Natural Gas Services Group, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results; amounts below are in U.S. dollars unless otherwise noted.
Business context
The company manufactures, fabricates, rents, sells and services natural-gas compressors, with a primary focus on small- to medium-horsepower equipment used in U.S. unconventional oil and gas production. It also sells flare systems. Rental operations generated about 80% of 2015 revenue.
Financial results and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $95.9 million | $97.0 million |
| Operating income | $15.1 million | $22.0 million |
| Net income | $10.1 million | $14.1 million |
| Diluted earnings per share | $0.79 | $1.11 |
| Operating cash flow | $41.6 million | $34.6 million |
| Capital expenditures | $12.5 million | $53.3 million |
| Cash and cash equivalents at year-end | $35.5 million | $6.2 million |
| Total debt at year-end | $0.417 million | $0.417 million |
- Revenue fell 1.1%; operating income fell 31.1% and net income fell 28.2%. GAAP operating margin was approximately 15.8%, down from 22.7%.
- Gross margin, a company-defined non-GAAP measure excluding depreciation and amortization, was $53.3 million, or 55.5% of revenue, unchanged as a percentage year over year. Adjusted EBITDA, also non-GAAP, was $42.4 million versus $43.7 million.
- Rental revenue declined 3.2% to $76.4 million; sales revenue rose 7.7% to $18.5 million; service and maintenance revenue rose 22.4% to $1.0 million.
- Cash increased largely as capital spending declined. Year-end working capital was $68.6 million, with current assets of $73.2 million and current liabilities of $4.6 million. Cash exceeded debt by about $35.1 million.
- The $30 million revolving credit facility matures December 31, 2017; $29.5 million of borrowing-base availability was reported at year-end. The company reported compliance with its covenants.
Fourth-quarter results
Fourth-quarter 2015 revenue was $25.8 million, operating income $4.6 million, and net income $3.3 million; diluted EPS was $0.26. Compared with fourth-quarter 2014, revenue declined from $27.1 million, operating income from $6.7 million, net income from $4.0 million, and diluted EPS from $0.32.
Material changes and unusual items
- Rental-fleet utilization fell to 69.3% from 76.0%. The year-end fleet totaled 2,622 compressors and 372,482 horsepower, compared with 2,879 compressors and 401,361 horsepower a year earlier; rented units declined to 1,818 from 2,189.
- The company recorded a $4.37 million non-cash loss after retiring 258 rental compressors, representing 32,259 horsepower, and retaining components with an estimated fair value of about $967,000.
- Approximately $4 million of 2015 sales revenue was recognized under bill-and-hold arrangements. Verify the related criteria and delivery arrangements.
- Sales backlog declined to approximately $4.1 million from $5.8 million, with fulfillment expected in the first half of 2016.
- Two customers represented 31% of 2015 revenue; two customers represented 35% of year-end receivables. The largest customer contributed 21% of revenue.
Outlook, risks and contingencies
- Management expected 2016 activity to be lower amid weak oil and gas prices, customer capital-budget cuts, tight credit and competitive pricing pressure. It anticipated moderately lower rental activity and reduced fabrication; no specific revenue or earnings guidance was provided.
- Management expected 2016 capital expenditures to depend on customer requirements and not exceed internally generated cash flow, and believed operating cash and available borrowing capacity would meet liquidity needs through 2016. These expectations are forward-looking and not assured.
- Key risks include commodity-price and industry cyclicality, lower rental utilization and rates, short-term or month-to-month contracts, customer concentration and creditworthiness, competition, and access to financing or compliance with credit covenants.
- Environmental, product-warranty, and operational liabilities are potential risks. Management reported no current cleanup order and did not expect near-term material environmental expenditures; ordinary-course legal proceedings were not expected to have a material effect.
- The company reported no goodwill impairment in 2015. Its independent auditor issued an unqualified opinion on the financial statements and internal controls; management also assessed internal control over financial reporting as effective.
Important facts for investors to verify
- Whether rental utilization, fleet deployment and rental pricing continued to weaken after year-end.
- The collectability of receivables and exposure to the largest customers, particularly given customer and receivable concentration.
- The accounting support, customer request and shipment status for the $4 million bill-and-hold sales recognition.
- The carrying value and subsequent use or sale of retired fleet equipment, and whether additional impairments or retirements were required.
- Actual 2016 cash generation, capital spending, backlog conversion, and available borrowing capacity under the facility’s borrowing-base and covenant terms.