Natural Gas Services Group, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. Financial statements are unaudited. The company fabricates, sells, rents and services natural gas compressors and related equipment, with rental operations its primary focus.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $20.3 million | $24.5 million | $44.2 million | $50.9 million |
| Operating income | $5.8 million | $4.8 million | $12.0 million | $10.5 million |
| Operating margin | 29% | 20% | 27% | 21% |
| Net income | $3.8 million | $3.0 million | $7.8 million | $6.5 million |
| Diluted EPS | $0.31 | $0.24 | $0.63 | $0.53 |
| Operating cash flow | — | $19.4 million | $20.4 million |
- Revenue mix: Q2 sales revenue fell 69% to $3.3 million, while rental revenue grew 22% to $16.7 million. For the first half, sales declined 51.6% to $11.2 million and rentals rose 19.4% to $32.7 million. Service and maintenance revenue was $0.2 million in Q2 and $0.3 million for the half-year.
- Profitability: Despite lower total revenue, operating income and net income increased in both comparison periods. Management attributed higher operating margins to the greater share of rentals, which typically carry higher margins, and control of compressor sales costs. Depreciation and amortization rose to $4.4 million in Q2 and $8.7 million for the first half as the rental fleet expanded.
- Cash flow and investment: First-half operating cash flow was $19.4 million. Investing cash outflow was $18.4 million, primarily for rental equipment and service vehicles; cash increased $1.2 million to $29.3 million.
- Liquidity and debt: Working capital was $53.0 million at June 30, up from $50.3 million at December 31, 2012. The company reported $0.8 million outstanding on its line of credit, classified as long-term, and $29.0 million of borrowing-base availability. The revolving facility has a $30 million commitment and matures December 31, 2014. The company said it was in compliance with its covenants.
- Balance sheet: Total assets were $244.4 million and stockholders’ equity was $184.6 million at June 30, 2013. Rental equipment, net, was $160.9 million.
Material changes and management commentary
- The revenue decline primarily reflected lower compressor sales, including comparison with a large one-time fleet sale to a single customer in 2012 and the timing of industry capital projects. Rental growth reflected stronger drilling activity and demand for low- to mid-horsepower compression.
- The rental fleet had 2,392 compressor packages at quarter-end, compared with 2,167 a year earlier; utilization was 79.0%, up from 74.4%. The company separately reported 1,889 compressors totaling 264,150 horsepower rented to 99 customers, versus 1,613 compressors totaling 222,421 horsepower rented to 104 customers a year earlier.
- First-half other income included a $223,000 gain from settling a Midland Development Corporation liability for less than its recorded amount.
Outlook, risks and contingencies
- Management planned to monitor expenses, build rental equipment in response to customer needs, market idle compressors and limit borrowing. It expected 2013 capital spending to remain within internally generated cash flows and believed operating cash flow would meet capital and liquidity needs through 2013 and into early 2014. No specific revenue or earnings guidance was provided.
- Management described long-term market prospects as favorable, while noting weak natural gas prices, economic uncertainty and uncertain demand in conventional natural-gas markets. It cited opportunities in shale plays and said higher natural gas prices could support incremental fleet utilization.
- Key risks include cyclical oil and gas activity, lower commodity prices reducing customer demand, competition, component-cost increases that cannot be passed through, and potential new safety, health or environmental regulation. The company also noted possible need for additional capital for unexpected spending or acquisitions.
- Purchase obligations were $3.4 million and total disclosed contractual obligations were $5.7 million. The company reported no material pending legal proceedings and did not expect ordinary-course proceedings to materially affect its financial position, results or cash flow.
Important facts for investors to verify
- Whether rental revenue and utilization continue to offset volatile compressor sales, and whether rental growth supports returns on the expanded fleet.
- Whether operating cash flow can sustain planned capital expenditures while preserving liquidity; first-half capital spending was nearly equal to operating cash flow.
- Facility availability, covenant compliance and the December 2014 credit-facility maturity, including any changes in borrowing needs or terms.
- The effect of natural gas and oil prices, customer capital spending, supplier costs and regulatory requirements on demand and margins.
- The source filing’s differing rental-fleet figures: it reports 2,392 total fleet packages but also 1,889 units rented at June 30, 2013; investors should confirm the definitions and reconciliation.