What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-14 compared with 2023-08-14 · 73 added, 69 removed, 137 unchanged (51% of the section changed)

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Please read Item 1A, Risk Factors, in our Annual Report, as it contains important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements.

We fabricate, manufacture, rent, and sell natural gas compressors and related equipment.

We fabricate in-house and through third-party contractors, natural gas compressors and related equipment which we rent and sell to customers.

Our primary focus is on the rental of natural gas compressors.

Our rental contracts typically provide for initial terms of six to 24 months, with our larger horsepower units having contract terms of up to 60 months.

Our rental contracts typically provide for initial terms of 6 to 24 months, with our larger horsepower units having contract terms of up to 60 months.

After the initial term of our rental contracts, many of our customers have continued to rent our compressors on a month-to-month basis.

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

As of June 30, 2023, we had 1,249 natural gas compressors totaling 372,596 horsepower rented t o 75 customers compared to 1,281 natural gas compressors totaling 311,379 horsepower rented to 79 customers at June 30, 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.

Fabrication of compressors involves our purchase of engines, compressors, coolers, and other components, and our assembling of these components on skids for delivery to customer locations.

As of September 30, 2023, we had 1,233 natural gas compressors totaling 400,727 horsepower rented t o 78 customers compared to 1,196 natural gas compressors totaling 305,953 horsepower rented to 77 customers at September 30, 2022.

We also fabricate in-house and through third-party contractors, 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.

Fabrication of compressors involves our purchase of engines, compressors, coolers, and other components, and assembly by us or third-party contractors of these components on skids for delivery to customer locations.

The major components of our compressor packages are acquired through periodic purchase orders placed with third-party suppliers on an “as needed” basis, which presently require lead times between three to six months with delivery dates scheduled to coincide with our estimated production schedules.

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Recent inflationary pressures have created price increases in both major and minor components for our compressors as well as longer than normal lead times for such components.

To date, we have been able to increase our rental rates and sales prices proportionally;

To date, generally we have been able to increase our rental rates and sales prices proportionally;

however, if cost increases continue and we are no longer able to increase our rental rates and sales prices such an event could have a material adverse effect on the results of our operations and financial condition.

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Generally, though, we believe that production activities (in which we are involved) will fare better than drilling activity.

This is reflected in both the stability of our rental revenues, which is driven by production activities, and the volatility of our compressor sales, which tends to fluctuate with capital allocations.

As such, we still expect compressor sales to be low for the remainder of 2023, as exploration and production companies have elected to rent compression units rather than allocating capital dollars to purchase new compression.

Results of Operations

Three months ended June 30, 2023, compared to the three months ended June 30, 2022.

The table below shows our revenues and percentage of total revenues of each of our product lines for the three months ended June 30, 2023 and 2022.

Three months ended June 30,

Three months ended September 30, 2023, compared to the three months ended September 30, 2022.

The table below shows our revenues and percentage of total revenues of each of our product lines for the three months ended September 30, 2023 and 2022.

Three months ended September 30,

(in thousands)

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Sales 1,413 4.5 % 3,086 14.0 %

Service and Maintenance 1,257 4.7 % 490 2.5 %

Aftermarket service 2,251 7.2 % 326 1.5 %

Total $ 31,369 $ 22,043

Total revenue increased 35.3% to $27.0 million for the three months ended June 30, 2023 compared to $19.9 million for the three months ended June 30, 2022.

Total revenue increased 42.3% to $31.4 million for the three months ended September 30, 2023 compared to $22.0 million for the three months ended September 30, 2022.

This increase was primarily a result of higher rental revenue (48.7% increase) during 2023.

Rental revenue increased to $24.1 million for the three months ended June 30, 2023 compared to $18.1 million for the same period in 2022.

This increase during the second 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) modest 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, 2023, we had 1,911 compressor packages in our fleet, down from 2,043 units at June 30, 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 to 473,884 horsepower at June 30, 2023 compared to 426,811 horsepower at June 30, 2022, due to additions to the Company's fleet of 59 high horsepower compressors over the past 12 months.

As of June 30, 2023, we had 1,249 natural gas compressors with a total of 372,596 horsepower rented to 75 customers, compared to 1,281 natural gas compressors with a total of 311,379 horsepower rented to 79 customers as of June 30, 2022.

