Natural Gas Services Group, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. The company fabricates, sells, rents and services natural-gas compressors and related equipment, with rentals its primary business. Dollar amounts below are in millions unless noted.
Financial performance
- Revenue: $24.74, up 11% from $22.32 in Q1 2014. Rental revenue was $20.60 (+10%), equipment and other sales were $3.91 (+17%), and service and maintenance revenue was $0.23.
- Profit: Operating income was $5.79, versus $4.36; net income was $3.69, versus $2.86. Diluted EPS was $0.29, versus $0.23.
- Margins: Operating margin rose to approximately 23% from 20%; net margin was approximately 15%, versus 13%.
- Cash flow: Operating cash flow was $11.63, compared with $9.62 in Q1 2014. Investing cash outflow was $8.67, including $8.71 of equipment purchases. Cash increased $2.44 during the quarter to $8.62.
- Liquidity: Working capital was $43.46, compared with $41.83 at December 31, 2014. Current assets were $51.16 and current liabilities $7.70.
- Debt: $0.42 outstanding on the revolving credit line, unchanged from year-end. The $30 million secured facility had $29.6 million of borrowing-base availability; the company reported compliance with its covenants. The agreement matures December 31, 2017.
- Other balance-sheet items: Total assets were $281.72 and stockholders’ equity was $214.56 at March 31, 2015.
Changes and operating developments
- Rental growth was attributed to continued demand for low- to mid-horsepower compression. The rental fleet had 2,918 packages, up from 2,643 a year earlier; utilization fell to 72.5% from 78.6%, mainly due to returns from older dry-gas areas.
- Sales revenue rose partly because of the timing of industry capital projects and increased flare demand. Management characterized third-party compressor sales as uneven across periods.
- Operating income and margin improved primarily through cost containment. SG&A was broadly steady at $2.59; depreciation and amortization increased to $5.79 from $5.04 as rental equipment was added.
- Inventory fell to $27.48 from $32.62, while cash rose from $6.18 at year-end. Accounts payable and accrued liabilities also declined substantially during the quarter.
Outlook, risks and notable items
- Management planned to keep expenses aligned with expected activity, build rental equipment in response to market needs, market idle compressors, and limit borrowing. 2015 capital spending was expected to depend on customer requirements and not exceed internally generated cash and cash on hand, according to management.
- Management expected operating cash flow and the credit line to meet capital and liquidity needs for the foreseeable future, while noting that additional capital for unexpected spending or acquisitions might not be available on acceptable terms.
- Management described the outlook as uncertain amid low oil and natural-gas prices and subdued producer investment, but considered the long-term market trend favorable. Demand is exposed to commodity prices, industry activity, and lower utilization; other cited risks include competition and new safety, health or environmental rules.
- No material legal proceedings were reported. The company said it was evaluating the forthcoming revenue-recognition standard; its potential financial-statement impact had not been determined.
- Stock-based compensation totaled approximately $0.79 for the quarter. The filing reported awards of restricted shares to executives and directors during the period.
Important facts for investors to verify
- Whether rental utilization stabilizes or declines further, and whether returned dry-gas equipment can be redeployed profitably.
- Whether rental and sales demand, particularly in non-conventional areas, supports the planned fleet investment and cash-flow outlook.
- How actual capital spending compares with operating cash generation and the stated plan, given the quarter’s $8.71 of equipment purchases.
- Available borrowing capacity, collateral-based limits and continued compliance with the credit agreement’s covenants.
- The impact and adoption timing of the new revenue-recognition standard; the filing does not provide a clear estimate of its effect.