UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-31398
NATURAL GAS SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
Colorado |
75-2811855 |
(State or other jurisdiction of |
(I.R.S. Employer |
incorporation or organization) |
Identification No.) |
508 W. Wall St., Ste 550
Midland, Texas 79701
(Address of principal executive offices)
(432) 262-2700
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
Accelerated filer x |
Non-accelerated filer o
(Do not check if smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class |
|
Outstanding at August 10, 2009 |
Common Stock, $.01 par value |
|
12,096,833 |
|
|
Part I - FINANCIAL INFORMATION |
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Item 1. Financial Statements |
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Page 1 |
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Page 2 |
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Page 3 |
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Page 4 |
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Page 10 |
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Page 16 |
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Page 17 |
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Page 18 |
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Page 18 |
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Page 18 |
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Page 19 |
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Page 20 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
NATURAL GAS SERVICES GROUP, INC.
CONDENSED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited) |
|
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|
December 31, |
June 30, |
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2008 |
|
|
2009 |
|
ASSETS |
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Current Assets: |
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|
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|
Cash and cash equivalents |
|
$ |
1,149 |
|
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$ |
11,687 |
|
Short-term investments |
|
|
2,300 |
|
|
|
— |
|
Trade accounts receivable, net of doubtful accounts of $177 and $293,
respectively |
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11,321 |
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5,799 |
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Inventory, net of allowance for obsolescence of $500 and $254, respectively |
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31,931 |
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27,445 |
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Prepaid income taxes |
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244 |
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|
801 |
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Prepaid expenses and other |
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87 |
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231 |
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Total current assets |
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47,032 |
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45,963 |
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Rental equipment, net of accumulated depreciation of $24,624 and $29,310, respectively |
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111,967 |
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113,723 |
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Property and equipment, net of accumulated depreciation of $6,065 and $6,400, respectively |
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8,973 |
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8,303 |
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Goodwill, net of accumulated amortization of $325, both periods |
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10,039 |
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10,039 |
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Intangibles, net of accumulated amortization of $1,198 and $1,347, respectively |
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3,020 |
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2,871 |
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Other assets |
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19 |
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19 |
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Total assets |
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$ |
181,050 |
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$ |
180,918 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current Liabilities: |
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Current portion of long-term debt |
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$ |
3,378 |
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$ |
3,378 |
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Accounts payable |
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8,410 |
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|
1,189 |
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Accrued liabilities |
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3,987 |
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|
1,925 |
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Current income tax liability |
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110 |
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|
99 |
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Deferred income |
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38 |
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281 |
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Total current liabilities |
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15,923 |
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6,872 |
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Long term debt, less current portion |
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6,194 |
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4,505 |
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Line of credit |
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7,000 |
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7,000 |
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Deferred income tax payable |
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21,042 |
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24,552 |
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Other long term liabilities |
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441 |
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562 |
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Total liabilities |
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50,600 |
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43,491 |
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Commitments & Contingencies (Note 8) |
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Stockholders’ equity: |
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Preferred stock, 5,000 shares authorized, no shares issued or outstanding |
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— |
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— |
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Common stock, 30,000 shares authorized, par value $0.01;12,094 and 12,097 shares issued and outstanding, respectively |
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121 |
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121 |
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Additional paid-in capital |
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83,937 |
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84,245 |
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Retained earnings |
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46,392 |
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53,061 |
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Total stockholders' equity |
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130,450 |
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137,427 |
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Total liabilities and stockholders' equity |
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$ |
181,050 |
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$ |
180,918 |
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See accompanying notes to these unaudited condensed financial statements.
NATURAL GAS SERVICES GROUP, INC.
(in thousands, except earnings per share)
(unaudited) |
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Three months ended June 30, |
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Six months ended June 30, |
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2008 |
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2009 |
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2008 |
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2009 |
Revenue: |
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Sales, net |
$ |
9,159 |
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$ |
4,599 |
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$ |
18,785 |
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$ |
11,528 |
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Rental income |
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10,095 |
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11,969 |
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19,105 |
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24,757 |
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Service and maintenance income |
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224 |
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189 |
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521 |
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497 |
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Total revenue |
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19,478 |
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16,757 |
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38,411 |
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36,782 |
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Operating costs and expenses: |
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Cost of sales, exclusive of depreciation stated separately below |
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6,238 |
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3,253 |
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12,631 |
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7,782 |
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Cost of rentals, exclusive of depreciation stated separately below |
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4,094 |
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4,152 |
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7,498 |
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8,841 |
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Cost of service and maintenance, exclusive of depreciation stated separately below |
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152 |
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132 |
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360 |
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347 |
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Selling, general, and administrative expense |
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1,485 |
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1,654 |
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2,835 |
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3,231 |
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Depreciation and amortization |
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2,364 |
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2,935 |
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4,489 |
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5,893 |
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Total operating costs and expenses |
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14,333 |
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12,126 |
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27,813 |
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26,094 |
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Operating income |
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5,145 |
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4,631 |
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10,598 |
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10,688 |
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Other income (expense): |
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Interest expense |
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(193) |
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(154 |
) |
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(434) |
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(314 |
) |
Other income (expense) |
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141 |
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(59 |
) |
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374 |
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(106 |
) |
Total other income (expense) |
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(52) |
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(213 |
) |
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(60) |
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(420 |
) |
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Income before provision for income taxes |
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5,093 |
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4,418 |
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10,538 |
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10,268 |
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Provision for income taxes |
|
1,760 |
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1,546 |
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3,688 |
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3,599 |
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Net income |
$ |
3,333 |
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|
|
2,872 |
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$ |
6,850 |
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$ |
6,669 |
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Earnings per share: |
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Basic |
$ |
0.28 |
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$ |
0.24 |
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$ |
0.57 |
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$ |
0.55 |
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Diluted |
$ |
0.27 |
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$ |
0.24 |
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$ |
0.56 |
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$ |
0.55 |
|
Weighted average shares outstanding: |
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Basic |
|
12,088 |
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12,095 |
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|
12,087 |
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|
12,094 |
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Diluted |
|
12,152 |
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|
|
12,099 |
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12,150 |
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12,102 |
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See accompanying notes to these unaudited condensed financial statements.
