Natural Gas Services Group, Inc. Reports Fourth Quarter 2018 Earnings

MIDLAND, Texas March 14, 2019 - Natural Gas Services Group, Inc. (NYSE:NGS), a leading provider of gas compression equipment and services to the natural gas and oil industry, announces its financial results for the three months and full year ended December 31, 2018. Financial results contained herein are preliminary and subject to the audited consolidated financial statements included in NGS's Form 10-K to be filed on or about March 15, 2019.

Revenue: Total revenue decreased slightly from $16.7 million for the three months ended in December 31, 2017 to $16.2 million for the three months ended in December 31, 2018. Comparing quarter to quarter there was a shift in the revenue mix with rental revenues contributing 79% of total revenue compared to 69% during the same period in 2017. Total revenue decreased between consecutive quarters by 236,000 or 1.4%, to $16.2 million from $16.4 million due to a decrease in compressor sales offset by an increase in rentals. Total revenue decreased to $65.5 million from $67.7 million, or 3.3%, for the year ended December 31, 2018, compared to the year ended December 31, 2017. This was primarily the result of a 19.5% decrease in sales revenue offset by an 3.7% increase in rental revenue. The sales revenue decrease is due to our concentration on fabricating larger horsepower rental fleet units which have taken up a proportionally larger portion of our fabrication footage.

Operating Income: Operating income for the three months ended December 31, 2018 was $106,000, compared to the comparative prior year's level of $217,000. This decrease was primarily due to the decrease in sales revenue and an increase in depreciation. Sequentially, operating income increased to $106,000 for the three months ended December 31, 2018 from an operating loss of $44,000 for the three months ended September 30, 2018 primarily due to an increase in rental gross margins between the periods. Operating income for the year ended December 31, 2018 was $638,000, down 59% compared to last year's comparative period, primarily due to a decrease in sales revenue and total gross margins.

Adjusted Gross Margins: Total adjusted gross margin, exclusive of depreciation and amortization, for the three months ended December 31, 2018, increased $330,000 to $8.2 million from $7.9 million for the same period ended December 31, 2017. Overall adjusted gross margin percentage increased to 50.7% from 47.2% for this same comparative period. This increase was the result in an increase in rental revenue. Sequentially, total adjusted gross margin increased to $8.2 million from $7.8 million due to an increase in our rental revenue in the fourth quarter compared to the third quarter of 2018. For the comparative year ended periods, adjusted gross margins decreased from prior year to $31.8 million from $33.0 million and stayed relatively constant at 48.5% and 48.7% of revenue, sequentially. Please see discussions of Non-GAAP Financial Measures - Adjusted Gross Margin, below.

Taxes: On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act ("2017 Tax Act'), which made broad and complex changes to the U.S. tax code. The income tax effects of the 2017 Tax Act on the December 31, 2017 financials included a $18.4 million income tax benefit related to the re-measurement of our deferred tax assets and liabilities at the reduced rate of 21 percent. There were no tax legislation changes that impacted our 2018 financials.

Net Income: The Company reported a net loss of $282,000 for the three months ended December 31, 2018 compared to net income of $18.7 million for the same period in 2017. However, the fourth quarter net loss included an adjustment for income tax expense and interest ("tax adjustment") related to executive compensation of $633,000. Excluding the tax adjustment, the adjusted net income for the period was $351,000. Excluding the $18.4 million tax benefit from the 2017 Tax Act in the fourth quarter of last year, our adjusted net income for the three months ended December 31, 2017 remained relatively flat at $352,000. Sequentially, we had a net loss of $282,000 in the fourth quarter of 2018 compared to net income of $236,000 in the third quarter of 2018. Please see discussions of Non-GAAP Financial Measures - Special Items, below.

Earnings per share: For the fourth quarter 2018, the Company posted a loss per diluted share of 2 cents, compared to $1.42 in 2017. Excluding the tax adjustment in the fourth quarter, earnings would have been 3 cents per diluted share.  Excluding any tax adjustments, year-over-year quarterly earnings were flat. Sequentially, diluted earnings per share decreased 4 cents; however, excluding the tax adjustment expense, earnings per diluted share increased 1 cent. Please see discussions of Non-GAAP Financial Measures - Special Items, below.

Adjusted EBITDA: Adjusted EBITDA increased $164,000 to $5.8 million or 36% of revenue for the three months ended December 31, 2018 compared to $5.6 million or 34% of revenue for the three months ended December 31, 2017. Adjusted EBITDA increased by approximately $100,000 for the three months ended December 31, 2018, as compared to the sequential quarter. As a percentage of revenue for the same comparative period Adjusted EBITDA increased slightly to 36% from 35%. For the year ended December 31, 2018, Adjusted EBITDA stayed relatively constant at $22.9 million though as a percentage of revenue Adjusted EBITDA increased to 35% from 34% compared to the year ended December 31, 2017. Please see discussion of Non-GAAP Financial Measures - Adjusted EBITDA, below.

Cash flow: At December 31, 2018, cash and cash equivalents were approximately $52.6 million; working capital was $85.0 million with a debt level of $417,000 which is due in 2020. Positive net cash flow from operating activities was approximately $23.4 million for the year ended December 31, 2018 compared to $17.5 million for 2017. The changes in operating cash flow relate to the cash contribution from net income and normal changes in our working capital accounts.

Commenting on fourth quarter and year-end 2018 results, Stephen C. Taylor, President and CEO, said:

"We are pleased with our operational performance in the fourth quarter of the year, driven by strong, sequential rental revenue growth of 7% in the quarter. While our growth included continued progress in our high-horsepower category, a majority of the rental revenue growth in the quarter was a result of solid performance from our core mid-horsepower fleet. Sales revenue declined by about $1.0 million dollars sequentially, primarily as the result of our decision to reallocate production plant resources to higher margin rental fabrication, reducing opportunities for sales revenue. However, our sales backlog at the end of the fourth quarter was at its highest level since the third quarter of 2017. We did record non-recurring expenses related to potential strategic growth initiatives. However, our margins were generally higher in the quarter which sets the stage for solid performance for the Company in the coming year."

Selected data: The table below shows revenues and percentage of total revenues, along with our adjusted gross margin, exclusive of depreciation and amortization, and related percentages of each of our product lines for the three months and year ended December 31, 2018 and 2017.  Adjusted gross margin is the difference between revenue and cost of sales, exclusive of depreciation and amortization.

(1)  For a reconciliation of adjusted gross margin to its most directly comparable financial measure calculated and presented in accordance 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 and 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 income to adjusted gross margin is as follows:

Non-GAAP Financial Measures - Adjusted EBITDA: "Adjusted EBITDA" reflects net income or loss before interest, taxes, depreciation and amortization and loss on retirement of rental equipment. Adjusted EBITDA is a measure used by management, 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 accounting principles 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 income to Adjusted EBITDA is as follows:

Non GAAP Financial Measures - Special Items: From time to time, management may publicly disclose certain "non-GAAP financial measures", such as adjusted operating income and net income, 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 net income reflects net income before the income adjustment related to executive compensation. The reconciliation of reported net (loss) income to adjusted net income for December 31, 2018 is as follows:

Adjusted net income reflects net income before the income tax effects of the 2017 Tax Act. The reconciliation of reported net income to adjusted net income for December 31, 2017 is as follows:

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.

Conference Call Details:

Teleconference: Thursday, March 14, 2019 at 10:00 a.m. Central (11:00 a.m. Eastern).  Live via phone by dialing 800-624-7038, 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 months and year ended December 31, 2018.

About Natural Gas Services Group, Inc. (NGS):

We are a leading provider of small to medium horsepower compression equipment to the natural gas industry, with an emerging position in the large horsepower market. We focus primarily on the non-conventional natural gas and oil production business in the United States (such as coal bed methane, gas shale, tight gas and oil shales). The Company manufactures, fabricates, rents, sells and maintains natural gas compressors and flare systems for gas and oil 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 gas and oil producing basins in the U.S. Additional information can be found at www.ngsgi.com.