Natural Gas Services Group, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; unaudited. The company fabricates, rents and sells natural-gas compressors and related equipment, with rental operations its primary business.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $16.2m | $21.2m | $55.0m | $70.2m |
| Operating income | $1.8m | $3.8m | $7.5m | $10.5m |
| Operating margin | 11% | 18% | 14% | 15% |
| Net income | $1.5m | $2.6m | $5.3m | $6.9m |
| Diluted EPS | $0.12 | $0.20 | $0.41 | $0.54 |
| Operating cash flow | Not separately provided | Not separately provided | $29.5m | $34.8m |
Rental revenue was $13.2m in Q3 and $44.2m for nine months; sales were $2.5m and $9.7m, respectively. Service and maintenance revenue was $0.5m and $1.0m. Rental income remained the dominant revenue source.
At September 30, cash was $61.2m, working capital was $86.7m, and total current assets and liabilities were $92.4m and $5.6m. Outstanding line-of-credit debt was $0.4m; borrowing-base availability was $29.5m under a $30m revolving commitment. The facility matures December 31, 2017. The company reported compliance with its covenants. Nine-month capital expenditures were $3.4m; cash increased $25.6m from year-end 2015.
Changes versus the prior comparable period
- Q3 revenue declined 24%; nine-month revenue declined 21.7%, principally because low oil and gas prices led customers to return rental units and curtail spending.
- Rental fleet utilization was 52.8%, down from 72.1% a year earlier. The company reported 2,626 compressor packages in its fleet, versus 2,664 a year earlier; elsewhere it reported 1,387 compressors rented, totaling 196,721 horsepower, and 79 rental customers.
- Nine-month rental revenue fell 25% and sales revenue fell 9%. Management attributed sales weakness to project timing and lower flare demand.
- Operating income and net income fell in both comparison periods. Lower revenue compressed Q3 operating margin to 11%. Lower SG&A, partly attributed to extending vesting periods for new restricted-stock awards, and lower depreciation partly offset the revenue decline.
- Prior-year nine-month results included a $4.4m non-cash loss on retirement of 258 rental units; no such retirements were made in 2016.
- Operating cash flow decreased to $29.5m from $34.8m, while cash rose to $61.2m from $35.5m at December 31, 2015.
Outlook, risks and notable items
- Management said low commodity prices continued to constrain industry project spending, though prices had strengthened somewhat. It viewed long-term market trends as favorable but said the timing of renewed investment was uncertain.
- For the rest of 2016 and into 2017, the company planned to align costs with activity, build rental equipment in response to market requirements, market idle compressors and limit borrowing. Forecast capital spending for the remainder of 2016 was not expected to exceed internally generated cash flow and cash on hand; no specific earnings or revenue guidance was provided.
- Management believed cash, operating cash flow and the credit line would meet foreseeable capital and liquidity needs. Risks cited include prolonged low oil and gas prices, competition, competing technologies and potential costs from new safety, health or environmental rules.
- The company recognized $4.4m of revenue under bill-and-hold arrangements as of September 30, 2016. It stated that the required recognition criteria were met.
- No material legal proceedings or threatened material litigation were reported. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was identified.
Important facts for investors to verify
- Whether rental utilization and customer demand improved after the quarter, and how commodity prices affected equipment returns and rental rates.
- The composition and recoverability of the $4.4m bill-and-hold revenue, including delivery timing and satisfaction of recognition criteria.
- Cash conversion and operating cash-flow drivers, including working-capital movements, against lower earnings and planned capital spending.
- Availability under the borrowing base, covenant compliance and the December 2017 credit-facility maturity.
- Potential effects of forthcoming revenue-recognition and stock-compensation accounting standards; the company was still evaluating their impact.