What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-15 compared with 2022-11-14 · 47 added, 86 removed, 128 unchanged (51% of the section changed)

13 unchanged sentences

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

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.

As of March 31, 2023, we had 1,245 natural gas compressors totaling 335,314 horsepower rented to 74 customers compared to 1,276 natural gas compressors totaling 306,834 horsepower rented to 79 customers at March 31, 2022.

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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We use finished CiP component products in the fabrication of compressor units for sale or rental by us or sell the finished component products to other compressor fabricators.

We also design, fabricate, sell, install, and service flare stacks and related ignition and control devices for onshore and offshore incineration of gas compounds such as hydrogen sulfide, carbon dioxide, natural gas and liquefied petroleum gases.

To provide customer support for our compressor and flare sales businesses, we stock varying levels of replacement parts at our Midland, Texas facility and at field service locations.

To provide customer support for our compressor sales businesses, we stock varying levels of replacement parts at our Midland, Texas facility and at field service locations.

We also provide an exchange and rebuild program for screw compressors and maintain an inventory of new and used compressors to facilitate this business.

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In addition, recent heightened focus on the emissions profile of our customers has created a shift in demand from natural gas powered compression to electric motor compression in areas where the electric infrastructure can accommodate the energy demands of these units.

In response to this shift, we have announced plans to convert up to 100 compressor packages from internal combustion engines to electric motors.

The initial conversions will focus on packages in the 200-250 horsepower range.

Industry Update

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Results of Operations

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,

Three months ended March 31, 2023, compared to the three months ended March 31, 2022.

The table below shows our revenues and percentage of total revenues of each of our product lines for the three months ended March 31, 2023 and 2022.

Three months ended March 31,

(in thousands)

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Total $ 26,620 $ 20,336

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%.

Total revenue increased 30.9% to $26.6 million for the three months ended March 31, 2023 compared to $20.3 million for the three months ended March 31, 2022.

This increase was primarily a result of higher rental revenue (32.7% increase) during 2023.

Rental revenue increased to $22.7 million for the three months ended March 31, 2023 compared to $17.1 million for the same period in 2022.

This increase during the first quarter of 2023 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 March 31, 2023, we had 1,875 compressor packages in our fleet, down from 2,033 units at March 31, 2022 due to the retirement of units during the fourth quarter of 2022 and th e disposition of a small number of compressors from the fleet during this year.

The Company's total unit horsepower increased slightly to 433,013 horsepower at March 31, 2023 compared to 421,422 horsepower at March 31, 2022, due to the aforementioned unit retirements and dispositions partially offset by the addition to the Company's fleet of 42 high horsepower compressors over the past 12 months.

As of March 31, 2023, we had 1,245 natural gas compressors with a total of 335,314 horsepower rented to 74 customers, compared to 1,276 natural gas compressors with a total of 306,834 horsepower rented to 79 customers as of March 31, 2022.

As a result, our total rented horsepower as of March 31, 2023 increased by 9.3% over the last twelve months.

Our rental fleet had unit utilization as of March 31, 2023, and 2022, respectively, of 66.4% and 62.8%, and our horsepower utilization for the same dates increased to 77.4% from 72.8%.

Our total rented horsepower increased by 9.3% contrasted against a 2.4% 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 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 revenue increased 3.5% to $3.0 million for the three months ended March 31, 2023 compared to $2.9 million for the three months ended March 31, 2022.

This increase is primarily attributable to increased parts sales during the first quarter of 2023 compared to the same period in 2022.

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 $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.

Cost of rentals increased t o $11.6 million during the three months ended March 31, 2023 compared to $9.2 million during the three months ended March 31, 2022.

While rental revenues increased 32.7%, this 26.2% increase in costs of rentals is primarily due to inflationary pressures on labor and parts as well higher make ready charges accrued at quarter end.

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 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.

Cost of sales increased 62.8% to $3.2 million during the three months ended March 31, 2023 compared to $2.0 million during the three months ended March 31, 2022.

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 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.

Selling, general, and administrative ("SG&A") expenses increased 82.3% to $4.6 million for the three months ended March 31, 2023 compared $2.5 million during the same period in 2022.

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 Stephen C.

Taylor, our prior and current interim Chief Executive Officer, (ii) $200,000 increase in stock option compensation expenses, (iii) a $300,000 increase in executive recruiting charges.