NATURAL GAS SERVICES GROUP, INC.
|
|
(in thousands)
(unaudited) |
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|
Six months ended
June 30, |
|
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2008 |
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|
2009 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
|
$ |
6,850 |
|
|
$ |
6,669 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
4,489 |
|
|
|
5,893 |
|
Deferred taxes |
|
|
3,688 |
|
|
|
3,599 |
|
Employee stock options expense |
|
|
181 |
|
|
|
299 |
|
Gain on disposal of assets |
|
|
(14 |
) |
|
|
(44 |
) |
Changes in current assets and liabilities: |
|
|
|
|
|
|
|
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Trade accounts receivables, net |
|
|
798 |
|
|
|
5,522 |
|
Inventory, net |
|
|
(9,332 |
) |
|
|
4,800 |
|
Prepaid income taxes and prepaid expenses |
|
|
558 |
|
|
|
(701 |
) |
Accounts payable and accrued liabilities |
|
|
4,682 |
|
|
|
(9,283 |
) |
Current income tax liability |
|
|
(220 |
) |
|
|
(100 |
) |
Deferred income |
|
|
1,670 |
|
|
|
243 |
|
Other |
|
|
18 |
|
|
|
— |
|
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
|
13,368 |
|
|
|
16,897 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
|
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|
|
|
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Purchase of property and equipment |
|
|
(21,897 |
) |
|
|
(7,235 |
) |
Purchase of short-term investments |
|
|
(294 |
) |
|
|
— |
|
Redemption of short-term investments |
|
|
12,528 |
|
|
|
2,300 |
|
Proceeds from sale of property and equipment |
|
|
35 |
|
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|
135 |
|
NET CASH USED IN INVESTING ACTIVITIES |
|
|
(9,628 |
) |
|
|
(4,800 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from line of credit |
|
|
500 |
|
|
|
— |
|
Proceeds from other long-term liabilities, net |
|
|
150 |
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|
|
121 |
|
Repayments of long-term debt |
|
|
(2,689 |
) |
|
|
(1,689 |
) |
Repayments of line of credit |
|
|
(1,100 |
) |
|
|
— |
|
Proceeds from exercise of stock options |
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|
44 |
|
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|
9 |
|
NET CASH USED IN FINANCING ACTIVITIES |
|
|
(3,095 |
) |
|
|
(1,559 |
) |
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NET CHANGE IN CASH |
|
|
645 |
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|
|
10,538 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
245 |
|
|
|
1,149 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
890 |
|
|
$ |
11,687 |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Interest paid |
|
$ |
477 |
|
|
$ |
322 |
|
Income taxes paid |
|
$ |
220 |
|
|
$ |
658 |
|
See accompanying notes to these unaudited condensed financial statements.
(1) Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited condensed financial statements present the condensed results of our company taken from our books and records. In our opinion, such information includes all adjustments, consisting of only normal recurring adjustments, which are necessary to make our financial position at June 30, 2009 and the results of
our operations for the three and six month periods ended June 30, 2008 and 2009 not misleading. As permitted by the rules and regulations of the Securities and Exchange Commission (SEC) the accompanying condensed financial statements do not include all disclosures normally required by accounting principles generally accepted in the United States of America. These condensed financial statements should be read in conjunction with
the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008 on file with the SEC. In our opinion, the condensed financial statements are a fair presentation of the financial position, results of operations and cash flows for the periods presented.
The results of operations for the three and six month period’s ending June 30, 2009 is not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2009.
Revenue recognition
Revenue from the sales of custom and fabricated compressors, and flare systems is recognized upon shipment of the equipment to customers or when all conditions have been met title is transferred to the customer. Exchange and rebuild compressor revenue is recognized when both the replacement compressor has been delivered and the rebuild
assessment has been completed. Revenue from compressor services is recognized upon providing services to the customer. Maintenance agreement revenue is recognized as services are rendered. Rental revenue is recognized over the terms of the respective rental agreements based upon the classification of the rental agreement. Deferred income represents payments received before a product is shipped. Revenue from the sale of rental units is included in sales revenue when equipment is shipped or title is
transferred to the customer.
Fair Value of Financial Instruments
We adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157), and the related effective interpretations for both financial and non-financial assets and liabilities. The adoption of SFAS 157 did not have a material impact on our unaudited condensed
consolidated financial statements. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements.
Our financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable and notes payable. Pursuant to SFAS 157, the fair value of our cash equivalents is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. We believe that the
recorded values of all of our other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.
Subsequent Events
We have evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through August 10, 2009, the day the financial statements were issued.
Recently Issued Accounting Pronouncements
On January 1, 2009, we adopted SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51,” (SFAS 160). SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial
Statements,” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This standard defines a noncontrolling interest, previously called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. SFAS 160 requires, among other items, that a noncontrolling interest be included in the consolidated statement of financial position within equity separate from the parent’s
equity; consolidated net income to be reported at amounts inclusive of both the parent’s and noncontrolling interest’s shares and, separately, the amounts of consolidated net income attributable to the parent and noncontrolling interest all on the consolidated income statement; and if a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be measured at fair value and a gain or loss be recognized in net income based on such fair value. The adoption of
SFAS 160 had no impact on our consolidated financial statements.
On January 1, 2009, we adopted SFAS No. 141(R), Business Combinations, which replaces SFAS No. 141, Business Combinations (SFAS 141R), and requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This Statement also requires the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values. Additionally, this Statement requires acquisition related costs to be expensed in the period
in which the costs were incurred and the services are received instead of including such costs as part of the acquisition price. SFAS 141(R) makes various other amendments to authoritative literature intended to provide additional guidance or to confirm the guidance in that literature to that provided in this Statement. The adoption of SFAS No. 141(R) had no impact on our consolidated financial statements.
In April 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. We adopted SFAS
165 for the quarter ending June 30, 2009. The adoption of SFAS 165 did not have a material impact on our consolidated financial statements.
In April 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS 167). SFAS 167 requires a qualitative approach to identifying a controlling financial interest in a variable interest entity (VIE), and requires ongoing assessment of whether
an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. SFAS 167 is effective for annual reporting periods beginning after November 15, 2009. The adoption of SFAS No. 167 is not expected to have a material impact on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (SFAS 168). SFAS 168 identifies the FASB Accounting Standards Codification as the authoritative source of generally accepted
accounting principles in the United States. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We do not expect the adoption of SFAS 168 to have a material impact on our consolidated financial statements.
(2) Stock-Based Compensation
A summary of option activity under our 1998 Stock Option plan for the six month period ended June 30, 2009 is presented below.
|
|
Number
of
Stock Options |
|
|
Weighted Average
Exercise
Price |
|
|
Weighted
Average
Remaining
Contractual Life (years) |
|
|
Aggregate
Intrinsic
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2008 |
|
|
264,501 |
|
|
$ |
14.61 |
|
|
|
7.94 |
|
|
$ |
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
107,433 |
|
|
|
8.45 |
|
|
|
— |
|
|
|
— |
|
Exercised |
|
|
(3,000 |
) |
|
|
3.25 |
|
|
|
— |
|
|
|
— |
|
Forfeited or expired |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2009 |
|
|
368,934 |
|
|
$ |
12.91 |
|
|
|
8.13 |
|
|
$ |
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30, 2009 |
|
|
176,166 |
|
|
$ |
12.72 |
|
|
|
6.85 |
|
|
$ |
102 |
|
* Market price as of December 31, 2008 exceeded the weighted average exercise price, and as such, resulted in the aggregate intrinsic value being negative or “out-of-the-money”.
