Natural Gas Services Group, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; unaudited. The company fabricates, manufactures, rents and sells natural-gas compressors and related equipment, with rental as its primary business.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $24.23 million | $21.95 million | $48.97 million | $44.27 million |
| Operating income | $0.92 million | $5.09 million | $6.71 million | $9.45 million |
| Net income | $0.61 million | $3.39 million | $4.31 million | $6.24 million |
| Diluted EPS | $0.05 | $0.27 | $0.34 | $0.49 |
| Operating cash flow | Not provided separately | Not provided separately | $25.32 million | $18.23 million |
- Q2 revenue rose about 10%; rental revenue was $19.71 million, sales $4.29 million and service and maintenance $0.23 million. For the first half, revenue rose 10.6%, with rental revenue up about 5% and sales up 46%.
- Reported operating income and net income fell sharply, primarily because of a $4.37 million non-cash loss on retirement of rental equipment. Excluding that charge, management reported operating margin of 22% in Q2 versus 23% a year earlier, and 23% for the first half versus 21%.
- Depreciation and amortization was $5.86 million in Q2 and $11.65 million for the first half. First-half SG&A was $5.46 million. The filing does not provide a clearly labeled gross-margin percentage.
- First-half operating cash flow of $25.32 million exceeded $9.56 million of equipment purchases; cash increased to $21.53 million from $6.18 million at year-end 2014. Working capital was $51.64 million, up from $41.83 million.
- At June 30, total assets were $282.00 million and stockholders’ equity $216.12 million. Line-of-credit debt was $0.42 million; borrowing-base availability was $29.5 million. The $30 million secured revolver matures December 31, 2017; the company reported compliance with its covenants.
Material changes and operating context
- Management retired 258 rental compressors, totaling 32,259 horsepower, after a review prompted by weaker market conditions and equipment that was less suited to customer demand or uneconomical to refurbish. The units’ book value was reduced to an estimated $0.97 million for reusable components, recording the $4.37 million loss.
- After the retirement, the rental fleet consisted of 2,662 packages. Utilization was 75.4% after the retirement, compared with 78.4% at June 30, 2014; management attributed lower utilization mainly to returns from older dry-gas areas. Separately, 2,006 compressors totaling 278,827 horsepower were reported rented to 90 customers, versus 2,142 compressors and 97 customers a year earlier.
- Q2 sales growth reflected timing of industry capital projects. Rental growth was attributed to continued demand for higher-rate, low- to mid-horsepower lift compression. Flare demand decreased slightly in the first half.
Outlook, risks and other matters
- Management described oil and gas prices and industry investment as weak or uncertain, with lower prices weighing on compression demand, particularly in non-conventional areas. It considers the market’s long-term trend favorable but emphasized the business is cyclical and sensitive to commodity prices and customer capital spending.
- For the rest of 2015 and into 2016, the company plans to control expenses, build rental equipment in response to market needs, market idle compressors and limit borrowing. 2015 capital spending was not expected to exceed internally generated cash and cash on hand; no precise full-year forecast was provided.
- Management believes operating cash flow and the credit line will meet foreseeable capital and liquidity needs, while noting that additional capital for unexpected spending or acquisitions might not be available on acceptable terms.
- Principal cited risks include prolonged low oil and natural-gas prices, reduced demand, competition, competing technologies, and new safety, health or environmental regulation. The company reported no material legal proceedings and no material changes to previously disclosed market risks.
- Disclosure controls were assessed as effective; no material change in internal control over financial reporting was identified. The company was evaluating the potential effects of new revenue-recognition and inventory standards.
Important facts for investors to verify
- Whether rental utilization and demand stabilize, particularly in older dry-gas regions, and whether the reported post-retirement utilization is sustained.
- How much of future earnings reflects recurring operations versus equipment retirements, depreciation, and other non-cash or unusual items.
- Whether customer project timing supports continued sales growth and whether rental revenue can offset commodity-driven weakness.
- Actual capital spending and cash conversion compared with management’s stated plan, plus borrowing-base availability and covenant compliance.
- The eventual financial effect of the new accounting standards; the filing says the impact was still under evaluation.