Natural Gas Services Group, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; the filing also reports unaudited fourth-quarter results. The company manufactures, fabricates, rents, and services natural gas compression equipment, primarily for U.S. unconventional oil and gas production.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $67.7 million | $71.7 million |
| Operating income | $1.6 million | $8.4 million |
| Net income | $19.9 million | $6.5 million |
| Diluted earnings per share | $1.51 | $0.50 |
| Adjusted EBITDA (non-GAAP) | $22.9 million | $30.8 million |
| Adjusted gross margin (non-GAAP) | $33.0 million; 48.7% | $39.8 million; 55.5% |
| Cash from operating activities | $17.5 million | $31.8 million |
| Cash and cash equivalents at year-end | $69.2 million | $64.1 million |
| Working capital at year-end | $100.8 million | $88.9 million |
| Debt outstanding at year-end | $417,000 | $417,000 |
FY 2017 revenue comprised $46.0 million rental, $20.2 million sales, and $1.4 million service and maintenance. Rental fleet utilization was 49.5% at year-end, down from 51.3%; 1,259 compressors were rented, compared with 1,298 a year earlier. Capital expenditures were $13.5 million, primarily funded with cash on hand.
Fourth-quarter revenue was $16.7 million and operating income was $217,000. Net income of $18.7 million included the substantial tax benefit described below.
Material changes versus prior year
- Revenue declined 5.5%. Rental revenue fell 18.8% to $46.0 million, reflecting lower demand and returned units; sales revenue rose 48.4% to $20.2 million.
- Operating income fell to $1.6 million from $8.4 million, and adjusted EBITDA declined to $22.9 million from $30.8 million.
- Adjusted gross margin decreased to 48.7% from 55.5%; management cited rental pricing pressure and lower rental revenue.
- Net income rose despite weaker operating performance because the 2017 Tax Act generated an approximately $18.4 million deferred income tax benefit. Before that remeasurement, the reported income tax benefit was $18.2 million overall; the statutory-rate change makes FY 2017 net income an unusual comparison with operating results.
- Operating cash flow decreased to $17.5 million from $31.8 million, including effects from lower deferred taxes and working-capital movements. Cash nevertheless increased to $69.2 million.
Outlook, risks, and unusual items
- Management expected industry activity to increase gradually during 2018, but anticipated only modest improvement in company activity because recovery in compression demand lags commodity-price changes. It also expected continued competitive price pressure and revenue pressure in 2018.
- Management said 2018 capital spending would depend on customer requirements and was not expected to exceed internally generated cash flow. Cash, operating cash flow, and the credit line were expected to cover planned needs.
- The company renewed its $30 million secured revolving credit facility through December 31, 2020. Year-end borrowing was $417,000, with $29.5 million of borrowing-base availability; the company reported compliance with covenants. The facility is collateralized and includes financial and other restrictive covenants.
- Construction began on a new Midland corporate office, expected to cost approximately $12 million and be completed in early 2019. This is an additional contractual commitment beyond the obligations summarized in the filing.
- Revenue concentration is material: Occidental Permian and Devon Energy represented 20% and 15% of 2017 revenue, respectively. Occidental represented 14% of year-end receivables.
- Key risks include oil and gas price volatility, customer spending and creditworthiness, short-term/month-to-month rental arrangements, fleet utilization and pricing, customer concentration, competition, financing and covenant compliance, equipment liability, and environmental and emissions regulation.
- The filing reports no material pending legal proceeding or current cleanup order. Management believes environmental compliance costs are not expected to be material in the near term, but notes possible future liabilities and regulatory costs. No rental equipment retirement loss or goodwill/intangible impairment was recorded in 2017; a $545,000 non-cash rental-equipment retirement loss was recorded in 2016.
- The $18.4 million tax benefit was provisional under SEC guidance; the company said it would complete its analysis of the Tax Act no later than the fourth quarter of 2018. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether rental utilization, rental revenue, and pricing recover, and whether sales growth can offset ongoing weakness in rentals.
- The sustainability of earnings and cash generation excluding the one-time tax remeasurement benefit; compare GAAP results with non-GAAP measures and their reconciliations.
- Customer concentration, receivable collection, and the renewal or cancellation of month-to-month rentals.
- The final tax-reform accounting and any adjustment to the provisional deferred-tax amounts.
- The cost, funding, and schedule of the $12 million office project, alongside planned fleet investment and available borrowing capacity.
- Credit-facility covenant compliance, collateral availability, maturity and renewal options, and any change in borrowing terms.