Results

NGSG - Natural Gas Services Group Inc.

11/07/2019 | Press release | Distributed by Public on 11/07/2019 05:32

Natural Gas Services Group, Inc. Reports Third Quarter 2019 Financial and Operating Results

Midland, Nov. 07, 2019 (GLOBE NEWSWIRE) -- Natural Gas Services Group, Inc. ('NGS' or the 'Company') (NYSE:NGS), a leading provider of gas compression equipment and services to the energy industry, today announced financial results for the three and nine months ended September 30, 2019.

Third Quarter 2019 Highlights

  • Total revenue for the third quarter was $20.9 million, an increase of 5% and 27% over the second quarter of 2019 and the third quarter of 2018, respectively.
  • Net loss for the third quarter was $12.2 million, which included a full impairment of goodwill, an increase to inventory allowance, and retirement of rental equipment that totaled $14.9 million.
  • Diluted loss per share for the third quarter was $0.93. Adjusted diluted earnings per share for the third quarter was $0.10, an increase of $0.06 and $0.08 over the second quarter of 2019 and the third quarter of 2018, respectively. Please see Non-GAAP Financial Measures - Impairment and Other Non-Cash Charges, below.
  • Adjusted EBITDA for the third quarter of 2019 was $7.3 million, an increase of 13% and 29% over the second quarter of 2019 and the third quarter of 2018, respectively. Please see Non-GAAP Financial Measures - Adjusted EBITDA, below.

For the quarter ended September 30, 2019, NGS reported rental revenue of $14.4 million, a 20% increase compared to $12.0 million for the quarter ended September 30, 2018. Sequentially, rental revenue increased 6% during the third quarter of 2019 from $13.6 million during the second quarter of 2019. This growth was primarily due to an increase in the rentals of large horsepower units.

In addition, the Company reported a net loss for the third quarter of 2019 of $12.2 million compared to net income of $236,000 in the same quarter in 2018 and net income of $573,000 in the prior quarter. The third quarter of 2019 net loss included a full impairment of goodwill, an increase to inventory allowance, and retirement of rental equipment that totaled $14.9 million ('Impairment and Other Non-Cash Charges'). Excluding Impairment and Other Non-Cash Charges, adjusted net income for the third quarter of 2019 was $1.3 million, an increase of $1.1 million and $0.7 million over the third quarter of 2018 and the second quarter of 2019, respectively. Please see Non-GAAP Financial Measures - Impairment and Other Non-Cash Charges, below.

NGS reported a loss per diluted share for the third quarter of 2019 of $0.93, compared to diluted earnings per share of $0.02 for the third quarter of 2018 and $0.04 for the second quarter of 2019. Excluding Impairment and Other Non-Cash Charges, adjusted diluted earnings per share for the third quarter of 2019 was $0.10, an increase of $0.08 and $0.06 over the third quarter of 2018 and the second quarter of 2019, respectively. Please see Non-GAAP Financial Measures - Impairment and Other Non-Cash Charges, below.

Due to additional customer orders for our large horsepower units and specialized high-pressure compressors, as well as, an acceleration of anticipated 2020 capital expenditures into 2019 due to customer timing demands, NGS increased its 2019 capital expenditures budget for rental fleet additions to $60-$65 million from its previously discussed range of $40-$45 million. As has been the case over the past two years, the vast majority of these orders are committed at premium rental terms with many contracted for rental terms exceeding current market standards. We believe that available cash and anticipated cash flow from operations will be generally sufficient to fund our capital needs. Our cash balance as of September 30, 2019 was $19.5 million.

Additional Discussion of the Quarter

Revenue: Total revenue for the three months ended September 30, 2019 was $20.9 million, an increase of 27% from $16.4 million during the three months ended September 30, 2018. This increase was a result higher rental revenue largely due to an increase in rentals of large horsepower units as well as an increase in compressor sales in the third quarter of 2019 compared to the same period in 2018. Sequentially, total revenue increased by 5% to $20.9 million from $19.9 million in the second quarter of 2019. This increase was the result of higher rental revenue primarily due to an increase in rentals of large horsepower units.

