Natural Gas Services Group, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are with fiscal 2019. This annual filing does not provide a separate Q4-only results summary. NGS manufactures, rents, sells, and services natural-gas compressors and flare systems, primarily for oil and gas producers.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $68.1 million | $78.4 million |
| Net income (loss) | $1.8 million | $(13.9) million |
| Operating income (loss) | $(3.6) million | $(15.2) million |
| Adjusted EBITDA (non-GAAP) | $22.7 million | $24.0 million |
| Cash from operating activities | $32.6 million | $29.4 million |
| Capital expenditures | $15.3 million | $69.9 million |
| Cash and cash equivalents at year-end | $28.9 million | $11.6 million |
| Working capital at year-end | $61.9 million | $36.9 million |
Revenue fell 13.2%. Rental revenue rose 7.3% to $60.8 million, while sales fell 71.4% to $5.7 million and service and maintenance revenue declined to $1.6 million. Rental represented 89.4% of revenue, versus 72.3% in 2019.
Adjusted gross margin, a non-GAAP measure excluding depreciation and amortization, increased to $32.6 million, or 47.9% of revenue, from $34.1 million, or 43.5%. Rental adjusted gross margin was 53.1%; sales adjusted gross margin was negative 9.8%, compared with 18.5% in 2019. Depreciation and amortization increased 8.3% to $25.2 million.
Net income included a $4.8 million income tax benefit. The CARES Act enabled carrybacks of prior-year net operating losses; NGS reported a $11.5 million federal income tax receivable at year-end after receiving refunds during 2020. Thus, the return to net income occurred despite an operating loss.
Year-end current assets were $72.7 million and current liabilities $10.9 million. The balance sheet reported a $417,000 line-of-credit balance; total stockholders’ equity was $251.5 million. Operating cash flow was partly supported by tax refunds. The company spent $13.0 million on additions to the rental fleet and $2.2 million on other property and equipment.
Material changes and operating developments
- Rental fleet horsepower increased 2.1% to 438,524, although the fleet declined to 2,224 units from 2,304. Year-end horsepower utilization fell to 65.6% from 69.8%; unit utilization fell to 57.3% from 61.6%.
- NGS added 42 units, including larger horsepower compressors, while retiring 216 units and recording a $291,000 retirement loss. The company recorded $184,000 of inventory allowance expense in 2020; 2019 included a $10.0 million goodwill impairment and $3.8 million inventory charge.
- Sales backlog was approximately $1.4 million at year-end, down from $2.2 million.
- Occidental Permian (Oxy) accounted for 30% of 2020 revenue and 35% of year-end receivables, making customer concentration and collections material considerations.
Outlook, risks, and other notable items
- Management expected smaller- and medium-horsepower utilization to continue declining during 2021, minimal compressor sales due to low customer capital budgets, and continued pricing pressure. The filing gives no specific revenue or earnings guidance.
- Management expected 2021 capital spending to depend on customer requirements, not exceed internally generated cash flow, and be fundable from cash and operating cash flow. It also stated the impact of the pandemic remained uncertain.
- The prior $30 million revolving credit agreement expired March 31, 2021; NGS repaid its outstanding principal and interest in March and was negotiating a replacement facility. Management expected a new facility by the end of April but could not assure one would be obtained. The filing also states that cash and expected operating cash flow were believed sufficient to meet 2021 needs.
- Principal risks include COVID-19 and oil-and-gas price volatility, reduced customer spending, short-term rental renewals, utilization and pricing pressure, customer concentration, environmental regulation, and potential limits on financing. Of 1,274 rented compressors, 948 were month-to-month.
- Management reported disclosure controls and internal control over financial reporting effective at December 31, 2020, and said two previously identified material weaknesses—income-tax accounting and compressor make-ready/maintenance job accounting—had been remediated. The 2019 internal-control assessment had been ineffective.
- The $4.6 million PPP loan obtained in April 2020 was voluntarily repaid with accrued interest in May 2020. No material off-balance-sheet arrangements were reported. NGS had not paid dividends and did not anticipate cash dividends.
Important facts for investors to verify
- Progress on securing replacement credit, including facility size, pricing, covenants, and availability; confirm whether the facility was ultimately obtained.
- Subsequent rental utilization, renewals, pricing, and demand—especially for smaller and medium units—and actual 2021 compressor sales.
- Oxy’s ongoing business and payment performance, given its share of revenue and receivables.
- Collection and use of the remaining federal tax receivable and the extent to which reported earnings and cash flow depend on tax refunds or other nonrecurring items.
- Whether the reported remediation of internal-control weaknesses remains effective and whether fleet asset cash-flow assumptions warrant impairment testing.