Natural Gas Services Group, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are to the corresponding 2018 periods. The company fabricates, sells, rents and services natural-gas compressors and related equipment, with rental operations its primary focus. Amounts below are in millions except per-share data and percentages.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Revenue | $19.895 | $18.204 | $37.886 | $32.922 |
| Operating income | $0.593 | $0.226 | $0.802 | $0.576 |
| Net income | $0.573 | $0.247 | $0.930 | $0.472 |
| Diluted EPS | $0.04 | $0.02 | $0.07 | $0.04 |
| Operating margin | 3.0% | 1.2% | 2.1% | 1.8% |
| Net margin | 2.9% | 1.4% | 2.5% | 1.4% |
Q2 revenue increased 9.3% year over year, principally from rental growth; H1 revenue rose 15.1%. Rental revenue increased 18.8% in Q2 and 17.7% in H1. Sales revenue fell 8.9% in Q2 but rose 5.9% in H1; service and maintenance revenue also increased in both periods. Q2 operating income improved primarily because of higher rental revenue. SG&A rose, mainly due to higher officer incentive bonuses, and depreciation increased as larger-horsepower equipment was added.
Operating cash flow was $6.4 million in H1 2019, down from $10.9 million in H1 2018. Investing cash outflow was $29.5 million, including $29.4 million for rental equipment and property and equipment. Cash declined to $29.9 million from $52.6 million at year-end 2018. Working capital was $69.8 million, versus $85.5 million at year-end.
At June 30, 2019, the company had $0.417 million outstanding on its revolving credit line, $29.5 million of borrowing-base availability, and a $30 million commitment (with an uncommitted option to request an additional $20 million). The facility matures December 31, 2020. The company reported compliance with its covenants. Total liabilities were $42.0 million; total assets were $304.6 million.
Business developments, outlook and risks
- The rental fleet had 2,572 compressor packages at quarter-end versus 2,557 a year earlier. Unit utilization was 53.4% versus 48.8%; horsepower utilization was 59.9% versus 50.9%. Management attributed higher utilization mainly to demand for larger units.
- Management expected activity to continue at levels it considered sufficient for producer investment during 2019, while noting that industry activity and commodity prices are uncertain. It anticipated further utilization gains if oil and gas prices remained steady or increased.
- For the remainder of 2019, management planned to match expenses and fleet fabrication to market requirements, market idle compressors and limit borrowing. Compression-equipment capital spending was not expected to exceed internally generated cash flow and cash on hand. Management believed cash, operating cash flow and the credit line would meet foreseeable liquidity needs; additional capital might be needed for unanticipated spending or acquisitions and might not be available on acceptable terms.
- The company spent $16.7 million on new rental equipment in H1 and had an approximately $1.4 million remaining commitment for its new corporate office, expected to be completed in 2019 and funded from cash.
- Key business risks include the cyclical oil and gas industry, sustained declines in commodity prices and demand, competition, competing technologies, component-price increases and potential new safety, health or environmental requirements.
- Management disclosed a material weakness in internal controls over financial reporting related to income-tax accounting and review. Remediation efforts were ongoing, with completion targeted by year-end 2019; controls were not yet considered effective without further adjustment.
- The company recorded a $0.547 million tax adjustment and $0.055 million of related penalty and interest in Q4 2018 for a potential uncertain tax position involving executive-compensation deductions for 2015–2017. It planned to amend affected federal tax returns and was assessing possible offsetting deductions.
- There were no material legal proceedings reported. The company stated that ordinary-course legal matters were not expected to materially affect its financial position, results or cash flow.
Most important facts for investors to verify
- Whether higher compressor utilization and rental revenue persist, particularly if commodity prices or customer spending weaken.
- Whether operating cash flow can support fleet investment and the office commitment after the substantial H1 capital outlay.
- Progress and completion of remediation of the tax-related material weakness, and any effects from the uncertain tax position or amended returns.
- Continued compliance with credit-facility covenants, borrowing-base availability and the December 2020 maturity.
- The timing and profitability of sales projects, given management’s explanation that sales fluctuate with customer capital-project timing.