Business context and reporting period
Natural Gas Services Group, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company designs, manufactures, sells, and rents natural-gas compressors and related equipment, with rental operations its primary focus. It also sells flare systems and provides compressor service and maintenance.
Financial performance and position
Amounts below are in millions of dollars except per-share data, percentages, and operating statistics.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $21.95 | $20.26 | $44.27 | $44.24 |
| Operating income | $5.09 | $5.84 | $9.45 | $11.98 |
| Operating margin | 23% | 29% | 21% | 27% |
| Net income | $3.39 | $3.84 | $6.24 | $7.84 |
| Diluted EPS | $0.27 | $0.31 | $0.49 | $0.63 |
| Operating cash flow | — | — | $18.23 | $19.42 |
| Capital expenditures | — | — | $28.46 | $18.43 |
- Q2 revenue grew 8%, led by rental income; six-month revenue was essentially flat. For the first half, rental income rose 17% to $38.25 million while sales revenue fell 50% to $5.61 million. Q2 rental income increased 16% to $19.47 million; sales decreased 32% to $2.28 million.
- Operating income and margins declined in both comparisons. Management attributed the pressure mainly to higher depreciation from rental-fleet additions and, to a lesser extent, higher administrative costs. SG&A rose to $5.33 million for the first half, including increased equity-compensation expense.
- At June 30, cash was $14.44 million, working capital was $38.58 million, and total current assets and liabilities were $53.71 million and $15.13 million, respectively. Cash was down from $24.44 million at year-end 2013.
- First-half operating cash flow of $18.23 million was more than offset by $28.46 million of equipment and other capital spending; cash declined by $10.00 million. Rental equipment, net, increased to $194.78 million from $176.42 million at year-end.
- Debt consisted of $0.44 million outstanding under the revolving line, versus $0.58 million at year-end. The $30 million secured facility had $29.4 million of borrowing-base availability; the company reported covenant compliance and a 1.4% weighted-average borrowing rate.
Changes, outlook, and risks
- The rental fleet grew to 2,732 compressor packages from 2,392 a year earlier; utilization was 78.4%, compared with 79.0%. The company reported 2,142 compressors rented to 97 third parties, versus 1,889 rented to 99 customers a year earlier.
- Management linked rental growth to higher industry drilling and demand for low- to mid-horsepower compression. Sales varied with the timing of customer capital projects; flare demand also affected comparisons.
- For the remainder of 2014 and into 2015, management planned to match spending and fleet fabrication to market requirements, market idle equipment, and limit borrowing. It expected 2014 capital expenditures to be supported by internally generated cash and cash on hand, and said operating cash flow should meet capital and liquidity needs for the foreseeable future. No specific full-year earnings or revenue guidance was provided.
- The revolving credit agreement matures December 31, 2014, when outstanding borrowings are due. It is secured by company assets and includes financial and other restrictive covenants; a default could accelerate debt and restrict access to credit.
- Management cited exposure to oil and natural-gas prices and industry activity, competition, competing technologies, and potential safety, health, and environmental regulation-related spending. It also noted possible component-cost increases and dependence on suppliers, while stating alternative sources were available.
- The company reported no material legal proceedings and no material changes in previously disclosed market risks. It was evaluating the new revenue-recognition standard, effective for it in 2017, and had not yet determined the impact.
Important facts for investors to verify
- Whether rental growth and utilization can sustain revenue as sales remain uneven, and whether fleet additions earn returns sufficient to offset higher depreciation.
- Whether margin pressure and increased equity-compensation costs persist; first-half net income and operating cash flow were both below the prior year.
- How planned capital spending, cash levels, and borrowing availability evolve, particularly ahead of the December 2014 credit-facility maturity.
- Whether market conditions, natural-gas and oil prices, and customer capital-project timing support management’s outlook; the filing cautions that interim results may not indicate full-year performance.