Natural Gas Services Group, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. The company fabricates, manufactures, rents and sells natural-gas compressors and related equipment, with rental compression as its primary business. This unaudited filing covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $21.2 million | $25.6 million | $70.2 million | $69.9 million |
| Operating income | $3.8 million | $5.8 million | $10.5 million | $15.3 million |
| Net income | $2.6 million | $3.9 million | $6.9 million | $10.1 million |
| Diluted EPS | $0.20 | $0.30 | $0.54 | $0.80 |
| Operating margin | 18% | 23% | Not separately stated on a comparable adjusted basis | Not separately stated |
- Revenue mix: Q3 rental revenue was $18.5 million, sales revenue $2.5 million and service and maintenance revenue $0.2 million. For the first nine months, these were $58.8 million, $10.7 million and $0.7 million, respectively.
- Margins and unusual charge: Nine-month operating income included a $4.4 million non-cash loss on retirement of rental equipment. Excluding that charge, management reported a 21% operating margin for the first nine months of 2015 versus 22% in 2014. Q3 operating margin fell to 18% from 23%, mainly as revenue declined.
- Cash flow: Nine-month cash from operations was $34.8 million, versus $26.5 million in 2014. Investing activities used $11.1 million, primarily reflecting $11.2 million of equipment purchases; financing activities provided $0.03 million. Cash increased by $23.8 million to $30.0 million.
- Liquidity and debt: Working capital was $58.2 million at September 30, 2015, compared with $41.8 million at December 31, 2014. The company had $0.417 million outstanding on its revolving credit line and reported $29.5 million of borrowing-base availability. It was in compliance with credit covenants.
- Balance sheet: Total assets were $287.7 million and total liabilities $68.0 million at September 30, 2015. Inventory was $28.1 million; rental equipment, net, was $197.0 million.
Material changes versus prior periods
- Q3 revenue declined 17% year over year, largely because lower oil prices weakened rental demand and units were returned; sales also fell amid uneven project timing and reduced flare demand.
- Rental utilization was 72.1% at September 30, 2015, versus 76.1% a year earlier. The rental fleet had 2,664 compressor packages, down from 2,842 a year earlier, following the June retirement of 258 units.
- Nine-month revenue was nearly flat, up 0.4%. Rental revenue rose slightly, while sales revenue edged down.
- Nine-month earnings fell substantially, including the effect of the rental-equipment retirement charge and higher depreciation and amortization. Q3 selling, general and administrative costs also increased, partly due to salaries and stock-based compensation.
- Cash flow from operations improved year over year; operating cash flow and cash on hand funded capital spending without a material increase in borrowings.
Outlook, risks and contingencies
- Management described oil and natural-gas prices and producer capital spending as weak, making demand uncertain, particularly in conventional markets and oil-price-sensitive shale plays. It nevertheless viewed the long-term market trend as favorable.
- For the remainder of 2015 and into 2016, management planned to align expenses and rental-fleet fabrication with market demand, market idle compressors and limit bank borrowing. Forecast capital expenditures for the remainder of 2015 were not expected to exceed internally generated cash flows and cash on hand. The filing provides no quantified earnings or revenue guidance.
- Management believed operating cash flow and the credit facility would meet capital and liquidity needs for the foreseeable future; additional capital for unexpected spending or acquisitions might not be available on acceptable terms.
- Key risks include a prolonged decline in oil and gas prices reducing demand, competition, and new safety, health or environmental regulations requiring significant capital spending. The credit facility matures December 31, 2017, is secured by specified assets, and includes covenant and default provisions.
- The company reported no material legal proceedings and no known threatened material litigation; management did not expect ordinary-course legal matters to materially affect financial position, results or cash flow.
- The filing states disclosure controls were effective and reports no material change in internal control over financial reporting during the quarter. The company was evaluating the potential effects of forthcoming revenue-recognition and inventory-accounting standards.
Important facts for investors to verify
- Whether rental demand and utilization stabilize or continue to fall, given commodity prices, customer returns and the reduced fleet.
- How much of the year-over-year earnings decline reflects the $4.4 million non-cash fleet-retirement charge versus ongoing operating trends and higher depreciation.
- Whether cash generation remains robust after working-capital movements and planned equipment spending.
- Available credit under the borrowing-base formula, covenant compliance and refinancing or repayment needs before the December 2017 facility maturity.
- Whether the forecasted capital-spending discipline and management’s long-term outlook remain supported by actual customer demand.