We granted 30,000 options to an officer on January 28, 2009 at an exercise price of $9.95 with a three year vesting period. We granted 62,433 options to employees and officers on March 17, 2009 at an exercise price of $7.84 with a one year vesting period. We granted 15,000 options to the non executive members of the
board of directors on March 18, 2009 at an exercise price of $8.00 vesting through December 2009.
The following table summarizes information about the stock options outstanding at June 30, 2009:
Range of Exercise Prices |
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
Shares |
|
|
Weighted
Average
Remaining
Contractual
Life (years) |
|
|
Weighted
Average
Exercise
Price |
|
|
Shares |
|
|
Weighted
Average
Exercise
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.00 – 5.58 |
|
|
|
19,000 |
|
|
|
3.56 |
|
|
$ |
4.24 |
|
|
|
19,000 |
|
|
$ |
4.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.59 – 9.43 |
|
|
|
137,433 |
|
|
|
8.08 |
|
|
|
8.41 |
|
|
|
67,500 |
|
|
|
8.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.44 – 15.60 |
|
|
|
74,501 |
|
|
|
8.36 |
|
|
|
12.57 |
|
|
|
36,333 |
|
|
|
14.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.61 – 20.48 |
|
|
|
138,000 |
|
|
|
8.68 |
|
|
|
18.76 |
|
|
|
53,333 |
|
|
|
19.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.00 – 20.48 |
|
|
|
368,934 |
|
|
|
8.13 |
|
|
$ |
12.91 |
|
|
|
176,166 |
|
|
$ |
12.72 |
|
The summary of the status of the our unvested stock options as of June 30, 2009 and changes during the six months ended June 30, 2009 is presented below.
Unvested stock options: |
|
Shares |
|
|
Weighted Average
Grant Date Fair Value |
|
|
|
|
|
|
|
|
Unvested at December 31, 2008 |
|
|
106,168 |
|
|
$ |
8.19 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
107,433 |
|
|
|
4.78 |
|
Vested |
|
|
(20,833 |
) |
|
|
8.00 |
|
Forfeited |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Unvested at June 30, 2009 |
|
|
192,768 |
|
|
$ |
6.29 |
|
As of June 30, 2009, there was $908,000 of unrecognized compensation cost related to unvested options. Such cost is expected to be recognized over a weighted-average period of 1.25 years. Total compensation expense for stock options was $181,000 and $299,000 for the six months ended June 30, 2008 and 2009, respectively. An
income tax benefit was recognized from the exercise of stock options of approximately $12,000 for the six months ended June 30, 2008 and 2009.
On June 16, 2009, at our annual meeting of shareholders, our shareholders approved a proposed amendment to our 1998 Stock Option Plan (the “Plan”) to add an additional 200,000 shares of common stock to the Plan, thereby authorizing the issuance of up to 750,000 shares of common stock under the Plan.
Also on June 16, 2009, at our annual meeting of shareholders, our shareholders adopted the 2009 Restricted Stock/Unit Plan. A total of 300,000 shares of Company common stock are reserved for issuance under the restricted stock plan.
(3) Inventory
During six months ended June 30, 2009, we disposed of approximately $527,000 of obsolete inventory and added approximately $281,000 to our allowance. Inventory, net of allowance for obsolescence of $500,000 at December 31, 2008 and $254,000 at June 30, 2009 consisted of the following amounts:
|
December 31, |
|
June 30, |
|
|
2008 |
|
2009 |
|
|
(in thousands) |
|
(in thousands) |
|
|
|
|
|
|
Raw materials |
|
$ |
26,124 |
|
|
$ |
23,814 |
|
Finished goods |
|
|
2,417 |
|
|
|
1,722 |
|
Work in process |
|
|
3,390 |
|
|
|
1,909 |
|
|
|
$ |
31,931 |
|
|
$ |
27,445 |
|
(4) Credit Facility
Revolving Line of Credit Facility. As of June 30, 2009, the amount available for revolving line of credit advances was $33.0 million. The amount we could borrow is determined by a borrowing base calculation and is based primarily upon our receivables, equipment
and inventory. We had $7.0 million outstanding as of June 30, 2009 on this revolving line of credit facility, and the interest rate was 4.00%.
$16.9 Million Multiple Advance Term Loan Facility. As of June 30, 2009 this term loan facility had a principal balance of $7.9 million, and the interest rate was 4.00%.
As of June 30, 2009, we were in compliance with all covenants in our Loan Agreement. A default under our bank credit facility could trigger the acceleration of our bank debt so that it is immediately due and payable. Such default would have a material adverse effect on our liquidity, financial position and operations.
(5) Other Long-term Liabilities
As of June 30, 2009, we had a long-term liability of $275,000 to Midland Development Corporation. This amount is to be recognized as income contingent upon certain staffing requirements in the future. In addition, we entered into a purchase agreement with a vendor on July 30, 2008 pursuant to which we agreed to purchase
up to $4.8 million of our paint and coating requirements exclusively from the vendor. In connection with the execution of the agreement, the vendor paid us a $300,000 fee which is considered to be a discount toward future purchases from the vendor. Based on our historical paint and coating requirements, we estimate meeting the $4.8 million purchase obligation within five years. The $300,000 payment received by the Company is recorded as a long-term liability and will decrease
as the purchase commitment is fulfilled. The long-term liability remaining as of June 30, 2009 was $287,000.
(6) Earnings per Share
The following table reconciles the numerators and denominators of the basic and diluted earnings per share computation.
|
|
Three months Ended
June 30,
(in thousands,
except per share data) |
|
|
Six months Ended
June 30,
(in thousands,
except per share data) |
|
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,333 |
|
|
|
2,872 |
|
|
|
6,850 |
|
|
|
6,669 |
|
Denominator for basic net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
12,088 |
|
|
|
12,095 |
|
|
|
12,087 |
|
|
|
12,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
12,088 |
|
|
|
12,095 |
|
|
|
12,087 |
|
|
|
12,094 |
|
Dilutive effect of stock options and warrants |
|
|
64 |
|
|
|
4 |
|
|
|
63 |
|
|
|
8 |
|
Diluted weighted average shares |
|
|
12,152 |
|
|
|
12,099 |
|
|
|
12,150 |
|
|
|
12,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.28 |
|
|
$ |
0.24 |
|
|
$ |
0.57 |
|
|
$ |
0.55 |
|
Diluted |
|
$ |
0.27 |
|
|
$ |
0.24 |
|
|
$ |
0.56 |
|
|
$ |
0.55 |
|
A total of 182,501 stock options were excluded from diluted weighted average shares as their effect would be antidilutive.
(7) Segment Information
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for public companies relating to the reporting of financial and descriptive information about their operating segments in financial statements. Operating segments are
components of an enterprise about which separate financial information is available that is evaluated regularly by chief operating decision makers in the allocation of resources and the assessment of performance. Our management identifies segments based upon major revenue sources as shown in the tables below. However, management does not track assets by segment.