As a result, our total rented horsepower as of June 30, 2023 increased by 19.7% over the last twelve months.

Our rental fleet had unit utilization as of June 30, 2023, and 2022, respectively, of 65.4% and 62.7%, and our horsepower utilization for the same dates increased to 78.6% from 73.0%.

Our total rented horsepower increased by 19.7% contrasted against a 2.5% decrease in total rented units.

Rental revenue increased to $27.7 million for the three months ended September 30, 2023 compared to $18.6 million for the same period in 2022.

This increase during the third 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) $0.3 million in 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, 2023, we had 1,947 compressor packages in our fleet, down from 1,976 units at September 30, 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 to 509,198 horsepower at September 30, 2023 compared to 423,658 horsepower at September 30, 2022, due to additions to the Company's fleet of 59 high horsepower compressors over the past 12 months.

As of September 30, 2023, we had 1,233 natural gas compressors with a total of 400,727 horsepower rented to 78 customers, compared to 1,196 natural gas compressors with a total of 305,953 horsepower rented to 77 customers as of September 30, 2022.

As a result, our total rented horsepower as of September 30, 2023 increased by 31.0% over the last twelve months.

Our rental fleet had unit utilization as of September 30, 2023, and 2022, respectively, of 63.3% and 60.5%, and our horsepower utilization for the same dates increased to 78.7% from 72.2%.

Our total rented horsepower increased by 31.0% contrasted against a 3.1% increase 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 23.5% to $1.6 million for the three months ended June 30, 2023 compared to $1.3 million for the three months ended June 30, 2022.

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

Sales revenue decreased (54.2)% to $1.4 million for the three months ended September 30, 2023 compared to $3.1 million for the three months ended September 30, 2022.

This decrease is primarily attributable to lower compressor sales during the third 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 t o $11.3 million during the three months ended June 30, 2023 compared to $9.2 million during the three months ended June 30, 2022.

Aftermarket service revenue increased 590% to $2.3 million for the three months ended September 30, 2023 compared to $0.3 million for the three months ended September 30, 2022.

This increase is primarily attributable to freight and commissioning of high horsepower units during the three months ended September 30, 2023.

Cost of rentals increased t o $13.5 million during the three months ended September 30, 2023 compared to $10.0 million during the three months ended September 30, 2022.

This 34.8% increase in costs of rentals is primarily due to more rented horsepower during 2023.

Cost of sales increased 30.3% to $1.9 million during the three months ended June 30, 2023 compared to $1.4 million during the three months ended June 30, 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 110.4% to $4.9 million for the three months ended June 30, 2023 compared $2.3 million during the same period in 2022.

This increase in SG&A expenses was primarily attributable to (i) $612,000 of severance expenses related to the retirement agreement between NGS and Stephen C.

Taylor, our prior and current interim Chief Executive Officer, (ii) $800,000 increase in stock compensation expenses, (iii) and a one-time increase of $350,000 for reimbursement expenses related to our Cooperation Agreement with Mill Road Capital.

Depreciation and amortization expense increased to $6.4 million for the three months ended June 30, 2023 compared to $6.0 million for the three months ended June 30, 2022, due to increased capital expenditures.

We recorded an income tax expense of approximately $0.2 million for the three months ended June 30, 2023 compared to an income tax expense of $0.4 million for the three months ended June 30, 2022.

Cost of sales decreased 27.7% to $1.5 million during the three months ended September 30, 2023 compared to $2.1 million during the three months ended September 30, 2022.

This decrease was primarily due to lower sales activity.

Selling, general, and administrative ("SG&A") expenses decreased 30.0% to $2.8 million for the three months ended September 30, 2023 compared $4.1 million during the same period in 2022.

This decrease in SG&A expenses was primarily attributable to (i) a decrease of $0.6 million in severance expenses related to the retirement agreement between NGS and Stephen C.

Taylor, our prior permanent Chief Executive Officer and current interim Chief Executive Officer, and (ii) $0.4 million decrease in stock compensation expenses.

Taylor continues to be employed as our interim CEO while we search for his permanent replacement.

Depreciation and amortization expense increased to $6.8 million for the three months ended September 30, 2023 compared to $6.0 million for the three months ended September 30, 2022, due to increased capital expenditures.