Operating Income (Loss): Reported operating income (loss) for the three months ended September 30, 2019 decreased to a loss of $13.6 million from a loss of $44,000 and income of $593,000 during to the third quarter of 2018 and the second quarter of 2019, respectively. The operating loss during the third quarter of 2019 was due to Impairment and Other Non-Cash Charges totaling $14.9 million. This loss was partially offset by higher rental revenues and compressor sales compared to the third quarter of 2018. In comparison to the second quarter of 2019, this loss was partially offset by higher rental revenue and higher adjusted gross margins as a percentage of revenue. Excluding Impairment and Other Non-Cash Charges, adjusted operating income increased to $1.3 million, driven by higher rental revenues and compressor sales. Sequentially, adjusted operating income increased approximately $747,000 to $1.3 million from $593,000 mainly due to higher rental revenue and higher adjusted gross margins as a percentage of revenue. Please see Non-GAAP Financial Measures - Impairment and Other Non-Cash Charges, below.

Adjusted Gross Margins: Total adjusted gross margin for the three months ended September 30, 2019 increased by 27% to $10.0 million from $7.8 million for the same period in 2018. As a percentage of revenue, total adjusted gross margin remained flat at 48% for the three months ended September 30, 2019 and 2018. Sequentially, adjusted gross margin of $10.0 million for the three months ended September 30, 2019 increased by 12% from $9.0 million for the three months ended in June 30, 2019. Adjusted gross margin as a percentage of revenue increased to 48% during the third quarter of 2019 from 45% during the previous quarter, partially driven by the shift in revenues towards higher margin rentals from lower margin sales. Please see Non-GAAP Financial Measures-Adjusted Gross Margin, below.

Adjusted EBITDA: Adjusted EBITDA increased by 29% to $7.3 million during the third quarter of 2019 compared to $5.7 million during the third quarter of 2018. As a percentage of revenue, adjusted EBITDA remained flat at 35% during the third quarter of 2019 compared to the same period in 2018. In addition, adjusted EBITDA also increased 13% in the third quarter of 2019 from $6.5 million in the second quarter of 2019, while adjusted EBITDA as a percentage of revenue increased to 35% in the third quarter of 2019 compared to 32% in the second quarter of 2019. Please see Non-GAAP Financial Measures - Adjusted EBITDA, below.

Cash Flow: At September 30, 2019, cash and cash equivalents were $19.5 million, while bank debt was $417,000, none of which was classified as current. We had positive net cash flow from operating activities of $20.6 million during the nine months ended September 30, 2019.

Impairment and Other Non-Cash Charges: The Company performed a goodwill impairment analysis as of September 30, 2019. The analysis showed its carrying value of net assets exceeded its fair value, indicating that goodwill was fully impaired. Accordingly, the Company recorded a goodwill impairment charge of $10.0 million during the third quarter of 2019.

During the third quarter of 2019, management performed a review of the Company's rental compressor units and determined that 327 units should be retired, representing total horsepower of 39,758. Based on this review, at September 30, 2019, NGS recorded a $1.5 million non-cash loss on the retirement of rental equipment to reduce the book value of the units to zero.

Due to the slow moving nature or obsolescence of long-term inventory and inventory related to the retirement of rental equipment, management has started a thorough inventory analysis. Accordingly, management has recorded an increase of $3.4 million in the inventory allowance reserve for costs that may not be recoverable in the future.

Commenting on Third Quarter 2019 results, Stephen C. Taylor, President and CEO, said:

'This morning, we reported our third quarter 2019 results. NGS posted yet another strong operational quarter despite headwinds that have challenged others in the energy industry. We grew revenue in all of our operating segments during the quarter while increasing our sales, rental and overall margins. We are especially encouraged by our rental revenue growth of 20% when compared to the same period last year and 6% compared sequentially, which was fueled by robust performance in our large horsepower segment. Our compressor sales continued to be strong with gross margin as a percentage of revenue this quarter being the highest since Q1 2018. Net income, adjusted for balance sheet items, was 10 cents per diluted share.