Depreciation and amortization expense increased to $6.2 million for the three months ended March 31, 2023 compared to $6.1 million for the three months ended March 31, 2022.

We recorded an income tax expense of approximately $150,000 for the three months ended March 31, 2023 compared to an income tax benefit of $11,000 for the three months ended March 31, 2022.

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.

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)

Rental $ 53,905 88.4 % $ 47,149 86.7 %

Sales 5,970 9.8 % 5,756 10.6 %

Service and Maintenance 1,129 1.8 % 1,486 2.7 %

Total $ 61,004 $ 54,391

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 13.5% 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 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 $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.

Non-GAAP Financial Measures

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There are other material limitations to using Adjusted EBITDA as a measure of performance, including the inability to analyze the impact of certain recurring items that materially affect our net income or loss, and the lack of comparability of results of operations of different companies.

Please read the table below under “Reconciliation” to see how Adjusted EBITDA reconciles to our net (loss) income, the most directly comparable GAAP financial measure.

Please read the table below under “Reconciliation” to see how Adjusted EBITDA reconciles to our net (loss) income, for the three months ended March 31, 2023 and 2022, the most directly comparable GAAP financial measure.

Reconciliation

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

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

2022 2021 2022 2021

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

Three months ended March 31,

(in thousands)

Net income (loss) $ (80) $ (1,257) $ 187 $ (3,569)

Net income $ 370 $ 337

Interest expense — 24

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Adjusted EBITDA $ 7,784 $ 6,834

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.

For the three months ended March 31, 2023, Adjusted EBITDA increased $1.0 million (13.9%) due primarily to a $6.3 million increase in total revenues partially offset by a $2.4 million increase in costs of rentals.

Liquidity and Capital Resources

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

September 30, December 31,

Our working capital positions as of March 31, 2023 and December 31, 2022 are set forth below:

March 31, December 31,

(in thousands)

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Total working capital $ 17,638 $ 23,748

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.

For the three months ended March 31, 2023, we invested $47.8 million in rental and property and other equipment by adding $47.0 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.

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.

Our rental work-in-process increased by $28.6 million during the three months ended March 31, 2023.

We financed our investment in rental equipment, property and other equipment with cash flow from operations, and borrowings under our Amended and Restated Credit Facility.

We anticipate that our cash flows from operations as well as our borrowing capacity under our Amended and Restated Credit Agreement will provide adequate liquidity for our planned capital expenditures during the remainder of 2023.

For any new capital expenditures in 2023 and beyond that exceeds our cash flow from operations and our

borrowing base under our Amended and Restated Credit Agreement, we anticipate that we would need to negotiate an expansion of our borrowing capacity under our Amended and Restated Credit Agreement or raise money in the capital markets through equity.

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.

For the remainder of 2022, our forecasted capital expenditures are not anticipated to exceed our internally generated cash flows, cash on hand and borrowing availability under our New Credit Agreement.

At March 31, 2023 we had approximately $77 million available for borrowing under the Amended and Restated Credit Agreement, subject to borrowing base determination.

At March 31, 2023, we had cash and cash equivalents of $7.4 million compared to $3.4 million at December 31, 2022.

Our cash flows from operating activities of $18.2 million were offset by capital expenditures of $47.8 million during the three months ended March 31, 2023.

We had working capital of $17.6 million at March 31, 2023 compared to $23.7 million at December 31, 2022.

We generated cash flows from operating activities of $18.2 million during the first three months of 2023 compared to cash flows provided by operating activities of $5.0 million for the first three months of 2022.

For the remainder of 2023, 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 utilizing bank borrowing in line with market conditions.

For the remainder of 2023, our forecasted capital expenditures are not anticipated to exceed our internally generated cash flows, cash on hand and borrowing availability under our Amended and Restated Credit Agreement.

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

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

The New Credit Agreement with Texas Capital Bank, National Association (the "Lender") has an initial commitment of $20 million, and an accordion feature that would increase the maximum commitment to $30 million, subject to collateral availability.

We also have a right to request from the Lender, on an uncommitted basis, an increase of up to $30 million on the aggregate commitment;

provided however, the aggregate commitment amount is not permitted to exceed $50 million.

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

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

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

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

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

As of March 31, 2023, 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