Natural Gas Services Group, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports unaudited fourth-quarter results. The company manufactures, fabricates, rents and services natural gas compression equipment, primarily for U.S. unconventional oil and gas production.
Financial performance and position
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $97.0 million | $89.2 million |
| Gross margin, excluding depreciation and amortization (non-GAAP) | $53.8 million; 55.5% | $48.3 million; 54.1% |
| Operating income | $22.0 million | $22.0 million |
| Net income | $14.1 million | $14.4 million |
| Diluted earnings per share | $1.11 | $1.15 |
| Cash from operating activities | $34.6 million | $39.2 million |
| Capital expenditures | $53.3 million | $43.4 million |
At year-end, cash was $6.2 million, current assets $55.9 million, current liabilities $14.1 million, working capital $41.8 million and total debt $417,000. Stockholders’ equity was $210.6 million. The $30 million revolving credit facility, renewed and extended to December 31, 2017, had $29.6 million of borrowing-base availability; the company reported compliance with its covenants.
Fourth-quarter 2014 revenue was $27.1 million, operating income $6.7 million and net income $4.0 million, compared with $23.1 million, $5.0 million and $3.2 million, respectively, in fourth-quarter 2013.
Changes versus the prior year
- Annual revenue rose 8.7%, driven by rental revenue increasing 14.4% to $79.0 million. Sales revenue fell 11.7% to $17.2 million; service and maintenance revenue increased 11.9% to $0.8 million.
- Rental fleet size grew to 2,879 compressors and 401,361 horsepower, from 2,556 compressors and 351,187 horsepower. Fleet utilization declined to 76.0% from 79.7%.
- Overall gross margin increased to 55.5% from 54.1%, reflecting a larger rental share of revenue. Rental margin rose to 60.1%; sales margin declined to 34.3% from 40.5%.
- Operating income was essentially flat and net income declined 1.8%, despite revenue growth. SG&A increased 26.9% to $10.3 million, and depreciation and amortization increased 18.5% to $21.5 million.
- Operating cash flow decreased to $34.6 million while capital expenditures increased to $53.3 million. Cash declined by $18.3 million during the year, primarily as the company invested in rental equipment.
Outlook, risks and notable items
- Management expected 2015 activity to be flat or lower: rental operations virtually flat or moderately down, with weaker fabrication activity. It anticipated reduced industry capital spending and continuing commodity-price weakness, and expected planned capital expenditures to be funded from operating cash flow and available bank borrowing.
- Management cited the sharp late-2014 oil-price decline, low natural gas prices, customer budget cuts, credit-market uncertainty and competitive pricing pressure as near-term demand risks. Long-term demand was viewed as favorable, but no quantified earnings or revenue guidance was provided.
- Customer concentration is material: Devon and EOG represented 18% and 15% of 2014 revenue, respectively. Three customers accounted for 52% of year-end receivables.
- Rental agreements are generally short-term; 1,784 of the 2,189 units rented at year-end were on month-to-month terms. Non-renewals, lower rates or reduced utilization could affect revenue and equipment-cost recovery.
- Environmental compliance, potential historical contamination, product liability, insurance limitations, supplier lead times and skilled-labor availability are disclosed risks. Management reported no current cleanup order and no legal proceeding expected to materially affect the company.
- No goodwill impairment was recorded in 2014. An annual inventory review resulted in a $298,000 adjustment to remove obsolete inventory; the year-end inventory-obsolescence allowance was $225,000. The auditor issued an unqualified opinion on the financial statements, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether oil and gas customer spending, rental rates and fleet utilization held up against management’s cautious 2015 outlook.
- Whether cash generation and liquidity can support fleet investment, given 2014 operating cash flow below capital expenditures and the substantial decline in cash.
- Receivable collectability and exposure to the three customers representing 52% of year-end receivables.
- Whether inventory levels, obsolescence reserves and sales backlog converted as expected; the $5.8 million year-end backlog was expected to be fulfilled in the first half of 2015.
- The eventual financial-statement impact of the new revenue-recognition standard, which the company was still evaluating.