Natural Gas Services Group, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. The company fabricates, sells, rents and services natural gas compressors and related equipment, with rental operations its primary focus. Unless otherwise noted, amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $14.7 million | $18.9 million; down 22% |
| Operating income | $350,000 | $343,000 |
| Operating margin | 2% | 2% |
| Net income | $225,000 | $252,000 |
| Basic and diluted EPS | $0.02 | $0.02 |
| Cash from operating activities | $5.1 million | $10.5 million |
| Cash and cash equivalents | $65.1 million at March 31 | $69.2 million at December 31, 2017 |
| Working capital | $97.4 million at March 31 | $100.8 million at December 31, 2017 |
| Line-of-credit balance | $417,000 | Unchanged from December 31, 2017 |
Rental revenue was $11.5 million, sales revenue $3.0 million and service and maintenance revenue $249,000. Rental equipment depreciation and amortization was a substantial cost; total depreciation and amortization was $5.4 million. The filing does not provide a separate gross-margin figure.
Investing cash outflow was $8.9 million, including reported purchases of rental equipment and property and equipment of $8.7 million. Cash declined by $4.1 million during the quarter. Total assets were $296.4 million and total liabilities $38.7 million at March 31.
Material changes and operating trends
- Revenue fell primarily because compressor sales fluctuated with the timing of customer capital projects: sales declined to $3.0 million from $6.6 million. Rental revenue eased to $11.5 million from $11.9 million.
- Rental fleet utilization was 47.5%, compared with 49.8% a year earlier. The company reported 2,552 compressor packages in its fleet, versus 2,531, while compressors rented totaled 1,213 units and 183,927 horsepower, versus 1,261 units and 180,594 horsepower a year earlier.
- Operating income remained nearly flat despite the revenue decline. Selling, general and administrative expense decreased to $2.0 million from $3.0 million, primarily because stock-based compensation expense was lower by approximately $1.1 million.
- Operating cash flow was lower year over year, reflecting, among other items, changes in working capital and other cash flows. Capital spending considerably exceeded operating cash flow in the quarter.
Outlook, risks and notable items
- Management said oil prices and industry activity had strengthened since the second half of 2017 and expected increased activity to continue through the rest of 2018, while acknowledging that continuation was uncertain. The company expects its business to track oil and natural gas industry activity.
- For the rest of 2018, management plans to control expenses, build rental equipment in response to market needs, market idle compressors and limit bank borrowing. Forecast capital expenditures are not expected to exceed internally generated cash flow and cash on hand; no specific expenditure forecast was provided.
- Management believes cash, operating cash flow and credit availability will meet foreseeable capital and liquidity needs. The revolving facility has a $30 million commitment, with $29.5 million of borrowing-base availability reported at quarter end; maturity is December 31, 2020. The company reported compliance with its covenants.
- A new corporate office is under construction, with an approximate $10.5 million contractual obligation, expected to be financed with cash on hand and completed in early 2019.
- The company adopted ASC 606 effective January 1, 2018, using the cumulative-effect method; it reported no opening equity adjustment and no significant change to revenue recognition. Approximately $1.7 million of revenue was recognized on completed equipment under bill-and-hold arrangements during the quarter.
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate, affecting the effective tax rate and contributing to lower income tax expense. The company said its analysis of certain tax effects remained provisional and was expected to be completed by Q4 2018.
- Risks identified include industry cyclicality and lower oil or gas prices, competition, component cost increases and potential regulatory requirements. Management reported no material legal proceedings or known threatened material litigation and did not expect ordinary-course proceedings to have a material adverse effect.
Important facts for investors to verify
- Whether lower rental utilization and compressor sales recover as management anticipates, and how that affects revenue and margins.
- The pace and return on rental-fleet investment, given $8.7 million of equipment and property purchases and the quarter’s operating cash flow.
- Cash requirements and completion costs for the approximately $10.5 million office project, alongside other planned capital spending.
- Availability under the asset-based credit facility, covenant compliance and the effect of any borrowing-base changes.
- Final tax-reform accounting and the implementation effects of the new lease standard, effective for the company in Q1 2019.