Business context and reporting period
Natural Gas Services Group, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2014. The company fabricates, manufactures, rents and sells natural-gas compressors and related equipment, with rental operations as its primary focus; it also provides service and maintenance and sells flare systems. Results are for the three months ended March 31, 2014, compared with the same period in 2013.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 or comparison |
|---|---|---|
| Total revenue | $22.322 million | $23.983 million; down 7% |
| Operating income | $4.362 million | $6.137 million |
| Operating margin | About 20% | About 25% |
| Net income | $2.856 million | $3.994 million |
| Diluted EPS | $0.23 | $0.32 |
| Cash from operations | $9.615 million | $10.935 million |
| Capital expenditures | $13.439 million | $7.713 million |
| Cash and cash equivalents | $20.607 million | $24.443 million at Dec. 31, 2013 |
| Working capital | $43.764 million | $48.454 million at Dec. 31, 2013 |
| Line-of-credit debt | $0.497 million | $0.577 million at Dec. 31, 2013 |
Rental revenue was $18.789 million, sales revenue $3.338 million and service and maintenance revenue $0.195 million. Total assets were $258.367 million and total liabilities $61.948 million at March 31, 2014. The company reported a $1.509 million income-tax provision. Interest expense was $2,000; the filing reports no separate gross-margin percentage.
Material changes versus the prior comparable period
- Rental revenue increased 17% to $18.8 million, attributed to stronger industry drilling and demand for low- to mid-horsepower compression. The rental fleet totaled 2,643 packages, versus 2,328 a year earlier; utilization was 78.6%, essentially unchanged from 78.7%.
- Sales revenue fell 57% to $3.3 million, which management attributed to timing of capital-project completions and lower flare demand. The decrease more than offset rental growth, reducing total revenue by $1.7 million.
- Operating income declined $1.8 million. Management cited higher depreciation from rental-fleet additions and, to a lesser extent, increased administrative costs. Depreciation and amortization rose to $5.042 million from $4.238 million; SG&A rose to $2.643 million from $1.846 million, primarily due to equity compensation.
- Net income and diluted EPS declined. Other income was $5,000 versus $335,000 in Q1 2013; the prior-year cash-flow reconciliation included a $223,000 gain on extinguishment of a liability.
- Operating cash flow remained positive but decreased year over year. Investment in equipment exceeded operating cash flow, and cash fell $3.836 million during the quarter.
Outlook, risks and other notable items
Management plans to monitor costs, build rental equipment in response to market needs, market idle compressors and limit bank borrowing. For the remainder of 2014, forecast capital spending was expected to depend on customer requirements and not exceed internally generated cash flow and cash on hand; full-year capital expenditures were likewise not expected to exceed internal cash-generating capacity. Management believes operating cash flow will meet capital and liquidity needs for the foreseeable future, while noting that unanticipated spending or acquisitions could require additional capital that may not be available on acceptable terms.
The company described its markets as cyclical and sensitive to oil and natural-gas prices, producer spending and industry activity. Management cited uncertain demand in conventional gas markets amid low natural-gas prices, while noting opportunities in shale plays and a favorable long-term market trend. Other disclosed risks include competition, competing technologies, sustained commodity-price declines, and new safety, health or environmental regulations that could require significant investment. Compressor-component suppliers generally require two to three months’ lead time; the company reported alternative sources but no continuing formal supply contracts.
The $30 million secured revolving facility had $29.4 million of borrowing-base availability and $0.497 million outstanding at March 31, 2014. It matures December 31, 2014; management reported covenant compliance. The facility includes a leverage-ratio limit of 2.50-to-1.00 and secured collateral provisions. The filing reports no material legal proceedings and no material changes in market risk or internal control over financial reporting; disclosure controls were assessed as effective. Restricted-stock and stock-option awards were notable compensation items, including $692,682 of restricted-stock compensation expense for the quarter.
Important facts for investors to verify
- Whether rental demand, fleet utilization and rental-rate trends sustain growth as sales revenue remains subject to project timing.
- Whether the substantial fleet investment generates adequate utilization and returns, given higher depreciation and Q1 capital expenditures exceeding operating cash flow.
- The status, renewal or replacement of the revolving credit facility before its December 31, 2014 maturity, and continued compliance with its covenants.
- Whether full-year capital expenditures remain within management’s stated internally generated funding expectations.
- The effect of commodity prices, producer capital spending, competition and regulatory changes on demand and costs.
- The amount and timing of equity-compensation expense and its impact on reported earnings and share dilution.