Natural Gas Services Group, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. The company designs and manufactures natural-gas compressors and flares, with compressor rentals as its primary business.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $15.9m | $16.2m | $51.0m | $55.0m |
| Operating income | $0.6m | $1.8m | $1.4m | $7.5m |
| Operating margin | 4% | 11% | 3% | 14% |
| Net income | $0.5m | $1.5m | $1.1m | $5.3m |
| Diluted EPS | $0.04 | $0.12 | $0.09 | $0.41 |
| Operating cash flow | — | $14.2m | $29.5m |
Q3 rental revenue fell 14% to $11.3m, while sales rose to $4.3m from $2.5m. For the first nine months, rental revenue declined 22% to $34.6m and sales increased 57% to $15.3m. Management attributed rental weakness to low oil and gas prices and returned units; sales gains reflected project timing and higher flare demand.
At September 30, cash was $72.9m, working capital was $106.0m, and total assets were $295.0m. The company had $417,000 outstanding on its credit line, reported as non-current, and $29.5m of borrowing-base availability. Nine-month capital expenditures were $4.7m. Stockholders’ equity was $237.2m.
Material changes and operating trends
- Total revenue declined 2% in Q3 and 7.1% year to date. Lower rental revenue outweighed higher equipment and flare sales.
- Rental-fleet utilization was 49.3%, down from 52.8% a year earlier. The fleet had 2,538 compressor packages versus 2,626; the company reported 1,251 rented compressors totaling 180,433 horsepower.
- Year-to-date operating income fell $6.1m. SG&A increased to $7.8m from $6.8m, primarily reflecting higher stock-based compensation; depreciation and amortization declined modestly to $16.0m.
- Operating cash flow was lower year over year, while cash increased $8.8m from year-end 2016. Cash flow included $16.0m of depreciation and $3.2m of stock-based compensation.
Outlook, risks and notable items
- Management described the oil and gas price environment as inconsistent, with continued restraint in project spending, but said the latest quarter brought some relief in rental sets versus returns. It views long-term market trends as favorable.
- For the rest of 2017 and into 2018, management plans to control expenses, build rental equipment in response to market needs, market idle compressors, and limit borrowing. Forecast 2017 capital expenditures were not expected to exceed internally generated cash flow and cash on hand. Management believes available cash, operating cash flow, and the credit line can meet foreseeable needs.
- The revolving credit agreement was renewed in August 2017 and extended to December 31, 2020, with a $30m commitment subject to collateral availability. The company was in covenant compliance at quarter-end; the leverage covenant limit is 2.50:1.00.
- The company recognized $5.7m of revenue under bill-and-hold arrangements in the first nine months. Revenue standard Topic 606 was expected to be adopted January 1, 2018; management had not concluded on the potential impact, particularly for rental revenue. Lease standard adoption was expected in 2019, with effects still under assessment.
- Key risks include commodity-price-driven demand, competition, possible component-cost increases, and regulatory requirements that could require significant capital spending. Management reported no material pending or threatened litigation.
Investor verification priorities
- Track utilization, rental returns and new placements, and whether the reported stabilization continues.
- Assess whether sales growth and the $5.7m bill-and-hold revenue are repeatable and how they affect future periods.
- Monitor margins and earnings for further effects from rental weakness and higher stock-based compensation.
- Review operating cash flow, capital spending, inventory levels and credit-facility availability as market conditions evolve.
- Check the company’s completed assessment and disclosed effects of adopting Topic 606 and the lease standard.