Natural Gas Services Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; financial statements are unaudited. The company designs, fabricates, rents, and sells natural-gas compressors and related equipment, with rentals as its primary business. Unless stated otherwise, financial figures below are in millions of dollars.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $17.991 | $14.718; up 22% |
| Operating income | $0.209 | $0.350 |
| Operating margin | 1.2% | 2.4% |
| Income before taxes | $0.510 | $0.274 |
| Net income | $0.357 | $0.225 |
| Diluted earnings per share | $0.03 | $0.02 |
| Cash from operations | $(3.846) | $5.128 |
| Capital expenditures | $9.130 | $8.712 |
Rental revenue rose to $13.387 million from $11.471 million, and sales revenue rose to $4.125 million from $2.998 million. Service and maintenance revenue was $0.479 million, versus $0.249 million. Management attributed revenue growth mainly to more and higher-horsepower units rented, at higher rates. At quarter-end, horsepower utilization was 58.6%, compared with 48.6% a year earlier; unit utilization was 53.1%, versus 47.5%.
Despite higher revenue, operating income declined, primarily because of lower gross margins, higher selling, general and administrative expense, and higher depreciation. SG&A increased to $2.493 million from $2.021 million; depreciation and amortization increased to $5.558 million from $5.387 million. Net income improved in part alongside a swing in other income/expense, which was $0.301 million of net income versus $0.076 million of net expense; the filing reports a $0.099 million gain on company-owned life insurance.
Cash and cash equivalents were $39.992 million at March 31, compared with $52.628 million at December 31, 2018. Working capital was $82.519 million, down from $85.453 million. Operating cash use reflected working-capital and other outflows of $10.3 million, including increases in receivables and inventory. Total liabilities were $42.961 million. Line-of-credit debt was $0.417 million, with $29.5 million of borrowing-base availability under the $30 million secured revolving facility; the facility matures December 31, 2020. The company reported compliance with its covenants.
Changes, outlook, and notable items
- Rental fleet horsepower growth and higher utilization supported rental revenue. The company reported 1,364 compressors totaling 238,566 horsepower rented to 97 customers, compared with 1,213 units totaling 183,927 horsepower rented to 84 customers a year earlier.
- Management expects activity and revenues to track oil and gas industry conditions and anticipated continued higher activity during 2019, while noting that this outlook is uncertain. Its plan is to manage expenses, build rental equipment in response to customer needs, market idle compressors, and limit borrowing. Forecast capital spending on compression equipment was not expected to exceed internally generated cash flow and cash on hand; no specific revenue or earnings guidance was provided.
- The company spent $9.1 million on property and equipment during the quarter, including $9.5 million of additions to the rental fleet, partly offset in the reported investment total by a decrease in work in progress. A separate remaining commitment of approximately $3.7 million for a new corporate office was expected to be funded from cash on hand; completion was anticipated in mid-2019.
- Adoption of the new lease standard on January 1, 2019 resulted in recognition of $0.541 million of operating-lease right-of-use assets and matching lease liabilities at March 31. Management said adoption did not materially affect operating results.
- Revenue of approximately $2.7 million was recognized under customer-requested bill-and-hold arrangements. The filing describes the customer conditions supporting recognition, which investors may wish to review.
- A material weakness in internal control over financial reporting related to income-tax accounting remained unremediated at quarter-end. Management said it had taken steps to improve controls and targeted remediation by year-end 2019. The weakness had contributed to prior-period tax misstatements; the 2018 Form 10-K reflected their correction. The company also disclosed a potential uncertain tax position, with a reserve recorded in Q4 2018, and said it planned to amend tax returns while analyzing offsetting deductions.
- Key risks include cyclical oil and gas activity and commodity prices, competition, component-cost increases, and possible new safety, health, or environmental regulations. Management reported no material litigation and no known threatened material litigation.
Important facts for investors to verify
- Whether higher fleet utilization and rental growth continue, especially for higher-horsepower equipment, and how those trends affect margins.
- Drivers of the sharp working-capital cash outflow and whether receivables and inventory convert to cash as expected.
- Progress remediating the income-tax control material weakness and the eventual resolution of the uncertain tax position.
- Completion and final cost of the corporate office project, including the remaining approximately $3.7 million commitment.
- Terms and accounting support for the $2.7 million of bill-and-hold revenue, and the status of the 2019 equity incentive plan awards requiring shareholder approval.