Natural Gas Services Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; unaudited. NGS provides natural-gas compression equipment and services, with rentals as its primary business.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $15.8 million | $20.9 million | $51.1 million | $58.7 million |
| Operating income (loss) | $(0.9) million | $(14.0) million | $(1.4) million | $(13.9) million |
| Net income (loss) | $(0.6) million | $(12.6) million | $3.7 million | $(12.2) million |
| Diluted earnings (loss) per share | $(0.04) | $(0.96) | $0.27 | $(0.93) |
| Cash from operating activities | — | — | $27.9 million | $21.3 million |
- Q3 rental revenue was $14.9 million, up 3.0% year over year; sales fell to $0.5 million from $5.9 million, primarily because there were no compressor sales in the quarter.
- Nine-month rental revenue rose 11.4% to $46.1 million, while sales fell 74.7% to $4.0 million. Service and maintenance revenue declined to $1.0 million from $1.5 million.
- Nine-month net income included a $4.7 million income tax benefit. The CARES Act NOL carryback generated a $11.1 million tax receivable at September 30; the company received $3.9 million of refunds during Q3.
- Cash was $27.6 million at September 30, versus $11.6 million at year-end 2019. Working capital was $59.2 million, compared with $36.9 million.
- Capital expenditures were $12.0 million for the first nine months. Net investing cash outflow was $11.8 million.
- Debt was $0.4 million under the revolving credit line. The facility had $29.5 million of borrowing-base availability and matures December 31, 2020. NGS reported compliance with its financial covenants.
- Total assets were $304.3 million and stockholders’ equity was $252.9 million at September 30. No rental-equipment impairment was identified at that date.
Changes and operating trends
- Total revenue declined 24.4% in Q3 and 13.1% year to date, mainly due to lower compressor sales amid reduced industry activity and customer capital spending.
- The much smaller operating losses versus 2019 primarily reflect the absence of 2019 charges totaling $14.9 million: $10.0 million goodwill impairment, $3.35 million inventory allowance, and $1.5 million of rental-equipment retirements.
- Rental fleet horsepower grew, but utilization weakened year over year. At September 30, unit utilization was 54.6% versus 61.5%; horsepower utilization was 63.8% versus 66.4%. Rented horsepower increased 6.0%, reflecting stronger demand for larger units and weaker demand for smaller and medium units.
- Depreciation and amortization increased 6.7% in Q3 and 9.5% year to date, associated with additions of larger-horsepower equipment. Nine-month rental costs rose 8.9%, including higher maintenance and repair costs.
- Cash from operations increased year over year, but included significant tax-related and working-capital movements, including the $11.1 million increase in federal income tax receivable and a $10.1 million increase in deferred tax liability related to the tax-law change.
Outlook, risks, and notable items
- Management expected compressor sales to remain low through the rest of 2020 and early 2021, citing reduced customer capital budgets. It said rental utilization and pricing had been broadly stable from June through September, while warning that renewed COVID-19 restrictions or weaker oil demand and prices could reduce utilization and revenue.
- Management could not estimate the pandemic’s full effect on 2020 or 2021 results, liquidity, or financial condition. It reported field operations largely uninterrupted and no COVID-related supply-chain issues to date.
- Cost reductions included headcount cuts, wage freezes, process centralization, and supplier cost initiatives. Management expected continued benefits into 2021. It forecast total 2020 capital expenditures of $19–$21 million, including $7–$9 million in Q4, versus $69.9 million in 2019.
- NGS voluntarily repaid its $4.6 million PPP loan, with accrued interest, on May 4, 2020.
- On October 23, 2020, the board authorized a discretionary share-repurchase program of up to $10 million, expiring September 30, 2021; the program does not require repurchases.
- Disclosure controls were reported ineffective because of two material weaknesses: income-tax accounting and reporting, and capitalization of compressor make-ready and maintenance costs. Management expected remediation by year-end 2020. The filing also notes prior-period financial statement revisions for improperly capitalized costs.
- The company reported no material legal proceedings and no known threatened material litigation. Its credit facility’s December 31, 2020 maturity is a near-term financing consideration.
Important facts for investors to verify
- Whether the revolving credit facility was renewed, replaced, or repaid by its December 31, 2020 maturity, and whether borrowing availability or covenant terms changed.
- Subsequent collection of the remaining $11.1 million federal tax receivable and the timing and amount of planned 2019 NOL carryback claims.
- Subsequent trends in compressor sales, rental utilization, pricing, customer concentration, and demand for smaller versus larger units.
- Actual Q4 and full-year capital expenditures compared with the $19–$21 million forecast, and whether spending was supported by contracted customer demand.
- Progress in remediating both material weaknesses and any later disclosures about control effectiveness or accounting revisions.
- Whether any shares were repurchased under the authorized program and the effect on liquidity and capital allocation.