For the three months ended June 30, 2009 (in thousands): |
|
|
|
Sales |
|
|
Rental |
|
|
Service & Maintenance |
|
|
Corporate |
|
|
Total |
|
Revenue |
|
$ |
4,599 |
|
|
$ |
11,969 |
|
|
$ |
189 |
|
|
$ |
— |
|
|
$ |
16,757 |
|
Operating costs and expenses |
|
|
3,253 |
|
|
|
4,152 |
|
|
|
132 |
|
|
|
4,589 |
|
|
|
12,126 |
|
Other income/(expense) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(213 |
) |
|
|
(213 |
) |
Income before provision for income taxes |
|
$ |
1,346 |
|
|
$ |
7,817 |
|
|
$ |
57 |
|
|
$ |
(4,802 |
) |
|
$ |
4,418 |
|
For the three months ended June 30, 2008 (in thousands): |
|
|
|
Sales |
|
|
Rental |
|
|
Service & Maintenance |
|
|
Corporate |
|
|
Total |
|
Revenue |
|
$ |
9,159 |
|
|
$ |
10,095 |
|
|
$ |
224 |
|
|
$ |
— |
|
|
$ |
19,478 |
|
Operating costs and expenses |
|
|
6,238 |
|
|
|
4,094 |
|
|
|
152 |
|
|
|
3,849 |
|
|
|
14,333 |
|
Other income/(expense) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(52 |
) |
|
|
(52 |
) |
Income before provision for income taxes |
|
$ |
2,921 |
|
|
$ |
6,001 |
|
|
$ |
72 |
|
|
$ |
(3,901 |
) |
|
$ |
5,093 |
|
For the six months ended June 30, 2009 (in thousands): |
|
|
|
Sales |
|
|
Rental |
|
|
Service & Maintenance |
|
|
Corporate |
|
|
Total |
|
Revenue |
|
$ |
11,528 |
|
|
$ |
24,757 |
|
|
$ |
497 |
|
|
$ |
— |
|
|
$ |
36,782 |
|
Operating costs and expenses |
|
|
7,782 |
|
|
|
8,841 |
|
|
|
347 |
|
|
|
9,124 |
|
|
|
26,094 |
|
Other income/(expense) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(420) |
|
|
|
(420 |
) |
Income before provision for income taxes |
|
$ |
3,746 |
|
|
$ |
15,916 |
|
|
$ |
150 |
|
|
$ |
(9,544) |
|
|
$ |
10,268 |
|
*Segment Assets |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
180,918 |
|
|
$ |
180,918 |
|
For the six months ended June 30, 2008 (in thousands): |
|
|
|
Sales |
|
|
Rental |
|
|
Service & Maintenance |
|
|
Corporate |
|
|
Total |
|
Revenue |
|
$ |
18,785 |
|
|
$ |
19,105 |
|
|
$ |
521 |
|
|
$ |
— |
|
|
$ |
38,411 |
|
Operating costs and expenses |
|
|
12,631 |
|
|
|
7,498 |
|
|
|
360 |
|
|
|
7,324 |
|
|
|
27,813 |
|
Other income/(expense) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(60 |
) |
|
|
(60) |
|
Income before provision for income taxes |
|
$ |
6,154 |
|
|
$ |
11,607 |
|
|
$ |
161 |
|
|
$ |
(7,384 |
) |
|
$ |
10,538 |
|
*Segment Assets |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
163,687 |
|
|
$ |
163,687 |
|
* Management does not track assets by segment
(8) Legal Proceedings
From time to time, we are a party to various other legal proceedings in the ordinary course of our business. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not have a material adverse effect on our consolidated financial position,
results of operations or cash flow. We are not currently a party to any material legal proceedings and we are not aware of any other threatened litigation.
The discussion and analysis of our financial condition and results of operations are based on, and should be read in conjunction with, our condensed consolidated financial
statements and the related notes included elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC.
Overview
We fabricate, manufacture, rent and sell natural gas compressors and related equipment. Our primary focus is on the rental of natural gas compressors. Our rental contracts generally provide for initial terms of six to 24 months. After the initial term of our rental contracts, most of our customers have continued to rent our compressors
on a month-to-month basis. Rental amounts are paid monthly in advance and include maintenance of the rented compressors. As of June 30, 2009, we had 1,345 natural gas compressors totaling 168,381 horsepower rented to 99 third parties compared to 1,388 natural gas compressors totaling 168,355 horsepower rented to 108 third parties at June 30, 2008.
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 the purchase by us of engines, compressors, coolers and other components,
and then assembling these components on skids for delivery to customer locations. The major components of our compressors are acquired through periodic purchase orders placed with third-party suppliers on an “as needed” basis, which presently requires a two to three month lead time with delivery dates scheduled to coincide with our estimated production schedules. Although we do not have formal continuing supply contracts with any major supplier, we believe we have adequate alternative sources available.
In the past, we have not experienced any sudden and dramatic increases in the prices of the major components for our compressors. However, the occurrence of such an event could have a material adverse effect on the results of our operations and financial condition, particularly if we were unable to increase our rental rates and sales prices proportionate to any such component price increases.
We also manufacture a proprietary line of compressor frames, cylinders and parts, known as our CiP (Cylinder-in-Plane) product line. 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. We also provide an exchange and rebuild program for screw compressors and maintain an inventory of new and used compressors
to facilitate this business.
We provide service and maintenance to our customers under written maintenance contracts or on an as required basis in the absence of a service contract. Maintenance agreements typically have terms of six months to one year and require payment of a monthly fee.
The oil and gas equipment rental and services industry is cyclical in nature. The most critical factor in assessing the outlook for the industry is the worldwide supply and demand for natural gas and the corresponding changes in commodity prices. As demand and prices increase, oil and gas producers increase their capital expenditures for
drilling, development and production activities. Generally, the increased capital expenditures ultimately result in greater revenues and profits for services and equipment companies.
In general, we expect our overall business activity and revenues to track the level of activity in the natural gas industry, with changes in domestic natural gas production and consumption levels and prices more significantly affecting our business than changes in crude oil and condensate production and consumption levels and prices. We
also believe that demand for compression services and products is driven by declining reservoir pressure in maturing natural gas producing fields and, more recently, by increased focus by producers on non-conventional natural gas production, such as coalbed methane, gas shales and tight gas, which typically requires more compression than production from conventional natural gas reservoirs.
Demand for our products and services was strong throughout previous years but began to decline in the first quarter of 2009 and will most likely continue to decline for the remainder of the year due to lower oil and natural gas prices and decreased demand for natural gas. However, we believe the long-term trend in our markets
is favorable.
For fiscal year 2009, our forecasted capital expenditures will be directly dependent upon our customers’ compression requirements and are not anticipated to exceed our internally generated cash flows. Any required capital will be for additions to our compressor rental fleet and/or addition or replacement of service vehicles. We
believe that cash flows from operations will be sufficient to satisfy our capital and liquidity requirements through 2009. We may require additional capital to fund any unanticipated expenditures, including any acquisitions of other businesses, although that capital may not be available to us when we need it or on acceptable terms.
