Natural Gas Services Group, Inc. — Q1 2022 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are to the three months ended March 31, 2021 unless stated otherwise. The company manufactures, sells, rents, and services natural gas compression equipment, with rental activity its primary business.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $20.3 million | $18.4 million |
| Operating income (loss) | $0.4 million | $(0.4) million |
| Net income (loss) | $0.3 million | $(0.4) million |
| Diluted earnings (loss) per share | $0.03 | $(0.03) |
| Adjusted EBITDA | $6.8 million | $6.5 million |
| Cash from operating activities | $5.0 million | $7.4 million |
| Capital expenditures | $8.2 million | $5.0 million |
Revenue rose 10.5%, led by rental income, up 11.7% to $17.1 million; sales increased 7.0% to $2.9 million, while service and maintenance revenue declined to $0.3 million. Rental revenue represented 84.2% of total revenue. Operating margin was approximately 1.9%, compared with approximately negative 2.0% a year earlier. Adjusted EBITDA, a company-defined non-GAAP measure, increased 5.1%.
Rental costs increased 29.0% to $9.2 million, outpacing rental revenue growth, due mainly to labor and parts inflation and higher fleet repair and maintenance work. Cost of sales fell 24.0% to $2.0 million. SG&A decreased 5.5% to $2.5 million, and depreciation and amortization declined to $6.1 million.
Financial position and liquidity
At March 31, 2022, cash was $16.4 million, down from $22.9 million at year-end 2021. Working capital was $40.2 million, versus $44.8 million at December 31, 2021. Current assets were $58.8 million and current liabilities $18.7 million. The company had no borrowings under its revolving credit agreement; its allowable borrowing base was $20.0 million, and it reported compliance with financial covenants. The facility matures May 11, 2026.
Operating cash flow of $5.0 million was more than offset by $8.2 million of equipment and other capital purchases and $2.9 million of treasury-share purchases. The company reported total liabilities of $60.9 million and stockholders’ equity of $233.4 million. A federal income tax receivable of $11.5 million remained on the balance sheet.
Changes, outlook, and risks
- Rental demand shifted toward larger horsepower equipment. Rented horsepower increased 6.6% year over year, and horsepower utilization rose to 72.8% from 65.2%; unit utilization increased to 62.8% from 56.5%.
- The fleet had 2,033 compressor packages and 421,422 total horsepower, compared with 2,238 packages and 441,911 horsepower a year earlier. The company attributed the reduction mainly to equipment retirements in late 2021.
- Management expected compressor sales to remain low for the rest of 2022 as customers favored rentals over equipment purchases. It planned to align expenses and fleet fabrication with market demand, promote idle units, and limit borrowing. No specific revenue or earnings guidance was provided.
- Management expected remaining-2022 capital spending to be covered by operating cash flow and cash on hand, with additions focused on contracted, premium-priced rental equipment and service vehicles. It described available liquidity as sufficient for planned spending and foreseeable needs.
- Risks include the cyclical energy-services market and sensitivity to oil and gas prices and customer capital spending. Inflation, equipment-component lead times of three to six months, and elevated repair costs could pressure margins; management said price increases had so far generally offset component cost inflation.
- The company reported no material legal proceedings, no identified threatened material litigation, and no subsequent events. It reported no rental-equipment impairment at quarter-end. Disclosure controls were concluded effective.
Important facts for investors to verify
- Whether higher rental utilization and horsepower demand can sustain revenue growth while rental repair, labor, and parts costs remain elevated.
- Whether planned capital expenditures and share repurchases can be supported by operating cash generation, given Q1 operating cash flow was below capital spending.
- The timing and collectability of the $11.5 million federal income tax receivable, which remained outstanding at quarter-end.
- Progress on sales, utilization, and margins in smaller and medium horsepower equipment, which management said had not recovered in line with commodity prices.
- Credit-facility availability and covenant compliance as activity, capital spending, and market conditions change; the facility is secured and includes restrictions on certain transactions and capital returns.