Natural Gas Services Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023, compared with the same periods in 2022. The company provides, manufactures, rents, sells, and services natural-gas compression equipment, with rental operations as its primary business.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $27.0 million | $19.9 million | $53.6 million | $40.3 million |
| Operating income | $0.7 million | $0.7 million | $1.1 million | $1.0 million |
| Net income (loss) | $0.5 million | $(0.1) million | $0.9 million | $0.3 million |
| Diluted EPS | $0.04 | $(0.01) | $0.07 | $0.02 |
| Adjusted EBITDA (non-GAAP) | $9.9 million | $6.7 million | $17.7 million | $13.5 million |
Revenue rose 35.3% in Q2 and 33.1% for the first half, driven principally by rentals. Operating margin was approximately 2.6% in Q2 (3.3% prior year) and 2.1% for the first half (2.6% prior year); the higher revenue did not translate into higher GAAP operating margin. Adjusted EBITDA increased 47.4% in Q2 and 30.5% year to date; it is a company-defined non-GAAP measure and excludes specified expenses.
Rental revenue grew 32.9% in Q2 and 32.8% year to date. Service and maintenance revenue also increased substantially, to $1.3 million in Q2 from $0.5 million and to $2.2 million for the first half from $0.8 million. Sales revenue was $1.6 million in Q2 and $4.6 million year to date. Q2 rental growth reflected more high-horsepower rentals and some rate increases; parts sales contributed to the increase in Q2 sales.
Cash flow, liquidity, and debt
- First-half operating cash flow was $22.6 million, versus $13.2 million a year earlier. Investing cash outflow was $93.6 million, including $93.5 million of equipment and property purchases. Financing cash inflow was $71.8 million, including $75.0 million of loan proceeds.
- Cash was $4.3 million at June 30, 2023, versus $3.4 million at year-end 2022. Working capital was $18.9 million, down from $23.7 million. Current assets were $66.1 million and current liabilities $47.2 million.
- Long-term debt was $100.0 million, compared with $25.0 million at year-end. The new five-year, senior secured revolving facility has a $175 million initial commitment and matures in February 2028. Approximately $75 million was available at quarter-end, subject to borrowing-base determination. The company reported covenant compliance and an 8.48% weighted-average borrowing rate.
- Rental equipment, net, rose to $326.7 million from $246.5 million at year-end. The company reported $2.7 million of capitalized interest for the first half.
Material changes, outlook, and risks
- The fleet had 1,911 compressor packages and 473,884 total horsepower, versus 2,043 packages and 426,811 horsepower a year earlier. Rented horsepower increased 19.7%, while rented units declined 2.5%; horsepower utilization rose to 78.6% from 73.0%. Management attributed the trend to stronger demand for larger units and weaker recovery in smaller and medium units.
- Q2 SG&A increased 110.4% to $4.9 million; first-half SG&A increased 95.8% to $9.4 million. Reported drivers included severance related to Stephen C. Taylor, increased stock compensation, and expenses related to the Mill Road Capital cooperation agreement. Q2 included a one-time $0.35 million reimbursement expense associated with that agreement.
- The company recorded a $0.8 million impairment of capitalized software costs. First-half capital expenditures included $92.3 million of additions to the rental fleet; rental work-in-process increased $19.9 million.
- Management expects compressor sales to remain low for the rest of 2023 as customers favor rentals over purchases. Its plan is to match spending and fleet fabrication to market demand and prioritize contracted, premium-priced fleet additions. It expects remaining-2023 capital expenditures to be covered by internally generated cash, cash on hand, and facility availability, but says additional growth spending could require expanded borrowing capacity or capital-market financing.
- Key risks include oil and gas activity and commodity-price cycles, constrained customer capital spending, inflation and component lead times, competition, and potential regulatory costs. The filing gives no quantified earnings or revenue guidance.
- Management reported a continuing material weakness in internal controls over inventory, involving work-in-process classification, physical counts, and review and approval of inventory adjustments. Remediation steps are underway, but effectiveness still requires validation and testing. Management nevertheless concluded the financial statements fairly present the reported results.
- The company reported no material legal proceedings and no material subsequent events requiring disclosure. The $11.5 million federal income tax receivable remained unchanged from year-end; the filing describes it as arising from prior-year NOL carrybacks.
Important facts for investors to verify
- Whether high-horsepower utilization and rental growth continue, and whether rental pricing offsets labor, parts, and equipment cost inflation.
- Whether cash generation and borrowing-base availability can support fleet investment, given first-half equipment spending materially exceeded operating cash flow.
- Debt cost, covenant headroom, and actual availability under the secured facility as the borrowing base changes.
- Progress in remediating and testing the inventory-control material weakness, including whether any inventory balances or reporting require adjustment.
- The persistence of elevated SG&A, stock compensation, severance, and other unusual costs, and the basis for management’s non-GAAP Adjusted EBITDA.
- Collection and realizability of the federal income tax receivable and the effect of oil and gas industry activity on customer demand.