Results of Operations
Three months ended June 30, 2008, compared to the three months ended June 30, 2009.
The table below shows our revenues and percentage of total revenues of each of our segments for the three months ended June 30, 2008 and June 30, 2009.
|
|
Revenue |
|
|
(in thousands) |
|
|
Three months ended June 30, |
|
|
2008 |
|
2009 |
Sales |
|
$ |
9,159 |
|
47 |
% |
|
$ |
4,599 |
|
27 |
% |
Rental |
|
|
10,095 |
|
52 |
% |
|
|
11,969 |
|
72 |
% |
Service and Maintenance |
|
|
224 |
|
1 |
% |
|
|
189 |
|
1 |
% |
Total |
|
$ |
19,478 |
|
|
|
|
$ |
16,757 |
|
|
|
Total revenue decreased from $19.5 million to $16.8 million, or 14.0%, for the three months ended June 30, 2009, compared to the same period ended June 30, 2008. This was mainly the result of increased rental revenue offset by decreased sales revenue. Sales revenue decreased 49.8%, rental revenue increased 18.6%, and service
and maintenance revenue decreased 15.6%.
Sales revenue decreased from $9.2 million to $4.6 million, or 49.8%, for the three months ended June 30, 2009, compared to the same period ended June 30, 2008. This decrease is the result of lower demand for our products due to industry declines in capital expenditures which resulted in fewer compressor unit sales to third parties
from our Tulsa and Michigan operations. Sales from outside sources included: (1) compressor unit sales, (2) flare sales, (3) parts, and (4) compressor rebuilds.
Rental revenue increased from $10.1 million to $12.0 million, or 18.6%, for the three months ended June 30, 2009, compared to the same period ended June 30, 2008. This increase was the result of additional units added to our rental fleet and rented to third parties. The company ended the period with 1,771 compressor
packages in its rental fleet, up from 1,546 units at June 30, 2008. The rental fleet had a utilization of 75.9% as of June 30, 2009 compared to 89.8% utilization as of June 30, 2008. This utilization decrease partially resulted from units being returned by a major customer that performed a routine yearly evaluation of compressor needs. Additionally, the demand for smaller horsepower units has slowed due to the decline of natural
gas commodity prices.
The overall operating margin percentage increased to 27.6% for the three months ended June 30, 2009, from 26.4% for the same period ended June 30, 2008. This is mainly the result of higher margins received in our rental segment. The overall margin is affected by the product mix between rental and sales, and since our rental
margin is higher and rentals increased during the period, the overall margin moved higher.
Selling, general, and administrative expense increased from $1.5 million to $1.7 million or 11.4% for the three months ended June 30, 2009 as compared to the same period ended June 30, 2008. This
increase is mainly due to an increase in: (1) stock option expenses, (2) sales salaries expenses, related to additional salespeople in the Houston since several Oil and Gas Companies are Headquartered there, and (3) additional commission on rentals.
Depreciation and amortization expense increased from $2.4 million to $2.9 million or 24.2% for the three months ended June 30, 2009, compared to the same period ended June 30, 2008. This increase was the result of new gas compressor rental units being added to the rental fleet from June 30, 2008 to June 30, 2009, thus increasing
the depreciable base.
Other income, net of other expense, decreased $200,000 for the three months ended June 30, 2009, compared to the same period ended June 30, 2008. This decrease is mainly the result of decreased balances in our short-term investments generating less interest income.
Interest expense decreased 20.2% for the three months ended June 30, 2009, compared to the same period ended June 30, 2008, mainly due to decreased principal balances owed under our bank loan facility and a reduction in our interest rate on our term loan and bank line of credit.
Provision for income tax decreased from $1.8 million to $1.5 million, or 12.2%, and is the result of the decrease in taxable income.
Six months ended June 30, 2008, compared to the six months ended June 30, 2009.
The table below shows our revenues and percentage of total revenues of each of our segments for the six months ended June 30, 2008 and June 30, 2009.
|
|
Revenue |
|
|
(in thousands) |
|
|
Six months ended June 30, |
|
|
2008 |
|
2009 |
Sales |
|
$ |
18,785 |
|
49 |
% |
|
$ |
11,528 |
|
32 |
% |
Rental |
|
|
19,105 |
|
50 |
% |
|
|
24,757 |
|
67 |
% |
Service and Maintenance |
|
|
521 |
|
1 |
% |
|
|
497 |
|
1 |
% |
Total |
|
$ |
38,411 |
|
|
|
|
$ |
36,782 |
|
|
|
Total revenue decreased from $38.4 million to $36.8 million, or 4.2%, for the six months ended June 30, 2009, compared to the same period ended June 30, 2008. This was mainly the result of a 38.6% decrease in sales revenue, offset by an increase in rental revenue of 29.6%, and service and maintenance revenue decreased 4.6%.
Sales revenue decreased from $18.8 million to $11.5 million, or 38.6%, for the six months ended June 30, 2009, compared to the same period ended June 30, 2008. This decrease is the result of lower demand for our products due to an industry slowdown which resulted in fewer compressor unit sales to third parties from our Tulsa and Michigan
operations. Sales from outside sources included: (1) compressor unit sales, (2) flare sales, (3) parts sales, (4) compressor rebuilds and (5) rental unit sales.
Rental revenue increased from $19.1 million to $24.8 million, or 29.6%, for the six months ended June 30, 2009, compared to the same period ended June 30, 2008. This increase was the result of additional units added to our rental fleet and rented to customers. The company ended the period with 1,771 compressor packages
in its rental fleet, up from 1,546 units at June 30, 2008. The rental fleet has a utilization of 75.9% as of June 30, 2009.
The overall operating margin percentage increased to 29.1% for the six months ended June 30, 2009, from 27.6% for the same period ended June 30, 2008. This is mainly the result of increased margins of our rental fleet activity. The overall margin is also affected by the product mix between rental and sales, since our rental margin is higher
and rentals increased, as a percentage of revenue, during the period the overall margin moved higher. Because of the larger margins that we obtain from rentals it is generally our focus to increase our rentals business.
Selling, general, and administrative expense increased from $2.8 million, to $3.2 million, or 14.0%, for the six months ended June 30, 2009, as compared to the same period ended June 30, 2008. This
increase is mainly due to an increase in stock option expenses, and sales salaries expenses and commissions on rental equipment.
Depreciation and amortization expense increased from $4.5 million, to $5.9 million, or 31.3%, for the six months ended June 30, 2009, compared to the same period ended June 30, 2008. This increase was the result of 225 new gas compressor rental units being added to the rental fleet from June 30, 2008 to June 30, 2009, thus increasing
the depreciable base.
Other income net of other expense decreased $480,000 for the six months ended June 30, 2009, compared to the same period ended June 30, 2008. This decrease is mainly the result of decreased balances in our short-term investments.
Interest expense decreased 27.7% for the six months ended June 30, 2009, compared to the same period ended June 30, 2008, mainly due to decreased principal balances owed under our bank loan facility.