'Our focus on maintaining a strong balance sheet and focusing on high return projects has served NGS and its shareholders well in this challenging operating environment. Our approach to self-funding capital expenditures, mostly for large horsepower equipment, has enabled us to increase our market share and take advantage of opportunities not available to competitors with less financial flexibility. Our cash flow from operations for the quarter was $14.2 million, or 68% of revenue, and our balance sheet cash level remained solid at $19.5 million with debt at less than half a million dollars.'

Selected data: The tables below show, for the three and nine months ended September 30, 2019 and 2018, revenues and percentage of total revenues, along with our operating income (loss) and adjusted gross margin (exclusive of depreciation and amortization) as well as related percentages of revenue for each of our product lines. Adjusted gross margin is the difference between revenue and cost of sales, exclusive of depreciation and amortization.

Revenue
Three months ended September 30, Nine months ended September 30,
2019 2018 2019 2018
(in thousands)
Rental $ 14,434 69 % $ 12,039 73 % $ 41,393 70 % $ 34,937 71 %
Sales 5,877 28 % 3,947 24 % 15,816 27 % 13,328 27 %
Service & Maintenance 541 3 % 410 3 % 1,529 3 % 1,053 2 %
Corporate - - % - - % - - % - - %
Total $ 20,852 $ 16,396 $ 58,738 $ 49,318
Operating (loss) Income
Three months ended September 30, Nine months ended September 30,
2019 2018 2019 2018
(in thousands)
Rental $ 5,635 39 % $ 6,676 55 % $ 20,350 361 % $ 19,675 56 %
Sales (876 ) (15 ) % 866 22 % 945 (108 ) % 3,132 23 %
Service & Maintenance 377 70 % 303 74 % 1,059 281 % 780 74 %
Corporate (18,697 ) NA (7,889 ) NA (35,113 ) NA (23,055 ) NA
Total $ (13,561 ) (65 ) % $ (44 ) - % $ (12,759 ) (22 ) % $ 532 1 %
Adjusted Gross Margin (1)
Three months ended September 30, Nine months ended September 30,
2019 2018 2019 2018
(in thousands)
Rental $ 8,134 56 % $ 6,676 55 % $ 22,849 55 % $ 19,675 56 %
Sales 1,487 25 % 866 22 % 3,308 21 % 3,132 23 %
Service & Maintenance 377 70 % 303 74 % 1,059 69 % 780 74 %
Corporate - NA - NA - NA - NA
Total $ 9,998 48 % $ 7,845 48 % $ 27,216 46 % $ 23,587 48 %

(1) For a reconciliation of adjusted gross margin to its most directly comparable financial measure calculated and presented in accordance with GAAP, please read 'Non-GAAP Financial Measures - Adjusted Gross Margin' below.

Non-GAAP Financial Measure - Adjusted Gross Margin: 'Adjusted Gross Margin' is defined as total revenue less cost of sales (excluding depreciation and amortization expense). Adjusted gross margin is included as a supplemental disclosure because it is a primary measure used by management as it represents the results of revenue and cost of sales (excluding depreciation and amortization expense), which are key operating components. Depreciation expense is a necessary element of costs and the ability to generate revenue, while selling, general and administrative expense is a necessary cost to support operations and required corporate activities. Management uses this Non-GAAP measure as a supplemental measure to other GAAP results to provide a more complete understanding of the company's performance. As an indicator of operating performance, adjusted gross margin should not be considered an alternative to, or more meaningful than, operating income as determined in accordance with GAAP. Adjusted Gross margin may not be comparable to a similarly titled measure of another company because other entities may not calculate adjusted gross margin in the same manner.

