Natural Gas Services Group, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; financial statements are unaudited. The company fabricates, rents and sells natural-gas compressors and related equipment, with rental activity its primary focus. Unless stated otherwise, amounts below are in millions of dollars.
Financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $18.902 | $21.576 |
| Operating income | $0.343 | $3.767 |
| Operating margin | 2% | 17% |
| Net income | $0.252 | $2.541 |
| Diluted EPS | $0.02 | $0.20 |
| Cash from operations | $10.785 | $10.033 |
| Capital expenditures | $0.464 | $1.942 |
- Revenue mix in Q1 2017: rentals $11.922 million (63%); equipment sales $6.637 million (35%); service and maintenance $0.343 million (2%).
- At March 31, cash was $74.370 million, working capital $98.648 million, and total assets $292.441 million. Total liabilities were $57.678 million and stockholders’ equity was $234.763 million.
- Outstanding line-of-credit debt was $0.417 million. The company reported $29.5 million of borrowing-base availability under its $30 million revolving facility. The facility matures December 31, 2017; the company reported compliance with its covenants.
- Rental-equipment depreciation and amortization contributed to total depreciation and amortization expense of $5.328 million. Interest expense was $0.002 million.
Changes versus Q1 2016
- Total revenue declined 12%, principally because rental revenue fell $4.486 million. Rental income decreased from $16.408 million to $11.922 million as fewer compressors were rented amid weak oil and gas prices.
- Rental fleet utilization fell to 49.8% from 61.3%. The company had 1,261 compressors rented to 75 customers at quarter-end, versus 1,610 rented to 84 customers a year earlier. Its overall fleet comprised 2,531 packages, down from 2,627.
- Sales revenue rose to $6.637 million from $4.910 million, reflecting increased compressor sales partly offset by lower flare sales. Service and maintenance revenue increased to $0.343 million from $0.258 million.
- Operating income fell to $0.343 million from $3.767 million, and net income fell to $0.252 million from $2.541 million. Management attributed the operating decline to lower rental revenue and higher stock-based compensation. SG&A rose to $3.046 million from $2.569 million; stock compensation expense was $1.532 million in the cash-flow reconciliation, including restricted-stock expense of approximately $1.408 million.
- Operating cash flow increased to $10.785 million from $10.033 million. Cash rose $10.276 million during the quarter, supported in part by collections and reductions in inventory, prepaid items and deferred income; investing cash outflow was $0.530 million.
Outlook, risks and notable items
- Management said weak, inconsistent commodity prices continued to restrain project spending, while the timing of a return to stronger investment was uncertain. It viewed the market’s long-term trend as favorable but provided no quantified revenue or earnings guidance.
- For the remainder of 2017 and into 2018, the company planned to control expenses, build rental equipment only in response to market needs, market idle compressors and limit bank borrowing. Forecast capital expenditures for the rest of 2017 were not expected to exceed internally generated cash flows and cash on hand.
- Management believed operating cash flow, cash on hand and the credit line would meet foreseeable capital and liquidity needs. Risks include prolonged low oil and gas prices, competitive pressure, supplier cost increases, and potential spending for safety, health or environmental regulation.
- The company recognized $0.837 million of Q1 sales revenue under bill-and-hold arrangements. Investors may wish to assess the related delivery timing and revenue-recognition criteria.
- The company adopted ASU 2016-09 for stock compensation on January 1, 2017, with no material reported impact. It expected to adopt the revenue-recognition standard on January 1, 2018 and leases standard in Q1 2019; it had not selected a transition method for the revenue standard.
- Management reported no material legal proceedings or threatened material litigation, and no material changes to previously disclosed market risks. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether rental utilization and rental revenue stabilize or recover, given the sharp year-over-year decline in rented units and utilization.
- How much of operating cash flow reflects sustainable operations versus working-capital movements, and whether the $0.837 million of bill-and-hold revenue met the disclosed criteria.
- The effect of elevated stock-based compensation on future expenses, earnings and share dilution.
- Repayment, renewal or replacement of the revolving credit facility before its December 31, 2017 maturity, and continued compliance with its borrowing-base and financial covenants.
- Actual 2017 capital spending and whether the company’s liquidity outlook holds if commodity prices remain weak or unanticipated capital needs arise.