also reports 1,613 compressors rented to 104 third parties at June 30, 2012, compared with 1,465 rented to 94 third parties a year earlier.
- Management expected 2012 capital expenditures to remain within internally generated cash flow, with spending directed to rental fleet additions and service vehicles. It said operating cash flow should meet capital and liquidity needs through 2012 and the beginning of 2013. No specific revenue or earnings forecast was provided.
- Management described natural-gas prices and the economy as weak, while viewing the market’s long-term trend as favorable. Its stated plan was to monitor expenses, build rental equipment in response to market needs, market idle units, and limit borrowing.
- Key risks include cyclical energy-sector demand and commodity prices, competition, possible reductions in oil and gas prices, component cost increases or supply constraints, and new safety, health, or environmental regulations. The company noted its credit facility is secured and includes financial and other covenants; a default could accelerate repayment. It reported no material legal proceedings and did not expect ordinary-course matters to have a material adverse effect.
Investor verification points
- Determine how much of the sharp sales increase and earnings growth reflects the non-recurring rental-equipment sale, and whether ordinary sales demand persisted.
- Track rental utilization, rented units, idle fleet, and the effect of natural-gas and oil-market conditions on demand.
- Assess margin pressure on custom compressor sales, competitive bidding, and rising operating and staffing costs.
- Reconcile planned fleet investment with reported cash capital expenditures and the non-cash equipment transfer; monitor cash generation and credit-facility availability.
- Review the full 10-K risk disclosures and credit agreement covenants. The filing does not provide a quantified forward earnings or revenue outlook.