Quarterly / Earnings Reports | Third Quarter (3Q) Update | Financial Results | Capital Markets

Natural Gas Services Group Third Quarter 2020 Results

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Natural Gas Services Group, Inc. reported its Q3 2020 results.

Q3 2020 Highlights:

• Company generated exceptional cash flow and steady utilization despite market turmoil
  • Cash balance increased 78% to $27.6 million in Q3 from $15.5 million in Q2 due to strong operating cash flow, reduced CAPEX, and a federal income tax refund of $3.9 million.
  • Cash flows from operating activities increased 31% to $27.9 million during the first nine months of 2020 compared to $21.3 million during the same period in 2019.
  • Utilization remained steady on both a horsepower (63.8% in Q3 vs. 63.6% in Q2) and a unit (54.6% in Q3 vs. 54.5% in Q2) basis.
• Rental revenue of $14.9 million, an increase of 3.0% when compared to the third quarter of 2019.
• Net loss of $562,000 ($0.04 loss per diluted share).
• Adjusted EBITDA of $5.6 million. Please see Non-GAAP Financial Measures - Adjusted EBITDA, below.
• Planned capital expenditures of $7-$9 million for the fourth quarter of 2020 backed by attractive contracts

Financials

Revenue

Total revenue for the three months ended September 30, 2020 decreased to $15.8 million from $20.9 million for the three months ended September 30, 2019. This decrease was primarily due to a drop in sales revenue resulting from a lack of compressor sales offset by an increase in rental revenue. Rental revenue increased 3.0% to $14.9 million in the third quarter of 2020 from $14.4 million in the third quarter of 2019 due to a greater number of large horsepower units being rented. Total revenue decreased 9.4% to $15.8 million in the third quarter of 2020 compared to $17.4 million in the second quarter of 2020 resulting from a lack of compressor sales along with a 1.8% decrease in rental revenue during the third quarter of 2020. This sequential decrease in rental revenue was due to some continuing equipment shut-ins, rate reductions and unit returns in the third quarter.

Total gross margins decreased to $1.7 million for the three months ended September 30, 2020 compared to $3.8 million for the same period in 2019. Total adjusted gross margin, exclusive of depreciation, for the three months ended September 30, 2020, decreased $1.7 million to $7.9 million from $9.6 million for the same period ended September 30, 2019. This decrease was primarily attributable to a decrease in sales revenue and higher unabsorbed fabrication costs partially offset by higher rental revenue and slightly higher rental margins. Sequentially, total gross margin decreased to $1.7 million for the three months ended September 30, 2020 compared to $2.7 million for the three months ended June 30, 2020. Excluding depreciation, total adjusted gross margin decreased 10.7% to $7.9 million during the third quarter of 2020 compared to $8.8 million during the second quarter of 2020. This sequential decrease was primarily due to a reduction in sales revenue as well as slightly lower rental revenue and rental margins. The small decrease in rental margin was impacted by an increase in our bad debt allowance and higher payroll costs mostly offset by lower maintenance and repair costs during the third quarter. Please see discussions of Non-GAAP Financial Measures - Adjusted Gross Margin, below.

Operating loss for the three months ended September 30, 2020 was $941,000 compared to an operating loss of $14.0 million for the three months ended September 30, 2019. Operating loss during the third quarter of 2019 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 operating income was $880,000 in the third quarter of 2019. The larger adjusted operating loss in the third quarter of 2020 compared to the third quarter of 2019 was mainly due to lower sales revenue, higher unabsorbed fabrication costs, and higher depreciation expense partially offset by higher rental revenues, slightly higher rental margins, and lower selling, general and administrative ("SG&A") expenses. Operating loss in the third quarter of 2020 was $941,000 compared to an operating loss of $148,000 during the second quarter of 2020. This sequential decrease was primarily due to lower compressor and other sales as well as slight decreases in both rental revenue and rental margins that were partially offset by lower SG&A expenses during the third quarter. SG&A decreased by $169,000 sequentially primarily due to a decrease in unrealized loss on deferred compensation between quarters. Please see Non-GAAP Financial Measures Adjusted Operating Income and Adjusted Net Income (Loss), below.

Net loss for the three months ended September 30, 2020 was $562,000 compared to a net loss of $12.6 million for the three months ended September 30, 2019. Excluding Impairment and Other Non-Cash Charges, adjusted net income was $967,000 in the third quarter of 2019. The decrease in adjusted net income during the third quarter of 2020 was mainly due to lower sales revenue, higher unabsorbed fabrication costs, and higher depreciation expense partially offset by higher rental revenues, slightly higher rental margins, lower selling, general and administrative ("SG&A") expenses, and higher other income. Sequentially, net loss during the third quarter of 2020 of $562,000 compares to net income of $165,000 during the second quarter of 2020. This sequential decrease was primarily due to lower compressor and other sales, slight decreases in both rental revenue and rental margins, and lower other income that were partially offset by lower SG&A expenses during the third quarter. The sequential decrease in other income was primarily due to lower unrealized gains on company-owned life insurance (related to deferred compensation) during the third quarter and a gain on disposal of assets during the second quarter. These factors were partially offset by interest income related to income tax refunds received during the third quarter. Please see discussions of Non-GAAP Financial Measures - Adjusted Operating Income and Adjusted Net Income (Loss), below.

For the third quarter of 2020, the Company reported a loss per diluted share of $0.04 compared to loss per diluted share of $0.96 in the third quarter of 2019. Excluding Impairment and Other Non-Cash Charges, the company's adjusted earnings per diluted share was $0.07 in the third quarter of 2019. Sequentially, the Company reported a loss per diluted share of $0.04 compared to earnings per diluted share of $0.01 in the second quarter of 2020. Please see discussions of Non-GAAP Financial Measures - Adjusted Operating Income and Adjusted Net Income (Loss), below.

Adjusted EBITDA decreased to $5.6 million for the three months ended September 30, 2020 compared to $6.9 million for the same period in 2019. This decrease was attributable to lower sales revenue and higher unabsorbed fabrication costs partially offset by higher rental revenue, slightly higher rental margins, lower G&A expenses and higher other income during the third quarter of 2020. Sequentially, adjusted EBITDA decreased to $5.6 million for the three months ended September 30, 2020 compared to $6.5 million in the previous quarter. This decrease was attributable to lower sales revenue, slightly lower rental revenue, slightly lower rental margins, and lower other income partially offset by lower SG&A expenses during the third quarter. Please see discussion of Non-GAAP Financial Measures - Adjusted EBITDA, below.

At September 30, 2020, cash and cash equivalents were approximately $27.6 million, while working capital was $59.2 million and total debt was $417,000. For the nine months of 2020, cash flow from operating activities was $27.9 million, while cash flow used in investing activities was $11.8 million. Cash flow used in investing activities included $12.0 million in capital expenditures, of which $10.3 million was dedicated to rental capital expenditures.

Commenting on Third Quarter 2020 results, Stephen C. Taylor, President and CEO, said: "NGS posted solid operating results during this third quarter of 2020. Although our total revenue in both comparative quarters was down, which was driven primarily by our compressor sales business, our rental revenues continue to be solid. We continue to focus on our costs and to pursue work that prompts good returns. Accordingly, total gross margins came in at 50% of revenue and Adjusted EBITDA was 35% of revenue.

"Importantly, we continued to strengthen our balance sheet and liquidity position, even in this very challenging market environment. During the third quarter, NGS delivered positive net cash flow from operating activities of $13.1 million and reduced capital expenditures to $1.0 million, which resulted in our cash balance increasing to $27.6 million. This is up significantly from $15.5 million at the end of the second quarter. NGS continues to maintain one of the best balance sheets in the industry.

"NGS is fortunate to have been well positioned entering this period of extraordinary pain for the energy industry. Our ability to react rapidly in this environment and respond to our customers' needs have resulted in less impact on our financial condition compared to many of our peers."