Natural Gas Services Group, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; financial statements are unaudited. The company designs, fabricates, rents and sells natural-gas compression equipment and related products, with rental operations its primary focus. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $18.204 million | $16.218 million | $32.922 million | $35.120 million |
| Operating income | $226,000 | $414,000 | $576,000 | $757,000 |
| Net income | $247,000 | $375,000 | $472,000 | $627,000 |
| Diluted EPS | $0.02 | $0.03 | $0.04 | $0.05 |
| Operating cash flow | — | $10.860 million | $11.145 million |
- Q2 revenue increased 12% year over year, primarily from higher equipment sales. Rental revenue was essentially flat at $11.4 million; sales rose to $6.4 million from $4.4 million.
- First-half revenue declined 6%, mainly from lower sales tied to the timing of industry capital projects. Rental revenue fell to $22.9 million from $23.3 million, and sales to $9.4 million from $11.0 million.
- Operating income and net income declined in both comparisons. Management attributed Q2’s lower operating margin (1% versus 3%) to a revenue mix shift from higher-margin rentals to lower-margin sales. For the first half, management reported operating margin of 2% in both periods and cited lower revenue.
- At June 30, cash and equivalents were $62.5 million, down from $69.2 million at year-end 2017. Working capital was $95.4 million, versus $100.8 million. Operating cash flow was offset by $16.9 million of capital spending, and cash declined $6.7 million during the half.
- Total debt was $417,000, unchanged from December 31, 2017. The revolving facility has a $30 million commitment, with $29.5 million of borrowing-base availability at quarter-end; the weighted average borrowing rate for the half was 3.37%. The company reported compliance with its covenants.
- Capital spending included $11.0 million for rental equipment, $3.2 million for the new office and $582,000 for vehicles. Total assets were $295.7 million and stockholders’ equity was $258.4 million at June 30.
Business developments and material changes
- The rental fleet comprised 2,557 compressor packages at quarter-end, versus 2,531 a year earlier; utilization was 48.8%, down from 49.3%. Separately, 1,247 compressors totaling 194,948 horsepower were rented to 88 customers, compared with 1,248 compressors and 179,366 horsepower rented to 76 customers a year earlier.
- The company added 31 fleet units, approximately 21,000 horsepower, over the prior 12 months; 22 units were at least 400 horsepower. It said customers’ needs sometimes require new equipment even when other fleet equipment is idle.
- First-half SG&A declined to $4.3 million from $5.4 million, primarily reflecting $1.1 million less stock-based compensation expense. Depreciation and amortization increased slightly to $10.8 million.
- ASC 606 was adopted January 1, 2018 using the cumulative-effect method, with no opening-equity adjustment. The company recognized approximately $6.3 million of revenue from completed equipment under bill-and-hold arrangements during the first half.
Outlook, risks and contingencies
- Management expected higher oil and gas prices and industry activity to continue for the remainder of 2018, while noting that continuation was uncertain. It described the longer-term market trend as favorable.
- For the rest of 2018, the company planned to manage expenses to activity levels, build rental equipment in response to market requirements, market idle compressors and limit borrowing. Forecast capital expenditures were expected not to exceed internally generated cash flow and cash on hand. No specific revenue or earnings guidance was provided.
- Management believed cash, operating cash flow and the credit facility would meet foreseeable capital and liquidity needs. The new corporate office carries an approximately $8.9 million contractual construction obligation, intended to be funded with cash; completion was expected in early 2019.
- Key risks include oil and gas price and activity cyclicality, customer shifts among basins affecting utilization, competition, component-supplier lead times and potential cost increases, and new safety, health or environmental requirements. The credit agreement includes a maximum leverage ratio of 2.50 to 1.00 and customary default provisions; a default could accelerate debt.
- The company reported no material pending or threatened litigation and believed ordinary-course proceedings would not materially affect its financial position, results or cash flow. It reported effective disclosure controls. The new lease accounting standard was expected to take effect in Q1 2019; management anticipated higher reported assets and liabilities but did not expect a significant impact.
Important facts for investors to verify
- Whether rental utilization and rental rates improve, and how customer basin shifts affect compressor returns and deployments.
- Whether sales timing and product mix continue to pressure operating margins and earnings.
- Actual spending and funding for the $8.9 million office project and rental-fleet additions, relative to cash generation.
- The composition and accounting support for the $6.3 million of first-half bill-and-hold revenue, including fulfillment of customer arrangements.
- Ongoing liquidity, borrowing-base availability and covenant compliance, as well as the impact of lease-standard adoption.