What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-14 compared with 2022-08-15 · 66 added, 62 removed, 148 unchanged (46% of the section changed)

13 unchanged sentences

Rental amounts are billed monthly in advance and include maintenance of our rented compressors.

As of June 30, 2022, we had 1,281 natural gas compressors totaling 311,379 horsepower rented to 79 customers compared to 1,245 natural gas compressors totaling 287,365 horsepower rented to 79 customers at June 30, 2021.

As of September 30, 2022, we had 1,196 natural gas compressors totaling 305,953 horsepower rented to 77 customers compared to 1,221 natural gas compressors totaling 288,706 horsepower rented to 78 customers at September 30, 2021.

We also fabricate natural gas compressors for sale to our customers, designing compressors to meet unique specifications dictated by well pressures, production characteristics, and particular applications for which compression is sought.

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During the first quarter of 2020, we saw a substantial decline in the prices for oil and natural gas.

Commodity prices stabilized during 2021 with a sharp increase through the first six months of 2022.

Commodity prices stabilized during 2021 with a sharp increase in 2022.

Historically, activity levels of exploration and production companies have been dependent on commodity prices.

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Results of Operations

Three months ended June 30, 2022, compared to the three months ended June 30, 2021.

The table below shows our revenues and percentage of total revenues of each of our product lines for the three months ended June 30, 2022 and 2021.

Three months ended June 30,

Three months ended September 30, 2022, compared to the three months ended September 30, 2021.

The table below shows our revenues and percentage of total revenues of each of our product lines for the three months ended September 30, 2022 and 2021.

Three months ended September 30,

(in thousands)

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Total $ 20,743 $ 18,245

Total revenue increased 12.3% to $19.9 million for the three months ended June 30, 2022 compared to $17.7 million for the three months ended June 30, 2021.

This increase was primarily a result of higher rental revenue (16.2% increase) during 2022 partially offset by lower sales revenue (18% decrease).

Rental revenue increased to $18.1 million for the three months ended June 30, 2022 compared to $15.6 million for the same period in 2021.

This increase during the second quarter of 2022 was attributable to (i) an increase in high horsepower compression rentals as these units carry a higher revenue rate than our lower horsepower units and (ii) rental rate increases across a portion of our fleet intended to offset inflationary pressures related to the costs of our rental fleet.

As of June 30, 2022, we had 2,043 compressor packages in our fleet, down from 2,257 units at June 30, 2021 due to the retirement of units during the fourth quarter of 2021.

The Company's total unit horsepower decreased to 426,811 horsepower at June 30, 2022 compared to 446,803 horsepower at June 30, 2021, due to the aforementioned unit retirements in the fourth quarter of 2021 partially offset by the addition to the Company's fleet of 27 high horsepower compressors with 13,160 horsepower over the past 12 months.

As of June 30, 2022, we had 1,281 natural gas compressors with a total of 311,379 horsepower rented to 79 customers, compared to 1,245 natural gas compressors with a total of 287,365 horsepower rented to 79 customers as of June 30, 2021.

As a result, our total rented horsepower as of June 30, 2022 increased by 8.4% over the last twelve months.

Our rental fleet had unit utilization as of June 30, 2022, and 2021, respectively, of 62.7% and 55.2%, and our horsepower utilization for the same dates increased to 73.0% from 64.3%.

Our total rented horsepower increased by 8.4% contrasted against a 2.9% increase in total rented units.

Total revenue increased 13.7% to $20.7 million for the three months ended September 30, 2022 compared to $18.2 million for the three months ended September 30, 2021.

This increase was primarily a result of higher rental revenue (15.0% increase) during 2022 partially offset by lower service and maintenance revenues.

Rental revenue increased to $18.6 million for the three months ended September 30, 2022 compared to $16.2 million for the same period in 2021.

This increase during the third quarter of 2022 was attributable to (i) an increase in high horsepower compression rentals as these units carry a higher rental revenue rate than our lower horsepower units and (ii) rental rate increases across a portion of our fleet intended to offset inflationary pressures related to the costs of our rental fleet.

As of September 30, 2022, we had 1,976 compressor packages in our fleet, down from 2,275 units at September 30, 2021 due to the retirement of units during the fourth quarter of 2021 and the disposition of a small number of compressors from the fleet during this year.