Provision for income tax decreased from $3.7 million to $3.6 million, or 2.4%, and is the result of the decrease in taxable income.
Critical Accounting Policies and Practices
A discussion of our critical accounting policies is included in the Company's Form 10-K for the year ended December 31, 2008.
Recently Issued Accounting Pronouncements
On January 1, 2009, we adopted Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” (SFAS 157) as it relates to nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the financial
statements on at least an annual basis. SFAS 157 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (GAAP), and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions. The adoption of SFAS 157, as it relates to nonfinancial assets and nonfinancial
liabilities had no impact on our consolidated financial statements. The provisions of SFAS 157 will be applied at such time a fair value measurement of a nonfinancial asset or nonfinancial liability is required, which may result in a fair value that is materially different than would have been calculated prior to the adoption of SFAS 157.
On January 1, 2009, we adopted SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51,” (SFAS 160). SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial
Statements,” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This standard defines a noncontrolling interest, previously called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. SFAS 160 requires, among other items, that a noncontrolling interest be included in the consolidated statement of financial position within equity separate from the parent’s
equity; consolidated net income to be reported at amounts inclusive of both the parent’s and noncontrolling interest’s shares and, separately, the amounts of consolidated net income attributable to the parent and noncontrolling interest all on the consolidated income statement; and if a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be measured at fair value and a gain or loss be recognized in net income based on such fair value. The adoption of
SFAS 160 had no impact on our consolidated financial statements.
On January 1, 2009, we adopted SFAS No. 141(R), Business Combinations, which replaces SFAS No. 141, Business Combination (SFAS
141R), and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This Statement also requires the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values. Additionally, this statement requires
acquisition related costs to be expensed in the period in which the costs were incurred and the services are received instead of including such costs as part of the acquisition price. SFAS 141(R) makes various other amendments to authoritative literature intended to provide additional guidance or to confirm the guidance in that literature to that provided in this Statement. The adoption of SFAS No. 141(R) had no impact on our consolidated financial statements.
In April 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. We adopted SFAS
165 for the quarter ending June 30, 2009. The adoption of SFAS 165 did not have a material impact on our consolidated financial statements.
In April 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS 167). SFAS 167 requires a qualitative approach to identifying a controlling financial interest in a variable interest entity (VIE), and requires ongoing assessment of whether
an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. SFAS 167 is effective for annual reporting periods beginning after November 15, 2009. We are currently evaluating the impact of the pending adoption of SFAS No. 167 on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (SFAS 168). SFAS 168 identifies the FASB Accounting Standards Codification as the authoritative source of generally accepted
accounting principles in the United States. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We do not expect the adoption of SFAS 168 to have a material impact on our consolidated financial statements.
Liquidity and Capital Resources
Our working capital positions as of December 31, 2008 and June 30, 2009 are set forth below.
|
|
December 31, |
|
June 30, |
|
|
2008 |
|
2009 |
|
|
(in thousands) |
|
(in thousands) |
|
|
|
|
|
Current Assets: |
|
|
|
|
Cash and cash equivalents |
|
$ |
1,149 |
|
$ |
11,687 |
Short-term investments |
|
|
2,300 |
|
|
— |
Trade accounts receivable, net |
|
|
11,321 |
|
|
5,799 |
Inventory, net |
|
|
31,931 |
|
|
27,445 |
Prepaid income taxes |
|
|
244 |
|
|
801 |
Prepaid expenses and other |
|
|
87 |
|
|
231 |
Total current assets |
|
|
47,032 |
|
|
45,963 |
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
Current portion of long-term debt |
|
|
3,378 |
|
|
3,378 |
Accounts payable |
|
|
8,410 |
|
|
1,189 |
Accrued liabilities |
|
|
3,987 |
|
|
1,925 |
Current portion of tax liability |
|
|
110 |
|
|
99 |
Deferred income |
|
|
38 |
|
|
281 |
Total current liabilities |
|
|
15,923 |
|
|
6,872 |
|
|
|
|
|
|
|
Total working capital |
|
$ |
31,109 |
|
$ |
39,091 |
|
|
|
|
|
|
|
Historically, we have funded our operations through public and private offerings of our equity securities, subordinated debt, bank borrowings and cash flow from operations. Proceeds from financing were primarily used to pay debt and to fund the manufacture and fabrication of additional units for our rental fleet of natural gas compressors.
For the six months ended June 30, 2009, we invested $7.2 million in equipment for our rental fleet, upgrades in emission control, and service vehicles. We financed this activity with cash flow from operations and cash on hand. In addition, we have repaid $1.7 million of our existing debt.
Cash flows
At June 30, 2009, we had cash and cash equivalents of $11.7 million compared to $1.1 million at December 31, 2008. We had working capital of $39.1 million at June 30, 2009 compared to $31.1 million at December 31, 2008. At June 30, 2009, our total debt was $14.9 million of which $3.4 million was classified as current compared to $16.6
million and $3.4 million, respectively at December 31, 2008. We had positive net cash flow from operating activities of $16.9 million during the first six months of 2009 compared to $13.4 million for the first six months of 2008. The cash flow from operations of $16.9 million was primarily the result of the net income of $6.7 million and the non cash items of depreciation and taxes of $9.5 million.
Accounts receivable decreased $5.5 million to $5.8 million at June 30, 2009 as compared to $11.3 million at December 31, 2008. This decrease largely reflects the timing of collections and a slowdown in compressor unit sales during the first six months of 2009.
Inventory decreased $4.5 million to $27.4 million as of June 30, 2009 as compared to $31.9 million as of the year ended December 31, 2008. This decrease is mainly the result of our decreased manufacturing activity.
Long-term debt decreased $1.7 million to $14.9 million at June 30, 2009, compared to $17.0 million at December 2008. This decrease is mainly the result of the normal debt amortization. The current portion of long-term debt remained flat at $3.4 million at June 30, 2009 compared to December 31, 2008.
Recession strategy
For the quarter ended June 30, 2009, our overall plan during the downturn in the economy is to reduce expenses in line with the lower anticipated activity, fabricate rental fleet equipment only in direct response to market requirements, emphasize marketing of our idle gas compressor units
and reduce bank borrowing. Capital expenditures for the remainder of the year are not to exceed our internal cash generating capacity. We believe that cash flows from operations will be sufficient to satisfy our capital and liquidity requirements through 2009. We may require additional capital to fund any unanticipated expenditures, including any acquisitions of other businesses. We currently have a $40 million dollar bank line of credit with an available balance of $33
million.
Senior Bank Borrowings
Revolving Line of Credit Facility. As of June 30, 2009, the amount available for revolving line of credit advances was $33.0 million. The amount we could borrow is determined by a borrowing base calculation
and is based primarily upon our receivables, equipment and inventory. We had $7.0 million outstanding as of June 30, 2009 on this revolving line of credit facility, and the interest rate on that date was 4.00%.
