Natural Gas Services Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; financial statements are unaudited. NGS provides, fabricates, rents, sells, and services natural gas compression equipment, with rental operations as its primary business.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $31.4m | $22.0m | $84.9m | $62.3m |
| Operating income (loss) | $4.9m | $(0.3)m | $6.0m | $0.7m |
| Net income (loss) | $2.2m | $(0.1)m | $3.0m | $0.2m |
| Diluted EPS | $0.18 | $(0.01) | $0.25 | $0.02 |
| Adjusted EBITDA (non-GAAP) | $11.8m | $7.7m | $29.5m | $21.4m |
Q3 operating margin was approximately 15.6%, versus negative 1.3% a year earlier; nine-month operating margin was approximately 7.1%, versus 1.2%. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results or cash flow.
- Revenue mix: Q3 rental revenue rose 48.7% to $27.7m; sales fell 54.2% to $1.4m; aftermarket services increased to $2.3m from $0.3m. For nine months, rental revenue grew 38.3% to $74.5m, sales declined to $6.0m from $7.3m, and aftermarket services rose to $4.4m from $1.1m.
- Cash flow and investment: Nine-month operating cash flow was $25.7m, compared with $20.2m. Capital purchases of rental, property, and other equipment were $128.6m, versus $35.3m; investing cash outflow was $128.7m. Cash ended at $0.2m, down from $3.4m at year-end 2022.
- Liquidity and debt: Working capital was $22.1m, down from $23.7m at December 31, 2022. Long-term debt was $128.0m, versus $25.0m; the company reported a 8.98% weighted-average borrowing rate and approximately $47m of availability, subject to borrowing-base determination. It was in compliance with financial covenants at quarter-end.
- Balance sheet: Total assets were $451.8m, including net rental equipment of $355.4m. Accounts receivable increased to $28.0m from $14.7m at year-end; the company attributed the increase mainly to timing differences in performance and customer payments. Accounts payable rose to $30.6m from $6.5m.
Changes, outlook, and risks
- Revenue and profitability improved year over year, driven principally by rental growth and greater demand for high-horsepower units. Horsepower utilization reached 78.7%, up from 72.2%; unit utilization was 63.3%, up from 60.5%. Rented horsepower increased 31.0% year over year.
- Rental fleet investment expanded capacity: NGS reported 509,198 fleet horsepower at quarter-end, compared with 423,658 a year earlier. Rental equipment additions drove higher depreciation and borrowing needs.
- Management expects compressor sales to remain low for the rest of 2023 as customers favor rentals over purchases. Its plan is to align fabrication with demand and focus on marketing idle units. It expects remaining-2023 capital expenditures not to exceed internally generated cash, cash on hand, and borrowing availability; additional demand could require expanded borrowing capacity.
- Industry demand depends on oil and natural gas activity and commodity prices. Risks include lower commodity prices, customer capital-spending constraints, competition, inflation and supplier lead times, and changing safety, health, and environmental regulation. Management said it has generally been able to pass cost increases through to rental rates and sales prices, but warned that inability to do so could adversely affect results.
- Nine-month results included a $0.8m impairment of capitalized software costs. SG&A included $1.2m of severance expense and a $0.4m one-time increase in legal costs related to a cooperation agreement. The CEO remained interim while the company searched for a permanent replacement.
- Management concluded internal control over financial reporting was not effective at September 30, 2023 because of a continuing material weakness in inventory work-in-process classification, physical counts, and review and approval of inventory adjustments. Remediation actions are underway; management nevertheless concluded the filed financial statements fairly present the company’s financial position and results.
- NGS reported no material legal proceedings or threatened material litigation and no subsequent events requiring disclosure. It held an $11.5m federal income tax receivable related to prior-year net operating loss carrybacks.
Important facts for investors to verify
- Whether inventory-control remediation is completed and tested, and whether the material weakness is resolved.
- Whether operating cash flow and collections keep pace with major fleet investment, receivables, and supplier payments.
- Borrowing-base availability, interest expense and rates, covenant compliance, and any need to expand the credit facility.
- Continued utilization and returns on the high-horsepower fleet, and whether management’s capital-spending expectations hold.
- Progress toward appointing a permanent CEO and any further costs or governance changes related to the cooperation agreement.