The Company's total unit horsepower decreased slightly to 423,658 horsepower at September 30, 2022 compared to 452,283 horsepower at September 30, 2021, due to the aforementioned unit retirements and dispositions partially offset by the addition to the Company's fleet of 24 high horsepower compressors with 14,260 horsepower over the past 12 months.

As of September 30, 2022, we had 1,196 natural gas compressors with a total of 305,953 horsepower rented to 77 customers, compared to 1,221 natural gas compressors with a total of 288,706 horsepower rented to 78 customers as of September 30, 2021.

As a result, our total rented horsepower as of September 30, 2022 increased by 6.0% over the last twelve months.

Our rental fleet had unit utilization as of September 30, 2022, and 2021, respectively, of 60.5% and 53.7%, and our horsepower utilization for the same dates increased to 72.2% from 63.8%.

Our total rented horsepower increased by 6.0% contrasted against a 2.0% decrease in total rented units.

This illustrates the growing demand for our high horsepower units while the demand for our smaller and medium horsepower units has not recovered in line with recent commodity price increases.

Sales revenue decreased to $1.3 million for the three months ended June 30, 2022 compared to $1.6 million for the three months ended June 30, 2021.

This decrease is mostly attributable to decreased parts and rebuild sales partially offset by increased compressor sales during the second quarter of 2022 compared to the same period in 2021.

Sales revenue increased 21.3% to $1.8 million for the three months ended September 30, 2022 compared to $1.5 million for the three months ended September 30, 2021.

This increase is primarily attributable to increased parts sales during the third quarter of 2022 compared to the same period in 2021.

Sales are subject to fluctuations in timing of industry activity related to our customers' capital projects and, as such, can vary substantially between periods.

Cost of rentals increased to $9.2 million during the three months ended June 30, 2022 compared to $9.1 million during the three months ended June 30, 2021.

Cost of rentals increased to $10.0 million during the three months ended September 30, 2022 compared to $8.8 million during the three months ended September 30, 2021.

While rental revenues increased 15.0%, this 13.2% increase in costs of rentals is primarily due to inflationary pressures on labor and parts.

While repair and maintenance expenses are customary in our business, the timing of such expenses can fluctuate between periods resulting in periods with larger than normal expenses.

Cost of sales decreased 19.0% to $1.4 million during the three months ended June 30, 2022 compared to $1.8 million during the three months ended June 30, 2021.

This decrease was primarily due to a reduction in unabsorbed costs related to our fabrication operations during the period.

Selling, general, and administrative ("SG&A") expenses decreased 11.4% to $2.3 million for the three months ended June 30, 2022 compared $2.6 million during the same period in 2021.

This decrease in SG&A expenses was primarily attributable to (i) a $392,000 decrease in our deferred compensation liability and (ii) a $188,000 decrease in restricted stock compensation expense.

These decreases were partially offset by (i) a $160,000 increase in accrued bonus expense and (ii) a $147,000 increase in stock option expense.

Depreciation and amortization expense decreased to $6.0 million for the three months ended June 30, 2022 compared to $6.3 million for the three months ended June 30, 2021.

Cost of sales increased 27.1% to $2.0 million during the three months ended September 30, 2022 compared to $1.6 million during the three months ended September 30, 2021.

This increase was primarily due to an increase in the volume of parts sales at margins below our historical realizations.

Selling, general, and administrative ("SG&A") expenses increased 50.2% to $4.1 million for the three months ended September 30, 2022 compared $2.7 million during the same period in 2021.

This increase in SG&A expenses was primarily attributable to (i) $1.0 million of severance expenses related to the retirement agreement between NGS and Mr.

Stephen Taylor, our prior Chief Executive Officer, (ii) $0.2 million increase in stock option compensation expenses, (iii) a $0.2 million increase in executive officer salaries primarily related to our Interim Chief Executive Officer and (iv) $0.1 million increase in software expenses related to data automation efforts.

Depreciation and amortization expense decreased to $6.0 million for the three months ended September 30, 2022 compared to $6.4 million for the three months ended September 30, 2021.

This was the result of a reduction in our rental fleet due to unit retirements in the fourth quarter of 2021.

We recorded an income tax expense of approximately $372,000 for the three months ended June 30, 2022 compared to an income tax benefit of $339,000 for the three months ended June 30, 2021.