The reconciliation of operating (loss) income to adjusted gross margin is as follows:

Three months ended September 30, Nine months ended September 30,
(in thousands) (in thousands)
2019 2018 2019 2018
Operating (loss) income $ (13,561 ) $ (44 ) $ (12,759 ) $ 532
Depreciation and amortization 5,867 5,536 17,108 16,372
Selling, general, and administration expenses 2,791 2,353 7,966 6,683
Impairment of goodwill 10,039 - 10,039 -
Inventory allowance and retirement of rental equipment 4,862 - 4,862 -
Adjusted Gross Margin $ 9,998 $ 7,845 $ 27,216 $ 23,587

Non GAAP Financial Measures - Adjusted EBITDA: 'Adjusted EBITDA' reflects net income or loss before interest, taxes, depreciation and amortization, impairment of goodwill, an increase in inventory allowance and retirement of rental equipment. Adjusted EBITDA is a measure used by analysts and investors as an indicator of operating cash flow since it excludes the impact of movements in working capital items, non-cash charges and financing costs. Therefore, Adjusted EBITDA gives the investor information as to the cash generated from the operations of a business. However, Adjusted EBITDA is not a measure of financial performance under GAAP and should not be considered a substitute for other financial measures of performance. Adjusted EBITDA as calculated by NGS may not be comparable to Adjusted EBITDA as calculated and reported by other companies. The most comparable GAAP measure to Adjusted EBITDA is net income.

The reconciliation of net (loss) income to Adjusted EBITDA is as follows:

Three months ended September 30, Nine months ended September 30,
(in thousands) (in thousands)
2019 2018 2019 2018
Net (loss) income $ (12,232 ) $ 236 $ (11,302 ) $ 708
Interest expense 4 4 12 10
Income tax (benefit) expense (1,240 ) (100 ) (890 ) 3
Depreciation and amortization 5,867 5,536 17,108 16,372
Impairment of goodwill 10,039 - 10,039 -
Inventory allowance and retirement of rental equipment 4,862 - 4,862 -
Adjusted EBITDA $ 7,300 $ 5,676 $ 19,829 $ 17,093

Non GAAP Financial Measures - Impairment and Other Non-Cash Charges: From time to time, management may publicly disclose certain 'non-GAAP financial measures', such as adjusted operating income below, in our earnings releases, financial presentations or earnings conference calls. These non-GAAP measures are not in accordance with, or a substitute for, measures prepared in accordance with GAAP, and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with the Company's results of operations that would be reflected in measures determined in accordance with GAAP. Adjusted operating income and adjusted net income exclude goodwill impairment, an increase in inventory allowance, and retirement of rental equipment taken in the third quarter of 2019.

Impairment and Other Non-Cash Charges incurred during the third quarter of 2019 are as follows:

(in thousands)
Pre-Tax Tax Net
Inventory allowance $ 3,350 $ 758 $ 2,592
Retirement of rental equipment 1,512 342 1,170
Impairment of goodwill 10,039 255 9,784
Total $ 14,901 $ 1,355 $ 13,546

The reconciliation of operating loss to adjusted operating income is as follows:

Three months ended September 30, Nine months ended September 30,
Condensed (in thousands)
2019
Reported operating loss $ (13,561 ) $ (12,759 )
Inventory allowance 3,350 3,350
Retirement of rental equipment 1,512 1,512
Impairment of goodwill 10,039 10,039
Adjusted operating income $ 1,340 $ 2,142

The reconciliation of net loss to adjusted net income is as follows:

Three months ended September 30, Nine months ended September 30,
Condensed (in thousands) Per diluted share(1) Condensed (in thousands) Per diluted share(1)
2019
Reported net loss $ (12,232 ) $ (0.93 ) $ (11,302 ) $ (0.86 )
Inventory allowance 2,592 0.19 2,592 0.19
Retirement of rental equipment 1,170 0.09 1,170 0.09
Impairment of goodwill 9,784 0.73 9,784 0.73
Change in diluted shares(1) - - - -
Adjusted net income $ 1,314 $ 0.10 $ 2,244 $ 0.17

Notes:

(1) In the three and nine months ended September 30, 2019, restricted stock and stock options were not included in the computation of reported diluted loss per share due to their antidilutive effect ($0.02 per share). Weighted averages of 322,866 shares of restricted stock and 286,435 shares of restricted stock were included in the computation of adjusted diluted earnings per share for the three and nine months ended September 30, 2019, respectively.

