Natural Gas Services Group, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company fabricates, sells, rents and services natural-gas compressors and related equipment, with rental operations as its primary focus. Figures are in U.S. dollars; financial statement amounts are in thousands unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $20.9 million | $16.4 million | $58.7 million | $49.3 million |
| Operating income (loss) | $(13.6) million | $(0.04) million | $(12.8) million | $0.5 million |
| Net income (loss) | $(12.2) million | $0.2 million | $(11.3) million | $0.7 million |
| Diluted EPS | $(0.93) | $0.02 | $(0.86) | $0.05 |
| Cash from operations | Not separately stated | Not separately stated | $20.6 million | $23.0 million |
- Q3 revenue increased 27.2%; nine-month revenue increased 19.1%. Rental revenue rose 19.9% in Q3 and 18.5% year to date, mainly due to greater rental demand for larger-horsepower units. Sales revenue increased 48.9% in Q3 and 18.7% year to date, with management citing project timing and higher compressor sales.
- Rental fleet utilization at quarter-end was 61.5% by unit and 66.4% by horsepower, compared with 51.6% and 55.2%, respectively, a year earlier. The company reported 1,401 compressors rented to 93 customers; its overall fleet contained 2,277 packages.
- The operating loss included $10.0 million of goodwill impairment, a $3.4 million inventory allowance increase and a $1.5 million loss on retiring rental equipment. These charges totaled approximately $14.9 million; the equipment retirement loss and goodwill impairment were non-cash.
- Cash and cash equivalents were $19.5 million at September 30, down from $52.6 million at year-end 2018. Working capital was $52.7 million, versus $85.5 million. Nine-month capital spending was $53.4 million, compared with $20.6 million of operating cash flow.
- Debt under the line of credit was $417,000. The $30 million revolving facility had $29.5 million of borrowing-base availability and matures December 31, 2020. The company reported compliance with its credit covenants.
- Total assets were $297.0 million and stockholders’ equity was $250.5 million. The current ratio was approximately 5.1x, calculated from reported current assets and current liabilities.
Material changes and unusual items
- Following a decline in its share price and weakness across oilfield services stocks, the company concluded goodwill was fully impaired and wrote off its $10.0 million balance.
- Management’s fleet review led to retirement of 327 compressor units, representing 39,758 horsepower, and an inventory review prompted a $3.4 million reserve increase for slow-moving or potentially unrecoverable inventory.
- Cash used in investing activities was $53.6 million for the nine-month period, principally reflecting rental equipment and property purchases. Rental fleet additions accounted for $48.4 million of capital investment, according to management.
- The company adopted the new lease accounting standard in 2019, recognizing $447,000 of operating-lease right-of-use assets and corresponding liabilities at September 30. Management said adoption did not materially affect earnings.
Outlook, risks and contingencies
For the remainder of 2019, management 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 flow and cash on hand. Management said operating cash flow, available cash and the credit line should meet foreseeable capital and liquidity needs.
Management described 2019 as a period of moderating crude-oil prices and drilling and completion activity, while viewing the longer-term market trend as favorable. Results remain exposed to oil and gas prices, customer spending and industry activity, competition, component costs, and regulatory requirements. The company reported no material legal proceedings or known threatened material litigation. It had approximately $375,000 remaining in commitments for construction of its new corporate office.
The company continued remediation work on a previously identified material weakness in income-tax controls, involving tax-provision preparation and review. Management believed implemented changes would remediate the weakness, but said they remained subject to further testing at year-end. A separate uncertain tax position reserve was $259,000 at September 30; amended returns and analysis of offsetting deductions were ongoing.
Investor verification priorities
- Review the assumptions and valuation methods behind the $10.0 million goodwill impairment and the inventory and fleet retirement charges.
- Track whether utilization, rental demand and compressor sales remain strong amid moderating oilfield activity.
- Assess the impact of capital spending on cash balances and liquidity, and confirm the company’s plans remain consistent with actual spending and operating cash flow.
- Check year-end testing and remediation of the income-tax internal-control material weakness, as well as resolution of the uncertain tax position.
- Monitor borrowing-base availability, covenant compliance and the December 2020 credit-facility maturity; the filing provides no formal earnings guidance.