Natural Gas Services Group, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing; quarterly figures are included where relevant. The company provides natural-gas compression equipment and services, with rentals as its primary business. The filing was signed March 31, 2020.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $78.4 million | $65.5 million |
| Rental revenue | $56.7 million | $47.8 million |
| Sales revenue | $19.8 million | $16.3 million |
| Operating income (loss) | $(15.2) million | $(0.5) million |
| Net income (loss) | $(13.9) million; $(1.06) per diluted share | $(0.5) million; $(0.04) per diluted share |
| Adjusted EBITDA (non-GAAP) | $24.0 million | $21.8 million |
| Cash from operating activities | $29.4 million | $23.7 million |
| Capital expenditures | $69.9 million | $40.1 million |
| Cash and cash equivalents | $11.6 million | $52.6 million |
| Current assets / current liabilities | $42.4 million / $5.5 million | $94.9 million / $10.9 million |
| Net working capital | $36.9 million | $84.0 million |
| Debt outstanding | $0.4 million | $0.4 million |
| Stockholders’ equity | $247.7 million | $259.2 million |
Revenue grew 19.8%, led by rental growth of 18.7% and sales growth of 21.5%. The GAAP gross margin was $11.2 million, or approximately 14.3% of revenue, versus $8.8 million, or approximately 13.4%, in 2018. Adjusted gross margin, a non-GAAP measure excluding depreciation and amortization, was $34.1 million (43.5% of revenue), down from $30.7 million (46.8%). Rental adjusted margin declined to 51.4% from 54.2%; sales adjusted margin fell to 18.5% from 22.8%.
Cash from operations improved, but was more than offset by the larger fleet and other investment spending; cash declined by $41.0 million during the year. The $30 million revolving credit facility had $29.5 million of borrowing-base availability at year-end, subject to collateral terms, and matures December 31, 2020. The company reported covenant compliance at year-end. Operating lease liabilities were $0.6 million.
Material changes and unusual items
- Operating results included a $10.0 million goodwill impairment, a $3.8 million inventory allowance/write-off, and a $1.5 million loss on retirement of 327 rental units. Together these charges materially contributed to the operating loss.
- The company added approximately 74,000 horsepower to its rental fleet, while retiring older or less economic units. Year-end fleet horsepower was 429,650; horsepower utilization improved to 69.8% from 57.7%, and unit utilization to 61.6% from 53.0%.
- Management extended estimated useful lives for certain higher-horsepower rental equipment. The change reduced 2019 depreciation expense by approximately $1.47 million and reduced the reported net loss by approximately $1.13 million.
- Prior-period financial statements were revised for operating and maintenance costs that had been inappropriately capitalized. Management characterized the prior-period effects as immaterial; revisions reduced 2018 net income by $0.9 million, changing it to a $0.5 million net loss.
- Sales backlog fell to approximately $2.2 million at year-end from $14.8 million in 2018.
- The company repurchased 37,936 shares for $0.49 million during 2019; no repurchases occurred in the fourth quarter. The authorization had approximately $9.5 million remaining.
Outlook, risks, and contingencies
Management expected the COVID-19 pandemic, oil-price weakness, and increased supply from Saudi Arabia and Russia to pressure 2020 results and potentially beyond. As of the filing, it forecast lower utilization among small- and medium-horsepower units after a limited first-quarter decline, minimal compressor sales for the year, and continued pricing pressure. Management said it had not yet experienced workforce or supply-chain disruptions and that its largest customer continued to pay on time. It expected 2020 capital spending to depend on customer demand and not exceed internally generated cash flow, while acknowledging uncertainty about the outlook.
- Customer concentration: Occidental Permian (Oxy) accounted for 36% of 2019 revenue and 35% of year-end receivables. Loss or weakened creditworthiness of this customer could materially affect results and collections.
- Short rental terms: 953 of 1,419 rented compressors were on month-to-month terms, exposing revenue and utilization to cancellations, renewals, and rate reductions.
- Liquidity and financing: Cash was substantially lower after fleet investment. The credit line matured in 2020; renewal or replacement was not assured and could have less favorable terms. The facility includes financial and other covenants.
- Financial reporting controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to material weaknesses in income-tax accounting and timely recording of compressor make-ready and maintenance costs. Management targeted remediation by year-end 2020. The auditor issued an adverse opinion on internal control, while issuing an unqualified opinion on the financial statements.
- Environmental and legal matters: The company described potential environmental cleanup and compliance exposures, but reported no current cleanup order and no legal proceeding expected by management to have a material financial effect.
Most important facts for investors to verify
- Whether 2020 utilization, rental pricing, sales, and customer spending tracked or worsened management’s stated expectations.
- Whether Oxy remained a strong customer and whether its revenue and receivables concentration changed.
- Whether the credit facility was renewed or replaced on acceptable terms and whether covenant compliance continued.
- Whether the two material weaknesses were remediated by the stated year-end 2020 target, and whether subsequent filings required further revisions.
- Whether the 2019 fleet investment, equipment-life estimates, inventory valuation, and goodwill impairment assumptions remained supportable as market conditions changed.
- Adjusted EBITDA and adjusted gross margin are non-GAAP measures; compare them with GAAP results and cash requirements rather than treating them as substitutes for earnings or cash flow.