We recorded an income tax expense of approximately $1.0 million for the three months ended September 30, 2023 compared to an income tax benefit of $0.1 million for the three months ended September 30, 2022.

For interim periods, our income tax 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.

We recorded an impairment expense of $0.8 million related to capitalized software costs for the three months ended June 30, 2023.

Six months ended June 30, 2023, compared to the six months ended June 30, 2022.

The table below shows our revenues and percentage of total revenues of each of our product lines for the six months ended June 30, 2023 and 2022.

Six months ended June 30,

Nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.

The table below shows our revenues and percentage of total revenues of each of our product lines for the nine months ended September 30, 2023 and 2022.

Nine months ended September 30,

(in thousands)

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Sales 6,000 7.1 % 7,270 11.7 %

Service and Maintenance 2,162 4.0 % 804 2.0 %

Aftermarket services 4,413 5.2 % 1,129 1.8 %

Total $ 84,946 $ 62,304

Total revenue increased 33.1% to $53.6 million for the six months ended June 30, 2023 compared to $40.3 million during the nine months ended June 30, 2022.

This increase was primarily a result of higher rental revenue (32.8% increase) and higher service and maintenance revenue during the first six months of 2023 (168.9% increase).

Rental revenue increased to $46.8 million for the six months ended June 30, 2023 compared to $35.3 million during the six months ended June 30, 2022.

This increase during the first six months of 2023 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 $4.6 million for the six months ended June 30, 2023 compared to $4.2 million for the same period in 2022.

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

Total revenue increased 36.3% to $84.9 million for the nine months ended September 30, 2023 compared to $62.3 million during the nine months ended September 30, 2022.

This increase was primarily a result of higher rental revenue (38.3% increase) and higher aftermarket service revenue during the first nine months of 2023 (290.9% increase).

Rental revenue increased to $74.5 million for the nine months ended September 30, 2023 compared to $53.9 million during the nine months ended September 30, 2022.

This increase during the first nine months of 2023 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 decreased to $6.0 million for the nine months ended September 30, 2023 compared to $7.3 million for the same period in 2022.

This decrease is mostly attributable to a decrease in compressor 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 24.4% to $23.0 million during the six months ended June 30, 2023 compared to $18.5 million during the six months ended June 30, 2022.

Aftermarket service revenue increased 290.9% to $4.4 million for the nine months ended September 30, 2023 compared to $1.1 million for the nine months ended September 30, 2022.

This increase is primarily attributable to freight and commissioning of high horsepower units during the nine months ended September 30, 2023.

Cost of rentals increased 28.1% to $36.5 million during the nine months ended September 30, 2023 compared to $28.5 million during the nine months ended September 30, 2022.

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 increased 49.2% to $5.1 million during the six months ended June 30, 2023 compared to $3.4 million during the six months ended June 30, 2022.

This increase during the first six months of 2023 was primarily due to a increased fabrication cost in costs of sales attributable to costs from our fabrication shops.

Selling, general, and administrative expenses increased 95.8% to $9.4 million for the six months ended June 30, 2023 compared to $4.8 million for the same period in 2022.

SG&A expenses during the first six months of 2023 were impacted by (i) $ 1.2 million of severance expenses related to the retirement agreement between NGS and Mr.

Stephen Taylor, our prior Chief Executive Officer, (ii) a $800,000 increase in stock option compensation expense and (iii) $400,000 increase in legals costs associated with our cooperation agreement.

Depreciation and amortization expense increased 4.0% to $12.6 million for the six months ended June 30, 2023 compared to $12.1 million for the six months ended June 30, 2022.

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

We recorded an income tax expense of $0.4 million for the six months ended June 30, 2023 and the six months ended June 30, 2022.

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

We recorded an impairment expense of $0.8 million related to capitalized software costs for the 6 months ended June 30, 2023.

Cost of sales increased 20.1% to $6.6 million during the nine months ended September 30, 2023 compared to $5.5 million during the nine months ended September 30, 2022.

This increase during the first nine months of 2023 was primarily due to a increased fabrication costs attributable to our fabrication shops.

Selling, general, and administrative expenses increased 38.2% to $12.3 million for the nine months ended September 30, 2023 compared to $8.9 million for the same period in 2022.

