Natural Gas Services Group, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The company fabricates, rents and sells natural-gas compressors and related equipment, with rental operations as its primary focus. Financial statements are unaudited.
Financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $25.6 million | $21.9 million | $69.9 million | $66.1 million |
| Operating income | $5.8 million | $5.1 million | $15.3 million | $17.1 million |
| Operating margin | 23% | 23% | 22% | 26% |
| Net income | $3.9 million | $3.4 million | $10.1 million | $11.2 million |
| Diluted EPS | $0.30 | $0.27 | $0.80 | $0.90 |
| Operating cash flow | — | — | $26.5 million | $28.4 million |
- Revenue mix: Q3 rental income was $20.2 million, sales $5.2 million and service and maintenance $0.2 million. Nine-month rental income was $58.4 million, sales $10.8 million and service and maintenance $0.6 million.
- Cash and investment: Cash was $5.1 million at September 30, down from $24.4 million at December 31, 2013. Capital expenditures were $46.4 million for the nine months, primarily for rental equipment and service vehicles; operating cash flow less capital expenditures was approximately negative $19.9 million.
- Liquidity and debt: Working capital was $30.7 million, versus $48.5 million at year-end 2013. The line of credit balance was $0.4 million; reported borrowing-base availability was $29.5 million. Total liabilities were $72.4 million and stockholders’ equity was $205.8 million.
Changes versus comparable periods
- Q3 revenue rose 17% year over year, led by rental revenue growth of 13% and sales growth of 34%. Operating income increased about $0.8 million; operating margin was unchanged at 23%.
- For the first nine months, revenue increased 5.7% as rental income grew 16%, but sales revenue fell 28%. Operating income declined about $1.8 million and operating margin fell from 26% to 22%; net income decreased about 10%.
- Management attributed lower nine-month profitability primarily to higher depreciation from rental-fleet additions and, to a lesser extent, increased administrative expense. SG&A rose to $7.9 million from $6.0 million, with higher equity compensation contributing.
- Rental fleet utilization was 76.1% at September 30, compared with 80.5% a year earlier. The company cited returns of equipment from older dry-gas areas. Its rental fleet contained 2,842 compressor packages, up from 2,466 a year earlier.
Outlook, risks and other notable items
- Management planned to monitor expenses, build rental equipment in response to market needs, market idle compressors and limit bank borrowing. It expected remaining-2014 capital expenditures to be supported by internally generated cash and cash on hand; full-year capital spending was not expected to exceed internal cash generation and the credit line.
- The existing $30 million revolving credit agreement matured December 31, 2014. Management said it was finalizing a new or extended facility and expected an agreement before maturity. The company was in covenant compliance at September 30; the agreement includes a maximum leverage ratio of 2.50 to 1.00.
- Management described long-term market prospects as favorable but noted uncertainty from natural-gas prices, industry activity and the economy. Risks include sustained declines in oil and gas prices, competition, new technologies, and regulatory requirements that could require significant capital spending.
- Legal proceedings were described as ordinary-course matters; management did not expect a material adverse effect and reported no material litigation. Disclosure controls were deemed effective, with no material changes in internal controls reported.
- The company was evaluating FASB revenue standard Topic 606, effective for it in the first quarter of 2017; the potential financial-statement impact had not yet been determined.
Important facts for investors to verify
- Whether the credit facility was renewed or replaced before its December 31, 2014 maturity, and on what terms.
- Whether rental utilization stabilizes or improves, particularly in dry-gas areas, and how fleet additions translate into rental revenue.
- Whether capital spending moderates enough to rebuild cash after the substantial nine-month investment in equipment.
- Whether sales revenue recovers from its nine-month decline and whether depreciation and equity-compensation costs continue to pressure margins.
- The eventual impact and transition method for adoption of Topic 606, and any changes in commodity-price, customer-demand or regulatory risks.