Natural Gas Services Group, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are to the same periods in 2017. The company manufactures, rents, and sells natural-gas compressors and related equipment, with rental operations its primary business.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $16.4 million | $15.9 million | $49.3 million | $51.0 million |
| Operating income (loss) | ($44,000) | $593,000 | $532,000 | $1.35 million |
| Net income | $236,000 | $522,000 | $708,000 | $1.15 million |
| Diluted EPS | $0.02 | $0.04 | $0.05 | $0.09 |
| Cash from operations | Not stated for quarter | Not stated for quarter | $23.0 million | $15.4 million |
- Q3 revenue increased 3%, driven by rental income, up to $12.0 million from $11.3 million. Sales declined to $3.9 million from $4.3 million.
- Nine-month revenue fell 3%, primarily because of lower sales associated with the timing of capital projects. Rental revenue rose slightly to $34.9 million; sales fell to $13.3 million from $15.3 million.
- Nine-month operating margin was approximately 1%, versus 3% in 2017, as reported by management. Higher rental costs and depreciation weighed on profitability; lower stock compensation helped reduce SG&A.
- At September 30, cash was $63.3 million, down from $69.2 million at year-end 2017. Working capital was $90.1 million, versus $100.8 million. Total assets were $298.8 million and stockholders’ equity was $259.8 million.
- Nine-month capital expenditures were $28.8 million, including $19.8 million for rental equipment and $5.3 million for the new corporate office. Cash from operations did not fully cover investment outlays; cash declined by $5.9 million.
- Outstanding line-of-credit debt was $417,000. The $30 million revolving facility had $29.5 million of borrowing-base availability and matures December 31, 2020. The company reported covenant compliance and a 3.50% weighted-average borrowing rate for the nine-month period.
Operating changes and business indicators
- Rental fleet utilization improved to 51.6% from 49.3% a year earlier. The fleet comprised 2,567 compressor packages, compared with 2,538; 1,324 compressors totaling 217,315 horsepower were rented to 87 customers.
- Management attributed increased rental activity to more units and greater demand for higher-horsepower equipment. Over the prior 12 months, 34 units totaling approximately 29,000 horsepower were added, 26 of them at least 400 horsepower.
- Depreciation and amortization increased to $16.4 million for nine months from $16.0 million, reflecting larger fleet additions. The effective tax provision was also lower, partly due to bonus depreciation.
- ASC 606 was adopted January 1, 2018 with no opening-equity adjustment. The filing reports $7.6 million of revenue from bill-and-hold arrangements during the first nine months.
Outlook, risks, and notable items
- Management expected increased oil and gas prices and industry activity to continue through the remainder of 2018, while noting that activity could vary and the outlook was uncertain. It described the longer-term market trend as favorable.
- For the rest of 2018, the company planned to control expenses, build rental equipment in response to market needs, market idle compressors, and limit borrowing. Compression-equipment capital spending was expected to depend on customer requirements and not exceed internally generated cash and cash on hand.
- Management believed operating cash flow, cash on hand, and the credit line would meet foreseeable capital and liquidity needs. It cautioned that additional capital, including for potential acquisitions, might not be available on acceptable terms.
- Construction of a new corporate office was expected to cost approximately $7.0 million, funded with cash on hand, and to be completed in early 2019. This is a significant cash commitment alongside fleet investment.
- Key stated risks include lower oil or natural-gas prices and resulting weaker demand, competition, competing technologies, and new safety, health, or environmental regulations that could require significant spending. The company reported no material legal proceedings or threatened material litigation.
- Other income was $184,000 in Q3 2018 versus a $7,000 expense in Q3 2017; the filing does not provide a clear breakdown of the quarterly change. The company was still evaluating certain tax-reform effects and expected to complete its analysis by Q4 2018.
Investor verification points
- Verify rental utilization, rates, and demand for higher-horsepower units, and whether these translate into stronger operating margins.
- Track sales timing and the pipeline of compressor and flare projects, given the year-to-date sales decline.
- Review capital spending, cash generation, and the total cost and completion schedule for the new office.
- Confirm the borrowing-base availability, covenant compliance, and liquidity position as investment continues.
- Assess the composition and recurrence of other income and the final tax-reform accounting impact.
- Reconcile reported fleet and rented-compressor measures with subsequent utilization and growth disclosures.