SG&A expenses during the first nine months of 2023 were impacted by (i) $ 1.2 million of severance expenses related to the retirement agreement between NGS and Mr.

Stephen Taylor, our prior Chief Executive Officer, (ii) a $0.5 million increase in stock compensation expense when compared to the first 9 months of 2022 and (iii) $0.4 million one time increase in legals costs associated with our cooperation agreement.

Depreciation and amortization expense increased 7.0% to $19.4 million for the nine months ended September 30, 2023 compared to $18.1 million for the nine months ended September 30, 2022.

This increase was the result of units in service during 2023.

We recorded an income tax expense of $1.4 million for the nine months ended September 30, 2023 and $0.3 million for the nine months ended September 30, 2022.

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

We recorded an impairment expense of $0.8 million related to capitalized software costs for the nine months ended September 30, 2023.

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, for the three months ended June 30, 2023 and 2022, 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 and the nine months ended September 30, 2023 and 2022, the most directly comparable GAAP financial measure.

Reconciliation

The following table reconciles our net 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,

2023 2022 2023 2022

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Adjusted EBITDA $ 11,833 $ 7,729 $ 29,491 $ 21,411

For the three months ended June 30, 2023, Adjusted EBITDA increased $3.2 million (47.4%) due primarily to a $7.0 million increase in total revenues partially offset by a $2.1 million increase in costs of rentals.

For the six months ended June 30, 2023, Adjusted EBITDA increased 4.1 million (30.5%) due primarily to an $11.6 million increase in rental revenue partially offset by an increase of $4.5 million for cost of rentals.

For the three months ended September 30, 2023, Adjusted EBITDA increased $4.1 million 53.1% due primarily to a $9.3 million increase in total revenues partially offset by a $3.5 million increase in costs of rentals.

For the nine months ended September 30, 2023, Adjusted EBITDA increased $8.1 million (37.7%) due primarily to an $20.6 million increase in rental revenue partially offset by an increase of $8.0 million for cost of rentals.

Liquidity and Capital Resources

Our working capital positions as of June 30, 2023 and December 31, 2022 are set forth below:

June 30, December 31,

Our working capital positions as of September 30, 2023 and December 31, 2022 are set forth below:

September 30, December 31,

(in thousands)

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Total working capital $ 22,071 $ 23,748

For the six months ended June 30, 2023, we invested $93.5 million in rental and property and other equipment by adding $92.3 million in new equipment to our rental fleet and $1.2 million primarily in vehicles as well as various other machinery and equipment.

For the nine months ended September 30, 2023, we invested $128.6 million in rental and property and other equipment by adding $126.4 million in new equipment to our rental fleet and $2.2 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 $19.9 million during the six months ended June 30, 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.

Our rental work-in-process increased by $17.9 million during the nine months ended September 30, 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.

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

At June 30, 2023 we had approximately $75 million available for borrowing under the Amended and Restated Credit Agreement, subject to borrowing base determination.

At June 30, 2023, we had cash and cash equivalents of $4.3 million compared to $3.4 million at December 31, 2022.

Our cash flows from operating activities of $22.6 million were offset by capital expenditures of $93.5 million during the six months ended June 30, 2023.

We had working capital of $18.9 million at June 30, 2023 compared to $23.7 million at December 31, 2022.

We generated cash flows from operating activities of $22.6 million during the first six months of 2023 compared to cash flows provided by operating activities of $13.2 million for the first six 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.

At September 30, 2023 we had approximately $47 million available for borrowing under the Amended and Restated Credit Agreement, subject to borrowing base determination.

At September 30, 2023, we had cash and cash equivalents of $0.2 million compared to $3.4 million at December 31, 2022.

Our cash flows from operating activities of $25.7 million were offset by capital expenditures of $128.6 million during the nine months ended September 30, 2023.

We had working capital of $22.1 million at September 30, 2023 compared to $23.7 million at December 31, 2022.

We generated cash flows from operating activities of $25.7 million during the first nine months of 2023 compared to cash flows provided by operating activities of $20.2 million for the first nine 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 either in-house or through third-party contractors only in direct response to market requirements, emphasize marketing of our idle gas compressor units and utilize 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.

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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, 2023, the off-balance sheet arrangements and transactions that we have entered into include purchase agreements.

As of September 30, 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