Natural Gas Services Group, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; unaudited. The company fabricates, sells, rents and services natural-gas compression equipment, with rental operations its primary business. Amounts below are in millions except per-share data and where noted.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $13.76 | $11.90 | $28.81 | $23.45 |
| Operating income | $3.22 | $2.39 | $6.55 | $4.62 |
| Net income | $2.01 | $1.54 | $4.51 | $2.91 |
| Diluted EPS | $0.16 | $0.13 | $0.37 | $0.24 |
| Operating margin, calculated from statements | 23.4% | 20.1% | 22.7% | 19.7% |
- Q2 revenue rose 15.9% year over year, driven mainly by rental revenue (+17.1%); sales increased 6.8% and service and maintenance 16.3%. First-half revenue grew 22.6%, including sales growth of 78.3% and rental growth of 13.7%.
- First-half operating cash flow was $16.0 million, versus $15.0 million in 2010. Capital expenditures were $19.5 million, versus $6.0 million; cash declined to $16.9 million from $19.1 million at year-end 2010.
- At June 30, working capital was $35.8 million, down from $40.4 million at year-end. Total assets were $198.0 million and stockholders’ equity $155.7 million.
- Debt was $2.0 million, all drawn on the revolving credit facility; there was no long-term debt. The $20 million facility’s borrowing base was $20 million, its reported rate was 1.954%, and it matures December 31, 2011. The company reported compliance with covenants, including a maximum leverage ratio of 2.50x.
Changes and operating developments
- Rental fleet utilization rose to 72.1% from 67.9% a year earlier. The quarter-end fleet comprised 2,031 compressor packages, versus 1,806 a year earlier; separately, the company reported 1,465 compressors totaling 201,951 horsepower rented to 94 customers, compared with 1,227 units and 160,140 horsepower rented to 97 customers a year earlier.
- Depreciation and amortization increased 15.5% in the first half as rental equipment was added. First-half SG&A declined 6.6%; rental and parts-related costs contributed to a lower reported six-month margin measure.
- Other income was $0.753 million for the first half, versus $0.043 million in the comparable period. The cash flow statement reports a $0.702 million gain on asset disposals; the filing does not clearly reconcile the difference or fully explain the other-income increase.
- Management describes the six-month “overall operating margin” as 56% versus 57%, which does not match operating income divided by revenue (22.7% versus 19.7%). The filing text does not clearly define this measure.
Outlook, risks and notable items
- Management said demand improved into early 2011, but natural-gas prices had stalled and near-term compression demand remained uncertain. It viewed the long-term market trend as favorable.
- For 2011, planned capital spending was not expected to exceed internally generated cash flow; spending would focus on rental fleet additions and service vehicles. Management expected operating cash flow to meet capital and liquidity needs through year-end, while noting that unexpected spending or acquisitions could require additional capital.
- Key risks include natural-gas and oil price weakness reducing customer drilling and equipment demand, customer credit and retention, supplier/component cost increases, competition, and potential new safety, health or environmental requirements. The company also disclosed variable-rate debt exposure and no use of interest-rate derivatives.
- The revolving facility’s December 31, 2011 maturity, collateral and covenants are important liquidity considerations. Contractual obligations totaled $7.393 million, including $4.260 million of purchase obligations; the filing also describes an exclusive paint-and-coating purchase commitment of up to $4.8 million.
- Other contingent items include a $275,000 economic-development incentive subject to staffing requirements through April 2016 and a remaining $253,000 vendor-related long-term liability. Management reported no material legal proceedings. After quarter-end, the company acquired its Farmington branch facility for $775,000 using escrow proceeds from the sale of its former Midland property as part of a like-kind exchange.
Important facts for investors to verify
- Whether the revolving credit facility was renewed, refinanced or repaid before its December 31, 2011 maturity.
- Whether utilization, rental rates and customer demand sustained growth amid stalled natural-gas prices, and how fleet additions affected returns and cash generation.
- The composition and recurrence of first-half other income and the asset-disposal gain.
- The definition and calculation of management’s reported 56% six-month operating margin, which differs from the statement-based operating margin.
- Whether the company met its cash-flow and capital-spending outlook and complied with its credit covenants and contingent staffing and purchasing commitments.