Conference Call Details:

Teleconference: Thursday, November 7, 2019 at 10:00 a.m. Central (11:00 a.m. Eastern). Live via phone by dialing 877-358-7306, pass code 'Natural Gas Services'. All attendees and participants to the conference call should arrange to call in at least 5 minutes prior to the start time.

Live Webcast: The webcast will be available in listen only mode via our website www.ngsgi.com, investor relations section.

Webcast Reply: For those unable to attend or participate, a replay of the conference call will be available within 24 hours on the NGS website at www.ngsgi.com.

Stephen C. Taylor, President and CEO of Natural Gas Services Group, Inc. will be leading the call and discussing the financial results for the three and nine months ended September 30, 2019.

About Natural Gas Services Group, Inc. (NGS): NGS is a leading provider of gas compression equipment and services to the energy industry. The Company manufactures, fabricates, rents, sells and maintains natural gas compressors and flare systems for oil and natural gas production and plant facilities. NGS is headquartered in Midland, Texas, with fabrication facilities located in Tulsa, Oklahoma and Midland, Texas, and service facilities located in major oil and natural gas producing basins in the U.S. Additional information can be found at www.ngsgi.com.

Cautionary Note Regarding Forward-Looking Statements:

Except for historical information contained herein, the statements in this release are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause NGS's actual results in future periods to differ materially from forecasted results. Those risks include, among other things, the loss of market share through competition or otherwise; the introduction of competing technologies by other companies; a prolonged, substantial reduction in oil and gas prices which could cause a decline in the demand for NGS's products and services; and new governmental safety, health and environmental regulations which could require NGS to make significant capital expenditures. The forward-looking statements included in this press release are only made as of the date of this press release, and NGS undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. A discussion of these factors is included in the Company's most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission.

For More Information, Contact: Alicia Dada, Investor Relations
(432) 262-2700
[email protected]
www.ngsgi.com
NATURAL GAS SERVICES GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
September 30,
2019
December 31, 2018
ASSETS
Current Assets:
Cash and cash equivalents $ 19,482 $ 52,628
Trade accounts receivable, net of allowance for doubtful accounts of $325 and $291, respectively 11,224 7,219
Inventory 30,289 30,974
Prepaid income taxes 3,102 3,148
Prepaid expenses and other 1,320 2,430
Total current assets 65,417 96,399
Long-term inventory, net of allowance of $3,371 and $19, respectively 540 3,980
Rental equipment, net of accumulated depreciation of $156,800 and $165,428, respectively 205,741 175,886
Property and equipment, net of accumulated depreciation of $12,317 and $11,556, respectively 22,101 16,587
Right of use assets - operating leases, net of accumulated amortization $130 447 -
Goodwill - 10,039
Intangibles, net of accumulated amortization of $1,852 and $1,758, respectively 1,307 1,401
Other assets 1,443 1,109
Total assets $ 296,996 $ 305,401
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,183 $ 2,122
Accrued liabilities 8,358 8,743
Current operating leases 107 -
Deferred income 81 81
Total current liabilities 12,729 10,946
Line of credit 417 417
Deferred income tax liability 31,229 32,158
Long-term operating leases 340 -
Other long-term liabilities 1,790 1,699
Total liabilities 46,505 45,220
Commitments and contingencies
Stockholders' Equity:
Preferred stock, 5,000 shares authorized, no shares issued or outstanding - -
Common stock, 30,000 shares authorized, par value $0.01; 13,142 and 13,005 shares issued, respectively 131 130
Additional paid-in capital 109,861 107,760
Retained earnings 140,989 152,291
Treasury Shares, at cost, 38 shares (490 ) -
Total stockholders' equity 250,491 260,181
Total liabilities and stockholders' equity $ 296,996 $ 305,401
NATURAL GAS SERVICES GROUP, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(in thousands, except earnings per share)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
2019 2018 2019 2018
Revenue:
Rental income $ 14,434 $ 12,039 $ 41,393 $ 34,937
Sales 5,877 3,947 15,816 13,328
Service and maintenance income 541 410 1,529 1,053
Total revenue 20,852 16,396 58,738 49,318
Operating costs and expenses:
Cost of rentals, exclusive of depreciation and amortization stated separately below 6,300 5,363 18,544 15,262
Cost of sales, exclusive of depreciation and amortization stated separately below 4,390 3,081 12,508 10,196
Cost of service and maintenance 164 107 470 273
Selling, general and administrative expense 2,791 2,353 7,966 6,683
Depreciation and amortization 5,867 5,536 17,108 16,372
Impairment of goodwill 10,039 - 10,039 -
Inventory allowance and retirement of rental equipment 4,862 - 4,862 -
Total operating costs and expenses 34,413 16,440 71,497 48,786
Operating (loss) income (13,561 ) (44 ) (12,759 ) 532
Other income (expense):
Interest expense (4 ) (4 ) (12 ) (10 )
Other income, net 93 184 579 189
Total other income, net 89 180 567 179
(Loss) Income before provision for income taxes (13,472 ) 136 (12,192 ) 711
Income tax benefit (expense) 1,240 100 890 (3 )
Net (loss) income $ (12,232 ) $ 236 $ (11,302 ) $ 708
(Loss) Earnings per share:
Basic $ (0.93 ) $ 0.02 $ (0.86 ) $ 0.05
Diluted $ (0.93 ) $ 0.02 $ (0.86 ) $ 0.05
Weighted average shares outstanding:
Basic 13,137 12,977 13,112 12,953
Diluted 13,137 13,254 13,112 13,228
NATURAL GAS SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine months ended
September 30,
2019 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) income $ (11,302 ) $ 708
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization 17,108 16,372
Deferred income taxes (929 ) 133
Stock-based compensation 1,780 1,729
Bad debt allowance (recovery) 55 (137 )
Inventory allowance 3,350 -
Impairment of goodwill 10,039 -
Gain on sale of assets (37 ) (49 )
Retirement of rental equipment 1,512 -
(Gain) loss on company owned life insurance (145 ) 15
Changes in operating assets and liabilities:
Trade accounts receivables (4,060 ) 555
Inventory 1,861 6,307
Prepaid expenses and prepaid income taxes 198 (416 )
Accounts payable and accrued liabilities 1,054 (2,397 )
Deferred income - (51 )
Other 125 267
NET CASH PROVIDED BY OPERATING ACTIVITIES 20,609 23,036
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (53,401 ) (28,815 )
Purchase of company owned life insurance (207 ) (237 )
Proceeds from sale of property and equipment 26 49
Proceeds from insurance claims of property and equipment 11 -
NET CASH USED IN INVESTING ACTIVITIES (53,571 ) (29,003 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments from other long-term liabilities, net (16 ) (25 )
Proceeds from exercise of stock options 505 680
Purchase of treasury shares (490 ) -
Taxes paid related to net share settlement of equity awards (183 ) (629 )
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (184 ) 26
NET CHANGE IN CASH AND CASH EQUIVALENTS (33,146 ) (5,941 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 52,628 69,208
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,482 $ 63,267
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 42 $ 10
Income taxes paid $ 254 $ 66
NON-CASH TRANSACTIONS
Transfer of rental equipment components to inventory $ 746 $ 144
Transfer of prepaids to rental equipment and inventory $ 958 $ -
Right of use acquired through an operating lease $ 126 $ -

Source: Natural Gas Services Group, Inc.