$16.9 Million Multiple Advance Term Loan Facility. As of June 30, 2009 this term loan facility had a principal balance of $7.8 million, and the interest rate on that date was 4.00%.
As of June 30, 2009, we were in compliance with all covenants in our Loan Agreement. A default under our bank credit facility could trigger the acceleration of our bank debt so that it is immediately due and payable. Such default would have a material adverse effect
on our liquidity, financial position and operations.
As of June 30, 2009, we had a long-term liability of $275,000 to Midland Development Corporation. This amount is to be recognized as income contingent upon certain staffing requirements in the future. In addition, we entered into a purchase agreement with a vendor on July 30, 2008 pursuant to which we agreed to purchase
up to $4.8 million of our paint and coating requirements exclusively from the vendor. In connection with the execution of the agreement, the vendor paid us a $300,000 fee which is considered to be a discount toward future purchases from the vendor. Based on our historical paint and coating requirements, we estimate meeting the $4.8 million purchase obligation within five years. The $300,000 payment we received is recorded as a long-term liability and will decrease as the purchase
commitment is fulfilled. The long-term liability remaining as of June 30, 2009 was $287,000.
On June 16, 2009, at our annual meeting of shareholders, our shareholders approved a proposed amendment to our 1998 Stock Option Plan (the “Plan”) to add an additional 200,000 shares of common stock to the Plan, thereby authorizing the issuance of up to 750,000 shares of common stock under the Plan.
Also on June 16, 2009, at our annual meeting of shareholders, our shareholders adopted the 2009 Restricted Stock/Unit Plan. A total of 300,000 shares of Company common stock are reserved for issuance under the restricted stock plan.
Contractual Obligations and Commitments
We have contractual obligations and commitments that affect our consolidated results of operations, financial condition and liquidity. The following table is a summary of our significant cash contractual obligations:
|
|
Obligation Due in Period
(in thousands of dollars) |
Cash Contractual Obligations |
|
2009(1) |
|
|
|
2010 |
|
|
|
2011 |
|
|
|
2012 |
|
|
|
2013 |
|
|
|
Thereafter |
|
|
|
Total |
Term loan facility (secured) |
$ |
1,689 |
|
|
$ |
3,378 |
|
|
$ |
2,816 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
7,883 |
Interest on term loan facility(2) |
|
144 |
|
|
|
186 |
|
|
|
52 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
382 |
Line of credit (secured) |
|
|
|
|
|
7,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,000 |
Interest on line of credit(3) |
|
140 |
|
|
|
93 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
233 |
Purchase obligations |
|
880 |
|
|
|
956 |
|
|
|
956 |
|
|
|
956 |
|
|
|
814 |
|
|
|
— |
|
|
|
4,562 |
Other long term debt |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
562 |
|
|
|
562 |
Facilities and office leases |
|
231 |
|
|
|
356 |
|
|
|
257 |
|
|
|
233 |
|
|
|
166 |
|
|
|
17 |
|
|
|
1,260 |
Total |
$ |
3,084 |
|
|
$ |
11,969 |
|
|
$ |
4,081 |
|
|
$ |
1,189 |
|
|
$ |
980 |
|
|
$ |
579 |
|
|
$ |
21,882 |
______________________________________
(1) |
|
For the six months remaining in 2009. |
(2) |
|
Assumes an interest rate of 4.00%. |
(3) |
|
Assumes an interest rate of 4.00%. |
Off-Balance Sheet Arrangements
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, 2009, the off-balance sheet arrangements and transactions that we have entered into include operating lease agreements and purchase agreements. We do not believe that
these arrangements are reasonably likely to materially affect our liquidity, availability of, or requirements for, capital resources.
We entered into a purchase agreement with a vendor on July 30, 2008 pursuant to which we agreed to purchase up to $4.8 million of our paint and coating requirements exclusively from the vendor. In connection with the execution of the agreement, the vendor paid us a $300,000 fee which is considered to be a discount toward future
purchases from the vendor. Based on our historical paint and coating requirements, we estimate meeting the $4.8 million purchase obligation within five years. The $300,000 payment received by the Company is recorded as a long-term liability and will decrease as the purchase commitment is fulfilled. The long-term liability remaining as of June 30, 2009 was $287,000.
Special Note Regarding Forward-Looking Statements
Except for historical information contained herein, the statements in this release are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause NGS’s actual results
in future periods to differ materially from forecasted results. Those risks include, among other things, the loss of market share through competition or otherwise; the introduction of competing technologies by other companies; a prolonged, substantial reduction in oil and gas prices which could cause a decline in the demand for NGS’s products and services; and new governmental safety, health and environmental regulations which could require NGS to make significant capital expenditures. The forward-looking
statements included in this press release are only made as of the date of this press release, and NGS undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. A discussion of these factors is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Commodity Risk
Our commodity risk exposure is the pricing applicable to oil and natural gas production. Realized commodity prices received for such production are primarily driven by the prevailing worldwide price for crude oil and spot prices applicable to natural gas. Depending on the market prices of oil and natural gas, companies exploring for oil
and natural gas may cancel or curtail their drilling programs, thereby reducing demand for our equipment and services.
Financial Instruments and Debt Maturities
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, bank borrowings, and notes. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the highly liquid nature of these short-term instruments. The fair value of the bank
borrowings approximate the carrying amounts as of June 30, 2009 and were determined based upon interest rates currently available to us.
Customer Credit Risk
We are exposed to the risk of financial non-performance by customers. Our ability to collect on sales to our customers is dependent on the liquidity of our customer base. To manage customer credit risk, we monitor credit ratings of customers. Unless we are able to retain our existing customers, or secure new customers if we
lose one or more of our significant customers, our revenue and results of operations would be adversely affected.
Interest Rate Risk
Our Loan Agreement provides for Prime Rate less 1/2 % (but never lower than 4% or higher than 8.75%) for our term loan facility and Prime Rate less 1/4 % (but never lower than 4% or higher than 8.75%) for our revolving line of credit facility. Consequently, our exposure to interest rates relate primarily to interest earned on
short-term investments and paying above market rates, if such rates are below the fixed rate, on our bank borrowings. As of June 30, 2009, we were not using any derivatives to manage interest rate risk.
(a) Evaluation of Disclosure Controls and Procedures.
An evaluation was carried out under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Principal Accounting Officer and Treasurer, of the effectiveness of the design and of our “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934, as amended or, the “Exchange Act”) as of the end of the period covered by this report pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the President and Chief Executive Officer and our Principal Accounting Officer and Treasurer have concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective to ensure that information required to be disclosed by us in the reports
filed or submitted by us under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive and financial officers as appropriate to allow timely decisions regarding required disclosures. Due the inherent limitations
of control systems, not all misstatements may be detected. Those inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Additionally, controls could be circumvented by the individual acts of some persons or by collusion of two or more people. Our controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.
(b) Changes in Internal Controls.
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time, we are a party to various other legal proceedings in the ordinary course of our business. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not have a material adverse effect on our consolidated financial position,
results of operations or cash flow. Except as discussed herein, we are not currently a party to any legal proceedings and we are not aware of any other threatened litigation.