We recorded an income tax benefit of approximately $73,000 for the three months ended September 30, 2022 compared to an income tax benefit of $0.2 million for the three months ended September 30, 2021.

For interim periods, our income tax benefit (expense) is computed based upon our estimated annual effective tax rate and any discrete items that impact the interim periods.

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federal statutory rate of 21% primarily as a result of expenses not deductible for income tax purposes.

Six months ended June 30, 2022, compared to the six months ended June 30, 2021.

The table below shows our revenues and percentage of total revenues of each of our product lines for the six months ended June 30, 2022 and 2021.

Six months ended June 30,

Nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

The table below shows our revenues and percentage of total revenues of each of our product lines for the nine months ended September 30, 2022 and 2021.

Nine months ended September 30,

(in thousands)

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Total $ 61,004 $ 54,391

Total revenue increased 11.4% to $40.3 million for the six months ended June 30, 2022 compared to $36.1 million during the nine months ended June 30, 2021.

This increase was primarily a result of higher rental revenue (14.0% increase) during the first six months of 2022 partially offset by decreased sales revenue (2.3% decrease).

Rental revenue increased to $35.3 million for the six months ended June 30, 2022 compared to $31.0 million during the six months ended June 30, 2021.

This increase during the first six months of 2022 was attributable to an increase in high horsepower compression rentals as these units carry a higher revenue rate than our lower horsepower units and, to a lesser extent, rental rate increases across a portion of our fleet intended to offset inflationary pressures related to the costs of our rental fleet.

Sales revenue decreased to $4.2 million for the six months ended June 30, 2022 compared to $4.3 million for the same period in 2021.

This decrease is mostly attributable to a decrease in parts sales partially offset by an increase in compressor sales.

Total revenue increased 12.2% to $61.0 million for the nine months ended September 30, 2022 compared to $54.4 million during the nine months ended September 30, 2021.

This increase was primarily a result of higher rental revenue (14.3% increase) during the first nine months of 2022 partially offset by decreased service and maintenance revenue (24.0% decrease).

Rental revenue increased to $53.9 million for the nine months ended September 30, 2022 compared to $47.1 million during the nine months ended September 30, 2021.

This increase during the first nine months of 2022 was attributable to an increase in high horsepower compression rentals as these units carry a higher rental revenue rate than our lower horsepower units and, to a lesser extent, rental rate increases across a portion of our fleet intended to offset inflationary pressures related to the costs of our rental fleet.

Sales revenue increased to $6.0 million for the nine months ended September 30, 2022 compared to $5.8 million for the same period in 2021.

This increase is mostly attributable to an increase in compressor sales partially offset by a slight decrease in parts sales.

Sales are subject to fluctuations in timing of industry activity related to capital projects and, as such, can vary substantially between periods.

Cost of rentals increased 13.8% to $18.5 million during the six months ended June 30, 2022 compared to $16.2 million during the six months ended June 30, 2021.

Cost of rentals increased 13.5% to $28.5 million during the nine months ended September 30, 2022 compared to $25.1 million during the nine months ended September 30, 2021.

This increase was primarily due to inflationary pressures on labor and parts as well as increased high horsepower units being placed into service.

While repair and maintenance expenses are customary in our business, the timing of such expenses can fluctuate between periods resulting in periods with larger than normal expenses.

Cost of sales decreased 21.9% to $3.4 million during the six months ended June 30, 2022 compared to $4.4 million during the six months ended June 30, 2021.

This decrease during the first six months of 2022 was primarily due to a decrease in parts sales.

Selling, general, and administrative expenses decreased (8.4)% to $4.8 million for the six months ended June 30, 2022 compared to $5.3 million for the same period in 2021.

SG&A expenses during the first six months of 2022 were impacted by a $597,000 reduction in deferred compensation and a $201,000 reduction in restricted stock compensation expenses, partially offset by a $340,000 increase in expected executive bonus compensation expense and officer salaries related to the recent appointment of our interim President and Chief Executive Officer.

Depreciation and amortization expense decreased 4.1% to $12.1 million for the six months ended June 30, 2022 compared to $12.6 million for the six months ended June 30, 2021.

Cost of sales decreased 9.1% to $5.4 million during the nine months ended September 30, 2022 compared to $6.0 million during the nine months ended September 30, 2021.

This decrease during the first nine months of 2022 was primarily due to a decrease in costs of sales attributable to cost containment efforts in our fabrication shops.

Selling, general, and administrative expenses increased 11.5% to $8.9 million for the nine months ended September 30, 2022 compared to $8.0 million for the same period in 2021.

SG&A expenses during the first nine months of 2022 were impacted by (i) $1.0 million of severance expenses related to the retirement agreement between NGS and Mr.

Stephen Taylor, our prior Chief Executive Officer, (ii) a $0.4 million increase in stock option compensation expense and (iii) a $0.3 million increase in executive officer salaries primarily related to our Interim Chief Executive Officer.

These increases were partially offset by a $0.7 million reduction in deferred compensation expense.

Depreciation and amortization expense decreased 4.7% to $18.1 million for the nine months ended September 30, 2022 compared to $19.0 million for the nine months ended September 30, 2021.

This decrease was the result of unit retirements in the fourth quarter of 2021.

We recorded an income tax expense of $361,000 for the six months ended June 30, 2022 compared to an income tax benefit of $213,000 for the six months ended June 30, 2021.

We recorded an income tax expense of $0.3 million for the nine months ended September 30, 2022 compared to an income tax benefit of $0.4 million for the nine months ended September 30, 2021.

For interim periods, our income tax benefit (expense) is computed based upon our estimated annual effective tax rate and any discrete items that impact the interim periods.

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Our definition and use of Adjusted EBITDA

“Adjusted EBITDA” is a non-GAAP financial measure that we define as earnings (net (loss) income) before interest, taxes, depreciation and amortization, as well as non-cash stock compensation, impairment of goodwill, an increase in inventory allowance and inventory write-offs, and retirement of rental equipment.

This term, as used and defined by us, may not be comparable to similarly titled measures employed by other companies and is not a measure of performance calculated in

accordance with GAAP.

“Adjusted EBITDA” is a non-GAAP financial measure that we define as earnings (net (loss) income) before interest, taxes, depreciation and amortization, as well as non-cash stock compensation, severance expenses, impairment of goodwill, an increase in inventory allowance and inventory write-offs, and retirement of rental equipment.

This term, as used and defined by us, may not be comparable to similarly titled measures employed by other companies and is not a measure of performance calculated in accordance with GAAP.

Adjusted EBITDA should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP.

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The following table reconciles our net (loss) income, the most directly comparable GAAP financial measure, to Adjusted EBITDA:

Three months ended June 30, Six months ended June 30,

Three months ended September 30, Nine months ended September 30,

2022 2021 2022 2021

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Non-cash stock compensation expense 583 421 1,337 1,316

Severance expenses 1,258 — 1,407 —

Adjusted EBITDA $ 7,729 $ 5,364 $ 21,411 $ 16,372

For the three months ended June 30, 2022, Adjusted EBITDA increased $2.2 million (48.7%) due primarily to a $2.2 million increase in total revenues and a $0.3 million reduction in costs of sales partially offset by a $0.2 million increase in costs of rentals.

For the six months ended June 30, 2022, Adjusted EBITDA increased $2.5 million (22.9%) due primarily to a $4.1 million increase in total revenues and a $1.0 million reduction in costs of sales partially offset by a $2.2 million increase in costs of rentals.

For the three months ended September 30, 2022, Adjusted EBITDA increased $2.4 million (44.1%) due primarily to a $2.5 million increase in total revenues and a $1.3 million gain on sale of compression from the rental fleet partially offset by a $1.2 million increase in costs of rentals.

For the nine months ended September 30, 2022, Adjusted EBITDA increased $5.0 million (30.8%) due primarily to (i) a $6.6 million increase in total revenues, (ii) a $1.4 million gain on sales of compression from the rental fleet and (iii) a $0.5 million reduction in costs of sales partially offset by a $3.4 million increase in costs of rentals.

Liquidity and Capital Resources

Our working capital positions as of June 30, 2022 and December 31, 2021 are set forth below:

June 30, December 31,

Our working capital positions as of September 30, 2022 and December 31, 2021 are set forth below:

September 30, December 31,

(in thousands)

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Accrued liabilities 15,522 14,103

Line of credit — —

Current operating leases 82 68

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Total working capital $ 24,234 $ 44,825

For the six months ended June 30, 2022, we invested $19.2 million in rental and property and other equipment by adding $18.8 million in new equipment to our rental fleet and $410,000 mostly in vehicles as well as various other machinery and equipment.

For the nine months ended September 30, 2022, we invested $35.3 million in rental and property and other equipment by adding $34.6 million in new equipment to our rental fleet and $0.8 million primarily in vehicles as well as various other machinery and equipment.

Our investment in rental equipment, property and other equipment also includes any changes to work-in-process related to our rental fleet jobs at the beginning of the period compared to the end of the period.

Our rental work-in-process increased by $6.6 million during the six months ended June 30, 2022.

We financed our investment in rental equipment, property and other equipment with cash flow from operations and cash on hand.

We anticipate that our cash flows from operations as well as our borrowing capacity under our New Credit Agreement will provide ample liquidity for our planned capital expenditures during the remainder of 2022 and beyond.

At June 30, 2022, we had cash and cash equivalents of $9.8 million compared to $22.9 million at December 31, 2021.

Our cash flows from operating activities of $13.2 million were offset by capital expenditures of $19.2 million during the six months ended June 30, 2022.

We had working capital of $32.1 million at June 30, 2022 compared to $44.8 million at December 31, 2021.

We generated cash flows from operating activities of $13.2 million during the first six months of 2022 compared to cash flows provided by operating activities of $12.8 million for the first six months of 2021.

The increase in cash flows from operating activities was primarily driven by higher sales margins partially offset by higher costs of rentals during the first six months of 2022.

work-in-process increased by $16.8 million during the nine months ended September 30, 2022.

We financed our investment in rental equipment, property and other equipment with cash flow from operations, cash on hand and borrowings under our revolving credit facility.

We anticipate that our cash flows from operations as well as our borrowing capacity under our New Credit Agreement will provide adequate liquidity for our planned capital expenditures during the remainder of 2022.

For any new capital expenditures in 2023 and beyond that exceeds our cash flow from operations, we anticipate that we would need to negotiate an expansion of our borrowing capacity under our New Credit Agreement.

While we control the timing and extent of our capital expenditures, there is no assurance that any such borrowing expansion would be granted.

At September 30, 2022, we had cash and cash equivalents of $2.6 million compared to $22.9 million at December 31, 2021.

Our cash flows from operating activities of $18.9 million were offset by capital expenditures of $35.3 million during the nine months ended September 30, 2022.

We had working capital of $24.2 million at September 30, 2022 compared to $44.8 million at December 31, 2021.

We generated cash flows from operating activities of $18.9 million during the first nine months of 2022 compared to cash flows provided by operating activities of $20.0 million for the first nine months of 2021.

The decrease in cash flows from operating activities was primarily driven by higher costs of rentals during the first nine months of 2022.

For the remainder of 2022, our overall plan is to continue monitoring and holding expenses in line with the anticipated level of activity, fabricate rental fleet equipment only in direct response to market requirements, emphasize marketing of our idle gas compressor units and limit bank borrowing in line with market conditions.

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The majority of required capital will be for contracted, premium-priced additions to our compressor rental fleet and/or required service vehicles.

We believe that cash flows from operations, our current cash position and borrowing capacity under our New Credit Agreement will be sufficient to satisfy our capital and liquidity requirements for the foreseeable future.

We believe market conditions indicate significant demand growth for large horesepower compression in 2023 and beyond.

While we believe that cash flows from operations, our current cash position and borrowing capacity under our New Credit Agreement will be sufficient to satisfy a portion of our capital activity, we will need to negotiate an expansion of our borrowing capacity under our New Credit Agreement to meet the capital expenditure requirements needed to meet anticipated additional demand.

Bank Borrowings

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The maturity date of the New Credit Agreement is May 11, 2026.

As of June 30, 2022, we did not have any borrowings outstanding under the New Credit Agreement.

As of September 30, 2022, we had $2.0 million of borrowings outstanding under the New Credit Agreement.

Critical Accounting Policies and Practices

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From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations.

As of June 30, 2022, the off-balance sheet arrangements and transactions that we have entered into include purchase agreements.

As of September 30, 2022, the off-balance sheet arrangements and transactions that we have entered into include purchase agreements.

We do not believe that these arrangements are reasonably likely to materially affect our liquidity or availability of capital resources.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis