Natural Gas Services Group, Inc. — Q2 2016 Form 10-Q
Business context and period. The company designs, fabricates, rents and sells natural-gas compressors and related equipment, with rental compression as its primary business. This unaudited report covers the quarter and six months ended June 30, 2016; comparisons are to the same 2015 periods.
Financial performance
Amounts below are in millions of dollars except per-share data.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $17.194 | $24.230 | $38.770 | $48.971 |
| Operating income | $1.873 | $0.919 | $5.640 | $6.706 |
| Net income | $1.259 | $0.614 | $3.800 | $4.308 |
| Diluted EPS | $0.10 | $0.05 | $0.29 | $0.34 |
| Operating cash flow | — | — | $19.802 | $24.973 |
- Q2 revenue fell 29%; six-month revenue fell 20.8%. Rental income declined to $14.655 million in Q2 and $31.063 million for six months, while sales revenue was $2.300 million and $7.210 million, respectively.
- Management reported operating margins of 11% for Q2 and 15% for the six-month period in 2016, versus 22% and 23% in 2015 excluding the prior-year fleet-retirement charge.
- Cash and cash equivalents were $52.166 million at June 30, up from $35.532 million at December 31, 2015. Working capital was $80.843 million. Six-month capital expenditures were $2.618 million.
- Outstanding line-of-credit debt was $0.417 million, unchanged from year-end; borrowing-base availability was $29.5 million under a $30 million revolving commitment. The facility matures December 31, 2017; the company reported covenant compliance. Six-month weighted-average interest rate was 1.75%.
Material changes and operating drivers
- Management attributed lower revenue primarily to compressor returns amid persistently depressed oil and gas prices and to uneven timing of capital-project sales. Rental fleet utilization fell to 55.7% from 75.4% a year earlier. The fleet had 2,626 compressor packages, compared with 2,662; only 18 units had been added over the prior 12 months.
- Q2 operating income increased year over year partly because Q2 2015 included a $4.373 million noncash loss on retiring 258 rental units. Excluding that charge, operating margin declined in both the quarter and six-month comparison. Six-month operating income decreased $1.066 million.
- SG&A declined to $2.152 million in Q2 and $4.721 million for six months, which the company attributed primarily to extending vesting periods for new restricted-stock grants. Depreciation and amortization also declined, reflecting fewer fleet additions, fully depreciated older units and the 2015 fleet retirement.
Outlook, risks and unusual items
- Management said it would control expenses, build rental equipment in response to market requirements, market idle compressors and limit borrowing. Remaining-2016 capital expenditures were expected to depend on customer needs and not exceed internally generated cash flow and cash on hand. Management believed cash, operating cash flow and the credit line would meet foreseeable capital and liquidity needs.
- The company described long-term market trends as favorable but said the timing of renewed investment was uncertain. Risks include prolonged low commodity prices and reduced producer spending, competition, new technologies, and safety, health or environmental regulations that could require significant capital expenditures.
- The company recognized $4.0 million of revenue under bill-and-hold arrangements as of June 30, 2016. Investors may wish to review the associated revenue-recognition criteria and disclosures.
- A nonqualified deferred-compensation plan began in 2016; its assets are held in a rabbi trust and remain exposed to company insolvency risk. The company reported no material legal proceedings or threatened material litigation. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
- The company was evaluating the effects of new share-based compensation and revenue-recognition accounting standards; it had not yet determined their financial-statement impact.
Important facts for investors to verify
- Whether utilization and rental demand stabilize, and how further compressor returns or fleet additions affect revenue and margins.
- The timing and amount of sales and flare projects, given the company’s stated variability in capital-project activity.
- The bill-and-hold revenue balance, fulfillment status and compliance with recognition criteria.
- Actual remaining-2016 capital expenditures and cash generation compared with management’s stated plan.
- Credit-facility availability, collateral borrowing base, covenant compliance and the December 2017 maturity.