Natural Gas Services Group, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing provides annual comparisons with 2021; standalone fourth-quarter results are not clearly provided.
Business context
NGS manufactures, fabricates, rents, sells and services natural-gas compressors and flare systems. Rental compression is its principal business, serving oil and gas producers and midstream customers. The Permian Basin generated approximately 55.6% of 2022 rental revenue. Occidental Permian, Ltd. (Oxy) accounted for 42% of revenue and 55% of year-end receivables.
Financial performance and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Revenue | $84.8 million | $72.4 million |
| Operating income (loss) | $0.4 million | $(12.4) million |
| Net loss | $(0.6) million | $(9.2) million |
| Adjusted EBITDA (non-GAAP) | $29.2 million | $18.7 million |
| Adjusted gross margin (non-GAAP) | $38.5 million; 45.3% | $27.1 million; 37.4% |
| Cash from operations | $27.8 million | $28.5 million |
| Capital expenditures | $65.1 million | $25.7 million |
| Cash and cash equivalents at year-end | $3.4 million | $22.9 million |
| Current assets / current liabilities | $54.1 million / $30.4 million | $65.1 million / $20.3 million |
| Revolving credit borrowings at year-end | $25.0 million | None |
| Stockholders’ equity at year-end | $230.1 million | $235.9 million |
Revenue growth was led by rental income, up 17.0% to $74.5 million; sales rose 24.5% to $8.6 million, while service and maintenance revenue declined to $1.8 million from $1.9 million. The company reported a GAAP gross margin of $14.9 million, compared with $2.3 million in 2021. Interest expense was $0.4 million, and 2022 income tax expense was $0.5 million.
Material changes versus 2021
- Operating results improved substantially as higher rental revenue and utilization contributed to the return to operating income. Rental fleet horsepower utilization rose to 74.8% from 71.2%; unit utilization increased to 65.3% from 62.0%.
- Adjusted EBITDA increased 55.8%. Management’s adjusted measures exclude items including depreciation, inventory allowance, equipment retirements, severance and stock compensation; they are not GAAP measures.
- Capital expenditures increased to $65.1 million, primarily for rental equipment. Operating cash flow did not cover this investment; the company drew $25.0 million on its revolving facility and spent $6.7 million repurchasing shares. Cash declined by $19.6 million.
- SG&A rose $2.9 million to $13.6 million, including $2.5 million of severance costs. Equipment retirement losses fell to $0.2 million from $3.1 million; 124 units were retired in 2022.
- The company replaced its prior credit agreement after year-end: a February 2023 facility provides an initial $175 million commitment, subject to borrowing-base limits and covenants, and matures in 2028. The facility is secured and bears variable rates.
Outlook, risks and unusual items
- Management expected demand for medium- and large-horsepower rentals to remain strong through 2023, but anticipated minimal compressor sales. Planned 2023 capital expenditures were expected to exceed internally generated cash flow by a significant amount; management said cash, operating cash flow and the new facility should fund planned needs.
- Supply-chain disruption, inflation in parts and labor, longer component lead times, and difficulty passing higher costs through to customers could pressure results. The business is exposed to commodity-price and customer-spending cycles, competition, environmental and climate regulation, and interest-rate changes.
- Customer concentration is significant: Oxy represented 42% of annual revenue versus 40% in 2021 and 55% of year-end receivables versus 46%. Management described the relationship and payment history as strong, but loss or payment deterioration could materially affect the company.
- Of 1,221 rented compressors at year-end, 841 were month-to-month, creating renewal and utilization risk. There was no sales backlog at year-end, versus $1.5 million in 2021.
- Management identified a material weakness in inventory controls involving work-in-process classification, physical counts, and approval of inventory adjustments. It concluded disclosure controls and internal control over financial reporting were ineffective at year-end, while stating the audited financial statements were fairly presented. Remediation was underway; the auditor did not provide an ICFR attestation.
- Management disclosed planned CEO retirement effective June 30, 2023 and an interim CFO following the prior CFO’s resignation. The IRS selected the company’s 2015, 2016, 2017 and 2019 returns for examination; an $11.5 million federal income-tax receivable remained on the balance sheet. Management said ordinary-course legal matters were not expected to have a material effect and reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Progress and testing of the inventory-control remediation, including whether the material weakness is resolved.
- Borrowing-base availability, outstanding debt, variable-rate interest costs, covenant headroom and actual 2023 capital spending under the new facility.
- Rental utilization, contract renewals and customer concentration, particularly Oxy’s share of revenue and receivables.
- Collection and examination status of the $11.5 million tax receivable and potential outcomes of the IRS review.
- Execution of management succession plans and whether supply costs, component availability and rental pricing affect margins.