Natural Gas Services Group, Inc. — Q1 2020 Form 10-Q
Business and period: The company provides natural gas compression equipment and services, primarily through rentals, and also fabricates and sells compressors and related equipment. This unaudited report covers the three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $17.9 million | $18.0 million |
| Operating loss | $273,000 | $145,000 |
| Income (loss) before taxes | $(461,000) | $156,000 |
| Income tax benefit (expense) | $4.543 million | $(58,000) |
| Net income | $4.082 million | $98,000 |
| Diluted earnings per share | $0.30 | $0.01 |
| Cash provided by (used in) operating activities | $8.275 million | $(3.746) million |
Rental revenue was $16.1 million, up 20.3%; sales revenue was $1.45 million, down 64.8%; service and maintenance revenue was $340,000, down from $479,000. The filing does not report a single overall gross-margin percentage. Operating costs and expenses totaled $18.2 million, including $6.2 million of depreciation and amortization.
The $4.5 million tax benefit substantially explains the increase in net income despite a pretax loss. Under the CARES Act, the company recorded a $15.0 million federal income tax receivable associated with planned carrybacks of 2018–2019 net operating losses, a $10.1 million increase in deferred tax liabilities, and a current tax benefit of approximately $4.9 million, partly offset by other tax items.
Liquidity, debt and balance sheet
At March 31, 2020, cash was $13.1 million, working capital was $51.2 million, and total liabilities were $50.5 million. The company reported $417,000 outstanding under its revolving credit line, compared with $417,000 at year-end 2019. The $30 million facility had $29.5 million of borrowing-base availability; it matures December 31, 2020, and the company was in covenant compliance. The weighted-average borrowing rate for the quarter was 2.88%.
Operating cash flow of $8.3 million was partly offset by $6.7 million of capital expenditures; cash increased by $1.5 million from year-end. Cash flow included significant tax-related and working-capital movements, including the tax receivable, so the reported operating cash flow should not be viewed as a purely recurring run rate.
Changes and operating trends
- Total revenue was nearly flat as rental growth was offset by lower equipment sales.
- Rental utilization improved year over year: unit utilization was 59.7% versus 53.1%, and horsepower utilization was 68.1% versus 58.6%. The company attributed this chiefly to stronger demand for larger horsepower units and fleet retirements.
- Rental revenue rose despite a smaller total fleet: 2,316 compressor packages versus 2,567 a year earlier. Total fleet horsepower increased to 437,750 from 407,210.
- Operating loss widened, mainly because of lower sales and higher depreciation, partly offset by higher rental revenue, lower cost of revenues and lower SG&A.
- Other expense was $185,000 versus other income of $305,000, primarily reflecting a $262,000 loss on company-owned life insurance, compared with a gain in the prior-year quarter.
Outlook, risks and unusual items
- COVID-19 and oil-market shock: Management reported increasing unit returns and shut-in notices during April and expected a meaningful Q2–Q3 utilization decline among small and medium horsepower units. It expected lower rental revenue and margins, weaker overall performance, and minimal compressor sales for the rest of 2020. The company said the pandemic’s full financial, liquidity and operating impact could not yet be estimated.
- Cost and capital spending: Management cited headcount reductions, attrition, wage freezes and other expense controls. After $6.7 million of Q1 capital expenditures, it planned another $5–$7 million for the rest of 2020, implying a full-year budget of $12–$14 million versus $69.9 million in 2019. It expected planned spending to be covered by cash on hand and internally generated cash flows.
- Asset impairment: No rental-equipment impairment was identified at March 31, but management warned that weaker utilization and pricing could lead to impairment or equipment retirements later in 2020.
- PPP loan: The company obtained a $4.6 million Paycheck Protection Program loan on April 10, after quarter-end, and voluntarily repaid it with accrued interest on May 4, 2020.
- Controls and prior-period revisions: Disclosure controls were reported as ineffective due to material weaknesses in income-tax controls and in accounting for compressor maintenance and “make-ready” costs. Prior-period financial statements were revised for costs that had been inappropriately capitalized; the filing describes the prior-period impacts as immaterial. Management expected to remediate the tax-control weakness by year-end 2020.
- Other matters: The company reported no material legal proceedings or threatened material litigation. It identified heightened customer, supplier and vendor counterparty risk amid the downturn.
Important facts for investors to verify
- Whether the planned tax-loss carrybacks produce the expected cash refund, and the timing of collection of the $15.0 million receivable.
- Actual post-quarter rental utilization, customer returns and shut-in notices, rental pricing and sales demand relative to management’s expectations.
- Whether full-year capital expenditures remain within the $12–$14 million budget and are funded by operating cash flow and existing cash.
- Progress on remediating the disclosed internal-control weaknesses, and the reliability of tax and maintenance-cost reporting.
- Renewal or refinancing of the revolving credit facility before its December 31, 2020 maturity, including continued covenant compliance and borrowing availability.