Please refer to and read “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 for a discussion of the risk associated with our company and industry.
Item 4. Submission of Matters to a Vote of Security Holders.
Our Annual Meeting of Stockholders was held on June 16, 2009. At the meeting, our stockholders voted on four matters: (1) election of two Directors to serve until 2012, (2) approval of the Company’s 2009 Restricted Stock/Unit Plan;(3) amendment to the Company’s 1998 Stock Option Plan to increase the number of
shares authorized for issuance thereunder from 550,000 to 750,000 shares of common stock, and (4) ratification of the Audit Committee’s appointment of Hein & Associates LLP, registered independent accountants, as our independent auditors for the fiscal year ended December 31, 2009. Of the 12,093,833 shares of common stock outstanding at the date of the meeting, 10,813,532 shares were represented at the meeting in person or by proxy.
The individuals named below were re-elected to a three-year term ending in 2012:
Nominee |
|
Votes For |
|
Votes Withheld |
Alan A. Baker |
|
10,040,492 |
|
773,040 |
William F. Hughes, Jr. |
|
10,043,015 |
|
770,517 |
The Company’s 2009 Restricted Stock/Unit Plan was approved as follows:
Votes For |
|
Votes Against |
|
Abstentions |
8,171,190 |
|
456,909 |
|
14,467 |
|
|
|
|
|
The amendment to the Company’s 1998 Stock Option Plan to increase the number of shares authorized for issuance thereunder from 550,000 to 750,000 shares of common stock was approved as follows:
Votes For |
|
Votes Against |
|
Abstentions |
7,638,468 |
|
994,457 |
|
9,641 |
|
|
|
|
|
The appointment of Hein & Associates LLP, registered independent accountants, as our independent auditors for the fiscal year ended December 31, 2009, was ratified with voting on the proposal as follows:
Votes For |
|
Votes Against |
|
Abstentions |
10,438,092 |
|
361,158 |
|
14,281 |
|
|
|
|
|
The following exhibits are filed herewith or incorporated herein by reference, as indicated:
3.1 |
Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of the 10-QSB filed and dated November 10, 2004) |
3.2 |
Bylaws (Incorporated by reference to Exhibit 3.4 of the Registrant's Registration Statement on Form SB-2, No. 333-88314) |
4.1 |
Non-Statutory Stock Option Agreement (Incorporated by reference to Exhibit 10.2 to Form 8-K filed with the SEC on August 30, 2005) |
10.1 |
1998 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K Report dated September 20, 2006 on file with the SEC September 26, 2006) |
10.2 |
Lease Agreement, dated March 1, 2004, between the Registrant and the City of Midland, Texas (Incorporated by reference to Exhibit 10.19 of the Registrant's Form 10-QSB for the fiscal quarter ended March 31, 2004) |
10.3 |
Seventh Amended and Restated Loan Agreement (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K dated October 26, 2006 and filed with the Securities and Exchange Commission on November 1, 2006 |
10.4 |
Eighth Amended and Restated Loan Agreement between Natural Gas Services Group, Inc. and Western National Bank. |
10.5 |
Revolving Line of Credit Promissory Note issued to Western National Bank. |
10.6 |
Employment Agreement between Natural Gas Services Group, Inc. and Stephen C. Taylor dated October 25, 2008 (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 30, 2008) |
10.7 |
Lease Agreement, dated March 26, 2008, between WNB Tower, LTD and Natural Gas Services Group, Inc. (Incorporated by reference to Exhibit 10.15 of the Registrant’s Form 10-K for the fiscal year ended December 31, 2008 and filed with the Securities and Exchange Commission on March 9, 2009) |
10.8 |
2009 Restricted Stock/Unit Plan (Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K dated June 18, 2009 and filed with the Securities and Exchange Commission on June 18, 2009.) |
10.9 |
1998 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K dated June, 18 2009 and filed with the Securities and Exchange Commission on June 18, 2009.) |
14.0 |
Code of Ethics (Incorporated by reference to Exhibit 14.0 of the Registrant's Form 10-KSB for the fiscal year ended December 31, 2004, and filed with the Securities and Exchange Commission on March 30, 2005) |
*31.1 |
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
*31.2 |
Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
*32.1 |
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
*32.2 |
Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NATURAL GAS SERVICES GROUP, INC.
|
|
|
|
|
/s/ Stephen C. Taylor |
|
|
/s/ Earl R. Wait |
|
Stephen C. Taylor |
|
|
Earl R. Wait |
|
President and Chief Executive Officer |
|
|
Principal Accounting Officer and Treasurer |
|
August 10, 2009
INDEX TO EXHIBITS
Item 6. Exhibits
The following exhibits are filed herewith or incorporated herein by reference, as indicated:
3.1 |
Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of the 10-QSB filed and dated November 10, 2004) |
3.2 |
Bylaws (Incorporated by reference to Exhibit 3.4 of the Registrant's Registration Statement on Form SB-2, No. 333-88314) |
4.1 |
Non-Statutory Stock Option Agreement (Incorporated by reference to Exhibit 10.2 to Form 8-K filed with the SEC on August 30, 2005) |
10.1 |
1998 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K Report dated September 20, 2006 on file with the SEC September 26, 2006) |
10.2 |
Lease Agreement, dated March 1, 2004, between the Registrant and the City of Midland, Texas (Incorporated by reference to Exhibit 10.19 of the Registrant's Form 10-QSB for the fiscal quarter ended March 31, 2004) |
10.3 |
Seventh Amended and Restated Loan Agreement (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K dated October 26, 2006 and filed with the Securities and Exchange Commission on November 1, 2006 |
10.4 |
Eighth Amended and Restated Loan Agreement between Natural Gas Services Group, Inc. and Western National Bank. |
10.5 |
Revolving Line of Credit Promissory Note issued to Western National Bank. |
10.6 |
Employment Agreement between Natural Gas Services Group, Inc. and Stephen C. Taylor dated October 25, 2008 (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 30, 2008) |
10.7 |
Lease Agreement, dated March 26, 2008, between WNB Tower, LTD and Natural Gas Services Group, Inc. (Incorporated by reference to Exhibit 10.15 of the Registrant’s Form 10-K for the fiscal year ended December 31, 2008 and filed with the Securities and Exchange Commission on March 9, 2009) |
10.8 |
2009 Restricted Stock/Unit Plan (Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K dated June 18, 2009 and filed with the Securities and Exchange Commission on June 18, 2009.) |
10.9 |
1998 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K dated June, 18 2009 and filed with the Securities and Exchange Commission on June 18, 2009.) |
14.0 |
Code of Ethics (Incorporated by reference to Exhibit 14.0 of the Registrant's Form 10-KSB for the fiscal year ended December 31, 2004, and filed with the Securities and Exchange Commission on March 30, 2005) |
*31.1 |
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
*31.2 |
Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
*32.1 |
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
*32.2 |
Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |