Fellow NGSG Shareholders,
2014 was a record year in many
respects
for NGSG. Our rental
revenues, total revenues and total
gross margins were at the highest
levels in the history of the company.
at
$79
and
Total revenue and rental revenue
approximately $97
peaked
million
million,
respectively, and gross margin,
operating income, net income and
increased each quarter
EBITDA
throughout the year. We continued
to grow our rental fleet to a total of
2,879 compressor units at year-end,
a gain of 323 units. This enabled us
to achieve a 14% increase in rental
revenues while our gross margins
strengthened to 60%, the highest
level since 2010.
rental
growth
Comparing our progress since 2010,
the bottom of the last cycle, NGSG
has increased total revenues 80%
revenues have
and our
almost doubled. Unit fleet size grew
51%; equating to over $150 million
investment
in
capital
through our
generated
operational cash flow. In spite of
this growth, NGSG’s total short and
long-term debt was less than $500
thousand and our cash balance was
approximately $6.2 million at the
end of 2014.
strictly
While 2014 was an excellent year
for the company, the last half of the
year saw a dramatic deterioration in
the price of crude oil and associated
drilling activities. Although NGSG is
not directly tied to drilling products
linked to
and services, we are
production activities which will
ultimately be affected, although
typically on a delayed and
less
severe basis.
For
example,
but we
This is a commodity-driven business
and there is little we can do about
the supply and demand aspects of
hydrocarbons,
have
positioned the company for the
inevitable highs and lows in this
rental
industry.
revenues now approximate about
75% of our total revenues. Rentals
tend to be impacted to a lesser
degree than sales revenues and
enable NGSG to continue to collect
rental
through
fleet payments
periods of lower activity. Our mix of
gas and oil oriented compressors in
the rental fleet is about 50/50 and
provides the company with better
diversification
have
historically had. I’m also proud to
add that more than three-quarters
of our executive and operational
management have been together as
a team since the last downturn in
2009-2010. With minimal debt and
generation
our
capability, we anticipate growing
our net cash balances through the
coming year.
than we
strong
cash
our
those
experience
effects, we
While we are well-positioned, we
are prepared for an impact to our
activity and anticipate pricing and
utilization pressure. As is always the
horsepower
large
case,
compressor fabrication and sales
business will
the
greatest impact. To counter some
of
have
implemented both defensive and
aggressive measures. Defensively,
we are reducing all unnecessary
costs, our fabrication activity has
shrunk dramatically and we are
enlisting our suppliers in an effort
to reduce our cost base. From an
aggressive perspective, we are
concentrating on sales and product
initiatives.
Stephen C. Taylor
Chairman of the Board,
President & Chief Executive Officer,
Natural Gas Services Group, Inc.
two
announced
Additional sales consultants have
been placed into markets where we
feel we can gain share and we have
already
new
products, our vapor recovery unit
first 400-500
(VRU) and our
horsepower rental units. Although
we will not see any appreciable
contribution from these products
immediately, we think this is a good
time to introduce our products and
services.
I want to thank our shareholders,
employees and board members for
their interest, work and support on
behalf of NGSG this past year.
Although down turning markets are
unpredictable in their breadth and
depth, I am confident that NGSG
will emerge in a preferred position.
As always, you are
invited to
NGSG’s annual meeting in Midland,
Texas on June 18, 2015, beginning
at 8:30 am CDT. The meeting will be
held at the Midland Petroleum Club
at 501 West Wall Street
Sincerely,
Stephen Taylor
President and Chief Executive Officer
NATURAL GAS SERVICES GROUP, INC.
508 West Wall Street, Suite 550
Midland, Texas 79701
Important Notice Regarding the Availability of Proxy Materials for the
Shareholder Meeting to be Held on Thursday, June 18, 2015
The proxy statement and annual report to shareholders are available at
www.proxyvote.com.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be held on Thursday, June 18, 2015
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Natural Gas Services Group, Inc., a Colorado
corporation (the “Company”), will be held at the Petroleum Club of Midland, 501 West Wall Street, Midland, Texas 79701 on
Thursday, June 18, 2015 at 8:30 a.m., Central Time, for the purpose of considering and voting upon proposals:
1. To elect two Directors to serve until the Annual Meeting of Shareholders to be held in 2018 or until their successors
are elected and qualify;
2. To ratify the appointment of BDO USA, LLP as the Company’s independent registered public accounting firm
for 2015;
3. To consider an advisory vote on the compensation of our named executive officers; and
4. To transact such other business as may properly be presented at the meeting, or at any adjournment(s) of the
meeting.
Only shareholders of record at the close of business on April 20, 2015 are entitled to notice of and to vote at the meeting
and at any adjournment(s) of the meeting. On that day, 12,733,527 shares of our common stock were outstanding and entitled to
vote. A complete list of our shareholders entitled to vote at the meeting will be available for examination at our offices in Midland,
Texas during ordinary business hours for a period of ten (10) days prior to the annual meeting.
Our Board of Directors recommends that you vote FOR the (i) election of the two director nominees named in this proxy
statement, (ii) the ratification of the appointment of BDO USA, LLP as our independent registered public accounting firm for
2015; and (iii) approval, on an advisory basis, of the compensation programs of our named executive officers.
We cordially invite you to attend the meeting. To ensure your representation at the meeting, please vote promptly even
if you plan to attend the meeting. Voting now will not prevent you from voting in person at the meeting if you are a shareholder
of record and wish to do so.
April
29, 2015
/s/ Stephen C. Taylor
Stephen C. Taylor
BY ORDER OF THE BOARD OF DIRECTORS
Chairman of the Board, President and Chief
Executive Officer
NATURAL GAS SERVICES GROUP, INC.
508 West Wall Street, Suite 550
Midland, Texas 79701
PROXY STATEMENT
FOR THE
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON THURSDAY, JUNE 18, 2015
GENERAL INFORMATION
We are providing this proxy statement to you as part of a solicitation by the Board of Directors of Natural Gas Services Group, Inc.
for use at our 2015 Annual Meeting of Shareholders and at any adjournment or postponement that may take place. We will hold
the meeting at the Petroleum Club of Midland, 501 West Wall Street, Midland, Texas 79701 on Thursday, June 18, 2015 at 8:30
a.m., Central Time.
We are taking advantage of Securities and Exchange Commission, or SEC, rules that allow us to deliver our proxy materials to
our shareholders on the Internet. Under these rules, we are sending most of our shareholders a two-page notice regarding the
Internet availability of proxy materials instead of a full set of proxy materials. If you receive this two-page notice, you will not
receive printed copies of the proxy materials unless you specifically request them. Instead, this notice tells you how to access and
review on the Internet all of the important information contained in the proxy materials. This notice also tells you how to submit
your proxy card on the Internet and how to request to receive a printed copy of our proxy materials.
We expect to mail, or provide notice and electronic delivery of, this proxy statement and accompanying proxy card to shareholders
beginning on or about May 7, 2015.
i
Questions and Answers About the Proxy Materials and the Meeting
TABLE OF CONTENTS
Householding of Proxy Materials
Proposal 1- Election of Directors
The Board of Directors and its Committees
Code of Ethics
Executive Officers
Executive Compensation
Principal Shareholders and Security Ownership of Management
Report of the Audit Committee
Proposal 2- Ratification of Appointment of Independent Registered Public Accounting Firm
Proposal 3- Consideration of an Advisory Vote on Executive Compensation of our Named Executive Officers
Shareholder Proposals
Communications with the Board of Directors
Other Matters
1
5
6
9
13
14
15
39
42
43
44
45
46
47
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QUESTIONS AND ANSWERS ABOUT THE PROXY MATERIALS
AND THE MEETING
Q: Why am I receiving these materials?
A: Our Board is providing these proxy materials to you in connection with our 2015 Annual Meeting of Shareholders, which will
take place on Thursday, June 18, 2015. As a shareholder on the record date for the meeting, you are invited to attend the meeting.
We also encourage you to vote on the matters described in this proxy statement.
Q: What information is contained in these materials?
A: This proxy statement includes information about the nominees for director and the other matters to be voted on at the meeting.
The proxy statement also includes information about the voting process and requirements, the compensation of directors and some
of our executive officers, and certain other required information.
Q: What can I vote on at the meeting?
A: There are three matters to be voted on at the meeting:
1. To elect two Directors to serve until the Annual Meeting of Shareholders to be held in 2018, or until their
successors are elected and qualified;
2. To ratify the appointment of BDO USA, LLP as the Company’s independent registered public accounting firm
for 2015;
3. To consider an advisory vote on the compensation of our named executive officers; and
4. To transact such other business as may properly be presented at the meeting, or at any adjournment(s) of the
meeting.
Q: How does the Board recommend that I vote on each of the matters?
A: Our Board recommends that you vote FOR each of the director nominees and FOR the ratification of the appointment of BDO
USA, LLP as our independent registered public accounting firm for 2015 . With respect to Proposal #3, the Board of Directors
recommends that you vote FOR approval, on an advisory basis, of the compensation programs of our named executive officers
as disclosed in the Compensation Discussion and Analysis, the compensation tables, and the related disclosure contained in the
proxy statement set forth under the caption “Executive Compensation” of this proxy statement.
Q: Why did I receive a two-page notice in the mail regarding the Internet availability of proxy materials this year instead
of a full set of proxy materials?
A: We are taking advantage of SEC rules that allow us to deliver proxy materials to our shareholders on the Internet. Under these
rules, we are sending most of our shareholders a two-page notice regarding the Internet availability of proxy materials instead of
a full set of proxy materials. If you receive this two-page notice, you will not receive printed copies of the proxy materials unless
you specifically request them. Instead, this notice tells you how to access and review on the Internet all of the important information
contained in the proxy materials. This notice also tells you how to submit your proxy card on the Internet and how to request to
receive a printed copy of our proxy materials. Shareholders may also request to receive proxy materials in printed form by mail
or electronically by email on an ongoing basis.
Q: Can I receive next year’s proxy materials by email?
A: Yes. All shareholders who have active email accounts and Internet access may sign up for email delivery of shareholder materials.
To sign up, go to www.proxyvote.com and click on “Electronic Enrollment.” If you have multiple registered or beneficial accounts,
you need to enroll for each account. If you elect to receive proxy materials by email, we will not mail you any proxy-related
materials next year. Your enrollment in the email program will remain in effect as long as your account remains active or until
you cancel it.
1
Q: Who is entitled to vote at our annual meeting of shareholders?
A: Holders of our outstanding common stock on April 20, 2015, are entitled to one vote per share on each of the items being voted
on at the meeting. We refer to this date as the Record Date. On the Record Date, we had 12,733,527 shares of common stock
outstanding. We have no other classes of stock outstanding.
Q: What shares can I vote?
A: You can vote all shares you owned on the Record Date. These shares include (1) shares held directly in your name as the
shareholder of record and (2) shares held for you as the beneficial owner through a stockbroker, bank or other nominee.
Q: What is the difference between holding shares as a shareholder of record and as a beneficial owner?
A: Most of our shareholders hold their shares through a stockbroker, bank or other nominee rather than directly in their own name.
There are some important distinctions between shares held of record and those owned beneficially.
Shareholder of Record
If your shares are registered in your name with our transfer agent, Computershare, you are the shareholder of record for those
shares and are receiving proxy-related materials directly from us. As the shareholder of record, you have the right to grant your
voting proxy directly to us or to vote in person at the meeting.
Beneficial Owner
If your shares are held in a stock brokerage account, by a bank or other nominee (commonly referred to as being held in “street
name”) you are the beneficial owner of those shares. Your broker, bank or nominee is the shareholder of record and therefore has
forwarded proxy-related materials to you as beneficial owner. As the beneficial owner, you have the right to direct your broker,
bank or other nominee how to vote your shares and are also invited to attend the meeting. However, since you are not the shareholder
of record, you may not vote your shares in person at the meeting unless you obtain a signed proxy from your broker, bank or
nominee giving you the right to vote the shares.
Q: How do I vote if I am a shareholder of record (as described in the question and answer above)?
A: You can vote on the Internet or by telephone by following the instructions you received in the mail or by email. If you received
a full printed set of our proxy materials in the mail, you can also vote by mail by signing and returning the proxy card provided
with those materials. Finally, you can vote in person at the meeting.
Q: How do I vote if I am a beneficial owner (as described in the question and answer above)?
A: You can vote on the Internet or by telephone by following the instructions you received in the mail or by email. If you received
a full printed set of our proxy materials in the mail, you can also vote by mail. You can vote in person at the meeting only if you
obtain a signed proxy from your broker, bank or nominee giving you this right.
Q: Can I change my vote or revoke my proxy?
A: Yes. You can change your vote or revoke your proxy at any time before the final vote at the meeting. You can do this by casting
a later proxy through any of the available methods described in the questions and answers above. If you are a shareholder of record,
you can also revoke your proxy by delivering a written notice of your revocation to our Corporate Secretary at our principal
executive office at 508 West Wall Street, Suite 550, Midland, Texas 79701. If you are a beneficial owner, you can revoke your
proxy by following the instructions sent to you by your broker, bank or other nominee.
Q: What does it mean if I get more than one set of proxy-related materials?
A: It means you hold shares registered in more than one account. Follow the instructions in each set of proxy-related materials to
ensure that all of your shares are voted.
2
Q: What is the quorum requirement for the meeting?
A: For a “quorum” to exist at the meeting, shareholders holding a majority of the votes entitled to be cast by the shareholders
entitled to vote must be present in person or represented by proxy at the meeting. There must be a quorum for any action to be
taken at the meeting (other than adjournment or postponement of the meeting). If you submit a properly completed proxy, even
if you abstain from voting, then your shares will be counted for purposes of determining the presence of a quorum.
If a broker indicates on a proxy that it lacks discretionary authority as to certain shares to vote on a particular matter, commonly
referred to as “broker non-votes,” those shares will still be counted for purposes of determining the presence of a quorum at the
meeting. Please see the next question and answer for further information about "broker non-votes."
Q: What are broker non-votes and how are broker non-votes and abstentions counted?
A: If you are a beneficial owner and hold your shares in street name and do not provide your broker or other nominee with voting
instructions, the broker, bank, or other nominee will determine if it has the discretionary authority to vote on the particular matter.
The New York Stock Exchange permits brokers to vote their customers' shares on routine matters when the brokers have not
received voting instructions from the customers. The ratification of independent public accountants is an example of a routine
matter on which brokers may vote. Brokers may not vote their customers' shares on non-routine matters unless they have received
instructions from the customers. Non-voted shares on non-routine matters are referred to as broker non-votes. The ratification of
the appointment of BDO USA, LLP as our independent public accountants for 2015 (Proposal 2) is a matter considered "routine"
under application rules. The election of directors (Proposal 1) and the advisory vote to approve named executive officer
compensation(Proposal 3) are matters considered "non-routine" under applicable rules. A broker or other nominee cannot vote
without instructions on non-routine matters. Abstentions and broker non-votes will have no effect on Proposal 1, as the election
of Directors is determined by counting the votes actually cast where abstentions and broker non-votes are not treated as votes cast.
With respect to the advisory vote to approve the named executive officers compensation programs (Proposal 3) where the vote
required is a majority of votes present and entitled to vote, abstentions will be equivalent to a vote cast against the proposals and
broker non-votes will have no effect.
Q: What is the voting requirement to approve each of the matters?
A: Directors are elected by a plurality of the votes cast at the Annual Meeting. This means that the nominee for election as Director
who receives the greatest number of votes cast in favor of his or her election will be elected to the Board of Directors. The ratification
of the appointment of BDO USA, LLP as the Company’s independent registered public accounting firm and the advisory vote on
the compensation programs of our named executive officers are approved if the votes cast in favor of the matter exceed the votes
cast against the matter. If you are a beneficial owner and do not provide the shareholder of record with voting instructions, your
shares may constitute broker non-votes for certain matters (as described in the question and answer immediately above). In
tabulating the voting result for a proposal, shares that constitute broker non-votes are not considered as being entitled to vote on
that proposal.
Q: How can I vote on each of the matters and how will the votes be counted?
A: In the election of directors, you may vote “FOR,” “AGAINST,” or “ABSTAIN” with respect to each of the two nominees. If
you elect to abstain from the election of directors, the abstention will not have any effect on the election of directors. In tabulating
the voting results for the election of directors, only “FOR” and “AGAINST” votes are counted.
For the (i) ratification of the appointment of BDO USA, LLP as our independent auditors, and (ii) advisory vote on compensation
of our named executive officers advisory vote on compensation of our named executive officers, you may vote “FOR,” “AGAINST,”
or “ABSTAIN” with respect to these two proposals. If you elect to abstain from voting on any of these proposals, the abstention
will have the same effect as an “AGAINST” vote with respect to such proposal.
If you sign and return your proxy card or voting instruction form without giving specific voting instructions, your shares will be
voted as recommended by our Board. If you are a beneficial holder and do not return a voting instruction form, your broker may
only vote on the ratification of the appointment of BDO USA, LLP (Proposal 2).
3
Q: Who will count the votes?
A: Broadridge, an international investor relations company, is assisting us with the voting of proxies for our meeting. Prior to the
meeting, Broadridge will provide us with a tabulation of the votes cast prior to the meeting. We believe that Broadridge will use
procedures that are consistent with Colorado law concerning the voting of shares, the determination of the presence of a quorum
and the determination of the outcome of each matter submitted for a vote. In addition, we will appoint a voting inspector at the
meeting to count and tabulate any votes cast at the meeting.
Q: Who may attend the meeting?
A: All shareholders as of the Record Date may attend. Please bring to the meeting:
• proof of ownership such as: a copy of your proxy or voting instruction card; the two-page notice regarding the internet
availability of proxy materials you received in the mail; or a copy of a brokerage or bank statement showing your
share ownership as of the Record Date; and
• proof of identification such as a valid driver’s license or passport.
Q: How will voting on any other business be conducted?
A: We do not expect any matters to be presented for a vote at the meeting other than the three matters described in this proxy
statement. If you grant a proxy, either of the officers named as proxy holders, Stephen C. Taylor and G. Larry Lawrence, or their
nominees or substitutes, will have the discretion to vote your shares on any additional matters that are properly presented for a
vote at the meeting and at any adjournment or postponement that may take place. If, for any unforeseen reason, any of our nominees
is not available as a candidate for director, the persons named as the proxy holder will vote your proxy for another candidate or
other candidates nominated by our Board.
Q: May I propose actions for consideration at next year’s meeting of shareholders?
A: Yes. For your proposal to be considered for inclusion in our proxy statement for next year’s meeting, we must receive your
written proposal no later than December 21, 2015. If we change the date of next year’s meeting by more than 30 days from the
date of this year’s meeting, then the deadline is a reasonable time before we begin to print and send our proxy materials. You
should also be aware that your proposal must comply with SEC regulations regarding shareholder proposals.
Similarly, for you to raise a proposal (including a director nomination) from the floor at next year’s meeting, we must receive a
written notice of the proposal no later than March 9, 2016. If we change the date of next year’s meeting by more than 30 days
from the date of this year’s meeting, then we must receive your written proposal at least 150 days before the date of next year’s
meeting for the proposal to be timely.
Q: Who is paying for this proxy solicitation?
A: We will pay the cost of soliciting the proxies. In addition, our officers, directors and employees may solicit proxies or votes in
person, by telephone or by email. These people will not be paid any additional compensation for these activities. We will send
copies of proxy-related materials or additional solicitation materials to brokers, fiduciaries and custodians who will forward these
materials to the beneficial owners of our shares. On request, we will reimburse brokers and other persons representing beneficial
owners of shares for their reasonable expenses in forwarding these materials to beneficial owners.
4
HOUSEHOLDING OF PROXY MATERIALS
In an effort to reduce printing costs and postage fees, we have adopted a practice called “householding.” Under this
practice, shareholders who have the same address and last name and do not participate in email delivery of proxy-related materials
will receive only one set of our proxy statement, annual report or notice of internet availability of proxy-related materials unless
one or more of these people notifies us that he or she wishes to continue to receive individual copies.
If you share an address with another shareholder and receive only one set of proxy-related materials and would like to
request a separate copy for this year’s annual meeting or for any future meetings, please: (1) call our Investor Relations contact
at (432) 262-2700; (2) send an email message to alicia.dada@ngsgi.com; or (3) mail your request to Natural Gas Services Group,
Inc., 508 West Wall Street, Suite 550, Midland, Texas 79701, Attn: Investor Relations. Similarly, you may also contact us through
any of these methods if you receive multiple copies of the materials and would prefer to receive a single copy in the future.
5
PROPOSAL 1 - ELECTION OF DIRECTORS
Our Board of Directors is divided into three classes (commonly known as a “staggered” Board), each class to be as nearly
equal in number as possible. At each annual meeting of shareholders, members of one of the classes, on a rotating basis, are
elected for a three-year term. The authorized number of Directors is currently set at nine. We currently have five directors serving
on our Board. Our Board of Directors may fill the vacancies if a qualified candidate is vetted. The following table sets forth, by
class, the members of our Board of Directors as of the date of this proxy statement:
Terms Expiring at the
2015 Annual Meeting
David L. Bradshaw
William F. Hughes
Terms Expiring at the
2016 Annual Meeting
John W. Chisholm
Terms Expiring at the
2017 Annual Meeting
Charles G. Curtis
Stephen C. Taylor
Shareholders will be electing two Directors at the meeting. The Board is recommending Mr. Bradshaw and Mr. Hughes
for re-election to the Board of Directors to serve three year terms expiring at the annual meeting of shareholders in 2018.
The persons named in the enclosed form of proxy will vote the shares represented by such proxy for the election of the
nominees for Director named above unless other instructions are shown on the proxy card. If, at the time of the meeting, either or
both of these nominees becomes unavailable for any reason, which is not expected, the persons entitled to vote the proxy will vote
for such substitute nominee or nominees, if any, as they determine in their sole discretion, or we may reduce the size of the Board.
Biographical information and qualifications for each person nominated as a Director, and for each person whose term of
office as a Director will continue after the 2015 Annual Meeting, is set forth below.
Nominees for Directors for Terms to Expire in 2018
David L. Bradshaw
David L. Bradshaw, 60, joined our board in December of 2011. Since 2005, Mr. Bradshaw has acted as a consultant in
the oil and gas exploration and production sector and has overseen his investments in this area. From August 2007 through
November 2009, Mr. Bradshaw served as a Director and Audit Committee Chairman for Triangle Petroleum, a publicly traded
company listed on the American Stock Exchange. From November 2007 through November 2008, Mr. Bradshaw served as a
Director for Comet Ridge Limited, an Australian company listed on the Australian Securities Exchange. From 1986 to 2005, Mr.
Bradshaw worked for Tipperary Corporation, a U.S. public company listed on the American Stock Exchange. During his tenure
at Tipperary, the company was involved in oil and gas exploration and production, and natural gas processing and transportation.
He held the positions of Chief Executive Officer from 1996 to 2005, Chairman of the Board from 1997 to 2005, Chief Financial
Officer from 1990 to 1996 and Chief Operating Officer from 1993 to 1996. Mr. Bradshaw also served as Chief Executive Officer
and Chairman of Tipperary Oil & Gas (Australia) Pty Ltd from 1999 to 2005, a subsidiary of Tipperary, which explored for and
produced natural gas in Queensland, Australia. From 1983 to 1986, Mr. Bradshaw was an owner and officer of Bradcorp, Inc. a
private exploration and production company. Prior to this, Mr. Bradshaw spent six years in public accounting serving predominantly
oil and gas clients. Mr. Bradshaw graduated from Texas A&M University with a BBA in Accounting in 1976 and a MBA in 1977,
and is also a Certified Public Accountant.
Mr. Bradshaw's educational and professional training and achievements as a Certified Public Accountant and MBA, along
with his past experience as both a Chief Financial Officer and Chief Executive Officer of a public company involved in the natural
resources industry, provides us with considerable accounting and corporate finance skills. In addition, Mr. Bradshaw's career
spanning over thirty years in the oil and gas industry and as a public accountant. His executive management positions in both
private and public companies bring us significant leadership, planning and management skills and background.
William F. Hughes, Jr.
William F. Hughes Jr., 62, has served as a Director since December 2003. Mr. Hughes has over 30 years experience in
the engineering and construction industry as a Registered Civil Engineer and licensed building contractor. From 1974 to 1979,
he served as an officer in the United States Air Force. From 1979 to 1986, he was a project design engineer for Cushman &
Associates. From 1986 to 1996, he served as a Project Manager on a variety of public works and industrial construction
projects. Since 1983, Mr. Hughes has been co-owner of The Whole Wheatery, LLC, a natural foods store located in Lancaster,
6
California. Mr. Hughes holds a Bachelor of Science degree in Civil Engineering from the United States Air Force Academy and
a Master of Science in Engineering from the University of California at Los Angeles.
Mr. Hughes’ career experience in the engineering and construction industry brings us invaluable skills which are applicable
to our manufacturing processes. In addition, Mr. Hughes provides leadership skills arising from his service as an officer with the
U.S. Air Force and U.S. Air Force Academy graduate.
Continuing Directors Whose Terms Expire in 2016
John W. Chisholm
John W. Chisholm, 60, was appointed as a Director of Natural Gas Services Group in December 2006 to fill a vacancy
created by expanding the size of the Board from seven to eight Directors and was first elected as a Director of Natural Gas Services
Group at the annual meeting of shareholders held in June 2007. Mr. Chisholm is the founder of Wellogix, an oil and gas software
company that develops software aimed at expediting the exchange of enterprise data and communication of complex engineered
services. Prior to founding Wellogix, Mr. Chisholm co-founded and served as President of ProTechnics Company from 1985 until
its sale to Core Laboratories in December of 1996. Mr. Chisholm served as Senior Vice President of Global Sales and Marketing
of Core Laboratories until 1998, when he started Chisholm Energy Partners, an investment fund focused on mid-size energy service
companies. From 2002 to 2009 Mr. Chisholm served on the Board of Directors of Flotek Industries, Inc., and became interim
President in August 2009. In August 2010 Mr. Chisholm became President of the company and was appointed Chief Executive
officer in March 2012. Flotek Industries, Inc. is a public company which files reports under the Securities Exchange Act of 1934. Mr.
Chisholm holds a Business Administration degree from Fort Lewis College in Colorado. He currently serves on the Editorial
Advisory Board on Middle East Technology of the Oil & Gas Journal.
Mr. Chisholm brings significant natural resources experience to our Board, in connection with his background in supplying
drilling and production related products and services to the oil, gas and mining industries, and his investment fund experience
with mid-size energy service companies is an invaluable resource as the Company assesses its capital and liquidity needs.
In addition Mr. Chisholm's experience as a board member and executive officer of a public company provides us with a
wealth of leadership and management skills.
Continuing Directors Whose Terms Expire in 2017
Charles G. Curtis
Charles G. Curtis, 82, has served as a Director of Natural Gas Services Group since April 2001. Since 2002, substantially
all of Mr. Curtis’ business activities have been devoted to managing personal investments. From 1992 until 2002, Mr. Curtis was
the President and Chief Executive Officer of Curtis One, Inc., a manufacturer of aluminum and steel mobile stools and mobile
ladders. From 1988 to 1992, Mr. Curtis was the President and Chief Executive Officer of Cramer, Inc., a manufacturer of office
furniture. Mr. Curtis has a Bachelor of Science degree from the United States Naval Academy and a Master of Science degree in
Aeronautical Engineering from the University of Southern California.
Mr. Curtis has been a long-standing member of the Board since prior to the Company's initial public offering in 2002
and as such he brings a wealth of knowledge regarding the Company's history, growth and industry.Through his manufacturing
career and engineering educational background, Mr. Curtis assists the Board and the Company in connection with its compressor
manufacturing business. As a past U.S. Naval Officer and U.S. Naval Academy graduate, Mr. Curtis also brings leadership skills
to the Board and Company.
Stephen C. Taylor
Stephen C. Taylor, 61, has been President and Chief Executive Officer of Natural Gas Services Group since January
2005. He was elected as a Director of Natural Gas Services Group at the annual meeting of shareholders in June 2005. Effective
January 1, 2006, Mr. Taylor was appointed Chairman of the Board of Directors. Immediately prior to joining Natural Gas Services
Group, Mr. Taylor held the position of General Manager - US Operations for Trican Production Services, Inc. from 2002 through
2004. Mr. Taylor joined Halliburton Resource Management in 1976, becoming its Vice President - Operations in 1989. Beginning
in 1993, he held multiple senior level management positions with Halliburton Energy Services until 2000 when he was elected
Senior Vice President/Chief Operating Officer of Enventure Global Technology, LLC, a joint-venture deep water drilling technology
company owned by Halliburton Company and Shell Oil Company. Mr. Taylor elected early retirement from Halliburton Company
7
in 2002 to join Trican Production Services, Inc. Mr. Taylor holds a Bachelor of Science degree in Mechanical Engineering from
Texas Tech University and a Master of Business Administration degree from the University of Texas at Austin.
Mr. Taylor’s senior management experience in the natural resources industry provides the Board and our company with
significant insight into our business. Mr. Taylor’s engineering and advanced business training (MBA) uniquely suits him to provide
leadership, technical expertise and financial acumen to our Board and to the operations of our company in connection with his
position as our chief executive officer.
8
THE BOARD OF DIRECTORS AND ITS COMMITTEES
Natural Gas Services Group’s Board of Directors held four meetings in 2014. Each Director attended at least 75% of the
total number of Board meetings held while such person was a Director. Each Director also attended at least 75% of all of the
meetings held by all committees of the Board of Directors for which he served (during the periods that he served). The Board of
Directors acts from time to time by unanimous written consent in lieu of holding a meeting.
Our non-management directors hold regularly scheduled executive sessions in which those directors meet without
management participation. Generally, the Chairman of the Governance and Personnel Development Committee presides over
these sessions. Charles G. Curtis is currently that Chairman.
We typically schedule a Board meeting in conjunction with our annual meeting of shareholders. Although we do not
have a formal policy on the matter, we expect our Directors to attend each annual meeting, absent a valid reason, such as illness
or an unavoidable schedule conflict. Last year, all of the individuals then serving as Directors attended our 2014 Annual Meeting
of Shareholders.
To assist it in carrying out its duties, the Board has delegated certain authority to four separately designated standing
committees. These committees are described below.
Audit Committee
The primary functions of our Audit Committee include:
• assisting the Board in fulfilling its oversight responsibilities as they relate to our accounting policies, internal
controls, financial reporting practices and legal and regulatory compliance;
• hiring our independent registered public accounting firm;
• monitoring the independence and performance of our independent registered public accounting firm;
• maintaining, through regularly scheduled meetings, a line of communication between the Board, our
financial management and independent registered public accounting firm; and
• overseeing compliance with our policies for conducting business, including ethical business standards.
The members of the Audit Committee are David L. Bradshaw (Chairman), Charles G. Curtis, and William F. Hughes, Jr.
Our common stock is listed for trading on the New York Stock Exchange, or “NYSE”. Under rules of the NYSE, the Audit
Committee is to be comprised of three or more Directors, each of whom must be independent. Our Board has determined that all
of the members of the Audit Committee are independent, as defined under the applicable NYSE rules and listing standards. In
addition, our Board of Directors has determined that David L. Bradshaw is qualified as an “audit committee financial expert” as
that term is defined in the rules of the Securities and Exchange Commission. The Audit Committee met nine times during the last
fiscal year. The audit committee has also received from, and discussed with, BDO the matters required to be discussed by Public
Accounting oversight Board Auditing standard No. 16. (Communications with Audit Committees).
Any shareholder may obtain free of charge a printed copy of our Audit Committee Charter by sending a written request
to Investor Relations, Natural Gas Services Group, Inc., 508 West Wall Street, Suite 550, Midland, Texas 79701. You can also
view and print a copy of our Audit Committee Charter by clicking on the “Governance” tab at the Investor Relations page of our
website at www.ngsgi.com.
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Compensation Committee
The functions of our Compensation Committee include:
• assisting the Board in overseeing the management of our human resources;
• evaluating our Chief Executive Officer’s performance and compensation;
• formulating and administering our overall compensation principles and plans; and
• evaluating management.
The Compensation Committee’s policy is to offer the executive officers competitive compensation packages that will
permit us to attract and retain individuals with superior abilities and to motivate and reward such individuals in an appropriate
fashion in the long-term interests of Natural Gas Services Group and its shareholders. Currently, executive compensation is
comprised of salary and cash bonuses and awards of long-term incentive opportunities in the form of restricted stock awards under
the 2009 Restricted Stock/Unit Plan.
The members of the Compensation Committee are William F. Hughes, Jr. (Chairman), John W. Chisholm and David L.
Bradshaw. Our Board has determined that all of the members of the Compensation Committee are independent, as defined under
the applicable NYSE rules and listing standards. During the last fiscal year there were seven meetings of the Compensation
Committee.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee members are not officers or employees of our company, and there is not, nor was there
during fiscal 2014, any compensation committee interlock (in other words, no executive of our company serves as a Director or
on the compensation committee of a company that has one or more executives serving on our Board of Directors or our Compensation
Committee).
Any shareholder may obtain free of charge a printed copy of our Compensation Committee Charter by sending a written
request to Investor Relations, Natural Gas Services Group, Inc., 508 West Wall Street, Suite 550, Midland, Texas 79701. You can
also view and print a copy of our Compensation Committee Charter by clicking on the “Governance” tab at the Investor Relations
page of our website at www.ngsgi.com.
Governance and Personnel Development Committee
Our Governance and Personnel Development Committee primarily focuses on:
• generally overseeing the governance of the Board and its committees;
• interpreting the Governance Guidelines, the Code of Business Conduct and Ethics and other similar
governance documents adopted by the Board; and
• overseeing the evaluation of the Board and its committees.
The members of the Governance and Personnel Development Committee are Charles G. Curtis (Chairman), John W.
Chisholm and William F. Hughes, Jr. Our Board has determined that each of the Governance and Personnel Development
Committee members is independent, as defined under the applicable NYSE rules and listing standards. During the last fiscal year
there were four meetings of the Governance and Personnel Development Committee.
Any shareholder may obtain free of charge a printed copy of our Governance Committee Charter by sending a written
request to Investor Relations, Natural Gas Services Group, Inc., 508 West Wall Street, Suite 550, Midland, Texas 79701. You can
also view and print a copy of our Governance Committee Charter by clicking on the “Governance” tab at the Investor Relations
page of our website at www.ngsgi.com.
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Nominating Committee
The functions of our Nominating Committee include:
• identifying individuals qualified to become board members, consistent with the criteria approved by the
Board;
• recommending Director nominees and individuals to fill vacant positions; and
• overseeing executive development and succession and diversity efforts.
The members of the Nominating Committee are John W. Chisholm (Chairman), David L. Bradshaw, and Charles G.
Curtis. Our Board of Directors has determined that each of the Nominating Committee members is independent as defined under
the applicable NYSE rules and listing standards. During the last fiscal year there were four meetings of the Nominating Committee.
Any shareholder may obtain free of charge a printed copy of our Nominating Committee Charter by sending a written
request to Investor Relations, Natural Gas Services Group, Inc., 508 West Wall Street, Suite 550, Midland, Texas 79701. You can
also view and print a copy of our Nominating Committee Charter by clicking on the “Governance” tab at the Investor Relations
page of our website at www.ngsgi.com. Our Nominating Committee does not have a diversity policy; however, as discussed below,
the Committee’s goal is to nominate candidates who possess a range of experiences and backgrounds which will contribute to the
board’s overall effectiveness in meeting its duties and forwarding the goals of our company.
Our Nominating Committee will consider a Director candidate recommended by a shareholder. A candidate must be
highly qualified in terms of business experience and be both willing and expressly interested in serving on the Board. A shareholder
wishing to recommend a candidate for the Committee’s consideration should forward the candidate’s name and information about
the candidate’s qualifications to Natural Gas Services Group, Inc., Nominating Committee, 508 West Wall Street, Suite 550,
Midland, Texas 79701, Attn.: John W. Chisholm. Submissions must include sufficient biographical information concerning the
recommended individual, including age, employment history for at least the past five years indicating employers' names and
description of the employer’s business, educational background and any other biographical information that would assist the
Committee in determining the qualifications of the individual. The Committee will consider recommendations received by a date
not later than 120 calendar days before the date our proxy statement was released to shareholders in connection with the prior
year’s annual meeting for nomination at that annual meeting. The Committee will consider nominations received after that date
at the annual meeting subsequent to the next annual meeting.
The Committee evaluates nominees for Directors recommended by shareholders in the same manner in which it evaluates
other nominees for Directors. Minimum qualifications include the factors discussed above.
Director Independence
The Board has determined that each of the following four members of the Board is “independent” within the meaning
of applicable listing standards of the NYSE and under the standards, set forth in Exhibit A to our Governance and Personnel
Development Charter, (“Governance Charter”) which are consistent with the NYSE listing standards: David L. Bradshaw, John
W. Chisholm, Charles G. Curtis, and William F. Hughes, Jr. A copy of Exhibit A to our Governance Charter is available at our
website, www.ngsgi.com, under the heading “Investor Relations—Governance.” The Board has made an affirmative determination
that each of the four directors named above satisfies these categorical standards. In making its determination, the Board examined
relationships between directors or their affiliates with us and our affiliates and determined that each such relationship, if any, did
not impair the director’s independence.
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The Board’s Leadership Structure
Under our Corporate Governance Guidelines, our Chief Executive Officer also serves as our Chairman of the Board, and
that person is responsible to the Board for the overall management and functioning of the company. Stephen C. Taylor serves as
both Chairman of the Board and our President and Chief Executive Officer (“CEO”). The Board believes this is the most effective
Board leadership structure at the present time and believes that Mr. Taylor, in his role as Chairman/CEO, has the ability to execute
on both our short-term and long-term strategies necessary for the challenging marketplace in which we compete. The independent
directors believe that Mr. Taylor's detailed and in-depth knowledge of the issues, opportunities and challenges facing us and our
business make him the best qualified director to develop agendas that ensure that the Board’s time and attention are focused on
the most critical matters. Further, as the individual with primary responsibility for managing day-to-day operations, Mr. Taylor
is best positioned to chair regular Board meetings and ensure that key business issues and risks are brought to the attention of our
Board and/or Audit Committee. We believe that the creation of a lead independent director position is not necessary at this time.
Each of our directors, other than Mr. Taylor, is independent, and the Board believes that the independent directors provide
effective oversight of management. The Board may subsequently decide, however, to change that leadership structure which
would require a revision to our Corporate Governance Guidelines. The Board believes that it has in place safeguards to ensure
that we maintain the highest standards of corporate governance and continued accountability of the CEO to the Board. These
safeguards include:
• All members of the Board are independent directors except for Mr. Taylor.
• Each of the Board’s standing committees, including the Audit, Compensation, Governance and Nominating
Committees, are comprised of and chaired solely by non-employee directors who meet the independence
requirements under the NYSE listing standards and other governing laws and regulations. As noted above,
these committees meet frequently.
• Review and determination of Mr. Taylor’s compensation and performance remains within the purview of
the Compensation Committee.
• The independent directors continue to meet in executive sessions without management present to discuss
the effectiveness of the company’s management, the quality of the Board meetings and any other issues and
concerns.
Role in Risk Oversight
Our Board of Directors oversees the management of risks inherent in the operation of our business and the implementation
of our strategic plan. Our executive management is responsible for the day-to-day management of risks we face. The Board is
periodically advised by management on the status of various factors that could impact our business and operating results, including
oil and gas industry issues, operational issues (such as compressor manufacturing issues, backlog for compressor equipment,)
legal and regulatory risks. The full Board is also responsible for reviewing our strategy, business plan, and capital expenditure
budget.
Our Board committees assist the Board in fulfilling its oversight responsibilities in certain areas of risk. Our Audit
Committee serves an important role in providing risk oversight, as further detailed in its charter. One of the Audit Committee’s
primary duties and responsibilities is to monitor the integrity of our financial statements, financial reporting processes, systems
of internal controls regarding finance, and disclosure controls and procedures. The Compensation Committee assists the Board
with risk management relating to our compensation policies and programs, and the Governance and Nominating Committee assists
with risk management relating to Board organization, membership and structure, succession planning for our directors and executive
officers, and corporate governance.
12
CODE OF ETHICS
Our Board of Directors has adopted a Code of Business Conduct and Ethics, or “Code”, which is posted on our website
at www.ngsgi.com. You may also obtain a copy of our Code by requesting a copy in writing at 508 West Wall Street, Suite 550,
Midland, Texas 79701 or by calling us at (432) 262-2700.
Our Code provides general statements of our expectations regarding ethical standards that we expect our Directors, officers
and employees, including our Chief Executive Officer and principal financial officer, to adhere to while acting on our behalf. Among
other things, the Code provides that:
• we will comply with all laws, rules and regulations;
• our Directors, officers and employees are to avoid conflicts of interest and are prohibited from competing
with us or personally exploiting our corporate opportunities;
• our Directors, officers and employees are to protect our assets and maintain our confidentiality;
• we are committed to promoting values of integrity and fair dealing; and that
• we are committed to accurately maintaining our accounting records under generally accepted accounting
principles and timely filing our periodic reports.
Our Code also contains procedures for our employees to report, anonymously or otherwise, violations of the Code.
13
EXECUTIVE OFFICERS
Biographical information for the executive officers of Natural Gas Services Group who are not Directors is set forth
below. There are no family relationships between any Director or executive officer and any other Director or executive
officer. Executive officers serve at the discretion of the Board of Directors and until their successors have been duly elected and
qualified, unless sooner removed by the Board of Directors. Officers are elected by the Board of Directors annually at its first
meeting following the annual meeting of shareholders.
G. Larry Lawrence, 63, became our Chief Financial Officer, Principal Accounting Officer and Corporate Secretary on
July 1, 2011. Previously, Mr. Lawrence was our Controller since September 2010. From June 2006 to August 2010, Mr. Lawrence
was self employed as a management consultant doing business as Crescent Consulting. Overlapping this time, from September
2006 to August 2009, he also served as the CFO of Lynx Operating Company. Lynx is a private company engaged in oil and gas
production and gas processing activities. From May 2004 through April 2006 Mr. Lawrence served as Controller of Pure Resources,
an exploration and production company and wholly owned subsidiary of Unocal Corporation which was acquired by Chevron
Corporation. From June 2000 through May 2004, Mr. Lawrence was a practice manager of the Parson Group, LLC, a financial
management consulting firm whose services included Sarbanes Oxley engagements with oil and natural gas industry clients. From
1973 through May 2000, Mr. Lawrence was employed by Atlantic Richfield Company where he most recently (from 1993 through
2000) served as Controller of ARCO Permian. Since May 2006, Mr. Lawrence serves as a director of Legacy Reserves, LP. Mr.
Lawrence has a Bachelor of Arts in Accounting, with honors, from Dillard University.
James R. Hazlett, 59, has served as Vice President Technical Services since June 2005. He also served as Vice President
of Sales of Screw Compression Systems, Inc. from 1997 until June 2007 when Screw Compression Systems, Inc. was merged
into Natural Gas Services Group. After the merger in June 2007, Mr. Hazlett continues to remain employed by Natural Gas
Services Group as Vice President-T echnical Services. From 1982 to 1996 Mr. Hazlett served in management roles for Ingersoll
Rand/Dresser Rand working with compression of all types in several different departments from sales and service to engineering.
From 1978 to 1982 Mr. Hazlett was employed by the down-hole tool division of Hughes Tool designing and installing gas lift and
plunger systems. Mr. Hazlett holds a Bachelor of Science degree from the College of Engineering at Texas A&M University and
has over 37 years of industry experience.
14
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Compensation Discussion and Analysis
The compensation discussion and analysis provides information regarding our executive compensation program in 2014
for the following executive officers of the Company (collectively, the "named executive officers").
Stephen C. Taylor, our Chairman, President, and Chief Executive Officer;
G. Larry Lawrence, our Chief Financial Officer; and
James R. Hazlett, our Vice President Technical Services.
Introduction and Overview
The Compensation Committee or, the “Committee,” of the Board of Directors is responsible for determining the types
and amounts of compensation we pay to our executives. The Committee operates under a written charter that you can view on our
website at www.ngsgi.com. The Board of Directors has determined that each member of the Committee meets the independence
and financial literacy requirements of the NYSE. The Board determines, in its business judgment, whether a particular Director
satisfies the requirements for membership on the Committee set forth in the Committee’s charter. None of the members of the
Committee are current or former employees of Natural Gas Services Group or any of its subsidiaries.
The Committee is responsible for formulating and administering our overall compensation principles and plans. This
includes establishing the compensation paid to our CEO, meeting and consulting with our CEO to establish the compensation paid
to our other executive officers, counseling our CEO as to different compensation approaches, administering our stock option plan,
monitoring adherence to our compensation philosophy and conducting an annual, and sometimes more frequent, review of our
compensation programs and philosophy regarding executive compensation.
The Committee periodically meets in executive session without members of management or management Directors
present and reports to the Board of Directors on its actions and recommendations.
Compensation Philosophy and Objectives
Our compensation philosophy is to provide an executive compensation program that:
• rewards performance and skills necessary to advance our objectives and further the interests of our
shareholders;
• is fair and reasonable and appropriately applied to each executive officer;
• is competitive with compensation programs offered by our competitors ; and
• serves as an adequate retention tool in a competitive market.
The overall objectives of our compensation philosophy are to:
• provide a competitive level of current annual income that attracts and retains qualified executives at a
reasonable cost to us;
• retain and motivate executives to accomplish our company goals;
• provide long-term incentive compensation opportunities at levels appropriate for the respective
responsibilities and performance of each executive;
• align compensation and benefits with our business strategies and goals;
• encourage the application of a decision making process that takes into account both short-term and long-
term risks and the sometimes volatile nature of our industry; and
• align the financial interests of our executives with those of our shareholders through the potential grant of
equity based rewards.
15
Our Committee supports these objectives by emphasizing compensation arrangements that we believe are reasonable and
will attract and retain qualified executives and reward them for their efforts to further our long-term growth and success. At the
same time, we remain cognizant of and aim to balance our executive compensation arrangements with the interests and concerns
of our shareholders.
We have chosen to implement a relatively streamlined compensation framework for our executives. We feel that our
compensation philosophies and practices are appropriate given our relatively small size as a public company. By continuing a
relatively streamlined compensation framework for our executives, we believe that we are able to establish a higher degree of
transparency, understanding and certainty for our executives as well as the investing public, while at the same time avoiding
complex benefit packages and agreements that can be, in some ways, difficult to understand and require significant time and cost
to properly administer. In the end, we believe our compensation arrangements provide the desired results: fair and reasonable pay
for achievements beneficial to Natural Gas Services Group and its shareholders.
Fiscal Year 2014 Performance
In 2014, our financial performance continued to demonstrate strong growth that provided excellent shareholder value.
Some of our financial and operational highlights include:
• increasing gross operating margins by 11.4% to $53.8 million for 2014 from $48.3 million for 2013;
• achieving in 2014 record high revenue of $97 million, a 9.0% increase in revenue from 2013;
• a 7% increase in EBITDA;
• generating $34.6 million from operations, while investing $53.1 million in capital for equipment;
• controlling S,G&A expense to 10.6% of revenues;
• increasing rental revenue by 14.4%;
• internally funding over $175 million in growth capital since 2010 while maintaining a very low debt level
when compared to competitors;
• maintaining high margins and maintaining high rations of operating income, net income, and EBITDA when
compared to gross revenues relative to competitors;
• aggressive expansion into new geographic areas;
• positioning our business to emphasize servicing oil and gas production rather than drilling projects in order
offset drilling slowdowns as witnessed in the latter half of 2014: and
• maintaining safety performance.
Elements of Our Compensation Program
In order to achieve the objectives set forth above in our compensation philosophy and objectives, we have structured an
executive compensation program that provides our named executive officers with the following:
Element
Base Salary
Characteristics
Cash
Primary Objective
Attract and retain highly talented individuals
Short-Term Incentives
Cash-based performance awards
Reward for corporate and individual performance
Long-Term Incentives
Restricted stock with vesting period
Align the interests of our employees and shareholders by
providing employees with incentive to perform technically and
financially in a manner that promotes share price appreciation
Other Benefits
401(k) matching plans and employee
health benefit plans
Provide benefits that promote employee health and support
employees in attaining financial security
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We do not presently and have not in the past used any of the following types of executive compensation:
• defined benefit pension plans;
• employee stock purchase/ownership plans;
• supplemental executive retirement plans/benefits; or
• deferred compensation plans.
Assistance Provided to the Committee
The Committee makes all compensation decisions regarding our executive officers. Stephen C. Taylor, our Chief
Executive Officer, annually reviews the performance of each of our executive officers (other than the Chief Executive Officer
whose performance is reviewed by the Committee) and presents recommendations to the Committee with respect to salary and
cash bonus percentage adjustments and restricted stock grants for our executives (other than the Chief Executive Officer whose
salary, cash bonus percentage adjustments and restricted stock grants are determined solely by the Committee). The Committee
may exercise its discretion in modifying any recommendations made by our Chief Executive Officer.
The Committee also seeks the input and insight of Mr. Taylor concerning specific factors that Mr. Taylor believes to be
appropriate for the Committee’s consideration and which the Committee may not be aware of, such as extraordinary efforts or
accomplishments of our executive officers. Mr. Taylor also advises the Committee on general topics such as the morale of our
executives.
Natural Gas Services Group’s accounting department assists the Committee in the compensation process by gathering
and organizing data, which is then presented to the Committee by Mr. Taylor for the Committee’s review.
In the past, our Committee had not used any outside compensation consultants due to our relative small size; however,
in late 2012 our Committee hired an independent compensation consultant, Longnecker & Associates (“Longnecker”), to obtain
objective, expert advice and assist with compensation matters for 2013 and 2014 concerning our Chief Executive Officer.
Longnecker advised the Compensation Committee on a variety of compensation related issues in 2013 and 2014 with respect to
our Chief Executive Officer, including:
• competitive pay analysis on executive compensation;
• pay levels of Chief Executive Officers; and
• our executive compensation program design, including short-term incentive plan design, long-term incentive
plan design, and pay mix.
In the course of conducting its activities, Longnecker communicated with the Compensation Committee and presented
its findings and recommendations for discussion. During 2014, Longnecker also met with our Chief Executive Officer to review
its compensation report.
In 2014, Longnecker did not provide any services to the Company, or receive any payments from the Company, other
than in its capacity as a consultant to the Compensation Committee. The Compensation Committee has assessed whether the
services provided by Longnecker raised any conflicts of interest pursuant to the SEC rules, and has concluded that no such conflicts
of interest existed during 2014.
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Competitive Pay Analysis
To evaluate the competitiveness of our Chief Executive Officer's base salary, target total cash compensation (i.e., base
salary plus target short-term cash incentive award), long-term incentive awards, and total direct compensation (i.e. base salary,
target short-term cash incentive award, and long-term incentive awards), Longnecker provided the Committee competitive pay
information derived from a custom peer group (the “Custom Peer Group”) and referred to a variety of published compensation
surveys. The companies comprising the Custom Peer Group in Longnecker’s January 2014 compensation report included:
NGS Custom Peer Group
Company Name
Gulfmark Offshore, Inc.
Exterran Partners, LP
Dawson Geophysical Co.
Bolt Technology Corp.
Company Description
GulfMark Offshore, Inc. provides offshore marine support and transportation
services primarily to companies involved in the offshore exploration and
production of oil and natural gas.
Exterran Partners, L.P. provides natural gas contract operations services to
customers in the United States.
Dawson Geophysical Company provides onshore seismic data acquisition and
processing services in the United States.
Bolt Technology develops, manufactures and sells worldwide marine seismic
data acquisition equipment and underwater remotely operated robotic vehicles
used in offshore seismic exploration for oil and gas.
Pioneer Energy Services corp.
Pioneer Energy Services, through its subsidiaries, provides contract land drilling
services and production services in the United States and Colombia.
Vaalco Energy, Inc.
Team, Inc.
Tesco Corp.
RigNet, Inc.
Mitcham Industries, Inc.
USA Compression Partners, LP
Warren Resources, Inc.
Flotek Industries Inc.
VAALCO Energy, Inc., an independent energy company, together with its
subsidiaries, engages in the acquisition, exploration, development, and
production of crude oil and natural gas.
Team Inc. provides specialty industrial services in the United States, Canada,
Europe, and internationally related to the construction, maintenance and
monitoring of pressurized piping and associated systems in the refining,
petrochemical, power, pipeline and other heavy industrial industries.
Tesco Corporation, together with its subsidiaries, is engaged in the design,
manufacture and service delivery of technology-based solutions for the upstream
energy industry worldwide.
RigNet, Inc. provides remote communications services for the oil and gas
industry.
Mitcham Industries, Inc., through its subsidiaries, engages in the leasing, sale,
and service of geophysical and other equipment to the seismic industry
worldwide.
USA Compression Partners provides natural gas compression services under
term contracts with customers in the oil and gas industry in the U.S.
Warren Resources, Inc., an independent energy company, engages in the
exploration, development, and production of onshore oil and natural gas reserves
in the United States.
Flotek Industires develops and supplies drilling, completion and produciton
technologies and related services to the energy and mining industries in the U.S.
and internationally.
The Compensation Committee, with the assistance of the compensation consultant, reviewed the companies comprising
the Custom Peer Group in order to maintain its appropriateness for the competitive pay analysis. These companies were generally
selected since they are all companies in the energy and energy services industry and, the majority relatively similar annual revenues
and market capitalization. The Compensation Committee believes the Custom Peer Group reflects our current competitors for
employee talent and that it provides an appropriate peer set for the purposes of evaluating our pay practices and the Chief Executive
Officer’s pay levels.
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The published compensation surveys consisted of the following:
• Economic Research Institute, 2013 ERI Executive Compensation Assessor
• Tower Watson, 2013/2014 Top Management Compensation
• Mercer, Inc., 2013 US General Benchmark
• Kenexa, 2013 CompAnalyst Benchmark Survey
• Longnecker & Associates, 2013 Long-term Incentive Survey
• WorldatWork, 2013/2014 Total Salary Increase Budget Survey
The Compensation Committee used the competitive pay information as a “market check” to ensure, in its subjective
judgment, that the Chief Executive Officer’s base salary, target total cash compensation, long-term incentive awards and total
direct compensation remain competitive. The Compensation Committee does not target any individual pay component to fall
within a specific range or percentile of the competitive pay information. While the competitive pay information is important to
the Compensation Committee’s approval process, it is just one of several factors considered by the Compensation Committee in
approving executive compensation and the Compensation Committee has discretion in determining the nature and extent of its
use.
Individual and Company Performance - Base Salary and Equity Awards
The Compensation Committee also evaluates compensation, particularly base salary levels and equity awards (restricted
stock awards), through an analysis of each executive officer’s individual performance and the overall performance of Natural Gas
Services Group, our goal being to strengthen the link between what we pay our executives and the performance of Natural Gas
Services Group. Factors the Commitee considers in our analysis include:
• the individual performance, leadership, business knowledge and level of responsibility of our officers;
• the particular skill-set and longevity of service of the officer;
• the effectiveness of the officer in implementing our overall strategy; and
• the general financial performance and health of the Company.
Specific Company Financial Metrics - Cash Bonuses
With respect to compensation we pay in the form of cash bonuses, the Committee sets target performance levels for three
specific company financial metrics. The Committee relies on whether these targets are achieved and the individual performance
of our executive officers to determine whether cash bonuses are awarded and the amounts of such bonuses. The three financial
metrics the Committee considers are:
• total revenues;
• EBITDA; and
• net income before taxes.
EBITDA is calculated from our audited financial statements by adding to net income, or loss, (1) amortization and
depreciation expense, (2) interest expense and (3) provision for income tax expense.
We believe that our core executive compensation mix of base salary, cash bonuses and equity awards, while fairly limited,
presently provides enough diversity for us to link executive compensation to our short-term and long-term objectives. For instance,
annual income is linked to short-term objectives and providing competitive salary levels to attract and retain top talent, while
equity awards are more closely linked to the long-term objectives of earnings per share and increased market value of our common
stock.
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Base Salary
We provide our executive officers and other employees with base salary to compensate them for services rendered during
the fiscal year. Each year the Committee receives base salary recommendations from our Chief Executive Officer for all of our
executive officers (other than our Chief Executive Officer whose base salary is evaluated by the Committee on an annual basis).
In January 2014, the Compensation Committee reviewed the 2013 performance of our Chief Executive Officer, Stephen
C. Taylor, along with the competitive pay information provided in Longnecker’s report in setting Mr. Taylor's base salary for 2014 .
Before the increase in salary for 2014, Mr. Taylor’s base salary fell to slightly less than the 50th percentile bracket.
In connection with that review, the Committee increased the base salary of Mr. Taylor from $459,250 in 2013 to $505,175
in 2014, which moved Mr. Taylor’s base salary to approximately the 56th percentile bracket. The increase was made in recognition
of Mr. Taylor’s leadership and contributions to the Company's strong 2013 financial and operational results, which included: (i)
increasing gross operating margins by 10% from $43.8 million to $48.3 million; (ii) achieving in 2013 a 7.9% increase in revenue
when 2012 is adjusted for a large non-reoccurring sale from the fleet, 9% increase in operating income; 13% increase in net income
and a 13% increase in EBITDA; (iii) generating $39.2 million from operations while investing $43.3 million in capital for equipment,
(iv) increasing earnings per share by 12%; (v) controlling S,G&A expense within the target of 9% of revenues; (vi) increasing
rental revenue by 22%; increasing the Company's common stock price from approximately $17 at the beginning of 2013 to
approximately $27.50 at the end of 2013, an increase of nearly 62%; and (vii) maintaining safety performance.
While the Compensation Committee reviewed the competitive pay information in connection with setting Mr. Taylor's
base salary adjustments, together with his contributions toward our goals, the Compensation Committee did not target his base
salary to fall within a specific range or percentile of the competitive pay information.
With respect to our other two named executive officers other than our CEO, James Hazlett, our Vice President of Technical
Services, base salary for 2014 was $190,000 compared to $177,500 for 2013. The base salary of G. Larry Lawrence, our Vice
President and Chief Financial Officer, for 2014, was $170,000 compared to $150,000 for most of 2013. We continue, as we have
in the past, to rely on the following factors in evaluating and determining the amount of compensation we pay these executives:
• our general knowledge of executive compensation levels in the natural gas compression industry and
similarly sized energy service companies;
• each executive’s individual performance and the overall performance of Natural Gas Services Group; and
• specific company financial metrics and the application of specific weights to such metrics.
The applicability of these factors varies depending on the type of compensation being evaluated and determined. For
instance, we do not rely on weighted company financial metrics to evaluate and determine base salary levels, but such factor is
the primary means through which we evaluate and determine the amount of the cash bonuses we award to our executives. Below
is a more detailed discussion of how these factors apply to the different types of compensation we utilize.
Short-Term Incentives - Annual Incentive Bonus Plan
In 2006, the Committee adopted an Annual Incentive Bonus Plan or, the “IBP,” that provides guidelines for the calculation
of annual non-equity incentive based compensation in the form of cash bonuses to our executives, subject to Committee oversight
and modification. The bonuses awarded under the IBP are short-term awards in recognition of the overall performance and efforts
made by our executives during a particular year. Each year, the Committee approves the group of executives eligible to participate
in the IBP and establishes target award opportunities for such executives. For 2014, the Committee modified Mr. Taylor’s target
award opportunity to up to 100% of his base salary. Target award opportunity was 45% of average base salary for Messrs. Lawrence
and Hazlett.
In 2014, 90% of an executive officer’s IBP award was based on achievement of company financial objectives relating
to:
• total revenues;
• EBITDA; and
• net income before taxes.
20
Each of these three components accounts for 30% of the total company financial objective portion of the IBP. The
remaining 10% of an executive officer’s IBP award is based upon individual performance as evaluated by our CEO (except with
respect to our CEO whose individual performance is evaluated by the Committee).
Each year, the Committee sets a target level for each component of the company financial objective portion of the IBP. The
payment of awards under the IBP is based upon whether these target levels are achieved for the year. Payout on each of the three
financial objectives is as follows:
• 75% of the bonus amount attributable to a financial component will be paid if we achieve at least 90% of
the target amount;
• 100% of the bonus amount attributable to a financial component will be paid if we achieve at least 100%
of the target amount; and
• 125% of the bonus amount attributable to a financial component will be paid if we achieve at least 110%
of the target amount.
Thus, if we achieve 100% on each of the target levels for each of the three components of the company financial objective
portion of the IBP, an executive with a base salary of $100,000 and a target award opportunity of 40% will receive a cash bonus
of $40,000, assuming the executive receives the full amount (10%) of the individual performance portion of the IBP. If we do not
achieve at least 90% of the target levels for all of the components, the Committee will decrease the target award opportunity for
each executive officer by a percentage of up to 30% for each component in which there is a shortfall.
For instance, if we meet all target levels except that we achieve less than 90% of the target level for EBITDA, the
Committee will decrease the executive's award opportunity by up to 30%. With respect to the executive described above, the
award opportunity for such executive would be reduced from 40% to as low as 28% (the target bonus of 40% multiplied by 70%),
in which case the executive would receive a cash bonus of $28,000, assuming the executive receives the full amount of the individual
performance portion of the IBP. Had we achieved at least 90% of the target level for EBITDA, but less than 100%, then the
executive would receive 75% of the bonus amount attributable to EBITDA component, which would equate to an additional $9,000
for a total bonus of $37,000.
Similarly, if we achieve at least 110% of each of the three financial component targets, then the executive described above
would receive a bonus of $49,000 ($4,000 for the individual performance portion plus $45,000 for achieving at least 110% on
each of the three financial components calculated by multiplying $40,000 times 90% times 125%).
The following table sets forth the bonus financial criteria and target thresholds set by the Committee and compares such
thresholds to actual performance achieved and the resulting bonus payout percentages earned in 2014:
2014 Annual Incentive Bonus Plan
Bonus Criteria
Base Target
Actual
Performance
% of Base
Achieved
Base Target
Payout
Revenue
Net Income
before Taxes
EBITDA*
Personal Performance
Total
$
100,000,000 $
96,974,300
97.0%
22.5%
23,627,000
44,740,000
22,158,000
43,675,000
93.8%
97.6%
22.5%
22.5%
10.0%
77.5%
*
indicator of operating performance.
EBITDA is defined as the Company's earnings before interest, income taxes, depreciation, and amortization, and is an
21
The following table sets forth the maximum bonus eligibility set by the Committee for 2014 for each of our named
executive officers, and based upon the payout percentages noted in the table above, the bonus payout amount earned by each
named executive for 2014 under our Annual Incentive Bonus Plan:
Name
Title
Base Salary
Max Bonus
Eligibility
Max Bonus $
Bonus
Payout %
Bonus
Payouts
Stephen C. Taylor
President & CEO
G. Larry Lawrence
Chief Financial Officer
James R. Hazlett
VP- Technical Services
$
$
$
505,175
170,000
190,000
100% $
45% $
45% $
505,175
76,500
85,500
77.5% $
391,511
77.5% $
77.5% $
59,288
66,263
As noted in the tables above, actual financial performance for 2014 fell short of each of the three financial metrics set
for 2014, but actual results exceeded 90% of the financial metric, thereby entitling each of the named executive officers to 75%
of 90% of the maximum bonus payout for each of the three financial metrics.
With respect to the personal performance criteria, the Committee awarded Messrs. Taylor, Lawrence and Hazlett the
maximum amount payable under this component, or 10% of the maximum bonus amount that could have been earned in 2014. In
addition to the Committee's non-quantitative evaluation of each executive's performance, with respect to all of the named executives,
the Committee made this award in recognition of the Company's 2014 financial and operational performance.
With respect to Mr. Taylor’s personal performance criteria, the Committee based its full award on (i) his successful
strategic expansion into marketing our products to customers in oil shale plays and for his geographic expansion of our business;
(ii) successful foresight and positioning of the Company to adjust capital outlays and production to mitigate the sudden downturn
in business attributed to the plunging price of oil in the latter part of 2014; and (iii) his continuing to maintain superior cost control,
industry leading margins in gross margin, operating income and EBITDA while doing so with a lean corporate staff designed to
keep overhead costs down.
With respect to Mr. Lawrence’s personal performance criteria, the Committee also based its full award on his success in
converting to new COSO 2013 internal control framework ahead of schedule, managing cash flow required to fund $53.1 million
in capital expenditures and continuing to strengthen the Company’s accounting and finance department as necessary to meet the
demands of a public company.
With respect to Mr. Hazlett’s personal performance criteria, the Committee also based its full award on his on-time and
on-budget management of our compressor fabrication expansion in Midland, Texas, the successful ramp-up of rental equipment
fabrication and his leadership of our product engineering and development activities.
Based on the foregoing, each of our named executive officers received bonus payouts of 77.5% of the maximum potential bonus
amount (75% multiplied by 90% plus 10%).
Long-Term Incentives - Restricted Stock Awards
We consider restricted stock to be a type of long-term incentive compensation that motivates our executive officers to
work toward our long-term growth and allows them to participate in the growth and profitability of Natural Gas Services Group. We
believe that restricted stock aligns the interests of our executive officers with our shareholders in that our executive officers will
benefit from the options only to the extent that the value of our common stock increases. With the exception of Mr. Taylor, our
Chief Executive Officer, the number of shares of restricted stock granted to an executive officer is based on a subjective
determination of an officer’s individual performance and his current contributions and potential for future contributions to the
overall performance of Natural Gas Services Group. In Mr. Taylor’s employment agreement we have agreed to award Mr. Taylor
a restricted stock award or equivalent equity awards in January of each year with an aggregate minimum value equal to at least
175% of his Base Salary, subject to one-year vesting terms and other standard terms which shall be established by the Compensation
Committee taking into account the performance of the Company, Mr. Taylor and industry norms. Our compensation consultant
concurred with our approach relating to long-term incentives and recommended that we continue the practice.
In 2009, we adopted the 2009 Restricted Stock/Unit Plan (the “Plan”) and it went into effect upon its approval by our
shareholders at our 2009 annual meeting. The Compensation Committee does not have any specific program or plan with regard
to the timing or dating of restricted stock or unit grants. However, the Committee's practice will likely be to grant awards after
22
Natural Gas Services Group's annual earnings releases. We have not and do not plan to purposefully time the release of material
non-public information for the purpose of affecting the value of executive compensation.
During the first quarter of 2015, the Company granted the following restricted stock awards in connection with our 2014
financial results and personal accomplishments of our named executive officers:
Name
Stephen C. Taylor, CEO and President
James R. Hazlett, Vice President - Technical Services
G. Larry Lawrence, Chief Financial Officer
Dollar Value
of the Award
Number of Restricted Shares
Awarded
$
$
$
1,629,169
375,000
375,000
83,590
20,000
20,000
Pursuant to Mr. Taylor's employment agreement, we are required to grant a restricted stock award or equivalent equity
awards in January of each year with an aggregate minimum value equal to at least 175% of his Base Salary, subject to one-year
vesting terms. See “Compensation Agreements with Management” beginning on page 35 of this Proxy Statement for information
concerning Mr. Taylor’s new employment agreement.
The Committee also reviewed Mr. Taylor's total compensation level along with Company's performance and Mr. Taylor's
personal performance in connection with determining the value of the 2014 restricted stock award. As a result of the Committee's
review, the Committee awarded Mr. Taylor (i) 48,760 shares of restricted common stock pursuant to the terms of his employment
agreement and (ii) an additional $34,830 shares of restricted common stock in recognition of our strong 2014 financial and
operational results and performance, for a total award of 83,590 shares of restricted common stock. The restricted shares are
subject to a one year vesting period, although such vesting is subject to acceleration and will immediately vest in the case of (i)
death, disability or retirement of the recipient employee, or (ii) a change of control in the Company, as set forth in the Plan.
On March 19, 2015, the Compensation Committee awarded 20,000 shares of restricted common stock to each of G. Larry
Lawrence, our Chief Financial Officer and James R. Hazlett, our Vice President - Technical Services.The restricted shares are
subject to a one year vesting requirement from the date of grant. All of the restricted shares are subject to acceleration and will
immediately vest in the case of (i) death, disability or retirement of the recipient employee, or (ii) a change of control in the
Company, as set forth in the Plan.
The additional restricted shares which were issued to Mr. Taylor in excess of the 175% of his Base Salary obligation
under the terms of his employment agreement, and the restricted stock awards to our other two named executive officers were
made in recognition of the Company's financial and operation performance as set forth under "Fiscal Year 2014 Performance" on
page 16 of this Proxy Statement.
Further information concerning these awards is set forth in column (i) of the "Summary Compensation Table" on page
26 and column (i) of the "Grants of Plan-Based Awards for Fiscal 2014" on page 28.
Other Compensation
We maintain a 401(k) retirement plan in which all of our executives and employees are eligible to participate. We match
executive and employee contributions to our 401(k) plan, on an equal percentage basis, with cash contributions. The Company
matching portion is equal to one-half of the employee’s annual contribution up to a maximum of 3% of the employee’s salary. Our
matching amounts for our executive officers are included in column (i) of the “Summary Compensation Table” on page 26.
Other than the reductions that can occur with respect to the target award opportunities of our executives under our Annual
Incentive Bonus Plan, we do not have a written policy or formula regarding the adjustment, reduction or recovery of awards or
payments if company performance measures are restated or adjusted in a manner that would reduce the award or payment. However,
the Committee does consider compensation realized or potentially realizable from prior compensation awards in setting new types
and amounts of compensation, the result of such consideration being varying increases in annual salaries and cash bonuses, with
percentage increases in some cases being smaller than previous years.
23
Total Direct Compensation
In determining the extent to which our chief executive officer compensation program meets the Committee’s compensation
philosophy and objectives, the Committee emphasizes the competitiveness of total compensation (the aggregate of base salary,
annual cash bonus incentive payment, and the grant value of long-term incentive plan award). In reviewing the Custom Peer Group
data from Longnecker’s study and discussing with Longnecker the pay practices of our peers, the Committee targeted its total
compensation for Mr. Taylor, our Chief Executive Officer, at approximately the 75th percentile bracket considering our 2014
financial and operational which have been noted above.
Employment Agreements
We employed Mr. Taylor in January 2005. On October 23, 2013, we entered into a new written employment agreement
with Stephen C. Taylor, our President and Chief Executive Officer. We do not have written employment agreements with any of
our other executive officers. On April 24, 2015, we entered into an amendment with Mr. Taylor to his Employment Agreement
pursuant to which the "modified single trigger" change of control provision was changed to a "double trigger" change of control.
Under the "modified single trigger provision", Mr. Taylor could voluntarily terminate the Employment Agreement for any reason
immediately upon a change in control and collect severance benefits. Under the new "double trigger" change of control provision,
a change of control must occur followed by the Company or its successor terminating Mr. Taylor's employment other than for
cause, death, or disability, or by Mr. Taylor terminating his employment for Good Reason. See “Compensation Agreements with
Management” beginning on page 35 of this Proxy Statement for detailed information concerning Mr. Taylor’s employment
agreement, as amended.
Allocation of Amounts and Types of Compensation
Other than the restricted stock awards we grant to our executives from time to time and the determinations made by the
Committee as to specific target award opportunities under our IBP, the allocation of different amounts and types of compensation
has not been a consideration for us, except with respect to our Chief Executive Officer whose employment agreement requires an
annual restricted stock award or similar equity award with a value of at least 175% of his base salary. The Committee has not
adopted a specific policy or target for the allocation between amounts or types of compensation. We believe that the use of stock
awards
interests of our management and employees with our
stockholders. Notwithstanding moderately increasing the use of stock-based compensation, we intend to maintain and continue
our practice of having a simplified, but effective and competitive, compensation package.
in our compensation package will align
the
Change of Control and Severance Arrangements
Our 1998 Stock Option Plan, as amended, and our 2009 Restricted Stock/Unit Plan contains change of control
provisions. In addition, Mr. Taylor’s employment agreement contains change of control and severance provisions. Information
regarding these provisions is provided under the caption “Potential Payments Upon Termination or Change of Control” on page
32.
Stock Ownership/Retention Guidelines
We have not in the past had written guidelines or policy statements that required our executives to maintain specified
levels of stock ownership or adhere to specified “holding” practices with regard to our common stock.
Perquisites
We provide limited perquisites to our executives. The primary perquisites include allowing our executives a choice of
receiving an automobile allowance or personal use of a company-provided automobile and matching contributions made by Natural
Gas Services Group under our 401(k) plan. Although we provide Mr. Taylor with one club membership, since his use of the club
is limited solely for business entertainment, we have not considered it to be a perquisite and have not valued it as such for inclusion
in column (i) of the "Summary Compensation Table" on page 26.
Our executives also participate in the same medical, dental and life insurance plans as other employees. However, we
pay a greater percentage of the premiums for health insurance for our executives than we do for our other employees.
24
Limit on Deductibility of Certain Compensation
Provisions of the Internal Revenue Code that restrict the deductibility of certain compensation over $1 million dollars
per year have not been a factor in our considerations or recommendations. Section 162(m) of the Code currently imposes a $1
million limitation on the deductibility of certain compensation paid to specified executives. Excluded from the limitation is
compensation that is “performance based.” For compensation to be performance based, it must meet certain criteria, including
being based on predetermined objective standards approved by shareholders. The Committee has not taken the requirements of
Section 162(m) into account in designing executive compensation.
Say-on-Pay
At our 2014 Annual Meeting of Stockholders held in June 2014, we submitted a proposal to our stockholders regarding
our executive compensation practices. The proposal was an advisory vote on the 2013 compensation awarded to our named
executive officers (commonly known as a “say-on-pay” vote). Excluding broker non-votes, our stockholders approved our 2013
compensation with 67.6% of the shares that voted on the proposal voted in favor.
We believe that the outcome of our say-on-pay vote indicates our stockholders' support of our compensation approach,
specifically our efforts to retain and motivate our named executive officers. In light of this stockholder support, the Committee
determined not to change its approach to 2014 compensation as described in this proxy statement. The Compensation Committee
will continue to consider the outcome of say-on-pay votes when making future compensation decisions for our named executive
officers.
Compensation Committee Report
The Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on its
review and discussions, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis
be included in our proxy statement for the 2015 Annual Meeting of Shareholders.
Members of the Compensation Committee
William F. Hughes, Jr. (Chairman)
John W. Chisholm
David L. Bradshaw
25
Executive Compensation
The table below sets forth the compensation earned by, and paid to our CEO, Stephen C. Taylor, and our other named
executive officers for services rendered to us for the fiscal years ended December 31, 2014, 2013 and 2012.
Summary Compensation Table
Salary
(c)
Bonus (1)
(d)
Stock
Awards(2)
(e)
Option
Awards(3)
(f)
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
(h)
Non-Equity
Incentive
Plan
Compensation(4)
(g)
All Other
Compensation(5)
(i)
Total
(j)
2014
$ 540,949 $
7,267 $ 1,629,169 $
— $
391,511 $
— $
14,444 $ 2,583,340
2013
2012
2014
2013
2012
2014
2013
2012
444,798
8,405
1,389,196
411,211
3,786
1,148,821
180,708
2,445
375,000
86,860(6)
139,518(7)
16,910(8)
152,308
129,687
3,020
1,356
456,150
16,899(9)
187,500
16,910(10)
200,228
3,574
375,000
180,989
3,574
456,150
163,350
1,549
187,500
33,809(11)
33,819(12)
72,758(13)
444,324
409,150
59,288
66,854
60,256
66,263
76,325
70,036
—
—
—
—
—
—
—
—
15,752
2,389,335
14,277
2,126,763
12,645
646,996
13,573
708,804
12,517
408,226
29,259
708,133
30,119
780,976
30,033
525,226
Name
and
Principal
Position Year
(b)
(a)
Stephen C.
Taylor,
Chairman,
President
& CEO
G. Larry
Lawrence,
Chief
Financial
Officer
James R.
Hazlett,
Vice
President,
Technical
Services
(1)
(2)
(3)
(4)
(5)
The amounts reflected in column (d) reflect payments under the company's profit sharing program administered to all
employees.
The amounts in column (e) reflect the grant date fair value of stock granted under our 2009 Restricted Stock/Unit
Plan.
The amounts in column (f) reflect the dollar amounts recognized for financial statement reporting purposes for the
fiscal years ended December 31, 2012, 2013 and 2014, in accordance with FASB ASC Topic 718, associated with
stock option grants under our 1998 Stock Option Plan. Assumptions used to calculate these amounts are included in
footnote 8 for our audited financial statements for the fiscal year ended December 31, 2012; footnote 8 for our
audited financial statement for fiscal year ended December 31, 2013; and footnote 8 for our audited financial
statement for fiscal year ended December 31, 2014.
The amounts in column (g) reflect the cash bonus awards to the named executive officers under our Annual Incentive
Bonus Plan, which is discussed in further detail on page 20 under the caption “Short-Term Incentives - Annual
Incentive Bonus Plan.”
The amounts shown in column (i) include matching contributions made by Natural Gas Services Group to each
named executive officer under our 401(k) plan and the aggregate incremental cost to Natural Gas Services Group of
perquisites provided to our named executive officers as follows:
26
Name
Stephen C. Taylor
G. Larry Lawrence
James R. Hazlett
Automobile
Allowance
Personal Use of
Company Provided
Automobiles
Additional
Incremental Portion
of Health Insurance
Premiums Paid for Officers
Only
401(k)
Plan
Total(a)
$
— $
—
—
10,200
10,200
9,808
10,200
10,200
10,200
20,400
20,400
20,008
1,800 $
1,800
1,237
—
—
—
—
—
—
1,800
1,800
1,237
7,285 $
5,359 $
6,715
6,716
—
—
—
16,463
15,828
15,828
23,748
22,543
22,544
7,237
6,324
2,445
3,373
2,709
2,596
4,091
4,005
10,400
14,701
13,038
14,444
15,752
14,277
12,645
13,573
12,517
29,259
30,119
30,033
56,348
59,444
56,827
Year
2014
2013
2012
2014
2013
2012
2014
2013
2012
2014
2013
2012
This amount reflects the dollar amount recognized for financial statement reporting purposes for the fiscal year ended
December 31, 2013, in accordance with FASB ASC Topic 718, for 10,000 shares of common stock that vested on January
18, 2013 under the stock option granted to Mr. Taylor on January 18, 2010.
This amount reflects the dollar amount recognized for financial statement reporting purposes for the fiscal year ended
December 31, 2012, in accordance with FASB ASC Topic 718, for (a) 10,000 shares of common stock that vested on
January 28, 2012 under the stock option granted to Mr. Taylor on January 28, 2009, (b) 10,000 shares of common stock
that vested on January 18, 2012 under the stock option granted to Mr. Taylor on January 18, 2010.
This amount reflects the dollar amount recognized for financial statement reporting purposes for the fiscal year ended
December 31, 2014, in accordance with FASB ASC Topic 718, for 1,667 shares of common stock that vested on January
24, 2014 under the stock option granted to Mr. Lawrence on January 24, 2011.
This amount reflects the dollar amount recognized for financial statement reporting purposes for the fiscal year ended
December 31, 2013, in accordance with FASB ASC Topic 718, for 1,666 shares of common stock that vested on January
24, 2013 under the stock option granted to Mr. Lawrence on January 24, 2011.
This amount reflects the dollar amount recognized for financial statement reporting purposes for the fiscal year ended
December 31, 2012 in accordance with FASB ASC Topic 718, for1,667 shares of common stock that vested on January
24, 2012 under the stock option granted to Mr. Lawrence on January 24, 2011.
This amount reflects the dollar amount recognized for financial statement reporting purposes for the fiscal year ended
December 31, 2014, in accordance with FASB ASC Topic 718, for 3,333 shares of common stock that vested on January
24, 2014 under the stock option granted to Mr. Hazlett on January 24, 2011.
This amount reflects the dollar amount recognized for financial statement reporting purposes for the fiscal year ended
December 31, 2013, in accordance with FASB ASC Topic 718, for 3,334 shares of common stock that vested on January
24, 2013 under the stock option granted to Mr. Hazlett on January 24, 2011.
This amount reflects the dollar amount recognized for financial statement reporting purposes for the fiscal year ended
December 31, 2012 in accordance with FASB ASC Topic 718, for (a) 3,333 shares of common stock that vested on
December 9, 2012 under the stock option granted to Mr. Hazlett on December 9, 2009, and (b) 3,333 shares of common
stock that vested on January 24, 2012 under the stock option granted to Mr. Hazlett on January 24, 2011.
27
Total
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
Grants of Plan Based Awards
The table below sets forth the estimated future payouts under non-equity incentive plan awards and restricted stock
awards granted and the grant date fair value of such awards.
Grants of Plan-Based Awards for Fiscal 2014
Estimated Future
Payouts Under Non-Equity
Incentive Plan Awards(1)
Estimated Future Payouts
Under Equity Incentive
Plan Awards
Threshold
($)
Target
($)
Maximum
($)
Threshold
(#)
Target
Maxi-
mum
($)
(c)
(d)
(e)
(f)
(g)
(h)
All Other
Stock
Awards:
Number
of Shares
of Stock
or Units
(#)(2)
(i)
All Other
Option
Awards:
Number of
Securities
Underlying
Option (#)
Exercise or
Base
Price of
Option
Awards
($/Sh)
Grant Date
Fair
Value of
Stock and
Option
Awards ($)
(j)
(k)
(l)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 83,590
— $
19.49 $ 1,629,169
— 20,000
— 20,000
—
—
18.75
375,000
18.75
375,000
Name
(a)
Stephen
C. Taylor
Grant
Date
(b)
1/15/2015
G. Larry
Lawrence 3/19/2015
James R.
Hazlett
3/19/2015
(1)
(2)
No awards were made under the non-equity Incentive Plan for 2014 except as described of the performance goals
under our Annual Incentive Bonus Plan, or the "IBP." More information regarding the IBP and the calculation of
awards is provided below and under the caption “Short-Term Incentives - Annual Incentive Bonus Plan” on page 21.
The information shown in this column reflects awards of restricted stock earned in 2014 (but issued in early 2015)
our named executive officers pursuant to our 2009 Restricted Stock/Unit Plan.
The table below sets forth the estimated future payouts under non-equity incentive plan awards and restricted stock
awards granted and the grant date fair value of such awards.
Annual Incentive Bonus Plan
Our Annual Incentive Bonus Plan or, the “IBP,” provides for annual non-equity incentive based compensation in the form
of cash bonuses to our executive officers. Our Compensation Committee administers and determines from year to year the
executives that are eligible to participate in the IBP. The Committee establishes target award opportunities for the executives
eligible to participate in the plan. These target award opportunities are expressed as a percentage of an executive’s base salary. An
executive’s target award opportunity is the maximum cash bonus an executive is eligible to receive in any one year under the IBP.
The Committee establishes annual target levels for Natural Gas Services Group’s total revenues, EBITDA and net income
before taxes and assigns a weight of 30% to each of these components. The executive’s individual performance is assigned a
weight of 10%. If during the year Natural Gas Services Group achieves all of the target levels established by the Committee for
total revenues, EBITDA and net income before taxes, and it is determined by the Committee that an executive is entitled to the
full 10% weight assigned to individual performance, the executive is entitled to receive the maximum cash bonus amount for the
executive for that year. If any one of the target levels is not met or it is determined that an executive is not entitled to the full 10%
weight assigned to individual performance, the cash bonus award for the executive is reduced accordingly. More information
regarding the IBP and the calculation of awards is provided under the caption “Short-Term Incentives – Annual Incentive Bonus
Plan” on page 21.
28
1998 Stock Option Plan
Our 1998 Stock Option Plan provides for the issuance of stock options to purchase up to 750,000 shares of our common
stock. The purpose of this plan is to attract and retain the best available personnel for positions of substantial responsibility and
to provide long-term incentives to employees and consultants and to promote the long-term growth and success of our business. The
plan is administered by the Compensation Committee of the Board of Directors. At its discretion, the Compensation Committee
determines the persons to whom stock options may be granted and the terms upon which options will be granted. In addition, the
Compensation Committee may interpret the plan and may adopt, amend and rescind rules and regulations for its
administration. Option awards are generally granted with an exercise price equal to the closing price of our common stock at the
date of grant and generally vest based on three years of continuous service and have ten-year contractual terms.
As of December 31, 2014, stock options to purchase a total of 432,269 shares of our common stock were outstanding
under the 1998 Stock Option Plan. There were no shares included that relate to our non-employee directors under the compensation
arrangements described under the caption “Compensation of Directors” on page 34.
A total of 186,419 shares of common stock were available at December 31, 2014 for future grants of stock options under
the 1998 Stock Option Plan. Since the beginning of 2015, we have issued options for 50,000 shares of common stock which has
left 136,419 shares available under the 1998 Stock Option Plan as of the date of this proxy statement.
2009 Restricted Stock/Unit Plan
The purpose of our 2009 Restricted Stock/Unit Plan (the “2009 Plan”) is to retain our employees and directors having
experience and ability, to attract new employees and directors whose services are considered valuable, to encourage the sense of
proprietorship, and to stimulate the active interest of such persons in our development and financial success. We believe that grants
of restricted stock and restricted stock units are an increasingly important means to retain and compensate employees and directors.
General Description
Shares Reserved for Issuance under the 2009 Plan. A total of 800,000 shares of our common stock are reserved for
issuance under the 2009 Plan. The number of shares of our common stock available under the 2009 Plan will be subject to
adjustment in the event of a stock split, stock or other extraordinary dividend, or other similar change in our common stock or
capital structure.
Administration. The Plan is administered by the plan administrator, defined as one or more committees the Company
designates consisting of independent directors. The draft of the Plan appoints our Compensation Committee as the administrator
(the “Committee”).
Generally, the Committee has the authority, in its discretion, (a) to select officers, directors and employees to whom
awards may be granted from time to time, (b) to determine whether and to what extent, awards are granted, (c) to determine the
number of shares of our common stock, or the amount of other consideration to be covered by each award, (d) to approve award
agreements for use under the Plan, (e) to determine the terms and conditions of any award (including the vesting schedule applicable
to the award), (f) to amend the terms of any outstanding award granted under the Plan, (g) to construe and interpret the terms of
the Plan and awards granted, and (h) to take such other action not inconsistent with the terms of the Plan, as the Committee deems
appropriate.
Types of Awards; Eligibility. Awards of restricted stock and restricted stock units (RSUs) may be granted under the Plan.
Awards of restricted stock are shares of our common stock that are awarded subject to such restrictions on transfer as the Committee
may establish. Awards of RSUs are units valued by reference to shares of common stock that entitle a participant to receive, upon
the settlement of the unit, one share of our common stock for each unit. Awards may be granted to our officers, directors and
employees and our related entities, if any. Each award granted under the Plan shall be designated in an award agreement.
Terms and Vesting of Awards. As noted above, the Committee determines the terms and conditions of each award granted
to a participant, including the restrictions applicable to shares underlying awards of restricted stock and the dates these restrictions
lapse and the award vests, as well as the vesting and settlement terms applicable to RSUs. When an award vests, we deliver to the
participant a certificate for the number of shares without any legend or restrictions (except as necessary to comply with applicable
state and federal securities laws).
29
In addition to time-based vesting requirements, the Committee is also authorized to establish quantitative and qualitative
performance goals in order for awards to vest. For instance, quantitative performance standards, including, nut not limited to,
financial measurements such as (a) increase in share price, (b) earnings per share, (c) total shareholder return, (d) operating margin,
(e) gross margin, (f) return on equity, (g) return on assets, (h) net operating income, (i) pre-tax profit, (j) cash flow, (k) revenue,
(l) expenses, and (m) EBITDA, or other performance goal requirements may be adopted by the Committee and set forth in the
particular restricted stock or RSU agreement which must be met in order for shares to vest.
Termination of Service. Unless otherwise set forth in an individual award agreement, the Plan and forms of award
agreements provide that in the event a participant’s continuous service with us terminates as a result of death, disability or retirement
(an “Acceleration Event”), unvested shares or RSUs at the time of termination due to an Acceleration Event will immediately
become vested, but only to the extent that such unvested shares or RSUs would have vested within the 12 months following the
Acceleration Event. However, the Committee may revise this default provision on an individual basis as it deems advisable. For
example, the Committee could elect to accelerate vesting for all unvested shares and/or RSUs upon the occurrence of an Acceleration
Event, or conversely provide that all unvested shares and/or RSUs are forfeited upon the occurrence of an Acceleration Event. In
the case of a termination of service other than by an Acceleration Event, any unvested shares of RSUs will immediately become
null and void, except that with respect to Restricted Stock awards, the Board of Directors may vest any or all unvested shares in
its discretion in the case of any termination of service.
In addition, subject to revision by the Committee, the default provisions of the Plan and form of award agreements provide
that a Change of Control triggers accelerated vesting of all shares or units. Under the 2009 Plan, a Change in Control Event is
generally defined as:
• a complete liquidation or dissolution;
• acquisition of 50% or more of our stock by any individual or entity including by tender offer or a reverse
merger;
• a merger or consolidation in which we are not the surviving entity; or
• during any period not longer than 12 consecutive months, members of the Board who at the beginning of
such period cease to constitute at least a majority of the Board, unless the election, or the nomination for
election of each new Board member, was approved by a vote of at least 3/4 of the Board members then still
in office who were Board members at the beginning of such period.
Restricted Stock. Under an award of restricted stock, we issue shares of our common stock in the participant’s name;
however, the participant’s rights in the stock are restricted until the shares vest. If the vesting requirements are not met prior to
the end of the vesting period, the shares are forfeited. In connection with an award of restricted stock, since actual shares are
issued and outstanding, the participant is legally entitled to vote the shares and receive any dividends declared and paid on our
common stock prior to the satisfaction of the vesting requirements. However, as discussed above, Participants who hold unvested
restricted stock may not sell, assign or transfer such shares until they have vested.
Restricted Stock Units. Like a restricted stock award, a restricted stock unit is a grant valued in terms of our common
stock. Unlike a restricted stock award, none of our common stock is issued at the time the RSU award is granted. Instead, the
award is a mere promise to deliver shares of our common stock upon satisfaction of the vesting requirements. Upon satisfaction
of the vesting requirements of the award, we then issue and deliver the number of shares subject to the award. If the vesting
requirements are not satisfied prior to the end of the vesting period, the units expire and no shares are issued. Since shares of our
common stock are not issued in connection with RSUs until such time as the vesting conditions have been satisfied, participants
in the Plan who receive awards of RSUs will not have any voting rights and will not be entitled to dividends until such time as
the units vest and shares of our common stock are issued.
Amendment, Suspension or Termination of the Plan. We may at any time amend, suspend or terminate the Plan. The Plan
will be for a term of ten (10) years unless sooner terminated. Awards may be granted under the Plan upon it becoming effective,
but awards granted prior to obtaining shareholder approval will be rescinded if the shareholders do not approve the Plan. We may
amend the Plan subject to compliance with applicable provisions of federal securities laws, state corporate and securities laws,
the Internal Revenue Code, and the rules of the NYSE (or such other stock exchange as our common stock may be traded upon
at the time).
Change in Capitalization. Subject to any required action by our shareholders, the number of shares of common stock
covered by outstanding awards, the number of shares of common stock that have been authorized for issuance under the 2009
Plan, the exercise or purchase price of each outstanding award, the maximum number of shares of common stock that may be
granted subject to awards to any participant in a calendar year, and the like, shall be proportionally adjusted by the Committee in
30
the event of: (i) any increase or decrease in the number of issued shares of common stock resulting from a stock split, stock
dividend, combination or reclassification or similar event affecting our common stock; (ii) any other increase or decrease in the
number of issued shares of common stock effected without receipt of consideration by us; or (iii) any other transaction with respect
to common stock including a corporate merger, consolidation, acquisition of property or stock, separation (including a spin-off or
other distribution of stock or property), reorganization, liquidation (whether partial or complete), distribution of cash or other
assets to shareholders other than a normal cash dividend, or any similar transaction; provided, however, that conversion of any of
our convertible securities shall not be deemed to have been “effected without receipt of consideration.” Except as the Committee
determines, no issuance by us of shares of any class, or securities convertible into shares of any class, shall affect, and no adjustment
by reason hereof shall be made with respect to, the number of shares of common stock subject to an award.
As of April 14, 2015, we had issued 471,841 shares of restricted stock under the 2009 Plan, of which 313,131 have vested
and become unrestricted.
Outstanding Equity Awards at Fiscal Year-End
The following table shows certain information about stock options outstanding as of December 31, 2014 and held by our
Chief Executive Officer, Stephen C. Taylor, and each other named executive officer.
Outstanding Equity Awards at 2014 Fiscal Year-End
Option Awards
Stock Awards
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares or
Other
Rights
that Have
Not
Vested
(#)
Equity
Incentive
Plan
Awards:
Market or
Payout
Value
of Unearned
Shares or
Other Rights
that Have
Not
Vested ($)
Number
of Shares
of Stock
That
Have
Not
Vested
(#)
Market Value
of Shares of
Stock that
Have Not
Vested ($)
(g)
(h)
(i)
(j)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
49,420 $
1,389,196
—
—
3,333 $
49,628
15,000 $
—
456,150
—
—
—
—
—
3,333 $
15,000 $
49,628
456,150
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Options
(#)
Option
Exercise
Price
($)
(b)
(c)
(d)
(e)
Name
(a)
Stephen C.
Taylor
G. Larry
Lawrence
James R.
Hazlett
45,000
15,000
40,000
25,000
30,000
23,852
30,000
—
5,000
—
—
5,000
10,000
10,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Option
Expiration
Date
(f)
8/26/2015
— $
9.22
— $ 14.22 11/21/2016
— $ 20.06
1/15/2018
— $ 17.51
9/10/2018
— $
— $
9.95
7.84
1/28/2019
3/17/2019
— $ 19.90
1/18/2020
—
— $ 17.81
1/24/2021
—
—
$ 17.51
9/10/2018
— $ 17.74
12/9/2019
— $ 17.81
1/24/2021
—
—
31
Option Exercises and Stock Vested in 2014
In the table below, we show certain information about (i) the number of shares of common stock acquired upon exercise
of stock options by each of the named executive officers in 2014 and the value realized on exercise of the stock options and (ii)
stock awards.
Name
(a)
Stephen C. Taylor
G. Larry Lawrence
James R. Hazlett
Option Awards
Stock Awards
Number of Shares
Acquired
on Exercise (#)
(b)
—
—
—
Value Realized on
Exercise ($)
Number of Shares
Acquired on Vesting
Value Realized
on Vesting
(c)
—
—
—
(d)
(e)
56,950 $
15,001
15,001
1,747,796
455,680
455,680
Potential Payments Upon Termination or Change of Control
Our 1998 Stock Option Plan and 2009 Restricted Stock/Unit Plan contains “change of control” provisions. These
provisions are designed to provide some assurance that we will be able to rely upon each executive’s services and advice as to the
best interests of Natural Gas Services Group and our shareholders without concern that the executive might be distracted by the
personal uncertainties and risks created by any proposed or threatened change of control and to promote continuity of our executive
team.
Under our stock option plan, the Committee may adjust the stock options held by our executives upon the occurrence of
a change of control. With this authority, the Committee may in its discretion elect to accelerate the vesting of any stock options
that were not fully vested and allow for the exercise of such options as to all shares of stock subject thereto.
Likewise, under our 2009 Restricted Stock/Unit Plan, a change in control will accelerate the vesting of all awards under
the plan unless the Committee has provided otherwise in a particular award under the plan. In addition, upon death, disability or
retirement, any vesting or other restrictions on the restricted stock awards will accelerate or lapse such that all shares underlying
a restricted stock award will become unencumbered.
As noted in the tables above and summarized below, our named executive officers have stock options and restricted stock
awards which are subject to certain vesting requirements.
At December 31, 2014, our named executive officers had the following number of unvested restricted stock awards which
were subject to forfeiture as of that date:
• Stephen C. Taylor -- 49,420 shares
• G. Larry Lawrence -- 18,333 shares
• James R. Hazlett -- 18,333 shares
Each of these restricted stock awards could have become vested and issued without restrictions on December 31, 2014
assuming a change of control were to have occurred on that date. In addition, the restricted stock awards would have been issued
without restrictions on December 31, 2014, assuming the named executive officer had died, became disabled or retired. The
closing price of our common stock on December 31, 2014, was $23.04 per share. Accordingly, on December 31, 2014, had there
been a change in control event or had the named executive officer died, became disabled or retired, the vesting terms of the restricted
stock awards would have lapsed and the shares would have become unrestricted. As a result, there was a potential for Messrs. Taylor,
Hazlett and Lawrence to realize immediate value upon the lapse of restrictions on restricted stock awards as follows: Mr. Taylor
--$1,138,637; Mr. Hazlett --$422,392; and Mr. Lawrence --$422,392.
As described under “Compensation Agreements with Management” on page 35, we entered into a written employment
agreement with Stephen C. Taylor, President, Chief Executive Officer and Chairman of the Board in October 2013. Under the
employment agreement, Mr. Taylor is eligible for certain benefits in connection with a change in control. These provisions were
included in Mr. Taylor’s initial employment agreement with us and were continued in his current agreement as part of our
32
negotiations with Mr. Taylor as to the terms of his employment and as an inducement for him to continue his employ with our
company. The change of control and severance provisions were designed to promote stability and continuity with respect to Mr.
Taylor’s employment as our Chief Executive Officer and President.
The following table summarizes the benefits in effect as of December 31, 2014 that Mr. Taylor would receive assuming
that a qualifying termination (i.e., a termination described in footnote 2 below) in connection with a change in control, death or
disability or a termination by the Company without cause, or a voluntary termination by Mr. Taylor with and without good reason,
occurred on December 31, 2014. those payments that are available generally to salaried employees that do not discriminate in
scope, terms or operation in favor of executive officers are also not included in this table.
Chief Executive Officer Potential Payments Table
Qualifying
Termination in
Connection with a
change in Control,
Voluntary
Resignation with
Good Reason, or
Termination by
Company without
Cause (1) ($)
Termination by
Company with
Cause, Voluntary
Termination
without Good
Reason ($)
Retirement
(2) ($)
Death or Disability
(2) ($)
Named Executive Officer
Stephen C. Taylor
Acceleration of Unvested Restricted Stock Units (3)
$
1,138,637 $
1,138,637 $
— $
1,138,637
Severance
Medical, Dental, and Vision Benefits
Life Insurance Premiums
TOTAL
3,409,931
34,362
907
—
—
—
4,583,837
1,138,637
—
—
—
—
—
—
—
1,138,637
(1)
(2)
(3)
See "Compensation Agreements with Management" beginning on page 35 for definitions and discussion of Mr.
Taylor's severance package in connection with termination due to change of control, voluntary resignation with good
reason or termination by the Company without cause.
In the event of Mr. Taylor’s employment terminates on account of death, disability, or qualified retirement, 100% of
unvested Restricted Stock awards will immediately vest.
The value attributable to the acceleration of unvested Restricted Stock awards is based upon the number of awards
multiplied by the closing price of our common stock ($23.04) on December 31, 2014.
33
Compensation of Directors
We use a combination of cash and equity-based incentive compensation to attract and retain qualified candidates to serve
on our Board of Directors. In setting compensation for our Directors, we consider the substantial amount of time that Directors
expend in fulfilling their duties to us and our shareholders, as well as the skill-sets required to fulfill these duties.
The following table discloses the cash, equity awards and other compensation earned, paid or awarded, as the case may
be, to each of our non-employee Directors during the fiscal years ended December 31, 2014, 2013 and 2012.
Name
Year
(a)
Charles G. Curtis
David L. Bradshaw
John Chisholm
William F. Hughes
Fees
Earned
Or Paid
($)(1)
Stock
Awards
($)(2)
Option
Awards
($)
Non-Equity
Incentive
Plan
Compensation
($)
Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings
All
Other
Compensation
($)
Total
($)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
2014 $ 50,000 $
68,944 $
— $
— $
— $
2013
2012
2014
2013
2012
2014
2013
2012
2014
2013
2012
30,000
25,000
60,000
40,000
33,333
50,000
30,000
25,000
60,000
40,000
33,333
46,875
33,575
68,944
46,875
37,003
68,944
46,875
33,575
68,944
46,875
33,575
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $ 118,944
— 76,875
— 58,575
— 128,944
— 86,875
— 70,336
— 118,944
— 76,875
— 58,575
— 128,944
— 86,875
— 66,908
(1) Our non-employee Directors are paid a quarterly cash fee for their attendance at each meeting of our Board of Directors. The
cash fee payable to our non-employee Directors for 2014 was $11,250 per quarter. Each of our non-employee Directors
received a cash fee payment of $11,250 for the four quarters in 2014, totaling $45,000. In addition, (i) the Chairman of the
Audit Committee, David L. Bradshaw and the Chairman of the Compensation Committee, William F. Hughes Jr., were entitled
to an additional quarterly cash fee in the amount of $3,750 and (ii) the Chairman of the Nominating Committee John W.
Chisholm, and the Chairman of the Governance and Personnel Development Committee, Charles G. Curtis, were entitled to
an additional quarterly cash fee in the amount of $1,250. In 2013, our non-employee Directors were paid a quarterly cash fee
for their attendance at each meeting of our Board of Directors. The cash fee payable to our non-employee Directors was
$7,500 per quarter. Each of our non-employee Directors received a cash fee payment of $7,500 for the four quarters in 2013,
totaling $30,000. In addition, the Chairman of the Audit Committee, David L. Bradshaw was entitled to an additional quarterly
cash fee in the amount of $2,500; and the Chairman of the Compensation Committee, William F. Hughes Jr., was entitled the
same additional quarterly cash fee of $2,500. In 2012, the quarterly cash fee for attendance at each meeting of our Board of
Directors was $6,250. In addition, the Chairman of the Audit and Compensation Committee was entitled to an additional
quarterly cash fee in the amount 33% of their base cash fee.
(2) On March 20, 2014, each of our non-employee Directors were granted 3,288 restricted shares of common stock at an issue
price of $30.41 per share; on March 21, 2013, each of our non-employee Directors were granted 2,500 restricted shares of
common stock at an issue price of $18.75 per share; on March 28, 2012, each of our non-employee Directors were granted
2,500 restricted shares of common stock at an issue price of $13.43 per share.
Cash Compensation Paid to Independent Directors
We pay our non-employee Directors a quarterly cash fee for their attendance at each meeting of our Board of Directors. The
cash fee payable to our non-employee Directors for 2014 was $11,250 per quarter. In addition, the Chairmen of the Audit and
Compensation Committees were entitled to an additional quarterly cash fee in the amount of $3,750; while the Chairmen of the
Nominating and Governance and Personnel Development committees were entitled to an additional quarterly cash fee of $1,250.
34
Equity Based Compensation Paid to Independent Directors
In 2012 and 2013, each independent Director received a static grant of 2,500 shares of restricted shares of Company
common stock for each year. For 2014, our Board of Directors revised the Company's compensation policy for independent
directors so that in lieu of issuing a static 2,500 restricted shares of Company common stock as in past years, the independent
directors now receive an annual award of restricted shares based upon a review of equity award values paid by other public
companies in the Company's peer group and the Company's market and financial performance in comparison to such peer group
companies. For 2014, based upon the Company's performance compared to its peer group, the Compensation Committee
recommended and the Board approved an equity award value of $100,000 in restricted stock. In connection therewith, each of
our four independent directors was granted for 2014 the amount of 3,288 shares of restricted stock pursuant to the Plan, based
upon the closing price of $30.41 per share as of March 20, 2014, the date of the grant. The restricted shares are subject to vesting
whereby no shares will vest during the first year, and then upon the first anniversary date of the award, one-fourth of the shares
will vest every three months so that all restricted shares will have vested on the second anniversary date of the grant of the award.
Notwithstanding the vesting schedule, all of the restricted shares are subject to acceleration and will immediately vest in the case
of (i) death, disability, or retirement of the recipient or (ii) a change of control in the Company, as set forth in the Restricted Stock
Plan.
Directors who are our employees do not receive any compensation for their services as Directors.
Other
All Directors are reimbursed for their expenses incurred in connection with attending meetings.
We provide liability insurance for our Directors and officers. The cost of this coverage for 2014 was $108,350.
We do not offer non-employee Directors travel accident insurance, life insurance or a pension or retirement plan.
Compensation Agreements with Management
On October 23, 2013, we and Stephen C. Taylor entered into a new employment agreement (the “Employment
Agreement”), pursuant to which Mr. Taylor continues his employment as our President and Chief Executive Officer. The new
Employment Agreement became effective on the same date and Mr. Taylor’s previous employment agreement with us, which was
set to expire on October 25, 2013, was terminated in connection therewith.
On April 24, 2015, we entered into an amendment with Mr. Taylor to his Employment Agreement pursuant to which the
"modified single trigger" change of control provision was changed to a "double trigger" change of control. Under the "modified
single trigger provision", Mr. Taylor could voluntarily terminate the Employment Agreement and for any reason and collect
severance benefits. Under the new "double trigger" change of control provision, a change of control must occur followed by the
Company or its successor terminating Mr. Taylor's employment other than for cause, death, or disability, or by Mr. Taylor terminating
his employment for Good Reason. We discuss the definitions of "Change of Control" and "Good Reason" below, along with Mr.
Taylor's severance benefits in connection with these events.
The term of the Employment Agreement is for three years but the agreement contains an “evergreen” feature whereby
the agreement is automatically extended on a monthly basis on the last day of each month so that the term of the agreement will
always be three years unless written notice of nonrenewal is given by the Company. If a notice of nonrenewal is given, the term
of employment then ends three years from the date of that written notice of nonrenewal unless terminated earlier as described
below. The Employment Agreement provides for Mr. Taylor to receive a base salary, potential cash bonus, equity compensation,
and certain other benefits, which are summarized below.
Base Salary. Mr. Taylor’s annual 2013 base salary of $459,250 (“Base Salary”) remained the same for the remainder
of 2013. However, the Base Salary will be reviewed annually at the beginning of the year by, and may be increased at the discretion
of, the Compensation Committee of the Board of Directors of the Company (the “Compensation Committee”).
Bonus. Mr. Taylor will continue to be eligible for an annual cash bonus under the Company’s current Annual Incentive
Bonus Plan. Mr. Taylor’s annual bonus opportunity payable upon achievement of “target” levels shall be at least ninety percent
(90%) of Base Salary for 2013 and at least one hundred percent (100%) thereafter. The performance metrics, weighting and
thresholds for each annual bonus opportunity will be determined by the Company’s Board of Directors or Compensation Committee
in good faith following consultation with Mr. Taylor.
35
Annual Equity Compensation. Mr. Taylor will be eligible for annual grants of equity-based incentive awards under
the Company’s equity compensation plans. The Company has agreed to award Mr. Taylor a restricted stock award or equivalent
equity awards in January of each year with an aggregate minimum value equal to at least 175% of the Executive's Base Salary,
subject to one-year vesting terms and other standard terms which shall be established by the Compensation Committee taking into
account the performance of the Company, Mr. Taylor and industry norms.
Benefits. The Company will provide Mr. Taylor such retirement, and other benefits as are customarily provided to
similarly situated executives of the Company, including paid vacation, coverage under the Company’s medical, life, disability and
other insurance plans, and reimbursement for all reasonable business expenses in accordance with the Company’s expense
reimbursement policy.
Termination. The Company or Mr. Taylor may terminate the agreement prior to the expiration of its Term at any time
upon written notice.
Severance upon Early Termination. Mr. Taylor will be entitled to the following severance benefits during the first ten
years of his employment:
(A) If (i) the Company terminates Mr. Taylor's agreement without Cause (ii) Mr. Taylor terminates the agreement for
Good Reason or due to a Change of Control event (as defined below) followed by the Company or its successor terminating Mr.
Taylor's agreement without cause or Mr. Taylor terminating the agreement for Good Reason or (iii) Mr. Taylor's employment is
terminated due to death or disability, then he will receive (a) a lump sum payment equal to 300% of Base Salary and Annual Bonus;
(b) vesting of all unvested equity awards or other long-term incentive compensation; (c) continuation of health insurance benefits
and payment of any life insurance premiums for a period of 36 months after termination; and (d) receipt of any other vested benefits
which had not yet been paid prior to the date of termination.
(B) If Mr. Taylor's employment is terminated for Cause or he voluntarily resigns, then he will be entitled to any unpaid
compensation earned through the date of termination and receipt of any other vested benefits which had not yet been paid prior
to the date of termination.
(C) If Mr. Taylor retires in compliance with the Company's retirement policy, then he will be entitled to (i) any unpaid
compensation earned through the date of retirement; (ii) vesting of all unvested equity awards or other long-term incentive
compensation; and (iii) receipt of any other vested benefits which had not yet been paid prior to the date of termination.
After the tenth anniversary date of Mr. Taylor's employment agreement, in the event the Company delivers to Mr. Taylor
a Notice of Nonrenewal and:
(A) his employment is automatically terminated upon the expiration of the remaining three year term, Mr. Taylor shall
be entitled to (i) any unpaid compensation earned through the date of retirement; (ii) vesting of all unvested equity awards or other
long-term incentive compensation; and (iii) receipt of any other vested benefits which had not yet been paid prior to the date of;
or
(B) his employment is terminated prior to the expiration of the remaining three year term, unless said termination is due
to Cause, voluntary resignation or retirement, then Mr. Taylor shall be entitled to (i) lump sum payment of his Base Salary at the
time of termination for the remainder of the three year term of the agreement; (ii) a lump sum cash payment equal to 100% of the
Annual Bonus for each full year (if any) remaining in the three year term, plus a pro-rata portion of such Annul Bonus for any
partial remaining year in the three year term; (iii) vesting of all unvested equity awards or other long-term incentive compensation;
(iv) continuation of health insurance benefits and payment of any life insurance premiums for the remainder of the three year term
of the agreement; and (v) receipt of any other vested benefits which had not yet been paid prior to the date of termination.
Under the Employment Agreement, a "Change of Control" event includes (i) the acquisition by a person, entity or group
of related persons or entities of more than 30% of the total voting power in the Company (excluding sales to underwriters in a
public offering); (ii) consummation of the sale of 50% or more of the Company's assets; (iii) consummation of a merger or
consolidation of the Company with or into an entity unless the voting securities of the Company immediately prior to the merger
or consolidation continue to represent more the 70% of the voting power of the surviving entity after the merger or consolidation;
and (iv) replacement of at least a majority of the incumbent members of the Company's Board of Directors, excluding directors
whose election to the Board was approved by at least a majority of the then incumbent directors, subject to further limited exceptions
as set forth in the "Change of Control" definition in Employment Agreement.
36
Under the Employment Agreement, a "Good Reason" event includes (i) a material diminution of Mr. Taylor's duties, control,
authority or status or position or a requirement that the Executive report to a corporate officer or employee instead of reporting
directly to the board of directors; (ii) a material reduction in Mr. Taylor's compensation; (iii) a material breach by the Company
of the Employment Agreement; or (iv) a relocation of more than 50 miles of Mr. Taylor's principal office with the Company or its
successor. And in connection with a termination due to Change of Control, the following provisions also constitute “Good Reason”
events: (i) a material diminution of Mr. Taylor's duties, control, authority or status or position or a requirement that Mr. Taylor
report to a corporate officer or employee instead of reporting directly to the Company's or successor’s board of directors depending
on its composition after the change in control; (ii) the failure of the Company or successor to continue in effect any plan in which
Mr. Taylor participates immediately prior to the Change in Control which is material to total compensation, unless an equitable
arrangement has been made with respect to any such plan on a basis not less favorable, both in terms of the amount or timing of
payment of benefits provided; and (iii) a material breach by the Company or its successor of the Employment Agreement or any
other material agreement between Mr. Taylor and the Company or its successor.
Non-Competition and Non-Solicitation. In connection with the payment of the severance benefits described above,
for a period of two years following Mr. Taylor’s separation from the Company, he may not compete with the Company in any
geographic area within a 100 mile radius of a Company owned or leased facility which is Company staffed and actively engaging
in business on behalf of the Company.
Clawbacks. Mr. Taylor’s incentive compensation will be subject to clawback regulations in effect under applicable law.
We do not have any written employment agreements with our other named executive officers.
Limitation on Directors’ and Officers’ Liability
Our Articles of Incorporation provide our Directors and Officers with certain limitations on liability to us or any of our
shareholders for damages for breach of fiduciary duty as a Director or officer involving certain acts or omissions of any such
Director or Officer.
This limitation on liability may have the effect of reducing the likelihood of derivative litigation against Directors and
Officers and may discourage or deter shareholders or management from bringing a lawsuit against Directors and Officers for
breach of their duty of care even though such an action, if successful, might otherwise have benefited our shareholders and us.
Our Articles of Incorporation and bylaws provide certain indemnification privileges to our Directors, employees, agents
and officers against liabilities incurred in legal proceedings. Also, our Directors, employees, agents or officers who are successful,
on the merits or otherwise, in defense of any proceeding to which he or she was a party, are entitled to receive indemnification
against expenses, including attorneys’ fees, incurred in connection with the proceeding.
We are not aware of any pending litigation or proceeding involving any of our Directors, Officers, employees or agents
as to which indemnification is being or may be sought, and we are not aware of any other pending or threatened litigation that
may result in claims for indemnification by any of our Directors, officers, employees or agents.
Even though we maintain Directors’ and Officers’ liability insurance, the indemnification provisions contained in our
Articles of Incorporation and bylaws remain in place.
Procedures for Reviewing Certain Transactions
On March 7, 2007, we adopted a written policy for the review, approval or ratification of related party transactions. All
of our officers, Directors and employees are subject to the policy. Under this policy, the Audit Committee will review all related
party transactions for potential conflict of interest situations. Generally, our policy defines a “related party transaction” as a
transaction in which we are a participant and in which a related party has an interest. A “related party” is:
• any of our Directors, Officers or employees or a nominee to become a Director;
• an owner of more than 5% of our outstanding common stock;
• certain family members of any of the above persons; and
• any entity in which any of the above persons is employed or is a partner or principal or in which such person
has a 5% or greater ownership interest.
37
Approval Procedures
Before entering into a related party transaction, the related party or our department responsible for the potential transaction
must notify the CEO or the Audit Committee of the facts and circumstances of the proposed transaction. If the amount involved
is equal to or less than $100,000, the proposed transaction will be submitted to the CEO. If the amount involved exceeds $100,000,
the proposed transaction will be submitted to the Audit Committee. Matters to be submitted will include:
• the related party’s relationship to us and interest in the transaction;
• the material terms of the proposed transaction;
• the benefits to us of the proposed transaction;
• the availability of other sources of comparable properties or services; and
• whether the proposed transaction is on terms comparable to terms available to an unrelated third party or
to employees generally.
The CEO or the Audit Committee, as applicable, will then consider all of the relevant facts and circumstances available,
including the matters described above and, if applicable, the impact on a director’s independence. Neither the CEO nor any member
of the Audit Committee is permitted to participate in any review, consideration or approval of any related party transaction if such
person or any of his or her immediate family members is the related party. After review, the CEO or the Audit Committee, as
applicable, may approve, modify or disapprove the proposed transaction. Only those related party transactions that are in, or are
not inconsistent with, our best interests and that of our shareholders will be approved.
Ratification Procedures
If one of our officers or Directors becomes aware of a related party transaction that has not been previously approved
or ratified by the CEO or the Audit Committee then, if the transaction is pending or ongoing, the transaction must be submitted,
based on the amount involved, to either the CEO or the Audit Committee and the CEO or the Audit Committee will consider the
matters described above. Based on the conclusions reached, the CEO or the Audit Committee, as applicable, will evaluate all
options, including ratification, amendment or termination of the related party transaction. If the transaction is completed, the CEO
or the Audit Committee will evaluate the transaction, taking into account the same factors as described above, to determine if
rescission of the transaction or any disciplinary action is appropriate, and will request that we evaluate our controls and procedures
to determine the reason the transaction was not submitted to the CEO or the Audit Committee for prior approval and whether any
changes to the procedures are recommended.
We did not have any related party transactions in 2014 with our Officers or Directors.
38
PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT
For purposes of the following tables, "beneficial ownership" is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, pursuant to which a person or group of persons is deemed to have "beneficial ownership" of
any shares of Common Stock that such person has the right to acquire within 60 days.
The following table indicates the beneficial ownership of our Common Stock as of April 15, 2015 by: (1) each of our
current directors and nominees for election; (2) our chief executive officer, principal accounting officer and our other named
executive officers (as defined in Item 402(a) (3) of Regulation S-K) (together as a group, the " Named Executive Officers "); and
(3) all of our current directors, nominees and executive officers as a group, based on our records and data supplied by each of the
current directors, nominees and executive officers.
Name of Beneficial Owner and Position
Amount and Nature of
Beneficial Ownership(1)
Percent of Class
Directors & Nominees Who Are Not Named Executive Officers
John W. Chisholm
Current Director
Charles G. Curtis
Current Director
William F. Hughes, Jr.
Current Director & Director Nominee
David L. Bradshaw
Current Director & Director Nominee
Named Executive Officers
Stephen C. Taylor
Chief Executive Officer, Current Director
James R. Hazlett
Vice President – Technical Services
G. Larry Lawrence
Chief Financial Officer
31,280(2)
79,137(3)
143,220(4)
13,988
429,283(5)
105,010(6)
55,000(7)
*
*
1.12%
*
3.33%
*
*
All Directors (and nominees) and executive officers as a group (7 persons)
856,918(8)
6.61%
* Less than one percent.
(1) The number of shares listed includes all shares of common stock owned by, or which may be acquired within 60 days of April
15, 2015 upon exercise of warrants and options held by the shareholder (or group). Beneficial ownership is calculated in accordance
with the rules of the Securities and Exchange Commission. Unless otherwise indicated, all shares of common stock are held
directly with sole voting and investment powers. As of April 15, 2015, none of the shares of common stock owned by our officers
and Directors had been pledged as collateral to secure repayment of loans.
(2) Includes 15,000 shares of common stock that may be acquired upon exercise of stock options granted under our 1998 Stock
Option Plan.
39
(3) Includes 15,000 shares of common stock that may be acquired upon exercise of stock options granted under our 1998 Stock
Option Plan.
(4) Includes 110,500 shares of common stock indirectly owned by Mr. Hughes through the William and Cheryl Hughes Family
Trust and 10,000 shares that may be acquired upon exercise of stock options granted under our 1998 Stock Option Plan. Mr. and
Mrs. Hughes are co-trustees of the William and Cheryl Hughes Family Trust and have shared voting and investment powers with
respect to the shares held by the trust. Mr. and Mrs. Hughes are beneficiaries of the trust along with their two children.
(5) Includes 163,852 shares of common stock that may be acquired upon exercise of stock options granted to Mr. Taylor as an
inducement for his employment and under our 1998 Stock Option Plan.
(6) Includes 25,000 shares of common stock that may be acquired upon exercise of stock options granted under our 1998 Stock
Option Plan.
(7) Includes 5,000 shares of common stock that may be acquired upon exercise of stock options granted under our 1998 Stock
Option Plan.
(8) Includes 238,852 shares of common stock that may be acquired upon exercise of stock options.
The following table sets forth information as of April 15, 2015 regarding the beneficial owners of more than five percent
of the outstanding shares of our Common Stock. To our knowledge, there are no beneficial owners of more than five percent of
the outstanding shares of our Common Stock as of April 15, 2015 other than those set forth below.
Name and Address of Beneficial Owner
Blackrock, Inc.
40 East 52nd Street
New York, New York 10022
Neuberger Berman Group LLC
605 Third Avenue
New York, New York 10158
Dimensional Fund Advisors
Palisades West, Building One, 6300 Bee Cave Road
Austin, Texas 78746
Amount and Nature of
Beneficial Ownership
Percent of Class
799,353(1)
6.28%
1,255,535(2)
9.86%
915,246(3)
7.19%
(1) According to the filing, Blackrock, Inc. has the sole voting and dispositive power over the shares reported in the table above.
(2) As reported in Amendment No. 6 to Schedule 13G filed with the Securities and Exchange Commission on February 12,
2015. According to the filing, Neuberger Berman Group LLC and Neuberger Berman LLC beneficially own the shares.
(3) As reported in Amendment No. 3 to schedule 13G filed with the Securities and Exchange Commission in February 5, 2015.
According to the filing, Dimensional Fund Advisors holds voting and/or investment power over the shares, but economic
ownership is beneficially by four investment companies.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our Directors, officers and persons who
beneficially own more than 10% of our Common Stock to file certain reports of beneficial ownership with the Securities and
Exchange Commission. These reports show the Directors’, officers’ and greater than 10% stockholders' ownership and the changes
in ownership of our common stock and other equity securities. The SEC regulations also require that a copy of all such Section
16(a) forms filed must be furnished to us by the person or entity filing the report.
40
Based on a review of Section 16(a) filings furnished to us, all transactions in our equity securities required to be reported
by Section 16(a) of the Securities Exchange Act of 1934, as amended, were reported on a timely basis.
41
REPORT OF THE AUDIT COMMITTEE
Our Audit Committee is responsible for overseeing the integrity of our financial statements; financial reporting processes;
compliance with legal and regulatory requirements; the independent registered public accounting firm qualifications and
independence; and the performance of our internal accounting functions and independent registered public accounting firm.
Our independent registered public accounting firm is responsible for performing an independent audit of our financial
statements in accordance with the Standards of the Public Company Accounting Oversight Board (United States) and to issue a
report thereon. The Audit Committee reviews with management our financial statements and management’s assessment of internal
controls over financial reporting; reviews with the independent registered accounting firm their independent report on the condition
of the company's financial statements; and reviews the activities of the independent registered public accounting firm. The Audit
Committee selects our independent registered public accounting firm each year. The Audit Committee also considers the adequacy
of our internal controls and accounting policies. The chairman and members of the Audit Committee are all independent Directors
of our Board of Directors within the meaning of Section 303A of the New York Stock Exchange Listed Company Manual.
The Audit Committee has reviewed and discussed our audited financial statements with our management. The Audit
Committee has also received from, and discussed with, BDO the matters required to be discussed by Public Company Accounting
Oversight Board Auditing Standard No. 16 (Communications with Audit Committees)." In addition, the Audit Committee has
received the written disclosures and the letter from our independent registered public accounting firm required by the Public
Company Accounting Oversight Board in Rule 3200T. In addition, the Audit Committee has received the written disclosures and
the letter from our independent registered public accounting firm matters pertaining to their independence. Based upon the reviews
and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements
be included in our Annual Report on Form 10-K for 2014 for filing with the Securities and Exchange Commission. See “Proposal
2 – Ratification of Appointment of Independent Registered Accounting Firm” on the following page for further information.
Respectfully submitted by the Audit Committee,
David L. Bradshaw, Chairman
Charles G. Curtis
William F. Hughes, Jr.
42
PROPOSAL 2 – RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
We are asking the stockholders to ratify the Audit Committee’s appointment of BDO USA, LLP as our independent
registered public accounting firm for the fiscal year ending December 31, 2015. BDO USA, LLP is a registered public accounting
firm with the Public Company Accounting Oversight Board (“PCAOB”), as required by the Sarbanes-Oxley Act of 2002 and the
rules of the PCAOB. Shareholder ratification of the appointment is not required under the laws of the State of Colorado, but the
Board believes it is important to allow the shareholder to vote on the proposal. In the event the shareholders fail to ratify the
appointment, the Audit Committee will reconsider this appointment. Even if the appointment is ratified, the Audit Committee, in
its discretion, may direct the appointment of different independent registered public accounting firm at any time during the year
if the Audit Committee determines that such a change would be in our best interests and that of our shareholders.
BDO USA, LLP representatives are expected to attend the 2015 Annual Meeting in person. They will have an opportunity
to make a statement if they desire to do so and will be available to respond to appropriate shareholder questions.
The Board of Directors recommends that the shareholders vote “FOR” the ratification of the appointment of BDO USA,
LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2015.
Principal Accountant Fees
Our principal accountant for the fiscal years ended December 31, 2012, 2013 and 2014 was BDO USA, LLP.
Audit Fees
The aggregate fees billed for professional services rendered by BDO USA, LLP for the audit of our financial statements
for our fiscal years ended December 31, 2013 and 2014 and the review of the financial statements on Forms 10-Q for the fiscal
quarters in such fiscal years were approximately $231,000 and $236,000 respectively.
Audit Related Fees
During the years ended December 31, 2013 and 2014, there were no audit related fees.
Tax Fees
We were not billed by BDO USA, LLP during the years ended December 31, 2013 or 2014.
All Other Fees
No other fees were billed by BDO USA, LLP, during our fiscal years ended December 31, 2013 and 2014, other than as
described above.
Audit Committee Pre-Approval Policies and Procedures
As of the date of this proxy statement, our Audit Committee has not established general pre-approval policies and as
of December 31, 2014, our Audit Committee had not established pre-approval policies and procedures for the engagement of our
principal accountant to render audit or non-audit services. However, in accordance with Section 10A(i) of the Exchange Act, our
Audit Committee, as a whole, approves the engagement of our principal accountant prior to the accountant rendering audit or non-
audit services.
Certain rules of the Securities and Exchange Commission provide that an auditor is not independent of an audit client
if the services it provides to the client are not appropriately approved, subject, however, to a de minimus exception contained in
the rules. The Audit Committee pre-approved all services provided by BDO USA, LLP in 2014 and the de minimus exception
was not used.
43
PROPOSAL 3 – CONSIDERATION OF AN ADVISORY VOTE ON EXECUTIVE COMPENSATION OF OUR
NAMED EXECUTIVE OFFICERS
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), gives the stockholders
the right to endorse or not endorse the compensation of our named executive officers as disclosed in this Proxy Statement in
accordance with the SEC's rules. The proposal, commonly known as a “Say On Pay” proposal, gives our stockholders the
opportunity to express their views on the Company's executive compensation.
At the Company's annual meeting of stockholders held in June 2011, our shareholders recommended that the advisory vote
on the Say-on-Pay of our named executives in our proxy materials be submitted annually, notwithstanding that our Board of
Directors recommended that the advisory vote be submitted every third year. In light of the recommendation of the shareholders,
we intend to include the Say-on-Pay advisory vote in our proxy materials on an annual basis until the next shareholder vote on
the frequency of Say-on-Pay or our Board of Directors otherwise determines that a different frequency of Say-on-Pay vote is in
the best interests of the shareholders.
We are asking our stockholders to indicate whether or not they support the compensation program as described in this proxy
statement. This proposal is not intended to address any specific item of compensation, but rather the overall compensation of the
named executive officers and
this proxy
the compensation policies, methodologies and practices described
statement. Accordingly, we ask our stockholder to vote “FOR” the following resolution at our annual meeting:
in
“RESOLVED, that the stockholders approve the compensation of the Company's named executive officers, as disclosed in
the Compensation Discussion and Analysis, the compensation tables, and the related disclosure contained in the proxy statement
set forth under the caption “Executive Compensation” of this proxy statement.”
The Company believes its compensation philosophy and programs are strongly linked to performance and results and
appropriately aligned with the interests of stockholders. Our compensation philosophy is to provide an executive compensation
program that:
• rewards performance and skills necessary to advance our objectives and further the interests of our
shareholders;
• is fair and reasonable and appropriately applied to each executive officer;
• is competitive with compensation programs offered by our competitors; and
• is appropriately focused on achieving annual financial and operational goals through the Company's cash
bonus plan and on maximizing stockholder value over the long term, through grants of restricted shares and
stock options.
The Board of Directors recommends that you vote FOR approval, on an advisory basis, of the compensation programs
of our named executive officers as disclosed in the Compensation Discussion and Analysis, the compensation tables, and
the related disclosure contained in the proxy statement set forth under the caption “Executive Compensation” of this proxy
statement.
44
SHAREHOLDER PROPOSALS
Under SEC Rule 14a-8, if a shareholder wants us to include a proposal in our proxy statement and form of proxy for
presentation at our 2016 Annual Meeting of Shareholders, the proposal must be received by us at our principal executive offices
at 508 West Wall Street, Suite 550, Midland, Texas 79701 by December 21, 2015, unless the date of our 2016 Annual Meeting of
Shareholders is more than 30 days from the anniversary date of our 2015 Annual Meeting of Shareholders, in which case the
deadline is a reasonable time before we print and mail our proxy materials for the 2016 Annual Meeting of Shareholders. The
proposal should be sent to the attention of the Secretary of Natural Gas Services Group.
Rule 14a-4 of the SEC's proxy rules allows a company to use discretionary voting authority to vote on matters coming
before an annual meeting of shareholders for the prior year's annual meeting of shareholders or the date specified by an overriding
advance notice provision in the company's bylaws. Our bylaws do not contain such an advance notice provision. Accordingly, for
our 2016 annual meeting, shareholders' written notices must be received by us before March 9, 2016 for any proposal a shareholder
wishes to bring before the meeting but for which such shareholder does not seek to have a written proposal considered for inclusion
in the proxy statement and form of proxy. Your notice should be addressed to President, Natural Gas Services Group, Inc., 508
West Wall Street, Suite 550, Midland, Texas 79701.
In order to curtail controversy as to the date on which a proposal was received by us, it is suggested that proponents
submit their proposals by certified mail-return receipt requested. Such proposals must also meet the other requirements established
by the SEC for shareholder proposals.
45
COMMUNICATIONS WITH THE BOARD OF DIRECTORS
Because of our relatively small size, to date we have not developed formal processes by which shareholders or other
interested parties may communicate directly with Directors. Until formal procedures are developed and posted on our website
(www.ngsgi.com), any communication to one or more members of our Board of Directors may be made by sending them in care
of Investor Relations, Natural Gas Services Group, Inc., 508 West Wall Street, Suite 550, Midland, Texas 79701. Shareholders
should clearly note on the mailing envelope that the letter is a “Shareholder-Board Communication.” All such communications
will be forwarded to the intended recipients.
46
OTHER MATTERS
Our Board of Directors does not know of any matters to be presented at the meeting other than the matters set forth herein.
If any other business should come before the meeting, the person’s named in the enclosed proxy card will vote such proxy according
to their judgment on such matters.
New York Stock Exchange Certification. We listed our common stock on the New York Stock Exchange in October
2008. The certification of our Chief Executive Officer required by the NYSE Listing Standards, Section 303A.12(a), relating to
our compliance with the NYSE Corporate Governance Listing Standards, was submitted to the NYSE on May 6, 2014 in connection
with our listing on the exchange. The certifications of our Chief Executive Officer and Principal Accounting Officer required by
the SEC in connection with our Annual Report on Form 10-K for the year ended December 31, 2014 were submitted to the SEC
on March 13, 2015 with our Annual Report on Form 10-K.
You may obtain our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 without charge upon
written request to Stephen C. Taylor, President, at Natural Gas Services Group, Inc., 508 West Wall Street, Suite 550, Midland,
Texas 79701. In addition, the exhibits to the Annual Report on Form 10-K for the fiscal year ended December 31, 2014 may be
obtained by any shareholder upon written request to Mr. Taylor.
In addition, we use our website as a channel of distribution for company information. We make available free of charge
on the Investor Relations section of our website (www.ngsgi.com) our Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, and Current Reports on Form 8-K. We also make available through our website other reports filed with or furnished to the
SEC under the Securities Exchange Act of 1934, as amended, including our proxy statements and reports filed by officers and
directors under Section 16(a) of the Exchange Act, as well as our Code of Business Ethics and the charters to our various Committees
of our Board of Directors. We do not intend for information contained in our website to be part of this proxy statement.
Midland, Texas
April 29, 2015
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Stephen C. Taylor
Stephen C. Taylor
Chairman of the Board, President and Chief
Executive Officer
47
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from________________________to__________________________
Commission file number: 1-31398
NATURAL GAS SERVICES GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
Colorado
(State or other jurisdiction of incorporation or organization)
508 W. Wall St. Suite 550, Midland, Texas
(Address of principal executive offices)
75-2811855
(I.R.S. Employer Identification No.)
79701
(Zip Code)
Registrant’s telephone number, including area code:
(432) 262-2700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $.01 par value
Securities registered pursuant to section 12(g) of the Act: None.
Name of each exchange on which registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
-
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes
No
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.[]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
Large Accelerated Filer
Accelerated Filer
Non-Accelerated Filer
Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant as of June 30, 2014
was approximately $404,885,655 based on the closing price of the common stock on that date on the New York Stock Exchange.
At February 13, 2015, there were 12,581,360 shares of common stock outstanding.
Documents Incorporated by Reference
Certain information called for in Items 10, 11, 12, 13 and 14 of Part III are incorporated by reference to the registrant’s
definitive proxy statement for the annual meeting of shareholders to be held on June 18, 2015.
FORM 10-K
NATURAL GAS SERVICES GROUP, INC.
TABLE OF CONTENTS
Item No.
Page
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4. Mine Safety Disclosures
PART I
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6.
Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships, and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Item 15. Exhibits and Financial Statements
PART IV
1
9
17
17
17
17
18
20
22
32
32
32
32
34
36
36
36
36
36
37
i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements, within the meaning of Section 27A of
the Securities Act of 1933, as amended, and information pertaining to us, our industry and the oil and natural gas industry that is
based on the beliefs of our management, as well as assumptions made by and information currently available to our management. All
statements, other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding
our future financial position, growth strategy, budgets, projected costs, plans and objectives of management for future operations,
are forward-looking statements. We use the words “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue,”
“intend,” “plan,” “budget” and other similar words to identify forward-looking statements. You should read statements that contain
these words carefully and should not place undue reliance on these statements because they discuss future expectations, contain
projections of results of operations or of our financial condition and/or state other “forward-looking” information. We do not
undertake any obligation to update or revise publicly any forward-looking statements. Although we believe our expectations
reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations
or assumptions will prove to have been correct. Important factors that could cause actual results to differ materially from the
expectations reflected in the forward-looking statements include, but are not limited to, the following factors and the other factors
described in this Annual Report on Form 10-K under the caption “Risk Factors”:
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conditions in the oil and natural gas industry, including the supply and demand for natural gas and wide fluctuations in
the prices of oil and natural gas;
regulation or prohibition of new well completion techniques;
competition among the various providers of compression services and products;
changes in safety, health and environmental regulations;
changes in economic or political conditions in the markets in which we operate;
failure of our customers to continue to rent equipment after expiration of the primary rental term;
the inherent risks associated with our operations, such as equipment defects, malfunctions and natural disasters;
our inability to comply with covenants in our debt agreements and the decreased financial flexibility associated with our
debt;
future capital requirements and availability of financing;
fabrication and manufacturing costs;
general economic conditions;
acts of terrorism; and
fluctuations in interest rates.
We believe that it is important to communicate our expectations of future performance to our investors. However,
events may occur in the future that we are unable to accurately predict or that we are unable to control. When considering our
forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Annual Report on
Form 10-K.
ii
ITEM 1.
BUSINESS
PART I
Unless the context otherwise requires, references in this Annual Report on Form 10-K to “Natural Gas Services Group,”
the “Company”, “we,” “us,” “our” or “ours” refer to Natural Gas Services Group, Inc. Certain specialized terms used in describing
our natural gas compressor business are defined in "Glossary of Industry Terms" on page 8.
The Company
We are a leading provider of small to medium horsepower compression equipment to the natural gas industry. 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), which, according to data from the Energy Information Administration ("EIA"), is the single
largest and fastest growing segment of U.S. energy production. We manufacture, fabricate and rent natural gas compressors that
enhance the production of natural gas wells and provide maintenance services for those compressors. In addition, we sell custom
fabricated natural gas compressors to meet customer specifications dictated by well pressures, production characteristics and
particular applications. We also manufacture and sell flare systems for oil and gas plant and production facilities.
The vast majority of our rental operations are in non-conventional natural gas and oil regions, which typically have
lower initial reservoir pressures, lower productions pressures and/or faster well decline rates. These areas usually require
compression to be installed sooner and with greater frequency.
Natural gas compressors are used in a number of applications for the production and enhancement of gas wells and
in gas transportation lines and processing plants. Compression equipment is often required to boost a well’s production to
economically viable levels and enable gas to continue to flow in the pipeline to its destination.
We increased our revenue to $97.0 million in 2014 from $53.9 million in 2010. During the same period, income from
operations increased to $22.0 million from $11.4 million. Our compressor rental fleet has grown to 2,879 compressors at
December 31, 2014 from 1,909 compressors at the end of 2010.
Our revenue increased to $97.0 million from $89.2 million for the year ended December 31, 2014 compared to the
year ended December 31, 2013.
Net income for the year ended December 31, 2014 decreased to $14.1 million ($1.11 per diluted share), as compared
to $14.4 million ($1.15 per diluted share) for the year ended December 31, 2013.
At December 31, 2014, current assets were $55.9 million, which included $6.2 million of cash and cash
equivalents. Current liabilities were $14.1 million, and our line of credit due in 2017 was $417,000. Our stockholders' equity as
of December 31, 2014 was $210.6 million.
We were incorporated in Colorado on December 17, 1998 and maintain our principal offices at 508 W. Wall St., Suite
550, Midland, Texas 79701 and our telephone number is (432) 262-2700.
Overview and Outlook
The market for compression equipment and services is substantially dependent on the condition of the natural gas and
oil industry. In particular, the willingness of natural gas and oil companies to make capital expenditures on exploration, drilling
and production of natural gas and oil in the U.S. The level of activity and capital expenditures has generally been dependent upon
the prevailing view of future gas and oil prices, which are influenced by numerous factors, including the level of supply or demand
for natural gas and oil and the impact on price of natural gas and oil, worldwide economic activity, interest rates and the cost of
capital, environmental regulation, seasonal fluctuations and weather patterns. Natural gas and oil prices and the level of production
activity have historically been characterized by significant volatility. Increasing oil and natural gas prices from 2005 through
mid-2008 resulted in natural gas and oil operators increasing capital spending for exploration, development and production
programs. However, in mid-2008, natural gas and oil prices began to decline. This decline resulted in reduced production and
capital spending by some natural gas and oil companies, and had an impact on demand for compression equipment.
1
The reduction in capital expenditures and production in the natural gas and oil industry, combined with problems in
the global economy, led to a downturn in the demand for our products and services in 2009 and 2010. In 2011 a slow recovery
began which produced an improvement in the utilization rate on our rental fleet and stability in our sales backlog. In 2012 we
saw growth in demand for our products and that growth continued in 2013 and 2014. Towards the end of 2014 oil prices began
a steep decline which has resulted in capital budget cuts for many energy companies for 2015. These budget reductions will
translate to fewer well completions and a softening of near-term demand for compression. See “Item 1 -- Business – Our Operating
Units” and “Business – Backlog” for more information.
According to the U.S. Energy Information Administration (“EIA”), total consumption of natural gas in the United
States increased 2.8% for the twelve months ended November 2014 compared to the same period 2013. This follows a 2.1% and
a 5.1% increase in the periods from 2012 to 2013 and 2011 to 2012, respectively. EIA expects total natural gas consumption in
the U.S. to increase slightly in 2015. While we anticipate long-term increased demand for natural gas, we expect our business to
remain virtually flat or moderately decrease for 2015 due to the overall uncertainty in the combined oil and gas market.
Long-Term Industry Trends
Natural gas prices historically have been volatile, and this volatility is expected to continue. Oil and natural gas are
linked commodities with many drilling projects producing both products. The recent oil price collapse may make some of those
drilling projects uneconomic. Uncertainty continues to exist as to the direction of future natural gas and near-term crude oil price
and oil trends are down in the United States and worldwide. Over the last several years gas prices have not shown the resiliency
that crude oil prices have and now crude prices are also down sharply. We believe that natural gas is a more environmentally
friendly source of energy which is likely to result in increases in demand over time. Being primarily a provider of services and
equipment to natural gas producers, we are impacted by changes in natural gas, crude oil and condensate prices. Longer term
natural gas prices will be determined by the supply and demand for natural gas as well as the prices of competing fuels, such as
oil and coal.
We believe part of the growth of the rental compression capacity in the U.S. market has been driven by the trend toward
outsourcing by energy producers and processors. Renting does not require the purchaser to make large capital expenditures for
new equipment or to obtain financing through a lending institution. This allows the customer’s capital to be used for additional
exploration and production of natural gas and oil.
Notwithstanding the slow rise in natural gas prices, we believe that there will continue to be a growing demand for
natural gas. We expect long-term demand for our products and services will increase as a result of:
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the increasing demand for and limited supply of energy, both domestically and abroad;
continued non-conventional gas exploration and production;
environmental considerations which provide strong incentives to use natural gas in place of other carbon fuels;
the cost savings of using natural gas rather than electricity for heat generation;
implementation of international environmental and conservation laws;
the aging of producing natural gas reserves worldwide;
the extensive supply of undeveloped non-conventional natural gas reserves
the increased drilling for shale oil and its associated gas production; and
the use of our equipment for gas lift on oil wells.
Our Operating Units
We identify our operating units based upon major revenue sources as Gas Compressor Rental, Engineered Equipment
Sales, Service and Maintenance and Corporate.
Gas Compressor Rental. Our rental business is primarily focused on non-conventional gas and oil production. We
provide rental of small to medium horsepower compression equipment to customers under contracts typically having minimum
initial terms of six to twenty four months. Historically, in our experience, most customers retain the equipment beyond the
expiration of the initial term. By outsourcing their compression needs, we believe our customers are able to increase their revenues
by producing a higher volume of natural gas due to greater equipment run-time. Outsourcing also allows our customers to reduce
2
their compressor downtime, operating and maintenance costs and capital investments and more efficiently meet their changing
compression needs. We maintain and service compressor equipment rented to our customers.
The size, type and geographic diversity of our rental fleet enables us to provide our customers with a range of compression
units that can serve a wide variety of applications, and to select the correct equipment for the job, rather than the customer trying
to fit the job to its own equipment. We base our gas compressor rental rates on several factors, including the cost and size of the
equipment, the type and complexity of service desired by the customer, the length of contract and the inclusion of any other services
desired, such as installation, transportation and daily operation.
As of December 31, 2014, we had 2,879 natural gas compressors in our rental fleet totaling 401,361 horsepower, as
compared to 2,556 natural gas compressors totaling 351,187 horsepower at December 31, 2013. As of December 31, 2014, we
had 2,189 natural gas compressors totaling 301,392 horsepower rented to 102 customers, compared to 2,038 natural gas compressors
totaling 283,165 horsepower rented to 95 customers at December 31, 2013. As of December 31, 2014, the utilization rate of our
rental fleet was 76.0% compared to 79.7% as of December 31, 2013.
Engineered Equipment Sales. This operating unit includes the following components:
• Compressor fabrication. Fabrication involves the assembly of compressor components manufactured by us or other
vendors into compressor units that are ready for rental or sale. In addition to fabricating compressors for our rental fleet,
we engineer and fabricate natural gas compressors for sale to customers to meet their specifications based on well pressure,
production characteristics and the particular applications for which compression is sought.
• Compressor manufacturing. We design and manufacture our own proprietary line of reciprocating compressor frames,
cylinders and parts known as our “CiP”, or Cylinder-in-Plane, product line. We use the finished components to fabricate
compressor units for our rental fleet or for sale to customers. We also sell finished components to other fabricators.
• Flare fabrication. We design, fabricate, sell, install and service flare stacks and related ignition and control devices for
the onshore and offshore incineration of gas compounds such as hydrogen sulfide, carbon dioxide, natural gas and liquefied
petroleum gases. Applications for this equipment are often environmentally and regulatory driven, and we believe we
are a leading supplier to this market.
• Parts sales and compressor rebuilds. To provide customer support for our compressor and flare sales businesses, we
stock varying levels of replacement parts at our Midland, Texas facility and at field service locations. We also provide
an exchange and rebuild program for screw compressors and maintain an inventory of new and used compressors to
facilitate this part of our business.
Service and Maintenance. We service and maintain compressors owned by our customers on an “as needed”
basis. Natural gas compressors require routine maintenance and periodic refurbishing to prolong their useful life. Routine
maintenance includes physical and visual inspections and other parametric checks that indicate a change in the condition of the
compressors. We perform wear-particle analysis on all packages and perform overhauls on a condition-based interval or a time-
based schedule. Based on our past experience, these maintenance procedures maximize component life and unit availability and
minimize downtime.
Business Strategy
During the downturn in the economy beginning in mid 2008, our strategy was to reduce expenses in line with the lower
anticipated business activity, and fabricate compressor equipment only in direct response to market requirements. As the economy
recovered, we adjusted this strategy to ensure that we kept pace with growth while balancing appropriate business risk. As we
again enter an industry downturn, our proven strategy of reducing expenses and fabricating on an as needed basis will be in place
for 2015. See “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our
Performance Trends and Outlook" for more information. Our long-term intentions to grow our revenue and profitability are based
on the following business strategies:
• Expand rental fleet. We intend to increase the size of our rental fleet by fabricating compressor units in numbers that
correspond to the growth of the market and in relation to market share gains we may experience. We believe our growth
will continue to be primarily driven through our placement of small to medium horsepower wellhead natural gas
compressors for non-conventional natural gas and oil production.
3
• Geographic expansion. We will continue to consolidate our operations in existing areas, as well as pursue focused
expansion into new geographic regions as opportunities are identified. We presently provide our products and services
to a customer base of oil and natural gas exploration and production companies operating in Colorado, Kansas, Michigan,
New Mexico, North Dakota,Ohio, Oklahoma, Pennsylvania, Texas, Utah, West Virginia and Wyoming.
• Expand our ‘secondary’ product lines. In addition to our primary rental and engineered product business lines, we will
emphasize the growth of our other products, e.g., flares, CiP compressor products and general compressor maintenance
and repair services.
•
Selectively pursue acquisitions. We will continue to evaluate potential acquisitions that would provide us with access
to new markets or enhance our current market position.
Competitive Strengths
We believe our competitive strengths include:
•
Superior customer service. Our emphasis on the small to medium horsepower markets has enabled us to effectively
meet the evolving needs of our customers. We believe these markets have been under-serviced by our larger competitors
which, coupled with our personalized services and in-depth knowledge of our customers’ operating needs and growth
plans, have allowed us to enhance our relationships with existing customers as well as attract new customers. The size,
type and geographic diversity of our rental fleet enable us to provide customers with a range of compression units that
can serve a wide variety of applications. We are able to select the correct equipment for the job, rather than the customer
trying to fit its application to our equipment.
• Diversified product line. Our compressors are available as high and low pressure rotary screw and reciprocating
packages. They are designed to meet a number of applications, including wellhead production, natural gas gathering,
natural gas transmission, vapor recovery and gas and plunger lift. In addition, our compressors can be built to handle a
variety of gas mixtures, including air, nitrogen, carbon dioxide, hydrogen sulfide and hydrocarbon gases. A diversified
compression product line helps us compete by being able to satisfy widely varying pressure, volume and production
conditions that customers encounter. Our "Flare King" product line provides flares and gas incineration devices to the
industry for production maintenance and environmental compliance.
• Purpose-built rental compressors. Our rental compressor packages have been designed and built to address the primary
requirements of our customers in the producing regions in which we operate. Our units are compact in design and are
easy, quick and inexpensive to move, install and start-up. Our control systems are technically advanced and allow the
operator to start and stop our units remotely and/or in accordance with well conditions. We believe our rental fleet is
also one of the newest.
• Experienced management team. On average, each of our executive and operating team members have over 30 years of
oilfield services industry experience. We believe our management team has successfully demonstrated its ability to grow
our business during times of expansion and to manage through downturns.
• Broad geographic presence. We presently provide our products and services to a customer base of oil and natural gas
exploration and production companies operating in Colorado, Kansas, Michigan, New Mexico, North Dakota,Ohio,
Oklahoma, Pennsylvania, Texas, Utah, West Virginia and Wyoming. Our footprint allows us to service many of the
natural gas producing regions in the United States. We believe that operating in diverse geographic regions allows us
better utilization of our compressors, minimal incremental expenses, operating synergies, volume-based purchasing,
leveraged inventories and cross-trained personnel. We also sell engineered compression products to international
customers.
• Long-standing customer relationships. We have developed long-standing relationships providing compression
equipment to many major and independent oil and natural gas companies. Our customers generally continue to rent our
compressors after the expiration of the initial terms of our rental agreements, which we believe reflects their satisfaction
with the reliability and performance of our services and products.
Major Customers
Sales and rental income to Devon Energy Production, Inc. ("Devon") and EOG Resources, Inc. ("EOG") for the year
ended December 31, 2014 amounted to 18% and 15% of our revenue, respectively. Sales and rental income to EOG and Devon
in the year ended December 31, 2013 amounted to 18% and 15% of our revenue, respectively. Sales and rental income to EOG
and Devon in the year ended December 31, 2012 amounted to 32% and 12% of our revenue. No other single customer accounted
for more than 10% of our revenues in 2014, 2013 or 2012.
4
EOG, Promatcon Tepatguna ("Promatcon") and Occidental Permian, LTD. ("Oxy") amounted to 20%, 18% and 14% of
our accounts receivable as of December 31, 2014. EOG and Devon amounted to 18% and 14% of our accounts receivable as of
December 31, 2013. No other customers amounted to more than 10% of our accounts receivable as of December 31, 2014 and
2013. The loss of any of the above customers could have a material adverse effect on our business, financial condition, results of
operations and cash flows, depending upon the demand for our compressors at the time of such loss and our ability to attract new
customers.
Sales and Marketing
Our sales force pursues the rental and sales market for compressors and flare equipment and other services in their
respective territories. Additionally, our personnel coordinate with each other to develop relationships with customers who operate
in multiple regions. Our sales and marketing strategy is focused on communication with current customers and potential customers
through frequent direct contact, technical assistance, print literature, direct mail and referrals. Our sales and marketing personnel
coordinate with our operations personnel in order to promptly respond to and address customer needs. Our overall sales and
marketing efforts concentrate on demonstrating our commitment to enhancing the customer’s cash flow through enhanced product
design, fabrication, manufacturing, installation, customer service and support.
Competition
We have a number of competitors in the natural gas compression segment, some of which have greater financial
resources. We believe that we compete effectively on the basis of price, customer service, including the ability to place personnel
in remote locations, flexibility in meeting customer needs, and quality and reliability of our compressors and related services.
Compressor industry participants can achieve significant advantages through increased size and geographic breadth. As
the number of rental compressors in our rental fleet increases, the number of sales, support, and maintenance personnel required
and the minimum level of inventory do not increase proportionately.
Backlog
As of December 31, 2014, we had a sales backlog of approximately $5.8 million compared to $2.9 million as of
December 31, 2013 . We expect to fulfill the backlog in the first half of 2015. Sales backlog consists of firm customer orders for
which a purchase or work order has been received, satisfactory credit or a financing arrangement exists, and delivery is scheduled. In
addition, the major components of our compressors are acquired from suppliers through periodic purchase orders that in many
instances require three or four months of lead time prior to delivery of the order.
Employees
As of December 31, 2014, we had 353 total employees, none of which are represented by a labor union. We believe
we have good relations with our employees.
Liability and Other Insurance Coverage
Our equipment and services are provided to customers who are subject to hazards inherent in the oil and gas industry,
such as blowouts, explosions, craterings, fires, and oil spills. We maintain liability insurance that we believe is customary in the
industry and which includes environmental cleanup, but excludes product warranty insurance because the majority of components
on our compressor unit are covered by the manufacturers. We also maintain insurance with respect to our facilities. Based on our
historical experience, we believe that our insurance coverage is adequate. However, there is a risk that our insurance may not be
sufficient to cover any particular loss or that insurance may not cover all losses. In addition, insurance rates have in the past been
subject to wide fluctuation, and changes in coverage could result in less coverage, increases in cost or higher deductibles and
retentions.
Government Regulation
All of our operations and facilities are subject to numerous federal, state, foreign and local laws, rules and regulations
related to various aspects of our business, including containment and disposal of hazardous materials, oilfield waste, other waste
materials and acids.
To date, we have not been required to expend significant resources in order to satisfy applicable environmental laws
and regulations. We do not anticipate any material capital expenditures for environmental control facilities or extraordinary
5
expenditures to comply with environmental rules and regulations in the foreseeable future. However, compliance costs under
existing laws or under any new requirements could become material and we could incur liabilities for noncompliance.
Our business is generally affected by political developments and by federal, state, foreign and local laws and regulations,
which relate to the oil and natural gas industry. The adoption of laws and regulations affecting the oil and natural gas industry for
economic, environmental and other policy reasons could increase our costs and could have an adverse effect on our operations. The
state and federal environmental laws and regulations that currently apply to our operations could become more stringent in the
future.
We have utilized operating and disposal practices that were or are currently standard in the industry. However, materials
such as solvents, thinner, waste paint, waste oil, wash down waters and sandblast material may have been disposed of or released
in or under properties currently or formerly owned or operated by us or our predecessors. In addition, some of these properties
have been operated by third parties over whom we have no control either as to such entities' treatment of materials or the manner
in which such materials may have been disposed of or released.
The federal Comprehensive Environmental Response Compensation and Liability Act of 1980, commonly known as
CERCLA, and comparable state statutes impose strict liability on:
•
•
owners and operators of sites, and
persons who disposed of or arranged for the disposal of "hazardous substances" found at sites.
Waste Management and Disposal
The federal Resource Conservation and Recovery Act ("RCRA") and analogous state laws and their implementing
regulations govern the generation, transportation, treatment, storage and disposal of hazardous and non-hazardous solid wastes.
During the course of our operations, we generate wastes (including, but not limited to, used oil, antifreeze, filters, paints, solvents
and abrasive blasting materials) in quantities regulated under RCRA. The EPA and various state agencies have limited the approved
methods of disposal for these types of wastes. CERCLA and analogous state laws and their implementing regulations impose
strict, and under certain conditions, joint and several liability without regard to fault or the legality of the original conduct on
classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These
persons include current and past owners and operators of the facility or disposal site where the release occurred and any company
that transported, disposed of, or arranged for the transport or disposal of the hazardous substances released at the site. Under
CERCLA, such persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that
have been released into the environment, for damages to natural resources and for the costs of certain health studies. In addition,
where contamination may be present, it is not uncommon for neighboring landowners and other third parties to file claims for
personal injury, property damage and recovery of response costs allegedly caused by hazardous substances or other pollutants
released into the environment.
We currently own or lease, and in the past have owned or leased, a number of properties that have been used in support
of our operations for a number of years. Although we have utilized operating and disposal practices that were standard in the
industry at the time, hydrocarbons, hazardous substances, or other regulated wastes may have been disposed of or released on or
under the properties owned or leased by us or on or under other locations where such materials have been taken for disposal by
companies sub-contracted by us. In addition, some of these properties may have been previously owned or operated by third parties
whose treatment and disposal or release of hydrocarbons, hazardous substances or other regulated wastes was not under our control.
These properties and the materials released or disposed thereon may be subject to CERCLA, RCRA and analogous state laws.
Under such laws, we could be required to remove or remediate historical property contamination, or to perform certain operations
to prevent future contamination. We are not currently under any order requiring that we undertake or pay for any cleanup activities.
However, we cannot provide any assurance that we will not receive any such order in the future.
The federal Water Pollution Control Act and the Oil Pollution Act of 1990 and implementing regulations govern:
•
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the prevention of discharges, including oil and produced water spills, and
liability for drainage into waters.
6
Air Emissions
Our operations are also subject to federal, state, and local regulations. The Clean Air Act and implementing regulations
and comparable state laws and regulations regulate emissions of air pollutants from various industrial sources and also impose
various monitoring and reporting requirements, including requirements related to emissions from certain stationary engines, such
as those on our compressor units. These laws and regulations impose limits on the levels of various substances that may be emitted
into the atmosphere from our compressor units and require us to meet more stringent air emission standards and install new
emission control equipment on all of our engines built after July 1, 2008. In addition, the EPA issued regulations in 2012 that
require the reduction of emissions of volatile organic compounds, air toxics and methane, a greenhouse gas, at certain oil and gas
operations. We are not currently aware of material impacts to our operations associated with these rules.
We believe that our existing environmental control procedures are adequate and that we are in substantial compliance
with environmental laws and regulations, and the phasing in of emission controls and other known regulatory requirements should
not have a material adverse affect on our financial condition or operational results. However, it is possible that future developments,
such as new or increasingly strict requirements and environmental laws and enforcement policies there under, could lead to material
costs of environmental compliance by us. While we may be able to pass on the additional cost of complying with such laws to
our customers, there can be no assurance that attempts to do so will be successful. Some risk of environmental liability and other
costs are inherent in the nature of our business, however, and there can be no assurance that environmental costs will not rise.
In recent years, increased concern has been raised over the protection of the environment. Legislation to regulate
emissions of greenhouse gases has been introduced in Congress, and there has been a wide-ranging policy debate, both nationally
and internationally, regarding the impact of these gases and possible means for their regulation. In addition, efforts have been
made and continue to be made in the international community toward the adoption of international treaties or protocols that would
address global climate change issues, such as the United Nations Climate Change Conference in Copenhagen in 2009. Also, the
EPA has undertaken new efforts to collect information regarding greenhouse gas emissions and their effects. Recently, the EPA
declared that certain greenhouse gases represent a danger to human health and proposed to expand its regulations relating to those
emissions. To the extent that new laws or other governmental actions restrict the energy industry or impose additional environmental
protection requirements that result in increased costs to the oil and gas industry, we could be adversely affected. We cannot
determine to what extent our future operations and earnings may be affected by new legislation, new regulations or changes in
existing regulations.
Occupational Safety and Health
We are subject to the requirements of Occupational Safety and Health Administration ("OSHA") and comparable state
statutes. These laws and the implementing regulations strictly govern the protection of the health and safety of employees. The
OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of CERCLA, and similar
state statutes require that we maintain and/or disclose information about hazardous materials used or produced in our operations.
We believe that we are in compliance with these applicable requirements and with other comparable laws.
Patents, Trademarks and Other Intellectual Property
We believe that the success of our business depends more on the technical competence, creativity and marketing abilities
of our employees than on any individual patent, trademark, or copyright. Nevertheless, as part of our ongoing research, development
and manufacturing activities, we may seek patents when appropriate on inventions concerning new products and product
improvements. We do not own any unexpired patents. Although we continue to use the patented technology and consider it useful
in certain applications, we do not consider the expired patent to be material to our business as a whole.
Suppliers and Raw Materials
Fabrication of our rental compressors involves the purchase by us of engines, compressors, coolers and other
components, and the assembly of these components on skids for delivery to customer locations. These major components of our
compressors are acquired through periodic purchase orders placed with third-party suppliers on an "as needed" basis, which
typically requires a three to four month lead time with delivery dates scheduled to coincide with our estimated production
schedules. Although we do not have formal continuing supply contracts with any major supplier, we believe we have adequate
alternative sources available. In the past, we have not experienced any sudden and dramatic increases in the prices of the major
components for our compressors. However, the occurrence of such an event could have a material adverse effect on the results
of our operations and financial condition, particularly if we are unable to increase our rental rates and sale prices proportionate to
any such component price increases.
7
Available Information
We use our website as a channel of distribution for company information. We make available free of charge on the
Investor Relations section of our website ( www.ngsgi.com ) our Annual Report on Form 10-K, Quarterly Reports on Form 10-
Q, and Current Reports on Form 8-K. We also make available through our website other reports filed with or furnished to the
SEC under the Securities Exchange Act of 1934, as amended, including our proxy statements and reports filed by officers and
directors under Section 16(a) of the Exchange Act, as well as our Code of Business Ethics and the charters to our various Committees
of our Board of Directors. Paper copies of our filings are also available, without charge upon written request, at Natural Gas
Services Group, Inc., 508 West Wall Street, Suite 550, Midland, Texas 79701. The information contained in our website is not
part of this Report.
Glossary of Industry Terms
"CiP" - A branded, proprietary gas compressor product line designed, manufactured and packaged by the Company.
The 'Cylinder in Plane' design results in a compact and vibration-free compressor unit that particularly lends itself to unconventional
wellhead applications, air compression and compressed natural gas requirements.
"coal bed methane" – A natural gas generated during coal formation and provided from coal seams or adjacent
sandstones.
"flare" – A tall stack equipped with burners used as a safety device at wellheads, refining facilities, gas processing
plants, and chemical plants. Flares are used for the combustion and disposal of combustible gases. The gases are piped to a remote,
usually elevated, location and burned in an open flame in the open air using a specially designed burner tip, auxiliary fuel, and
steam or air. Combustible gases are flared most often due to emergency relief, overpressure, process upsets, startups, shutdowns,
and other operational safety reasons. Natural gas that is uneconomical for sale is also flared. Often natural gas is flared as a result
of the unavailability of a method for transporting such gas to markets.
"gas lift" – A production enhancement technique whereby natural gas is injected into an oil well to increase/improve
the oil production.
"gas shale" – Fine grained rocks where the predominant gas storage mechanism is absorption and gas is stored in
volumes that are potentially economic.
"oil shale" – Also referred to as tight oil, is petroleum that consists of light crude oil contained in petroleum-bearing
formations of low-permeability, often shale or tight sandstone.
"reciprocating compressors" – A reciprocating compressor is a type of compressor which compresses vapor by using
a piston in a cylinder and a back-and-forth motion.
"screw compressors" – A type of compressor used in low-pressure and vapor compression applications where two
intermesh rotors create pockets of continuously decreasing volume, in which the gas is compressed and its pressure is increased.
"tight gas" – A gas bearing sandstone or carbonate matrix (which may or may not contain natural fractures) which
exhibits a low-permeability (tight) reservoir.
8
ITEM 1A.
RISK FACTORS
You should carefully consider the following risks associated with owning our common stock. Although the risks
described below are the risks that we believe are material, they are not the only risks relating to our industry, our business and our
common stock. Additional risks and uncertainties, including those that we have not yet identified or that we currently believe are
immaterial, may also adversely affect our business, financial condition or results of operations.
Risks Associated With Our Industry
Adverse macroeconomic and business conditions may significantly and negatively affect our results of operations.
Economic conditions in the United States and abroad have, and will likely continue to, affect our revenue and
profitability. The condition of domestic and global financial markets, continued low natural gas prices, and the potential for
disruption and illiquidity in the credit markets could have an adverse effect on our operating results and financial condition, and
if sustained for an extended period, such adverse effects could become signifigant. Uncertainty and turmoil in the credit markets
may negatively impact the ability of our customers to finance purchases of our products and services and could result in a decrease
in, or cancellation of, orders included in our backlog or adversely affect the collectability of our receivables. If the availability of
credit to our customers is reduced, they may reduce their drilling and production expenditures, thereby decreasing demand for our
products and services, which could have a negative impact on our financial condition. A prolonged period of depressed prices for
gas and oil would likely result in delays or cancellation of projects by our customers, reducing the demand for our products and
services.
Decreased oil and natural gas prices and oil and gas industry expenditure levels could adversely affect our revenue.
Our revenue is derived primarily from expenditures in the oil and natural gas industry, which, in turn, are based on
budgets to explore for, develop and produce oil and natural gas. When these expenditures decline, our revenue will suffer. The
industry’s willingness to explore for, develop and produce oil and natural gas depends largely upon the prevailing view of future
oil and natural gas prices. Prices for oil and natural gas historically have been, and are likely to continue to be, highly volatile. Many
factors affect the supply and demand for oil and natural gas and, therefore, influence oil and natural gas prices, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the level of oil and natural gas production;
the level of oil and natural gas inventories;
domestic and worldwide demand for oil and natural gas;
the expected cost of developing new reserves;
the cost of producing oil and natural gas;
the level of drilling and completions activity;
inclement weather;
domestic and worldwide economic activity;
regulatory and other federal and state requirements in the United States;
the ability of the Organization of Petroleum Exporting Countries and other large producers to set and maintain production
levels and prices for oil;
political conditions in or affecting oil and natural gas producing countries;
terrorist activities in the United States and elsewhere;
the cost of developing alternate energy sources;
environmental regulation; and
tax policies.
9
Depending on the market prices of oil and natural gas, companies exploring for oil and natural gas may cancel or curtail
their drilling programs, thereby reducing demand for our equipment and services. Our rental contracts are generally short-term,
and oil and natural gas companies tend to respond quickly to upward or downward changes in prices. Any reduction in drilling
and production activities may materially erode both pricing and utilization rates for our equipment and services and adversely
affects our financial results. As a result, we may suffer losses, be unable to make necessary capital expenditures and be unable to
meet our financial obligations.
The intense competition in our industry could result in reduced profitability and loss of market share for us.
We compete with the oil and natural gas industry’s largest equipment and service providers who have greater name
recognition than we do. These companies also have substantially greater financial resources, larger operations and greater budgets
for marketing, research and development than we do. They may be better able to compete because of their broader geographic
dispersion and ability to take advantage of international opportunities, the greater number of compressors in their fleet or their
product and service diversity. As a result, we could lose customers and market share to those competitors. These companies may
also be better positioned than us to successfully endure downturns in the oil and natural gas industry.
Our operations may be adversely affected if our current competitors or new market entrants introduce new products
or services with better prices, features, performance or other competitive characteristics than our products and
services. Competitive pressures or other factors also may result in significant price competition that could harm our revenue and
our business. Additionally, we may face competition in our efforts to acquire other businesses.
Our industry is highly cyclical, and our results of operations may be volatile.
Our industry is highly cyclical, with periods of high demand and high pricing followed by periods of low demand and
low pricing. Periods of low demand intensify the competition in the industry and often result in rental equipment being idle for
long periods of time. We may be required to enter into lower rate rental contracts in response to market conditions, and our rentals
and sales may decrease as a result of such conditions. Due to the short-term nature of most of our rental contracts, changes in
market conditions can quickly affect our business. As a result of the cyclicality of our industry, our results of operations may be
volatile in the future.
Increased regulation or ban of current fracturing techniques could reduce demand for our compressors
Fracturing (frac) is a process that results in the creation of fractures in geological formations in order to stimulate
production from oil and gas wells. Fracturing is also done to increase the rate and ultimate recovery of oil and natural gas. Hydraulic
frac is the technique that has allowed domestic oil and natural gas exploration and production companies to produce massive shale
deposits often referred to as unconventional plays. Concerns have been raised over possible environmental damages related to
fluids used in the frac process. While the FRAC (Fracturing Responsibility and Awareness of Chemicals) Act has been introduced
on multiple occasions in Congress, as of February 1, 2015 the Act has yet to be adopted. The FRAC Act seeks to amend the Safe
Drinking Water Act so that hydraulic fracturing would be regulated on a federal level.
A ban of hydraulic fracing would likely halt some projects, including unconventional projects, at least temporarily.
Expanded regulations are likely to introduce a period of uncertainty as companies determine ways to proceed. Any curtailment
could result in a reduction of demand for our compressors, potentially affecting both sales and rentals of our units.
We are subject to extensive environmental laws and regulations that could require us to take costly compliance actions that
could harm our financial condition.
Our fabrication and maintenance operations are significantly affected by stringent and complex federal, state and local
laws and regulations governing the discharge of substances into the environment or otherwise relating to environmental
protection. In these operations, we generate and manage hazardous wastes such as solvents, thinner, waste paint, waste oil, wash
down wastes, and sandblast material. We attempt to use generally accepted operating and disposal practices and, with respect to
acquisitions, will attempt to identify and assess whether there is any environmental risk before completing an acquisition. Based
on the nature of the industry, however, hydrocarbons or other wastes may have been disposed of or released on or under properties
owned or leased by us or on or under other locations where such wastes have been taken for disposal. The waste on these properties
may be subject to federal or state environmental laws that could require us to remove the wastes or remediate sites where they
have been released. We could be exposed to liability for cleanup costs, natural resource and other damages as a result of our
conduct or the conduct of, or conditions caused by, prior owners, lessees or other third parties. Environmental laws and regulations
10
have changed in the past, and they are likely to change in the future. If current existing regulatory requirements or enforcement
policies change, we may be required to make significant unanticipated capital and operating expenditures.
Any failure by us to comply with applicable environmental laws and regulations may result in governmental
authorities taking actions against our business that could harm our operations and financial condition, including the:
•
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•
issuance of administrative, civil and criminal penalties;
denial or revocation of permits or other authorizations;
reduction or cessation in operations; and
performance of site investigatory, remedial or other corrective actions.
Risks Associated With Our Company
As of December 31, 2014, a significant majority of our compressor rentals were for terms of six months or less which, if
terminated or not renewed, would adversely impact our revenue and our ability to recover our initial equipment costs.
The length of our compressor rental agreements with our customers varies based on customer needs, equipment
configurations and geographic area. In most cases, under currently prevailing rental rates, the initial rental periods are not long
enough to enable us to fully recoup the average cost of acquiring or fabricating the equipment. We cannot be sure that a substantial
number of our customers will continue to renew their rental agreements or that we will be able to re-rent the equipment to new
customers or that any renewals or re-rentals will be at comparable rental rates. The inability to timely renew or re-rent a substantial
portion of our compressor rental fleet would have a material adverse effect upon our business, financial condition, results of
operations and cash flows.
We could be subject to substantial liability claims that could harm our financial condition.
Our products are used in production applications where an accident or a failure of a product can cause personal injury,
loss of life, damage to property, equipment or the environment, or suspension of operations. While we maintain insurance coverage,
we face the following risks under our insurance coverage:
• we may not be able to continue to obtain insurance on commercially reasonable terms;
• we may be faced with types of liabilities that will not be covered by our insurance, such as damages from significant
product liabilities and from environmental contamination;
•
the dollar amount of any liabilities may exceed our policy limits; and
• we do not maintain coverage against the risk of interruption of our business.
Any claims made under our policies will likely cause our premiums to increase. Any future damages caused by our
products or services that are not covered by insurance, are in excess of policy limits or are subject to substantial deductibles, would
reduce our earnings and our cash available for operations.
We might be unable to employ qualified technical personnel, which could hamper our present operations or increase our costs.
Many of the compressors that we sell or rent are mechanically complex and often must perform in harsh conditions. We
believe that our success depends upon our ability to employ and retain a sufficient number of technical personnel who have the
ability to design, utilize, enhance and maintain these compressors. Our ability to expand our operations depends in part on our
ability to increase our skilled labor force. The demand for skilled workers is high, and supply is limited. A significant increase
in the wages paid by competing employers could result in a reduction of our skilled labor force or cause an increase in the wage
rates that we must pay or both. If either of these events were to occur, our cost structure could increase and our operations and
growth potential could be impaired.
11
We will require a substantial amount of capital to expand our compressor rental fleet and grow our business.
During 2015, the amount we will spend on capital expenditures related to rental compression equipment will be
determined primarily by the activity of our customers. We do not anticipate demand for our products exceeding what we can fund
with internally generated funds and additional bank borrowing with our current bank line. The amount and timing of any of these
capital expenditures may vary depending on a variety of factors, including the level of activity in the oil and natural gas exploration
and production industry and the presence of alternative uses for our capital, including any acquisitions that we may pursue.
Historically, we have funded our capital expenditures through internally generated funds, borrowings under bank credit
facilities. Although we believe that cash flows from our operations will provide us with sufficient cash to fund our planned capital
expenditures for 2015, we cannot assure you that these sources will be sufficient. We may require additional capital to fund any
unanticipated capital expenditures, including any acquisitions, and to fund our growth beyond 2015, and necessary capital may
not be available to us when we need it or on acceptable terms. Our ability to raise additional capital will depend on the results of
our operations and the status of various capital and industry markets at the time we seek such capital. Failure to generate sufficient
cash flow, together with the absence of alternative sources of capital, could have a material adverse effect on our business, financial
condition, results of operations or cash flow.
Of our $30 million line of credit, we owe $417,000 as of December 31, 2014. All outstanding principal and unpaid
interest is due on December 31, 2017. Although we believe that we will be able to renew our existing line of credit, or obtain a
new line of credit with another lender, we can provide no assurance that we will be successful in renewing our line of credit or
obtaining a new line. In addition, any renewal of our existing line of credit or creation of a new line of credit may be on terms
less favorable that our existing line. For instance, changes in the terms of a new line of credit may include, but not be limited
to: a reduction in the borrowing amount, an increase in interest rate to be paid on borrowings under the line, or restrictive covenants
that are more onerous than those on our existing line of credit.
We believe that the lender participating in our current credit agreement has adequate capital and resources. If our
current lender were to encounter difficulties, it is possible that the borrowing capacity under our credit agreement would be reduced
or eliminated. In the event that the availability under our credit agreement was reduced significantly, we could be required to
obtain capital from alternate sources in order to finance our capital needs. Our options for addressing such capital constraints
would include, but not be limited to (1) obtaining commitments from other banks to fund increased amounts under the terms of
our credit agreement, (2) accessing the public capital markets, or (3) delaying certain projects. If it became necessary to access
additional capital, any alternatives at the time may be on terms less favorable than under our existing credit agreement terms,
which could have a material effect on our consolidated financial position, results of operations and cash flows. If future financing
is not available to us when required, as a result of limited access to the credit markets or otherwise, or is not available to us on
acceptable terms, we may be unable take advantage of business opportunities or respond to competitive pressures, either of which
could have a material adverse effect on our consolidated financial position, results of operations and cash flows.
Our debt levels may negatively impact our current and future financial stability.
Should we utilize our full debt capacity, growth beyond that point could be impacted. As of December 31, 2014, we
had an aggregate of approximately $417,000 of outstanding indebtedness, and accounts payable, accrued expenses and current
income tax liability of approximately $12.5 million. As a result of our indebtedness at any given point in time, we might not have
the ability to incur any substantial additional indebtedness. The level of our indebtedness could have several important effects on
our future operations, including:
•
•
our ability to obtain additional financing for working capital, acquisitions, capital expenditures and other purposes may
be limited;
a significant portion of our cash flow from operations may be dedicated to the payment of principal and interest on our
debt, thereby reducing funds available for other purposes; and
•
our leverage if increased to an unacceptable level, could make us more vulnerable to economic downturns.
If we are unable to service our debt, we will likely be forced to take remedial steps that are contrary to our business plan.
As of December 31, 2014, we had $417,000 due under our Line of Credit agreement which allows us to borrow up to
$30.0 million provided we maintain certain collateral and borrowing base requirements. We believe that our current cash position
and the amount available under the current revolver are sufficient to meet our capital needs through 2015. However, if we were
to materially increase our borrowings, it is possible that our business will not generate sufficient cash flow from operations to
12
meet our debt service requirements and the payment of principal when due depending on the amount of borrowings on the agreement
at any given time. If this were to occur, we may be forced to:
•
•
•
sell assets at disadvantageous prices;
obtain additional financing; or
refinance all or a portion of our indebtedness on terms that may be less favorable to us.
Our current credit agreement contains covenants that limit our operating and financial flexibility and, if breached, could
expose us to severe remedial provisions.
Under the terms of our credit agreement, we must:
•
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•
•
comply with a minimum leverage ratio;
comply with a commitment coverage ratio;
not exceed specified levels of debt; and
comply with limits on asset sales.
Our ability to meet the financial ratios and tests under our credit agreement can be affected by events beyond our
control, and we may not be able to satisfy those ratios and tests. A breach of any one of these covenants could permit the bank to
accelerate the debt so that it is immediately due and payable. If a breach occurred, no further borrowings would be available under
our credit agreement. If we were unable to repay the debt, the bank could proceed against and foreclose on our assets, substantially
all of which have been pledged as collateral to secure payment of our indebtedness.
If we fail to acquire or successfully integrate additional businesses, our growth may be limited and our results of operations
may suffer.
As part of our business strategy, we intend to evaluate potential acquisitions of other businesses or assets. However,
there can be no assurance that we will be successful in consummating any such acquisitions. Successful acquisition of businesses
or assets will depend on various factors, including, but not limited to, our ability to obtain financing and the competitive environment
for acquisitions. In addition, we may not be able to successfully integrate any businesses or assets that we acquire in the future. The
integration of acquired businesses is likely to be complex and time consuming and place a significant strain on management and
may disrupt our business. We also may be adversely impacted by any unknown liabilities of acquired businesses, including
environmental liabilities. We may encounter substantial difficulties, costs and delays involved in integrating common accounting,
information and communication systems, operating procedures, internal controls and human resources practices, including
incompatibility of business cultures and the loss of key employees and customers. These difficulties may reduce our ability to
gain customers or retain existing customers, and may increase operating expenses, resulting in reduced revenues and income and
a failure to realize the anticipated benefits of acquisitions.
The loss of one or more of our current customers could adversely affect our results of operations.
Our business is dependent not only on securing new customers but also on maintaining current customers. We had two
customers that accounted for approximately 33% of our revenue for the year ended December 31, 2014, and two customers that
accounted for approximately 33% of our revenue for the year ended December 31, 2013. At December 31, 2014, three customers
accounted for 52% of our accounts receivable. Unless we are able to retain our existing customers, or secure new customers if we
lose one or more of our significant customers, our revenue and results of operations would be adversely affected. In addition, the
default on payments by one or more of these significant customers may negatively impact our cash flow and current assets.
13
Loss of key members of our management could adversely affect our business.
In keeping with our streamlined approach to our business, our executive management team is limited to three officers:
our (i) Chief Executive Officer, (ii) Chief Financial Officer and (iii) Vice President of Technical Services. We depend on the
continued employment and performance of these three key members of our executive management team. In particular, we are
significantly reliant upon the leadership and guidance of Stephen C. Taylor, who has been our President, Chief Executive Officer
and Board member since 2004. In addition to his management duties, Mr. Taylor has been instrumental in our communications
and standing with the investment community. If any of our key executives resign or become unable to continue in his present role
and is not adequately replaced, our business operations could be materially adversely affected. We do not carry any key-man
insurance on any of our officers or directors.
Failure to effectively manage our growth and expansion could adversely affect our business and operating results and our
internal controls.
We have significantly expanded our operations since our formation in 1998 and anticipate that our growth will continue
if we are able to execute our strategy, subject to the supply and demand for oil and natural gas. Future growth may place significant
strain on our management and other resources. To manage our future growth, we must be able to, among other things:
•
•
•
•
•
accurately assess the number of additional officers and employees we will require and the areas in which they will be
required;
attract, hire and retain additional highly skilled and motivated officers and employees;
train and manage our work force in a timely and effective manner;
upgrade and expand our office infrastructure so that it is appropriate for our level of activity; and
improve our financial and management controls, reporting systems and procedures.
Liability to customers under warranties and indemnification provisions may materially and adversely affect our earnings.
We provide warranties as to the proper operation and conformance to specifications of the equipment we
manufacture. Our equipment is complex and often deployed in harsh environments. Failure of this equipment to operate properly
or to meet specifications may increase our costs by requiring additional engineering resources and services, replacement of parts
and equipment or monetary reimbursement to a customer. We have in the past received warranty claims and we expect to continue
to receive them in the future. To the extent that we incur substantial warranty claims in any period, our reputation, our ability to
obtain future business and our earnings could be materially and adversely affected.
Our rental and sales contracts provide for varying forms of indemnification from our customers and in most cases may
require us to indemnify our customers. Under some of our rental and sales contracts, liability with respect to personnel and property
is customarily assigned on a “knock-for-knock” basis, which means that we and our customers assume liability for our respective
personnel and property. However, in certain rental and sales contracts we assume liability for damage to our customer’s property
and other third-party on the site resulting from our negligence. Since our products are used in production applications in the energy
industry, expenses and liabilities in connection with accidents involving our products and services could be extensive and may
exceed our insurance coverages.
Failure to maintain effective internal controls could have a material adverse effect on our operations.
Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal
control over financial reporting. If we fail to maintain effective internal controls, we may not be able to ensure that we can conclude
on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-
Oxley Act. Moreover, effective internal controls are necessary for us to produce reliable financial reports and to help prevent
financial fraud. If, as a result of deficiencies in our internal controls, we cannot provide reliable financial reports or prevent fraud,
our business decision process may be adversely affected, our business and operating results could be harmed, investors could lose
confidence in our reported financial information, and the price of our stock could decrease as a result.
14
A reduction in demand primarily for natural gas or prices for this commodity and credit markets could adversely affect our
business.
Our results of operations depend upon the level of activity in the energy market, including natural gas development,
production, processing and transportation. Oil and natural gas prices and the level of drilling and exploration activity can be
volatile. For example, oil and natural gas exploration and development activity and the number of well completions typically
decline when there is a significant reduction in oil and natural gas prices or significant instability in energy markets. As a result,
the demand for our natural gas compression services could be adversely affected. A reduction in demand could also force us to
reduce our pricing substantially. Additionally, our customers’ production from unconventional natural gas sources such as tight
sands, shale and coal beds constitute the majority percentage of our business. Such unconventional sources are generally less
economically feasible to produce in lower natural gas price environments. These factors could in turn negatively impact the demand
for our products and services. A decline in demand for oil and natural gas or prices for those commodities and credit markets
generally have a material adverse effect on our business, financial condition, results of operations.
The erosion of the financial condition of our customers could adversely affect our business.
Many of our customers finance their exploration and development activities through cash flow from operations, the
incurrence of debt or the issuance of equity. During times when the oil or natural gas markets weaken, our customers are more
likely to experience a downturn in their financial condition. Many of our customers’ equity values substantially declined during
the most recent recession, and in some cases access to capital markets may be an unreliable source of financing for some customers.
The combination of a reduction in cash flow resulting from declines in commodity prices, a reduction in borrowing bases under
reserve-based credit facilities and the lack of availability of debt or equity financing may result in flat or moderate growth in our
customers’ spending for our products and services in 2015. For example, our customers could seek to preserve capital by canceling
month-to-month contracts, canceling or delaying scheduled maintenance of their existing natural gas compression equipment or
determining not to enter into any new natural gas compression service contracts or purchase new compression equipment.
Risks Associated With Our Common Stock
The price of our common stock may fluctuate.
The trading price of our common stock and the price at which we may sell securities in the future is subject to substantial
fluctuations in response to various factors, including our ability to successfully accomplish our business strategy, the trading
volume of our stock, changes in governmental regulations, actual or anticipated variations in our quarterly or annual financial
results, our involvement in litigation, general market conditions, the prices of oil and natural gas, announcements by us and our
competitors, our liquidity, our ability to raise additional funds, and other events.
Future sales of our common stock could adversely affect our stock price.
Substantial sales of our common stock in the public market, or the perception by the market that those sales could
occur, may lower our stock price or make it difficult for us to raise additional equity capital in the future. An aggregate of 23.6%
of the outstanding shares of our common stock are owned by three institutional investors, each of which own more than 5% of
our outstanding shares as of March 2, 2015. Potential sales of large amounts of these shares in a short period of time by one or
more of these significant investors could have a negative impact on our stock price. In addition, potential sales of our common
stock by our directors and officers, who beneficially own approximately 6.7% of the outstanding shares of our common stock as
of March 2, 2015, could also have a negative impact on our stock price.
We currently have on file with the SEC an effective “universal” shelf registration statement on Form S-3, which enables
us to sell, from time to time, our common stock and other securities covered by the registration statement in one or more public
offerings. The shelf registration statement allows us to enter the public markets and consummate sales of the registered securities
in rapid fashion and with little or no notice. Issuances of securities under our shelf registration statement may dilute our existing
shareholders. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and
Capital Resources.”
15
We have a comparatively low number of shares of common stock outstanding and, therefore, our common stock may suffer
from limited liquidity and its prices will likely be volatile and its value may be adversely affected.
Because of our relatively low number of outstanding shares of common stock, the trading price of our common stock
will likely be subject to significant price fluctuations and limited liquidity. This may adversely affect the value of your
investment. In addition, our common stock price could be subject to fluctuations in response to variations in quarterly operating
results, changes in management, future announcements concerning us, general trends in the industry and other events or factors
as well as those described above.
If we issue debt or equity securities, you may lose certain rights and be diluted.
If we raise funds in the future through the issuance of debt or equity securities, the securities issued may have rights
and preferences and privileges senior to those of holders of our common stock, and the terms of the securities may impose restrictions
on our operations or dilute your ownership in our Company.
If securities analysts downgrade our stock or cease coverage of us, the price of our stock could decline.
The trading market for our common stock relies in part on the research and reports that industry or financial analysts
publish about us or our business. We do not control these analysts. Furthermore, there are many large, well-established, publicly
traded companies active in our industry and market, which may mean that it is less likely that we will receive widespread analyst
coverage. If one or more of the analysts who do cover us downgrade our stock, our stock price would likely decline rapidly. If
one or more of these analysts cease coverage of our company, we could lose visibility in the market, which in turn could cause
our stock price to decline.
We do not intend to pay, and have restrictions upon our ability to pay, dividends on our common stock.
We have not paid cash dividends in the past and do not intend to pay dividends on our common stock in the foreseeable
future. Net income from our operations, if any, will be used for the development of our business, including capital expenditures,
and to retire debt. In addition, our credit agreement contains restrictions on our ability to pay cash dividends on our common
stock.
Provisions contained in our governing documents could hinder a change in control of us.
Our articles of incorporation and bylaws contain provisions that may discourage acquisition bids and may limit the
price investors are willing to pay for our common stock. Our articles of incorporation and bylaws provide that:
•
•
•
•
directors are elected for three-year terms, with approximately one-third of the board of directors standing for election
each year;
cumulative voting is not allowed, which limits the ability of minority shareholders to elect any directors;
the unanimous vote of the board of directors or the affirmative vote of the holders of not less than 80% of the votes
entitled to be cast by the holders of all shares entitled to vote in the election of directors is required to change the size of
the board of directors; and
directors may be removed only for cause and only by the holders of not less than 80% of the votes entitled to be cast on
the matter.
Our Board of Directors has the authority to issue up to five million shares of preferred stock. The Board of Directors
can fix the terms of the preferred stock without any action on the part of our stockholders. The issuance of shares of preferred
stock may delay or prevent a change in control transaction. In addition, preferred stock could be used in connection with the
Board of Directors’ adoption of a shareholders’ rights plan (also known as a poison pill), which would make it much more difficult
to effect a change in control of our company through acquiring or controlling blocks of stock. Also, our directors and officers as
a group will continue to beneficially own stock and although this is not a majority of our stock, it confers substantial voting power
in the election of directors and management of our company. This would make it difficult for other minority stockholders to effect
a change in control or otherwise extend any significant control over our management. This may adversely affect the market price
and interfere with the voting and other rights of our common stock.
16
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
The table below describes the material facilities owned or leased by Natural Gas Services Group as of December 31,
2014:
Location
Tulsa, Oklahoma
Midland, Texas
Lewiston, Michigan
Midland, Texas
Bloomfield, New Mexico
Bridgeport, Texas
Midland, Texas
Godley, Texas
Vernal, Utah
Carrollton, Ohio
Loveland, Colorado
Wheeler, Texas
Grapevine, Texas
Total
Status
Square Feet
Uses
Owned and Leased
91,780 Compressor fabrication, rental and services
Owned
Owned
Leased
Owned
Leased
Owned
Leased
Leased
Leased
Leased
Leased
Leased
70,000 Compressor fabrication, rental and services
15,360 Compressor fabrication, rental and services
13,135 Corporate offices
7,000 Office and parts and services
4,500 Office and parts and services
4,100
5,000
3,200
2,600
2,400
2,160
Parts and services
Parts and services
Parts and services
Parts and services
Parts and services
Parts and services
800
Sales
222,035
We believe that our properties are generally well maintained and in good condition and adequate for our purposes.
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we are a party to various legal proceedings in the ordinary course of our business. While management
is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not
have a material effect on our financial position, results of operations or cash flow. We are not currently a party to any bankruptcy,
receivership, reorganization, adjustment or similar proceeding, and we are not aware of any threatened litigation.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
17
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock currently trades on the New York Stock Exchange under the symbol “NGS”. The following table
sets forth for the periods indicated the high and low sales prices for our common stock as reported for 2014 and 2013.
2014
2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Low
$26.19
28.90
23.80
21.23
Low
$16.76
18.82
24.06
25.26
High
$34.81
34.69
33.36
26.75
High
$19.26
23.86
27.99
30.52
As of December 31, 2014 as reflected by our transfer agent records, we had 16 record holders of our common
stock. This number does not include any beneficial owners for whom shares of common stock may be held in “nominee” or
“street” name. On March 6, 2015, the last reported sale price of our common stock as reported by the New York Stock Exchange
was $18.35 per share.
The following graph shows a five year comparison of the cumulative total stockholder return on Natural Gas Services
Group common stock as compared to the cumulative total return of two other indexes: a custom composite index of the Philadelphia
Oil Service Index and the Standard & Poor’s 500 Composite Stock Price Index. These comparisons assume an initial investment
of $100 and the reinvestment of dividends.
The performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference the
Annual Report on Form 10-K into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to
the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under those Acts.
18
Dividends
To date, we have not declared or paid any dividends on our common stock. We currently do not anticipate paying any
cash dividends in the foreseeable future on our common stock. Although we intend to retain our earnings, if any, to finance the
growth of our business, our Board of Directors will have the discretion to declare and pay dividends in the future. Payment of
dividends in the future will depend upon our earnings, capital requirements, and other factors, which our Board of Directors may
deem relevant. Our credit agreement also contains restrictions on our paying dividends.
Equity Compensation Plans
The following table summarizes certain information regarding our equity compensation plans as of December 31,
2014:
(a)
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
(b)
Weighted-
average
Exercise Price
of
Outstanding
Options,
Warrants and
Rights
(c)
Number
of Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans
(Excluding
Securities
Reflected in
Column (a))
(1)
(2)
$
$
$
432,269
99,238
20,000
551,507
17.55
28.22
18.15
186,419
473,717
—
660,136
Plan Category
Equity compensation plans approved by security holders:
Stock Option Plan
Restricted Stock / Unit Plan
Equity compensation plans not approved by security holders
Total
(1) Total number of shares to be issued upon exercise of options granted to employees, officers, and directors under our 1998
stock option plan.
(2) Total number of shares to be issued upon exercise of options granted outside of our 1998 stock option plan
to Stephen C. Taylor, our Chief Executive Officer, under the terms of his initial employment.
Repurchase of Equity Securities
No repurchases of our securities were made by us or on our behalf by any “affiliated purchaser” during the year ended
December 31, 2014.
Sale of Unregistered Securities
We made no sales of unregistered securities during the year ended December 31, 2014.
19
ITEM 6.
SELECTED FINANCIAL DATA
In the table below, we provide you with selected historical financial data. We have derived this information from our
audited financial statements for each of the years in the five-year period ended December 31, 2014. This information is only a
summary and it is important that you read this information along with our audited financial statements and related notes and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 below, which discusses
factors affecting the comparability of the information presented. The selected financial information provided is not necessarily
indicative of our future results of operations or financial performance.
2014
Year Ended December 31,
2012
(in thousands, except per share amounts)
2013
2011
2010
$
96,974
$
89,248
$
93,722
$
65,158
$
53,908
STATEMENTS OF INCOME AND OTHER
INFORMATION:
Revenues
Costs of revenues, exclusive of depreciation and
amortization shown separately below
Gross margin(1)
Depreciation and amortization
Other operating expenses
Operating income
Total other income (expense)
Income before income taxes
Income tax expense
Net income
Net income per common share:
Basic
Diluted
Weighted average shares of common stock
outstanding:
Basic
Diluted
EBITDA(2)
Cash flows from:
Operating Activities
Investing Activities
Financing Activities
Net change in cash and cash equivalents
43,147
53,827
21,507
10,334
21,986
172
22,158
8,030
14,128
1.14
1.11
12,434
12,721
43,675
$
$
$
$
40,943
48,305
18,144
8,141
22,020
492
22,512
8,122
14,390
1.17
1.15
12,324
12,550
40,712
$
$
$
$
49,907
43,815
15,707
7,893
20,215
(4)
20,211
7,526
12,685
1.04
1.03
12,220
12,320
35,936
$
34,564
(53,102)
276
(18,262) $
$
39,244
(43,324)
437
(3,643) $
35,418
(23,761)
39
11,696
$
$
$
$
$
$
$
$
$
$
$
$
BALANCE SHEET INFORMATION:
Current assets
Total assets
Long-term debt (including current portion)
Stockholders’ equity
$
$
55,927
283,563
417
210,587
2014
2013
As of December 31,
2012
(in thousands)
62,036
$
232,751
897
175,825
$
60,645
256,589
577
192,737
30,394
34,764
13,994
5,910
14,860
769
15,629
5,869
9,760
0.80
0.80
12,148
12,250
29,678
$
$
$
$
24,750
29,158
11,927
5,867
11,364
(64)
11,300
4,272
7,028
0.58
0.58
12,108
12,210
23,421
$
33,623
(35,506)
(864)
(2,747) $
28,798
(21,861)
(10,817)
(3,880)
2011
2010
$
49,503
212,164
1,017
161,542
48,338
188,769
2,000
150,591
(1) Gross margin is defined, reconciled to net income and discussed immediately below under “-- Non-GAAP Financial
Measures”.
(2) EBITDA is defined, reconciled to net income and discussed immediately below under “-- Non-GAAP Financial
Measures”.
20
Non-GAAP Financial Measures
Our definition and use of EBITDA
“EBITDA” is a non-GAAP financial measure that we define as earnings (net income) from operations before interest,
taxes, depreciation, and amortization. This term, as used and defined by us, may not be comparable to similarly titled measures
employed by other companies and is not a measure of performance calculated in accordance with GAAP. EBITDA should not be
considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing
and financing activities, or other income or cash flow statement data prepared in accordance with GAAP. However, management
believes EBITDA is useful to an investor in evaluating our operating performance because:
•
•
•
it is widely used by investors in the energy industry to measure a company’s operating performance without regard to
items excluded from the calculation of EBITDA, which can vary substantially from company to company depending
upon accounting methods and book value of assets, capital structure and the method by which assets were acquired,
among other factors;
it helps investors to more meaningfully evaluate and compare the results of our operations from period to period by
removing the impact of our capital structure and asset base from our operating structure; and
it is used by our management for various purposes, including as a measure of operating performance, in presentations to
our Board of Directors, as a basis for strategic planning and forecasting, and as a component for setting incentive
compensation.
EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis
of our results as reported under generally accepted accounting principles. Some of these limitations are:
• EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual
commitments;
• EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
• EBITDA does not reflect the cash requirements necessary to service interest or principal payments on our debts; and
•
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often
have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements.
There are other material limitations to using EBITDA as a measure of performance, including the inability to analyze
the impact of certain recurring items that materially affect our net income or loss, and the lack of comparability of results of
operations of different companies. Please read the table below under “Reconciliation” to see how EBITDA reconciles to our net
income, the most directly comparable GAAP financial measure.
Definition and use of gross margin
We define gross margin as total revenue less costs (excluding depreciation and amortization expense). Gross margin
is included as a supplemental disclosure because it is a primary measure used by our management as it represents the results of
revenue and costs (excluding depreciation and amortization expense), which are key components of our operations. Gross margin
differs from gross profit, in that gross profit includes depreciation expense. We believe gross margin is important because it focuses
on the current operating performance of our operations and excludes the impact of the prior historical costs of the assets acquired
or constructed that are utilized in those operations, the indirect costs associated with our selling, general and administrative
activities, the impact of our financing methods and income taxes. Depreciation expense may not accurately reflect the costs
required to maintain and replenish the operational usage of our assets and therefore may not portray the costs from current operating
activity. Rather, depreciation expense reflects the systematic allocation of historical property and equipment values over the
estimated useful lives.
Gross margin has certain material limitations associated with its use as compared to net income. These limitations are
primarily due to the exclusion of certain expenses. Each of these excluded expenses is material to our results of operations. Because
we use capital assets, depreciation expense is a necessary element of our costs and our ability to generate revenue and selling,
general and administrative expense is a necessary cost to support our operations and required corporate activities. In order to
compensate for these limitations, management uses this non-GAAP measure as a supplemental measure to other GAAP results to
provide a more complete understanding of our performance.
21
As an indicator of our operating performance, gross margin should not be considered an alternative to, or more
meaningful than, net income as determined in accordance with GAAP. Our gross margin may not be comparable to a similarly
titled measure of another company because other entities may not calculate gross margin in the same manner.
Reconciliation
The following table reconciles EBITDA and gross margin to our net income, the most directly comparable GAAP
financial measure:
Net Income
Interest expense, net
Income taxes
Depreciation and amortization
EBITDA
Other operating expenses
Other expenses (income)
Gross Margin
2014
$ 14,128
10
8,030
21,507
43,675
2013
Year Ended December 31,
2012
(in thousands)
$ 12,685
$
2011
$ 14,390
9,760
56
8,122
18,144
40,712
18
7,526
15,707
35,936
55
5,869
13,994
29,678
2010
$
7,028
194
4,272
11,927
23,421
10,334
(182)
$ 53,827
8,141
(548)
$ 48,305
7,893
(14)
$ 43,815
5,910
(824)
$ 34,764
5,867
(130)
$ 29,158
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist you in understanding our financial position and results of operations for
each of the years ended December 31, 2014, 2013, and 2012. You should read the following discussion and analysis in conjunction
with our audited financial statements and the related notes.
The following discussion contains forward-looking statements. For a description of limitations inherent in forward-
looking statements, see “Special Note Regarding Forward-Looking Statements” on page (ii).
Overview
We fabricate, manufacture, rent and sell natural gas compressors and related equipment. Our primary focus is on the
rental of natural gas compressors. Our rental contracts generally provide for initial terms of six to 24 months. After the initial
term of our rental contracts, most of our customers have continued to rent our compressors on a month-to-month basis. Rental
amounts are paid monthly in advance and include maintenance of the rented compressors. As of December 31, 2014, we had
2,189 natural gas compressors totaling 301,392 horsepower rented to 102 customers, compared to 2,038 natural gas compressors
totaling 283,165 horsepower rented to 95 customers at December 31, 2013. Of the 2,189 compressors rented at December 31,
2014, 1,784 were rented on a month-to-month basis.
We also fabricate natural gas compressors for sale to our customers, designing compressors to meet unique specifications
dictated by well pressures, production characteristics and particular applications for which compression is sought. Fabrication of
compressors involves the purchase by us of engines, compressors, coolers and other components, and then assembling these
components on skids for delivery to customer locations. These major components of our compressors are acquired through periodic
purchase orders placed with third-party suppliers on an “as needed” basis, which presently requires a three to four month lead
time with delivery dates scheduled to coincide with our estimated production schedules. Although we do not have formal continuing
supply contracts with any major supplier, we believe we have adequate alternative sources available. In the past, we have not
experienced any sudden and dramatic increases in the prices of the major components for our compressors. However, the occurrence
of such an event could have a material adverse effect on the results of our operations and financial condition, particularly if we
were unable to increase our rental rates and sales prices proportionate to any such component price increases.
We also manufacture a proprietary line of compressor frames, cylinders and parts, known as our CiP (Cylinder-in-
Plane) product line. We use finished CiP component products in the fabrication of compressor units for sale or rental by us or sell
the finished component products to other compressor fabricators. We also design, fabricate, sell, install and service flare stacks
22
and related ignition and control devices for onshore and offshore incineration of gas compounds such as hydrogen sulfide, carbon
dioxide, natural gas and liquefied petroleum gases. To provide customer support for our compressor and flare sales businesses,
we stock varying levels of replacement parts at our Midland, Texas facility and at field service locations. We also provide an
exchange and rebuild program for screw compressors and maintain an inventory of new and used compressors to facilitate this
business.
We provide service and maintenance to our customers under written maintenance contracts or on an as required basis
in the absence of a service contract. Maintenance agreements typically have terms of six months to one year and require payment
of a monthly fee.
The following table sets forth our revenues from each of our three operating categories for the periods presented:
Rental
Sales
Service and maintenance
Total
$
$
2014
Year Ended December 31,
2013
(in thousands)
69,062
$
$
78,983
17,200
791
19,479
707
2012
56,477
36,375
870
96,974
$
89,248
$
93,722
Our strategy for growth is focused on our compressor rental business. Margins, exclusive of depreciation and
amortization, for our rental business historically run in the high 50% to low 60% range, while margins for the compressor sales
business tend to be in the mid 20% range. If our rental business grows and contributes a larger percentage of our total revenues,
we expect our overall company-wide margins to improve over time.
The oil and natural gas equipment rental and services industry is cyclical in nature. The most critical factor in assessing
the outlook for the industry is the worldwide supply and demand for natural gas and oil and the corresponding changes in commodity
prices. As demand and prices increase, oil and natural gas producers increase their capital expenditures for drilling, development
and production activities. Generally, the increased capital expenditures ultimately result in greater revenues and profits for service
and equipment companies.
In general, we expect our overall business activity and revenues to track the level of activity in the natural gas industry,
with changes in domestic natural gas production and consumption levels and prices more significantly affecting our business than
changes in crude oil and condensate production and consumption levels and prices. We also believe that demand for compression
services and products is driven by declining reservoir pressure in maturing natural gas producing fields and, more recently, by
increased focus by producers on non-conventional natural gas production, such as coal bed methane, gas shale and tight gas, which
typically requires more compression than production from conventional natural gas reservoirs.
Demand for our products and services was strong throughout most of 2008, but in 2009 the demand declined due to
lower natural gas prices, decreased demand for natural gas and the economic recession. During 2010, the economy began to
recover and demand for our products began to strengthen. This recovery has continued through 2014 due to increasing oil prices,
in spite of continued low natural gas prices. Towards the end of 2014 crude oil prices collapsed, placing uncertainty on the growth
in demand for our products and services.
For fiscal year 2015, our forecasted capital expenditures will be directly dependent upon our customers’ compression
requirements and are not anticipated to exceed our internally generated cash flows. Any required capital will be for additions to
our compressor rental fleet and/or addition or replacement of service vehicles. We believe that cash flows from operations will
be sufficient to satisfy our capital and liquidity requirements through 2015. We may require additional capital to fund any
unanticipated expenditures, including any acquisitions of other businesses, although that capital may not be available to us when
we need it or on acceptable terms.
Notwithstanding the continued uncertain economy and low energy price environment, we believe the long-term trend
in our market is favorable.
23
Critical Accounting Policies and Practices
We have identified the policies below as critical to our business operations and the understanding of our results of
operations. In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of
results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles
generally accepted in the United States. Actual results could differ significantly from those estimates under different assumptions
and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are
most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective, and
complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Our critical accounting policies are as follows:
revenue recognition;
estimating the allowance for doubtful accounts receivable;
accounting for income taxes;
valuation of long-lived and intangible assets and goodwill; and
valuation of inventory.
•
•
•
•
•
Revenue Recognition
Revenue from the sales of custom and fabricated compressors and flare systems is recognized when title passes to the
customer, the customer assumes risks and rewards of ownership, collectability is reasonably assured and delivery occurs as directed
by our customer. However, in certain circumstances customers request a bill and hold arrangement, in which case sales revenue
is recognized before delivery occurs. Under these bill and hold arrangements, the compressor or flare is available for shipment,
the Company has fulfilled all of its pre-delivery performance obligations and the customer has completed and signed a bill and
hold agreement. Revenue from sale of rental units is included in sales revenue when equipment is shipped or title is transferred
to the customer. Exchange and rebuild compressor revenue is recognized when both the replacement compressor has been delivered
and the rebuild assessment has been completed. Revenue from compressor services is recognized upon providing services to the
customer. Maintenance agreement revenue is recognized as services are rendered. Rental revenue is recognized over the terms
of the respective rental agreements. Deferred income represents payments received before a product is shipped.
Allowance for Doubtful Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the
customer’s current credit worthiness, as determined by our review of their current credit information. We continuously monitor
collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical
experience and any specific customer collection issues that we have identified. While such credit losses have historically been
within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit
loss rates that we have in the past. At December 31, 2014, three customers accounted for approximately 20%, 18% and 14% of
our accounts receivable, and at December 31, 2013, two customers accounted for approximately 18% and 14% of our accounts
receivable. A significant change in the liquidity or financial position of these customers could have a material adverse impact on
the collectability of our accounts receivables and our future operating results. At December 31, 2014, our allowance for doubtful
accounts balance was $507,000 and $436,000 at December 31, 2013.
Accounting for Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our federal income taxes as
well as income taxes in each of the states in which we operate. This process involves us estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included in our balance sheet. We must then assess the likelihood
that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not probable,
we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period,
we must include an expense in the tax provision in the statement of operations.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets
and liabilities and any valuation allowance recorded against our net deferred tax assets. We currently have no valuation allowance
and fully expect to utilize all of our deferred tax assets.
24
Valuation of Long-Lived and Intangible Assets and Goodwill
We assess the impairment of identifiable intangibles, long-lived assets and related goodwill annually or whenever
events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which
could trigger an impairment review include the following:
•
•
•
•
significant underperformance relative to expected historical or projected future operating results;
significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
significant negative industry or economic trends; and
significant decline in the market value of our stock.
When we determine that the carrying value of intangibles, long-lived assets and related goodwill may not be recoverable
based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in
our current business model.
We completed a review of goodwill for impairment during the fourth quarter of 2014 under the guidance of Accounting
Standards Update 2012-02. Our analysis considered multiple qualitative factors to determine whether events and circumstances
indicate a low likelihood that we have experienced impairment to the stated value of goodwill. Our assessment included a review
of changes in key company financial metrics, stock performance and other measures that are important to the company's success.
The other measure included demand for our products and services, maintenance of customers and cost of producing our product.
Based on the analysis we concluded that it is more likely than not that we have not incurred impairment and are not required to
take further action. As a result, no impairment of goodwill was recorded in the year ending at December 31, 2014. Future
impairment tests could result in impairments of our intangible assets or goodwill.
Inventories
We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current
estimated market value of the inventory. We regularly review inventory quantities on hand and record a provision for excess and
obsolete inventory based primarily on our estimated forecast of product demand and production requirements. At December 31,
2014, an adjustment to the allowance of $298,000 was made to remove obsolete inventory which represents 1.1% of inventory.
This adjustment was the result of our obsolescence review which is conducted each year. We ended 2014 with a balance of $225,000.
Our Performance Trends and Outlook
Given the current economic environment in North America and anticipated impact of continued low natural gas and
oil prices and potentially cautious capital spending by customers, we expect the overall activity levels to remain flat or drop in
2015. Currently, we believe that weak commodity prices will continue throughout 2015. In addition, credit and capital markets
could show signs of stress resulting from the weakness of commodity prices and will impact the level of capital spending by our
customers in the near term. We believe that the recovery from the recent market uncertainty will continue to be slow. The result
will likely be lagging capital spending by our customers and therefore slow growth in demand for our products and services and
price pressure from competitors. We anticipate industry capital spending will be greatly decreased in 2015 compared to 2014
levels, and we believe our fabrication business will likely reflect this in our production level though 2015. We believe our rental
operations business will be virtually flat or moderately down.
25
Results of Operations
Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013
The table below shows our revenues, percentage of total revenues, gross margin, exclusive of depreciation and
amortization, and gross margin percentage of each of our operating units for the years ended December 31, 2014 and December 31,
2013. Gross margin is the difference between revenue and cost of revenues, exclusive of depreciation and amortization expense.
Revenue
Year Ended December 31,
2013
2014
Gross Margin, Exclusive of Depreciation
and Amortization (1)
Year Ended December 31,
2013
2014
Rental
Sales
Service & Maintenance
Total
$ 78,983
17,200
791
$ 96,974
81.5% $ 69,062
19,479
17.7%
707
0.8%
$ 89,248
(dollars in thousands)
77.4% $ 47,461
5,903
21.8%
463
0.8%
$ 53,827
60.1% $ 40,045
7,897
34.3%
58.5%
363
55.5% $ 48,305
58.0%
40.5%
51.3%
54.1%
(1) For a reconciliation of gross margin to its most directly comparable financial measure calculated and presented in
accordance with GAAP, please read “Item 6. Selected Financial Data – Non-GAAP Financial Measures” in this Report.
Total revenue increased to $97.0 million from $89.2 million, or 8.7%, for the year ended December 31, 2014, compared
to 2013. This was the result of a 11.7% decrease in sales revenue offset by a 14.4% increase in rental revenue and a 11.9% increase
in service and maintenance revenue.
Rental revenue increased to $79.0 million from $69.1 million, or 14.4%, for the year ended December 31, 2014,
compared to 2013. This increase was the result of improved rental pricing of our units and our ability to place additional units in
service. As of December 31, 2014, we had 2,879 natural gas compressors in our rental fleet totaling 401,361 horsepower, as
compared to 2,556 natural gas compressors totaling 351,187 horsepower at December 31, 2013. As of December 31, 2014, we
had 2,189 natural gas compressors totaling 301,392 horsepower rented to 102 customers, compared to 2,038 natural gas compressors
totaling 283,165 horsepower rented to 95 customers at December 31, 2013. The rental fleet had a utilization of 76.0% as of
December 31, 2014 as compared to 79.7% at year end 2013.
Sales revenue decreased to $17.2 million from $19.5 million, or 11.7%, for the year ended December 31, 2014, compared
to 2013. Our normal sales activity continues to reflect demand from our customers' continued investment in non-conventional
shale plays which require compression for produced natural gas. The price of natural gas on December 31, 2014 was $3.14/MMBtu,
down from $4.31/MMBtu one year ago. The price of natural gas remains at levels that are considered depressed. Because of
lagging natural gas prices, along with economic uncertainty and continued tight credit markets, the energy industry continues to
encounter reduced capital spending, particularly for goods and services with respect to natural gas activities. This has caused
capital project funding to shift from gas projects to oil projects as the price of oil was not as volatile as gas, and oil prices have
rebounded from its lows compared to natural gas prices. Since our compressors are increasingly used in the production of natural
gas from shale plays which are driven by oil economics, we have been able to increase our sales. Our strategy over time has been
to increase our rental revenues so that they are a larger component of total revenue, but we intend to maintain our ability to build
and sell custom fabricated equipment. In support of this, we have continued to cultivate new sales-oriented customers and are
entertaining requests for bids on larger reciprocating compressors instead of being solely focused on screw-type equipment. Sales
included: (1) compressor unit sales, (2) flare sales, (3) parts sales and (4) compressor rebuilds.
The overall gross margin percentage increased to 55.5% for the twelve months ended December 31, 2014, from 54.1%
for the same period ended December 31, 2013, exclusive of depreciation and amortization. This increase is the result of the
relatively higher margin rentals comprising a larger share of total revenue. Rental revenue increased by 14.4% while sales revenue
declined. Rental margins increased for the year ended December 31, 2014 compared to 2013 from 58.0% to 60.1%. Sales margin
decreased to 34.3% from 40.5% for the year ended 2014 compared to 2013. Third party service and maintenance margins increased
to 58.5% from 51.3% for the year ended December 31, 2014 compared to 2013. Service and maintenance represents less than 1%
of our revenue providing minimal impact on our overall gross margin.
26
Selling, general, and administrative expense increased to $10.3 million for the year ended December 31, 2014, as
compared to $8.1 million for 2013. This 26.9% increase is primarily due to our need to maintain consistent staffing levels, salary
increases for existing staff ($243,000) and non-cash expenses related to stock compensation ($1.5 million).
Depreciation and amortization expense increased to $21.5 million from $18.1 million, or 18.5%, for the year ended
December 31, 2014, compared to 2013. This increase was the net result of 323 new gas compressor rental units being added to
the rental fleet in 2014, thus increasing the depreciable base.
Provision for income tax decreased to $8.0 million from $8.1 million, or 1.1%, and is the result of the decrease in
taxable income. Our effective tax rate was 36.2% for 2014 and 36.1% for 2013.
Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012
The table below shows our revenues, percentage of total revenues, gross margin, exclusive of depreciation and
amortization, and gross margin percentage of each of our operating units for the years ended December 31, 2013 and December 31,
2012. Gross margin is the difference between revenue and cost of sales, exclusive of depreciation and amortization expense.
Revenue
Year Ended December 31,
2012
2013
Gross Margin, Exclusive of Depreciation and
Amortization (1)
Year Ended December 31,
2013
2012
(dollars in thousands)
Rental
Sales
$
69,062 77.4% $
56,477
60.3% $
40,045
58.0% $
32,740
19,479 21.8%
36,375
38.8%
7,897
40.5%
10,559
Service & Maintenance
707
0.8%
870
0.9%
363
51.3%
516
Total
$
89,248
$
93,722
$
48,305
54.1% $
43,815
58.0%
29.0%
59.3%
46.7%
(1) For a reconciliation of gross margin to its most directly comparable financial measure calculated and presented in
accordance with GAAP, please read “Item 6. Selected Financial Data – Non-GAAP Financial Measures” in this Report.
Total revenue decreased to $89.2 million from $93.7 million, or 4.8%, for the year ended December 31, 2013, compared
to 2012. This was the result of a 46.4% decrease in sales revenue, a 22.3% increase in rental revenue and a 18.7% decrease in
service and maintenance revenue. The sales decrease was primarily due to a large non-recurring sale of rental units from our fleet
to a single customer in 2012.
Rental revenue increased from $56.5 million to $69.1 million, or 22.3%, for the year ended December 31, 2013,
compared to 2012. This increase was the result of improved rental pricing of our units and the achievement of higher fleet
utilization. As of December 31, 2013, we had 2,556 natural gas compressors in our rental fleet totaling 351,187 horsepower, as
compared to 2,279 natural gas compressors totaling 311,401 horsepower at December 31, 2012. As of December 31, 2013, we
had 2,038 natural gas compressors totaling 283,165 horsepower rented to 95 customers, compared to 1,756 natural gas compressors
totaling 245,340 horsepower rented to 100 customers at December 31, 2012. The rental fleet had a utilization of 79.7% as of
December 31, 2013 as compared to 77.1% at year end 2012.
Sales revenue decreased to $19.5 million from $36.4 million, or 46.4%, for the year ended December 31, 2013, compared
to 2012. This decrease was the result of the large one time sale from our fleet in 2012. Our normal sales activity continues to reflect
demand from our customers' continued investment in non-conventional shale plays which require compression for produced natural
gas. The price of natural gas on December 31, 2013 was $4.31/MMBtu, up from $3.43/MMBtu one year earlier. Despite this
increase in natural gas prices, the price of natural gas remained at levels that are considered depressed. Because of lagging natural
gas prices, along with economic uncertainty and continued tight credit markets, the energy industry continues to encounter reduced
capital spending, particularly for goods and services with respect to natural gas activities. This has caused capital project funding
to shift from gas projects to oil projects as the price of oil was not as volatile as gas, and oil prices have rebounded from its lows
compared to natural gas prices. Since our compressors are increasingly used in the production of natural gas from shale plays
which are driven by oil economics, we have been able to increase our sales. Our strategy over time has been to increase our rental
27
revenues so that they are a larger component of total revenue, but we intend to maintain our ability to build and sell custom
fabricated equipment. In support of this, we have continued to cultivate new sales-oriented customers and are entertaining requests
for bids on larger reciprocating compressors instead of being solely focused on screw-type equipment. Sales included: (1)
compressor unit sales, (2) flare sales, (3) parts sales and (4) compressor rebuilds.
The overall gross margin percentage increased to 54.1% for the twelve months ended December 31, 2013, from 46.7%
for the same period ended December 31, 2012, exclusive of depreciation and amortization. This increase is the result of the
relatively higher margin rentals comprising a larger share of total revenue. Rental revenue increased by 22.3% while sales revenue
declined. Rental margins were relatively flat for the year ended December 31, 2013 compared to 2012 at 58.0%. Sales margin
increased to 40.5% from 29.0% for the year ended 2013 compared to 2012. Third party service and maintenance margins decreased
to 51.3% from 59.3% for the year ended December 31, 2013 compared to 2012. Service and maintenance represents less than 1%
of our revenue providing minimal impact on our overall gross margin.
Selling, general, and administrative expense increased to $8.1 million for the year ended December 31, 2013, as
compared to $7.9 million for 2012. This 3.1% increase was primarily due to increases in staffing levels, salary increases for
existing staff and expenses related to vesting of restricted shares.
Depreciation and amortization expense increased to $18.1 million from $15.7 million, or 15.5%, for the year ended
December 31, 2013, compared to 2012. This increase was the net result of 277 new gas compressor rental units being added to
the rental fleet in 2013, thus increasing the depreciable base.
Provision for income tax increased to $8.1 million from $7.5 million, or 7.9%, and was the result of the increase in
taxable income. Our effective tax rate was 36.1% for 2013 and 37.2% for 2012.
Liquidity and Capital Resources
Our working capital positions as of December 31, 2014 and 2013 are set forth below.
Current Assets:
Cash and cash equivalents
Trade accounts receivable, net
Inventory, net
Prepaid income taxes
Prepaid expenses and other
Total current assets
Current Liabilities:
Line of credit
Accounts payable
Accrued liabilities
Current income tax liability
Deferred income
Total current liabilities
Net working capital
2014
2013
(in thousands)
$
$
6,181
10,408
32,624
6,242
472
55,927
—
4,990
6,624
851
1,635
14,100
41,827
$
$
24,443
6,750
26,832
2,281
339
60,645
577
3,904
6,487
350
873
12,191
48,454
Historically, we have funded our operations through public and private offerings of our equity securities, subordinated
debt, bank borrowings and cash flow from operations. Proceeds of financings have been primarily used to repay debt, to fund the
manufacture and fabrication of additional units for our rental fleet of natural gas compressors and for acquisitions. In recent years,
we have primarily funded our operations through cash flow from operations and, to a lesser extent, borrowings under our bank
line of credit, which is described below. For the year ended December 31, 2014, we invested approximately $53.3 million in
equipment for our rental fleet and service vehicles. We financed this activity with funds from operations.
28
Cash flows
At December 31, 2014, we had cash and cash equivalents of $6.2 million and working capital of $41.8 million, and
total debt of $417,000 under our credit agreement, all which is due in 2017. Our cash and cash equivalent decreased from 2013
due to an increase in demand from our customers for additional rental compression.We had positive net cash flow from operating
activities of approximately $34.6 million during 2014. This was primarily from net income of $14.1 million plus depreciation
and amortization of $21.5 million.
At December 31, 2013, we had cash and cash equivalents of $24.4 million, working capital of $48.5 million and total
debt of $577,000, under our line of credit. We had positive net cash flow from operating activities of approximately $39.2 million
during 2013. This was primarily from net income of $14.4 million plus depreciation and amortization of $18.1 million, and an
increase in deferred taxes of $7.7 million.
Raw materials and work in progress inventory increased to $32.6 million as of the end of 2014, as compared to $26.8
million as of the end of 2013. This increase is mainly a reflection of inventory management activity and the timing of jobs closing
from work in progress to finished goods.
Contractual Obligations and Commitments
We have contractual obligations and commitments that affect our results of operations, financial condition and
liquidity. The following table is a summary of our significant cash contractual obligations (in thousands):
Cash Contractual Obligations
2015
2016
2017
2018
Thereafter
Total
Line of credit
Interest on line of credit
Purchase obligations
Other long term liabilities
Facilities and office leases
Equipment leases
Total
Senior Bank Borrowings
$
— $
— $
417
$
— $
— $
17
620
—
288
13
17
620
—
261
7
17
620
—
241
2
—
612
155
113
—
$
938
$
905
$
1,297
$
880
$
—
—
—
15
—
15
417
51
2,472
155
918
22
$
4,035
On November 19, 2014, we amended and renewed our $30 million Credit Agreement with JP Morgan Chase Bank, N.A.
("the Amended Credit Agreement"). The Amended Credit Agreement was extended to December 31, 2017, and the interest rate
terms were amended. We also have a right to request from the lender, on an uncommitted basis, an increase of up to $20 million
on the aggregate commitment (which could potentially increase the commitment amount to $50 million). As of December 31,
2014, we owed $417,000 on the line of credit under the Credit Agreement.
Borrowing Base. At any time before the maturity of the Amended Credit Agreement, we may draw, repay and re-borrow amounts
available under the borrowing base up to the maximum aggregate availability discussed above. Generally, the borrowing base
equals the sum of (a) 80% of our eligible accounts receivable plus (b) 50% of the book value of our eligible general inventory
(not to exceed 50% of the commitment amount at the time) plus (c) 75% of the book value of our eligible equipment
inventory. JPMorgan Chase Bank (the “Lender”) may adjust the borrowing base components if material deviations in the collateral
are discovered in future audits of the collateral.
Interest and Fees. Under the terms of the Amended Credit Agreement, we have the option of selecting the applicable variable
rate for each revolving loan, or portion thereof, of either (a) LIBOR multiplied by the Statutory Reserve Rate (as defined in the
Amended Credit Agreement), with respect to this rate, for Eurocurrency funding, plus the Applicable Margin (“LIBOR-based”),
or (b) CB Floating Rate, which is the Lender’s Prime Rate less the Applicable Margin; provided, however, that no more than three
LIBOR-based borrowings under the agreement may be outstanding at any one time. For purposes of the LIBOR-based interest
rate, the Applicable Margin is 1.50%. For purposes of the CB Floating Rate, the Applicable Margin is 1.25%. Accrued interest is
payable monthly on outstanding principal amounts, provided that accrued interest on LIBOR-based loans is payable at the end of
each interest period, but in no event less frequently than quarterly. In addition, fees and expenses are payable in connection with
29
our requests for letters of credit (generally equal to the Applicable Margin for LIBOR-related borrowings multiplied by the face
amount of the requested letter of credit) and administrative and legal costs.
Maturity. The maturity date of the Amended Credit Agreement is December 31, 2017, at which time all amounts borrowed under
the agreement will be due and outstanding letters of credit must be cash collateralized. The agreement may be terminated early
upon our request or the occurrence of an event of default.
Security. The obligations under the Amended Credit Agreement are secured by a first priority lien on all of our inventory and
accounts and leases receivables, along with a first priority lien on a variable number of our leased compressor equipment the book
value of must be maintained at a minimum of 2.00 to 1.00 commitment coverage ratio (such ratio being equal to (i) the amount
of the borrowing base as of such date to (ii) the amount of the commitment as of such date.)
Covenants. The Amended Credit Agreement contains customary representations and warranties, as well as covenants which, among
other things, limit our ability to incur additional indebtedness and liens; enter into transactions with affiliates; make acquisitions
in excess of certain amounts; pay dividends; redeem or repurchase capital stock or senior notes; make investments or loans; make
negative pledges; consolidate, merge or effect asset sales; or change the nature of our business.
Events of Default and Acceleration. The Amended Credit Agreement contains customary events of default for credit facilities of
this size and type, and includes, without limitation, payment defaults; defaults in performance of covenants or other agreements
contained in the transaction documents; inaccuracies in representations and warranties; certain defaults, termination events or
similar events; certain defaults with respect to any other Company indebtedness in excess of $50,000; certain bankruptcy or
insolvency events; the rendering of certain judgments in excess of $150,000; certain ERISA events; certain change in control
events and the defectiveness of any liens under the secured revolving credit agreement. Obligations under the Amended Credit
Agreement may be accelerated upon the occurrence of an event of default.
As of December 31, 2014, we were in compliance with all covenants in our Amended Credit Agreement. A default
under our Amended Credit Agreement could trigger the acceleration of our bank debt so that it is immediately due and payable. Such
default would have a material adverse effect on our liquidity, financial position and operations.
Shelf Registration Statement
We have an effective $150 million “universal” shelf registration statement on Form S-3 on file with the Securities and
Exchange Commission, which we filed in late 2012 and became effective in February 2013. This shelf registration statement
enables us to sell, from time to time, the securities covered by the registration statement in one or more public offerings. The
securities covered by the registration statement include common stock, preferred stock, depositary shares, debt securities, rights
to purchase common stock, units consisting of two or more of any of the registered securities and warrants to purchase any of the
registered securities. We may offer any of these securities independently or together in any combination with other securities. The
shelf registration statement allows us to enter the public markets and consummate sales of the registered securities in rapid fashion
and with little or no notice. We have no immediate plans to issue securities under the shelf registration statement, but our
management believes that it may facilitate access to additional liquidity in the future. However, there is no assurance that equity
or debt capital would be available to us in the public markets should we determine to issue securities under the shelf registration
statement.
30
Components of Our Principal Capital Expenditures
Capital expenditures for the three years ended December 31, 2014:
Expenditure Category
Rental equipment, vehicles and shop equipment
2014
$
53,342
2013
(in thousands)
43,419
$
2012
$
23,766
The level of our expenditures will vary in future periods depending on energy market conditions and other related
economic factors. Based upon existing economic and market conditions, we believe that our operating cash flow and additional
bank borrowings are adequate to fully fund our net capital expenditures requirements for 2015. We also believe we have significant
flexibility with respect to our financing alternatives and adjustment of our expenditure plans if circumstances warrant. When
considered in relation to our total financial capacity, we do not have any material continuing commitments associated with
expenditure plans related to our current operations can be met.
Off-Balance Sheet Arrangements
From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet
obligations. As of December 31, 2014, the off-balance sheet arrangements and transactions that we have entered into include
operating lease agreements and purchase agreements. We do not believe that these arrangements are reasonably likely to materially
affect our liquidity or availability of, or requirements for, capital resources.
We entered into a purchase agreement with a vendor in July 2008 pursuant to which we agreed to purchase up to $4.8
million of our paint and coating requirements exclusively from the vendor. In connection with the execution of the agreement,
the vendor paid us a $300,000 fee which is considered to be a discount toward future purchases from the vendor. As of December 31,
2014 we had met $2.3 million of this obligation. The $300,000 payment we received is recorded as a long-term liability and will
decrease as the purchase commitment is fulfilled. The long-term liability remaining as of December 31, 2014 was $155,000.
Recently Issued Accounting Pronouncements
On May 28, 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with
Customers (Topic 606), as part of a joint project with the International Accounting Standards Board (IASB) to clarify revenue-
recognizing principles and develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards
(IFRS). ASU No. 2014-09 finalizes Proposed ASU Nos. 1820-100, 2011-230 and 2011-250 and is expected, among other things,
to remove inconsistencies and weaknesses in revenue requirements and improve comparability of revenue recognition practices
across entities, industries, jurisdictions and capital markets. In particular, the amendments in this ASU will be added to the FASB
Accounting Standards Codification (FASB ASC) as Topic 606, Revenue from Contracts with Customers, and will supersede the
revenue recognition requirements in FASB ASC 605, Revenue Recognition, as well as some cost guidance in FASB ASC Subtopic
605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The core principle of this ASU is that an entity
should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the
guidance provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the
performance obligation in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance
obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. For public entities,
the amendments in ASU No. 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including
interim periods within that reporting period, and early application is prohibited. Additionally, an entity should apply the amendments
either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying
this ASU recognized at the date of initial application. If an entity elects the latter, transition method, then it must also provide the
additional disclosures in reporting periods that include the date of initial application of (1) the amount by which each financial
statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change,
and (2) an explanation of the reasons for significant changes. The new standard will be effective during our first quarter ending
March 31, 2017. We are currently evaluating the new standard to determine which reporting option allows us to report the most
meaningful information and are still evaluating the potential impact this new standard may have on our financial statements.
31
Environmental Regulations
Various federal, state and local laws and regulations covering the discharge of materials into the environment, or
otherwise relating to protection of human safety and health and the environment, affect our operations and costs. Compliance
with these laws and regulations could cause us to incur remediation or other corrective action costs or result in the assessment of
administrative, civil and criminal penalties and the issuance of injunctions delaying or prohibiting operations. In addition, we
have acquired certain properties and plant facilities from third parties whose actions with respect to the management and disposal
or release of hydrocarbons or other wastes were not under our control. Under environmental laws and regulations, we could be
required to remove or remediate wastes disposed of or released by prior owners. In addition, we could be responsible under
environmental laws and regulations for properties and plant facilities we lease, but do not own. Compliance with such laws and
regulations increases our overall cost of business, but has not had a material adverse effect on our operations or financial condition. It
is not anticipated, based on current laws and regulations, that we will be required in the near future to expend amounts that are
material in relation to our total expenditure budget in order to comply with environmental laws and regulations but such laws and
regulations are frequently changed and we are unable to predict the ultimate cost of compliance. We also could incur costs related
to the cleanup of sites to which we send equipment and for damages to natural resources or other claims related to releases of
regulated substances at such sites.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Commodity Risk
Our commodity risk exposure is the pricing applicable primarily to natural gas production and to lesser extent oil
production. Realized commodity prices received for such production are primarily driven by the prevailing worldwide price for
crude oil and spot prices applicable to natural gas. Depending on the market prices of oil and natural gas, companies exploring
for such resources may cancel or curtail their drilling programs, thereby reducing demand for our equipment and services.
Financial Instruments and Debt Maturities
Our financial instruments consist of cash and cash equivalents, trade receivables, accounts payable and our line of
credit. The carrying amounts of cash and cash equivalents, trade receivables, and accounts payable approximate fair value because
of the short-term nature of the instruments. The fair value of our bank borrowings approximate the carrying amounts as of
December 31, 2014 and 2013, and were determined based upon interest rates currently available to us.
Customer Credit Risk
We are exposed to the risk of financial non-performance by our customers. Our ability to collect on rentals and sales
to our customers is dependent on the liquidity of our customer base. To manage customer credit risk, we monitor credit ratings
of our customers. Unless we are able to retain our existing customers, or secure new customers if we lose one or more of our
significant customers, our revenue and results of operations would be adversely affected. At December 31, 2014, three customers
accounted for 52% of our accounts receivable.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our audited financial statements and supplementary financial data are included in this Annual Report on Form 10-K
beginning on page F-1.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of our management, including our
President and Chief Executive Officer and our Vice President and Chief Financial Officer, of the effectiveness of the design of
our “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended or, the “Exchange Act”) as of December 31, 2014, pursuant to Exchange Act Rule 13a-15. Based upon
32
that evaluation, the President and Chief Executive Officer and our Principal Accounting Officer have concluded that our disclosure
controls and procedures as of December 31, 2014, are effective to ensure that information required to be disclosed by us in the
reports filed or submitted by us under the Exchange Act is recorded, processed, summarized, and reported within the time periods
specified in the SEC’s rules and forms and include controls and procedures designed to ensure that information required to be
disclosed by us in such reports is accumulated and communicated to our management, including our principal executive and
financial officers as appropriate to allow timely decisions regarding required disclosures. Due to the inherent limitations of control
systems, not all misstatements may be detected. Those inherent limitations include the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple errors or mistakes. Additionally, controls could be circumvented
by the individual acts of some persons or by collusion of two or more people. Our controls and procedures can only provide
reasonable, not absolute, assurance that the above objectives have been met.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation
required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last quarter that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
33
Management’s Report on Internal Control Over Financial Reporting
Our management, including the President and Chief Executive Officer and our Principal Accounting Officer, is
responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and
15d-15(f) under the Exchange Act. Our internal control system is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. Our internal control over financial reporting includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America, and that our receipt and
expenditures are being made only in accordance with authorizations of management and our Board of Directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
our assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations. A system of internal control may
become inadequate over time because of changes in conditions or deterioration in the degree of compliance with the policies or
procedures. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Our management assessed the effectiveness of our internal control over financial reporting as December 31, 2014 using
the criteria set forth by the Commission of Sponsoring Organizations of the Treadway Commission (COSO) in their 2013 Internal
Control-Integrated Framework. Based on this assessment, our management concluded that, as of December 31, 2014, our internal
control over financial reporting was effective.
Pursuant to the Section 404 of the Sarbanes-Oxley Act of 2002, we have included a report of management's assessment
of the effectiveness of our internal controls as part of this annual report on Form 10-K for the fiscal year December 31, 2014. BDO
USA, LLP, our independent registered public accounting firm, has issued an attestation report dated March 13, 2015 on the
effectiveness of internal control over financial reporting. That report is included herein.
ITEM 9B.
OTHER INFORMATION
None.
34
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Natural Gas Services Group, Inc.
Midland, Texas
We have audited Natural Gas Services Group, Inc.’s (the “Company”) internal control over financial reporting as of December 31,
2014, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying “Item 9A. Management’s Report on Internal Control Over Financial Reporting." Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Natural Gas Services Group, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
balance sheets of Natural Gas Services Group, Inc. as of December 31, 2014 and 2013 and the related statements of income,
stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2014 and our report dated March
13, 2015 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Houston, Texas
March 13, 2015
35
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference to the sections “Election of
Directors,” “Executive Officers,” “Corporate Governance” and “The Board of Directors and its Committees” in our definitive
proxy statement which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2014.
We have adopted a Code of Business Conduct and Ethics that applies to our directors, officers and employees. The
Code of Business Conduct and Ethics is posted in the "Investor Relations" section of our website at www.ngsgi.com. The Code
of Business Conduct and Ethics maybe obtained free of charge by writing to Natural Gas Services Group, Inc., Attn: Investor
Relations, 508 W. Wall Street, Suite 550 Midland, Texas 79701.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the section “Executive Compensation” in
our definitive proxy statement which will be filed with the Securities and Exchange Commission within 120 days after December 31,
2014.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to the section “Principal Shareholders and
Security Ownership of Management” in our definitive proxy statement which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 2014.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item is incorporated herein by reference to the sections “Related Person Transactions”
and “Corporate Governance” in our definitive proxy statement which will be filed with the Securities and Exchange Commission
within 120 days after December 31, 2014.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to the section “Principal Accountant Fees
and Services” in our definitive proxy statement which will be filed with the Securities and Exchange Commission within 120 days
after December 31, 2014.
36
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENTS
The following documents are filed as part of this Annual Report on Form 10-K:
(a)(1) and (a)(2) Financial Statements
For a list of Financial Statements, see “Index to Financial Statements” and incorporated herein by reference.
(a)(3) Exhibits
A list of exhibits to this Annual Report on Form 10-K is set forth below:
Exhibit No. Description
3.1
3.2
4.1
4.2
Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of the 10-QSB filed and dated
November 10, 2004)
Bylaws (Incorporated by reference to Exhibit 3.4 of the Registrant's Registration Statement on Form SB-2,
No. 333-88314)
Non-Statutory Stock Option Agreement (Incorporated by reference to Exhibit 10.2 to Form 8-K filed with the SEC
on August 30, 2005)
Form of Senior Indenture (Incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement on
Form S-3 (No. 333-161346) and filed on August 14, 2009)
37
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
*23.1
*31.1
*31.2
*32.1
*32.2
Lease Agreement, dated March 26, 2008, between WNB Tower, LTD and Natural Gas Services Group, Inc.
(Incorporated by reference to Exhibit 10.15 of the Registrant’s Form 10-K for the fiscal year ended December 31,
2008 and filed with the Securities and Exchange Commission on March 9, 2009)
2009 Restricted Stock/Unit Plan (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on
Form 8-K dated September 18, 2009 and filed with the Securities and Exchange Commission on September 18,
2009.)
1998 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report
on Form 8-K dated September 18, 2009 and filed with the Securities and Exchange Commission on September 18,
2009.)
Lease Agreement, dated December 11, 2008, between Klement-Wes Partnership, LTD and Natural Gas Services
Group, Inc. and commencing on January 1, 2009
Credit Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated December
10, 2010 (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 24, 2014.)
Third Amendment of Credit Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank,
N.A., dated November 19, 2014 (Incorporated by reference to Exhibit 10.1 of the Registrant's Current report on
Form 8-K filed with the Securities and Exchange Commission on January 9, 2012.)
Security Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated December
10, 2010 (Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 16, 2011.)
First Amendment of Security Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank,
N.A., dated December 31, 2011 (Incorporated by reference to Exhibit 10.2 of the Registrant's Current report on
Form 8-K filed with the Securities and Exchange Commission on January 9, 2012.)
Promissory Note in the aggregate amount of $30,000,000 issued to JPMorgan Chase Bank, N.A., dated December
31, 2014, in connection with the revolving credit line under the Credit Agreement with JPMorgan Chase Bank,
N.A. (Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 24, 2014.)
Employment Agreement between Natural Gas Services Group, Inc. and Stephen C. Taylor dated October 23, 2013
(Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on October 25, 2013)
Consent of BDO USA, LLP
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith.
38
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 13, 2015
NATURAL GAS SERVICES GROUP, INC.
By:
/s/ Stephen C. Taylor
Stephen C. Taylor
Chairman of the Board, President and Chief
Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
/s/ Stephen C. Taylor
Stephen C. Taylor
/s/ G. Larry Lawrence
G. Larry Lawrence
/s/ Charles G. Curtis
Charles G. Curtis
/s/ William F. Hughes, Jr.
William F. Hughes, Jr.
/s/ David L. Bradshaw
David L. Bradshaw
/s/ John W. Chisholm
John W. Chisholm
Title
Chairman of the Board of Directors, Chief Executive
Officer and President (Principal Executive Officer)
Date
March 13, 2015
March 13, 2015
March 13, 2015
March 13, 2015
March 13, 2015
March 13, 2015
Vice President and Chief Financial Officer (Principal
Accounting Officer)
Director
Director
Director
Director
39
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2014 and 2013
Statements of Income for the Years Ended December 31, 2014, 2013 and 2012
Statements of Stockholders' Equity for the Years Ended December 31, 2014, 2013, and 2012
Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012
Notes to Financial Statements
Page
F-1
F-2
F-3
F-4
F-5
F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Natural Gas Services Group, Inc.
Midland, Texas
We have audited the accompanying balance sheets of Natural Gas Services Group, Inc. (the "Company") as of December 31, 2014
and 2013 and the related statements of income, stockholders' equity and cash flows for each of the three years in the period ended
December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Natural
Gas Services Group, Inc. as of December 31, 2014 and 2013 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United
States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Natural Gas Services Group, Inc.’s, internal control over financial reporting as of December 31, 2014, based on criteria established
in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 13, 2015 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Houston, Texas
March 13, 2015
F- 1
NATURAL GAS SERVICES GROUP, INC.
BALANCE SHEETS
(in thousands, except per share amounts)
Current Assets:
Cash and cash equivalents
ASSETS
Trade accounts receivable, net of allowance for doubtful accounts of $507 and $436,
respectively
Inventory, net of allowance for obsolescence of $225 and $128, respectively
Prepaid income taxes
Prepaid expenses and other
Total current assets
Rental equipment, net of accumulated depreciation of $106,179 and $86,533, respectively
Property and equipment, net of accumulated depreciation of $10,830 and $9,692
respectively
Goodwill
Intangibles, net of accumulated amortization of $1,257 and $1,132, respectively
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit
Accounts payable
Accrued liabilities
Current income tax liability
Deferred income
Total current liabilities
Line of credit, non-current
Deferred income tax liability
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 9)
Stockholders’ Equity:
December 31,
2014
2013
$
6,181
$
24,443
10,408
32,624
6,242
472
55,927
208,292
7,362
10,039
1,902
41
6,750
26,832
2,281
339
60,645
176,420
7,429
10,039
2,027
29
$
$
283,563
$
256,589
— $
4,990
6,624
851
1,635
14,100
417
58,304
155
72,976
577
3,904
6,487
350
873
12,191
—
51,464
197
63,852
Preferred stock, 5,000 shares authorized, no shares issued or outstanding
—
—
Common stock, 30,000 shares authorized, par value $0.01; 12,466 and 12,366 shares
issued and outstanding, respectively
Additional paid-in capital
Retained earnings
Total stockholders' equity
124
95,065
115,398
210,587
Total liabilities and stockholders' equity
$
283,563
$
See accompanying notes to these financial statements.
123
91,344
101,270
192,737
256,589
F- 2
NATURAL GAS SERVICES GROUP, INC.
STATEMENTS OF INCOME
(in thousands, except earnings per share)
Revenue:
Rental income
Sales
Service and maintenance income
Total revenue
Operating costs and expenses:
Cost of rentals, exclusive of depreciation stated separately below
Cost of sales, exclusive of depreciation stated separately below
Cost of service and maintenance, exclusive of depreciation stated
separately below
Selling, general, and administrative expenses
Depreciation and amortization
Total operating costs and expenses
Operating income
Other income (expense):
Interest expense
Other income
Total other income (expense)
Income before provision for income taxes
Provision for income taxes:
Current
Deferred
Total income tax expense
Net income
Earnings per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
For the Years Ended December 31,
2014
2013
2012
$
78,983
$
69,062
$
17,200
791
96,974
31,522
11,297
328
10,334
21,507
74,988
21,986
(10)
182
172
19,479
707
89,248
29,017
11,582
344
8,141
18,144
67,228
22,020
(56)
548
492
22,158
22,512
1,190
6,840
8,030
14,128
1.14
1.11
12,434
12,721
$
$
$
399
7,723
8,122
14,390
1.17
1.15
12,324
12,550
$
$
$
$
$
$
56,477
36,375
870
93,722
23,737
25,816
354
7,893
15,707
73,507
20,215
(18)
14
(4)
20,211
554
6,972
7,526
12,685
1.04
1.03
12,220
12,320
See accompanying notes to these financial statements.
F- 3
NATURAL GAS SERVICES GROUP, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Preferred Stock
Common Stock
Shares Amount
Shares
Amount
Additional
Paid-In
Capital
Retained
Earnings
Total
Stockholders'
Equity
BALANCES, December 31, 2011
— $
— 12,179
$
122
$
87,225
$
74,195
$
161,542
Exercise of common stock options
and warrants
Compensation expense on common
stock options
Issuance of restricted stock
Compensation expense on
restricted common stock
Net income
—
—
—
—
—
—
—
—
—
—
23
—
39
—
—
—
—
—
—
—
180
440
—
978
—
—
—
—
—
180
440
—
978
12,685
12,685
BALANCES, December 31, 2012
— $
— 12,241
$
122
$
88,823
$
86,880
$
175,825
Exercise of common stock options
Compensation expense on common
stock options
Issuance of restricted stock
Tax benefit of equity compensation
Compensation expense on
restricted common stock
Net income
—
—
—
—
—
—
—
—
—
—
53
—
72
—
—
—
—
—
—
—
1
—
829
198
—
10
1,484
—
—
—
—
—
—
14,390
829
198
—
10
1,485
14,390
BALANCES, December 31, 2013
— $
— 12,366
$
123
$
91,344
$
101,270
$
192,737
Exercise of common stock options
Compensation expense on common
stock options
Issuance of restricted stock
Tax benefit of equity compensation
Compensation expense on
restricted common stock
Net income
—
—
—
—
—
—
—
—
—
—
—
—
3
—
97
—
—
—
—
—
—
—
1
—
59
426
—
419
2,817
—
—
—
—
—
—
14,128
59
426
—
419
2,818
14,128
BALANCES, December 31, 2014
— $
— 12,466
$
124
$
95,065
$
115,398
$
210,587
See accompanying notes to these financial statements.
F- 4
NATURAL GAS SERVICES GROUP, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
$
14,128
$
14,390
$
12,685
For the Years Ended December 31,
2013
2014
2012
Depreciation and amortization
Deferred taxes
Gain on extinguishment of liability
Gain on disposal of assets
Inventory allowance
Stock based compensation
Changes in current assets (increase) decrease in:
Trade accounts receivables
Inventory
Prepaid income taxes and prepaid expenses
Changes in current liabilities increase (decrease) in:
Accounts payable and accrued liabilities
Current income tax liability
Deferred income
Other
Tax benefit from equity compensation
NET CASH PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of rental, property and equipment
Proceeds from sale of property and equipment
NET CASH USED IN INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of other long-term liabilities, net
Repayments of line of credit, net
Tax benefit from equity compensation
Proceeds from exercise of stock options
NET CASH PROVIDED BY FINANCING ACTIVITIES
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS AT END OF PERIOD
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid
Income taxes paid
NON-CASH TRANSACTIONS
Transfer of rental equipment to inventory
Property and equipment purchases included in accounts payable
21,507
6,840
—
(160)
395
3,244
(3,658)
(6,112)
(3,997)
1,126
920
762
(12)
(419)
34,564
(53,342)
240
(53,102)
(42)
(160)
419
59
276
(18,262)
24,443
18,144
7,723
(223)
(48)
—
1,682
(59)
(323)
(1,870)
1,154
(162)
(1,154)
—
(10)
39,244
15,707
6,972
—
—
—
1,418
(1,012)
456
(281)
1,863
447
(2,836)
(1)
—
35,418
(43,419)
95
(43,324)
(23,766)
5
(23,761)
(82)
(320)
10
829
437
(3,643)
28,086
(21)
(120)
—
180
39
11,696
16,390
28,086
18
267
8,690
31
$
$
$
$
$
6,181
$
24,443
10
4,108
131
218
$
$
$
$
56
2,590
207
251
$
$
$
$
$
See accompanying notes to these financial statements.
F- 5
NATURAL GAS SERVICES GROUP INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization and Principles of Consolidation
These notes apply to the financial statements of Natural Gas Services Group, Inc. (the "Company", “NGSG”, "Natural
Gas Services Group", "we" or "our") (a Colorado corporation). Natural Gas Services Group, Inc. was formed on December 17,
1998 for the purposes of combining the operations of certain manufacturing, service and leasing entities.
Nature of Operations
Natural Gas Services Group, Inc. is a leading provider of small to medium horsepower compression equipment to the
natural gas industry. We focus primarily on the non-conventional natural gas production business in the United States (such as
coal bed methane, gas shale, tight gas and oil shale). We manufacture, fabricate and rent natural gas compressors that enhance
the production of natural gas wells. NGSG provides maintenance services for its natural gas compressors. In addition, we sell
custom fabricated natural gas compressors to meet customer specifications dictated by well pressures, production characteristics
and particular applications. We also manufacture and sell flare systems for oil and natural gas plant and production facilities.
Use of Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United
States of America requires our management to make estimates and assumptions that affect the amounts reported in these financial
statements and accompanying notes. Actual results could differ from those estimates. Significant estimates include fixed asset
lives, bad debt allowance and the allowance for inventory obsolescence. It is at least reasonably possible these estimates could
be revised in the near term and the revisions could be material.
Cash Equivalents
For purposes of reporting cash flows, we consider all short-term investments with an original maturity of three months
or less to be cash equivalents.
Accounts Receivable
Our trade receivables consist of customer obligations for the sale of compressors and flare systems due under normal
trade terms, and operating leases for the use of our natural gas compressors. The receivables are not collateralized except as
provided for under lease agreements. However, we typically require deposits of as much as 50% for large custom contracts. We
extend credit based on management's assessment of the customer's financial condition, receivable aging, customer disputes and
general business and economic conditions. The allowance for doubtful accounts was $507,000 and $436,000 at December 31,
2014 and 2013, respectively. Management believes that the allowance is adequate; however, actual write-offs may exceed the
recorded allowance.
Revenue Recognition
Revenue from the sales of custom and fabricated compressors, and flare systems is recognized when title passes to the
customer, the customer assumes risks and rewards of ownership, collectability is reasonably assured and delivery occurs as directed
by our customer. Exchange and rebuilt compressor revenue is recognized when both the replacement compressor has been delivered
and the rebuild assessment has been completed. Revenue from compressor service and retrofitting services is recognized upon
providing services to the customer. Maintenance agreement revenue is recognized as services are rendered. Rental revenue is
recognized over the terms of the respective rental agreements. Deferred income represents payments received before a product
is shipped. Revenue from the sale of rental units is included in sales revenue when equipment is shipped or title is transferred to
the customer.
F- 6
Major Customers and Concentration of Credit Risk
Sales and rental income to Devon Energy Production, Inc. ("Devon") and EOG Resources, Inc. ("EOG") in 2014
amounted to 18% and 15% of revenue, respectively. Sales and rental income to EOG and Devon in 2013 amounted to 18% and
15% of revenue, respectively. Sales and rental income to EOG and Devon in 2012 amounted to 32% and 12% of revenue. No
other single customer accounted for more than 10% of our revenues in 2014, 2013 or 2012. EOG, Promatcon and Oxy amounted
to 20%, 18% and 14% of our accounts receivable as of December 31, 2014. EOG and Devon amounted to 18% and 14% of our
accounts receivable as of December 31, 2013, respectively. No other customers amounted to more than 10% of our accounts
receivable as of December 31, 2014 and 2013.
Inventory
Inventory is valued at the lower of cost or market. The cost of inventories is determined by the weighted average
method. A reserve is recorded against inventory balances for estimated obsolescence. This reserve is based on specific
identification and historical experience and totaled $225,000 and $128,000 at December 31, 2014 and 2013, respectively. There
were no new completed compressor units at December 31, 2014 or at December 31, 2013 available for sale or for use in our rental
fleet. At December 31, 2014 and 2013, inventory consisted of the following (in thousands):
Raw materials
Work in process
Total
2014
2013
$
$
25,984
6,640
32,624
$
$
20,524
6,308
26,832
Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation. Depreciation is computed using the straight-
line method over the estimated useful lives of the assets, which range from three to forty years. Rental equipment has an estimated
useful life of fifteen years.
Gains and losses resulting from sales and dispositions of property and equipment are included in current
operations. Maintenance and repairs are charged to operations as incurred.
Goodwill
Goodwill represents the cost in excess of fair value of the identifiable net assets acquired. Goodwill is tested for
impairment annually or whenever events indicate impairment may have occurred. The annual goodwill impairment test is performed
in the fourth quarter of each year. We experienced no impairment of goodwill at December 31, 2014 and 2013.
F- 7
Intangibles
At December 31, 2014, NGSG had intangible assets, which relate to developed technology and a trade name. The
carrying amount net of accumulated amortization at December 31, 2014 and 2013 was $1.9 million and $2.0 million
respectively. Developed technology is amortized on a straight-line basis with a useful life of 20 years, with a weighted average
remaining life of approximately ten years as of December 31, 2014. Amortization expense recognized in each of the years ending
December 31, 2014, 2013, and 2012 was $125,000, $130,000 and $125,000 respectively. Estimated amortization expense for the
years 2015-2024 is $125,000 per year. NGSG has an intangible asset with a gross carrying value of $654,000 at December 31,
2014 related to the trade name of SCS which was acquired in our acquisition of Screw Compression Systems in January 2005. This
asset is not being amortized as it has been deemed to have an indefinite life.
The following table represents the identified intangible assets by major asset class (in thousands):
December 31, 2014
December 31, 2013
Developed Technology
Trade Name
Useful
Life
(years)
20
Indefinite
Gross
Carrying
Value
2,505
654
Accumulated
Amortization
Net Book
Value
1,257
—
1,248
654
1,902
Gross
Carrying
Value
2,505
654
Accumulated
Amortization
Net Book
Value
1,132
—
1,373
654
2,027
Total
$
3,159
$
1,257
$
$
3,159
$
1,132
$
Our policy is to periodically review intangibles for impairment through an assessment of the estimated future cash
flows related to such assets. In the event that assets are found to be carried at amounts in excess of estimated undiscounted future
cash flows, then the assets will be adjusted for impairment to a level commensurate with a discounted cash flow analysis of the
underlying assets. Based upon our analysis, we experienced no impairment of intangible assets at December 31, 2014 or 2013.
Warranty
We accrue amounts for estimated warranty claims based upon current and historical product warranty costs and any
other related information known. The warranty reserve was $0 and $28,000 for December 31, 2014 and 2013, respectively, and
is included in accrued liabilities on the balance sheet.
Financial Instruments and Concentrations of Credit Risk
We invest our cash primarily in deposits and money market funds with commercial banks. At times, cash balances at
banks and financial institutions may exceed federally insured amounts.
Per Share Data
Basic earnings per common share is computed using the weighted average number of common shares outstanding
during the period. Diluted earnings per common share is computed using the weighted average number of common stock and
common stock equivalent shares outstanding during the period. There were no an anti-dilutive securities in 2014, 2013, and 2012.
F- 8
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Numerator:
Net income
Denominator for basic net income per common share:
Weighted average common shares outstanding
Denominator for diluted net income per share:
Weighted average common shares outstanding
Dilutive effect of stock options and restricted shares
Diluted weighted average shares
Earnings per common share:
Basic
Diluted
Income Taxes
Year Ended December 31,
2014
2013
2012
$
14,128
$
14,390
$
12,685
12,434
12,324
12,220
12,434
287
12,721
12,324
226
12,550
12,220
100
12,320
$
$
1.14
1.11
$
$
1.17
1.15
$
$
1.04
1.03
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences
between the financial statement carrying amounts of assets and liabilities and their respective tax bases, and operating losses and
tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled.
ASC Topic 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. In order to record any financial statement benefit,
we are required to determine, based on technical merits of the position, whether it is more likely than not (a likelihood of more
than 50 percent) that a tax position will be sustained upon examination, including resolution of any related appeals or litigation
processes. If that step is satisfied, then we must measure the tax position to determine the amount of benefit to recognize in the
financial statements. The tax position is measured at the largest amount of the benefit that is greater than 50 percent likely of
being realized upon ultimate settlement. We have no uncertain tax positions as of December 31, 2014 or 2013.
Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date under current market conditions. Topic 820 established a fair
value hierarchy, which requires an entity to maximize the use of observable inputs when measuring fair value. These inputs are
categorized as follows:
Level 1- quoted prices in an active market for identical assets or liabilities;
Level 2- quoted prices in an active market for similar assets or liabilities, inputs other than quoted prices that are observable for
similar assets or liabilities, inputs derived principally from or corroborated by observable market data by correlation or other
means; and
Level 3- valuation methodology with unobservable inputs that are significant to the fair value measurement.
Management believes that the fair value of our cash and cash equivalents, trade receivables, accounts payable and line
of credit at December 31, 2014 and 2013 approximate their carrying values due to the short-term nature of the instruments or the
use of prevailing market interest rates.
F- 9
Segments and Related Information
ASC 280-10-50, “Operating Segments”, define the characteristics of an operating segment as a) being engaged in
business activity from which it may earn revenue and incur expenses, b) being reviewed by the company's chief operating decision
maker (CODM) for decisions about resources to be allocated and assess its performance and c) having discrete financial
information. Although we indeed look at our products to analyze the nature of our revenue, other financial information, such as
certain costs and expenses, net income and EBITDA are not captured or analyzed by these categories. Our CODM does not make
resource allocation decisions or access the performance of the business based on these categories, but rather in the aggregate.
Based on this, Management believes that it operates in one business segment.
In their analysis of product lines as potential operating segments, Management also considered ASC 280-10-50-11,
“Aggregation Criteria”, which allows for the aggregation of operating segments if the segments have similar economic
characteristics and if the segments are similar in each of the following areas:
• The nature of the products and services;
• The nature of the production processes;
• The type or class of customer for their products and services;
• The methods used to distribute their products or provide their services; and
• The nature of the regulatory environment, if applicable.
We are engaged in the business of designing and manufacturing compressors and flares. Our compressors and flares
are sold and rented to our customers. In addition, we provide service and maintenance on compressors in our fleet and to third
parties.These business activities are similar in all geographic areas. Our manufacturing process is essentially the same for the
entire Company and is performed in house at our facilities in Midland, Texas and Tulsa, Oklahoma. Our customers primarily
consist of entities in the business of producing natural gas. The maintenance and service of our products is consistent across the
entire Company and is performed via an internal fleet of vehicles. The regulatory environment is similar in every jurisdiction in
that the most impacting regulations and practices are the result of federal energy policy. In addition, the economic characteristics
of each customer arrangement are similar in that we maintain policies at the corporate level.
Recently Issued Accounting Pronouncements
On May 28, 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with
Customers (Topic 606), as part of a joint project with the International Accounting Standards Board (IASB) to clarify revenue-
recognizing principles and develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards
(IFRS). ASU No. 2014-09 finalizes Proposed ASU Nos. 1820-100, 2011-230 and 2011-250 and is expected, among other things,
to remove inconsistencies and weaknesses in revenue requirements and improve comparability of revenue recognition practices
across entities, industries, jurisdictions and capital markets. In particular, the amendments in this ASU will be added to the FASB
Accounting Standards Codification (FASB ASC) as Topic 606, Revenue from Contracts with Customers, and will supersede the
revenue recognition requirements in FASB ASC 605, Revenue Recognition, as well as some cost guidance in FASB ASC Subtopic
605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The core principle of this ASU is that an entity
should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the
guidance provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the
performance obligation in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance
obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. For public entities,
the amendments in ASU No. 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including
interim periods within that reporting period, and early application is prohibited. Additionally, an entity should apply the amendments
either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying
this ASU recognized at the date of initial application. If an entity elects the latter, transition method, then it must also provide the
additional disclosures in reporting periods that include the date of initial application of (1) the amount by which each financial
statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change,
and (2) an explanation of the reasons for significant changes. The new standard will be effective during our first quarter ending
March 31, 2017. We are currently evaluating the new standard to determine which reporting option allows us to report the most
meaningful information and are still evaluating the potential impact this new standard may have on our financial statements.
2. Rental Activity
F- 10
We rent natural gas compressor packages to entities in the petroleum industry. These rental arrangements are classified
as operating leases and generally have original terms of six months to two years and continue on a month-to-month basis
thereafter. Future minimum rent payments for arrangements not on a month-to-month basis at December 31, 2014 are as follows :
Years Ending December 31, (in thousands)
2015
2016
Thereafter
Total
$
$
9,835
1,306
—
11,141
3. Property and Equipment
Property and equipment consists of the following at December 31, 2014 and 2013 (in thousands):
Land and building
Leasehold improvements
Office equipment and furniture
Software
Machinery and equipment
Vehicles
Total
Less accumulated depreciation
Total
Useful Lives
(Years)
2014
2013
30
39
5
5
7
3
$
$
5,636
793
1,376
573
2,847
6,967
18,192
(10,830)
7,362
$
$
5,636
770
1,434
573
2,635
6,073
17,121
(9,692)
7,429
Depreciation expense for property and equipment and the compressors described in Note 2 was $21.4 million, $18.0
million and $15.6 million for the years ended December 31, 2014, 2013 and 2012, respectively.
4. Credit Facility
We have a senior secured revolving credit agreement with JP Morgan Chase Bank, N.A (the "Amended Credit
Agreement") aggregate commitment $30 million, subject to collateral availability. We also have a right to request from the lender,
on an uncommitted basis, an increase of up to $20 million on the aggregate commitment (which could potentially increase the
commitment amount to $50 million).
Borrowing Base. At any time before the maturity of the Amended Credit Agreement, we may draw, repay and re-borrow amounts
available under the borrowing base up to the maximum aggregate availability discussed above. Generally, the borrowing base
equals the sum of (a) 80% of our eligible accounts receivable plus (b) 50% of the book value of our eligible general inventory
(not to exceed 50% of the commitment amount at the time) plus (c) 75% of the book value of our eligible equipment
inventory. JPMorgan Chase Bank (the “Lender”) may adjust the borrowing base components if material deviations in the collateral
are discovered in future audits of the collateral. We had $29.6 million borrowing base availability at December 31, 2014 under
the terms of our Amended Credit Agreement.
Interest and Fees. Under the terms of the Amended Credit Agreement, we have the option of selecting the applicable variable
rate for each revolving loan, or portion thereof, of either (a) LIBOR multiplied by the Statutory Reserve Rate (as defined in the
Amended Credit Agreement), with respect to this rate, for Eurocurrency funding, plus the Applicable Margin (“LIBOR-based”),
or (b) CB Floating Rate, which is the Lender's Prime Rate less the Applicable Margin; provided, however, that no more than three
LIBOR-based borrowings under the agreement may be outstanding at any one time. For purposes of the LIBOR-based interest
rate, the Applicable Margin is 1.50%. For purposes of the CB Floating Rate, the Applicable Margin is 1.25%.
F- 11
Accrued interest is payable monthly on outstanding principal amounts, provided that accrued interest on LIBOR-based
loans is payable at the end of each interest period, but in no event less frequently than quarterly. In addition, fees and expenses
are payable in connection with our requests for letters of credit (generally equal to the Applicable Margin for LIBOR-related
borrowings multiplied by the face amount of the requested letter of credit) and administrative and legal costs.
Maturity . The maturity date of the Amended Credit Agreement is December 31, 2017, at which time all amounts borrowed under
the agreement will be due and outstanding letters of credit must be cash collateralized. The agreement may be terminated early
upon our request or the occurrence of an event of default.
Security. The obligations under the Amended Credit Agreement are secured by a first priority lien on all of our inventory and
accounts and leases receivables, along with a first priority lien on a variable number of our leased compressor equipment the book
value of must be maintained at a minimum of 2.00 to 1.00 commitment coverage ratio (such ratio being equal to (i) the amount
of the borrowing base as of such date to (ii) the amount of the commitment as of such date.)
Covenants. The Amended Credit Agreement contains customary representations and warranties, as well as covenants which, among
other things, limit our ability to incur additional indebtedness and liens; enter into transactions with affiliates; make acquisitions
in excess of certain amounts; pay dividends; redeem or repurchase capital stock or senior notes; make investments or loans; make
negative pledges; consolidate, merge or effect asset sales; or change the nature of our business. In addition, we also have certain
financial covenants that require us to maintain a leverage ratio less than or equal to 2.50 to 1.00 as of the last day of each fiscal
quarter.
Events of Default and Acceleration. The Amended Credit Agreement contains customary events of default for credit facilities of
this size and type, and includes, without limitation, payment defaults; defaults in performance of covenants or other agreements
contained in the loan documents; inaccuracies in representations and warranties; certain defaults, termination events or similar
events; certain defaults with respect to any other Company indebtedness in excess of $50,000; certain bankruptcy or insolvency
events; the rendering of certain judgments in excess of $150,000; certain ERISA events; certain change in control events and the
defectiveness of any liens under the secured revolving credit facility. Obligations under the Amended Credit Agreement may be
accelerated upon the occurrence of an event of default.
As of December 31, 2014, we were in compliance with all covenants in our Amended Credit Agreement. A default under
our Credit Agreement could trigger the acceleration of our bank debt so that it is immediately due and payable. Such default
would likely limit our ability to access other credit. At December 31, 2014 our balance on the line of credit was $417,000. Our
weighted average interest rate for the year ended December 31, 2014 was 1.40%.
5. Other Long-term Liabilities
At December 31, 2012, we had a long-term liability of $275,000 to Midland Development Corporation. The liability
was fully satisfied during the quarter ended March 31, 2013. As a result of our performance under the agreement, a payment to
Midland Development Corporation of $52,000 was made to settle the liability, resulting in a gain of $223,000, which is included
in the other income line, in our statement of income for the year ended December 31, 2013.
In addition, we entered into a purchase agreement with a vendor on July 30, 2008 pursuant to which we agreed to
purchase up to $4.8 million of our paint and coating requirements exclusively from the vendor. In connection with the execution
of the agreement, the vendor paid us a $300,000 fee which is considered to be a discount toward future purchases from the
vendor. The $300,000 payment we received is recorded as a long-term liability and will decrease as the purchase commitment is
fulfilled. The long-term liability remaining for the purchase commitment was $155,000 and $197,000 as of December 31, 2014
and 2013, respectively.
F- 12
6. Income Taxes
The provision for income taxes for the years ended December 31, 2014, 2013 and 2012, consists of the following (in thousands):
Current provision:
Federal
State
Total current provision
Deferred provision:
Federal
Total deferred provision
Total provision
2014
2013
2012
$
995
195
1,190
6,840
6,840
$
69
$
330
399
7,723
7,723
$
8,030
$
8,122
$
332
222
554
6,972
6,972
7,526
The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and (liabilities)
as of December 31, 2014 and 2013, are as follows (in thousands):
Deferred income tax assets:
Stock Compensation
Other
Total deferred income tax assets
Deferred income tax liabilities:
Property and equipment
Goodwill and other intangible assets
Total deferred income tax liabilities
Net deferred income tax liabilities
2014
2013
1,249
80
1,329
$
$
916
45
961
(58,610)
(1,023)
(59,633)
(58,304) $
(51,377)
(1,048)
(52,425)
(51,464)
$
$
$
$
The effective tax rate for the years ended December 31, 2014, 2013 and 2012, differs from the statutory rate as follows:
Statutory rate
State and local taxes
Other
Effective rate
2014
2013
2012
34.0%
1.5%
0.7%
36.2%
34.0%
1.7%
0.4%
36.1%
34.0%
0.7%
2.5%
37.2%
Our policy regarding income tax interest and penalties is to expense those items as general and administrative expense.
During the years ended December 31, 2014, 2013 and 2012, there were no significant income tax interest or penalty items in the
statement of income.
We had a federal net operating loss carry forward of $3.2 million as of December 31, 2012, which was utilized in the
year ended December 31, 2013. We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With
few exceptions, we are no longer subject to U.S. federal or state income tax examination by tax authorities for years before 2009.
7. Stockholders' Equity
Preferred Stock
F- 13
We have a total of 5.0 million authorized preferred shares with rights and preferences as designated by the Board of
Directors. As of December 31, 2014 and 2013, there were no issued or outstanding preferred shares.
8. Stock-Based Compensation
Restricted Stock
On June 16, 2009, at our annual meeting of shareholders, our shareholders adopted the 2009 Restricted Stock/Unit
Plan. On June 3, 2014, at our annual meeting of shareholders, our shareholders approved a proposed amendment to the Plan to
add additional 500,000 shares of common stock to the Plan, thereby authorizing the issuance of up to 800,000 shares of common
stock under the Plan. On March 20, 2014, the Compensation Committee awarded 15,000 shares of restricted common stock to
each of G. Larry Lawrence, our CFO, and James Hazlett our Vice President of Technical Services, subject to the approval at our
June 2014 annual meeting of shareholders of a proposal to increase the number of shares reserved for issuance under our 2009
restricted Stock\Unit Plan. As the proposal was approved by shareholders at the 2014 annual meeting, we issued the restricted
shares to Messrs. Hazlett and Lawrence which vest one year from the grant date. We also awarded and issued 13,152 shares of
restricted common stock to our Board of Directors as partial payment for 2014 Directors' fees. The restricted stock issued to our
Directors vests over one year, in quarterly installments, beginning March 31, 2015. In accordance with the Company's employment
agreement with Stephen Taylor, the Company's Chief Executive Officer, the Compensation Committee reviewed his performance
in determining the issuance of restricted common stock. Based on this review which included consideration of the Company's
2013 performance, Mr. Taylor, was awarded 49,420 restricted shares on January 23, 2014, which vest one year from the date of
grant. Compensation expense related to the restricted shares was approximately $2,818,000, $1,485,000 and $978,000 for the
years ended December 31, 2014, 2013, and 2012, respectively. As of December 31, 2014, there was a total of approximately
$608,000 of unrecognized compensation expense related to the nonvested portion of these restricted shares. This expense is
expected to be recognized within one year. As of December 31, 2014, 423,717 shares were still available for issuance under the
2009 Restricted Stock/Unit Plan.
A summary of all restricted stock activity as of December 31, 2014 and changes during the year then ended is presented below.
Number
of
Shares
103,618
$
92,572
(96,952)
—
99,238
$
Weighted
Average
Grant Date
Fair Value
Weighted
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(in thousands)
18.94
29.18
19.21
—
28.22
9.07
$
—
—
—
9.00
$
2,857
2,701
2,935
—
2,286
Outstanding, December 31, 2013
Granted
Vested
Canceled/Forfeited
Outstanding, December 31, 2014
Stock Option Plan
Our 1998 Stock Option Plan (the "Plan"), which is stockholder approved, permits the grant of stock options to its
employees for up to 550,000 shares of common stock. On June 16, 2009, at our annual meeting of shareholders, our shareholders
approved a proposed amendment to the Plan to add additional 200,000 shares of common stock to the Plan, thereby authorizing
the issuance of up to 750,000 shares of common stock under the Plan. We believe that such awards better align the interests of
our employees with our stockholders. Option awards are generally granted with an exercise price equal to the market price of our
stock at the date of grant; those option awards generally vest based on three years of continuous service and have ten-year contractual
terms. Certain option and share awards provide for accelerated vesting if there is a change in control of the Company (as defined
in the Plan). The last date that grants can be made under the Plan is March 1, 2016. As of December 31, 2014, 186,419 shares
were still available for issue under the Plan.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that
uses the assumptions noted in the following table. The risk-free rate for periods within the contractual life of the option is based
on the U.S. Treasury yield curve in effect at the time of grant. The expected life of options granted is based on the vesting period
and historical exercise and post-vesting employment termination behavior for similar grants. We use historical data to estimate
F- 14
option exercise and employee termination within the valuation model; separate groups of employees that have similar historical
exercise behavior are considered separately for valuation purposes.
Weighted average Black -Scholes fair value assumption during the years
ended December 31, are as follows:
Risk free rate
Expected life
Expected volatility
Expected dividend yield
2014
1.96%
6 years
58.44%
—
2013
1.02%
6 years
60.39%
—
2012
0.98%
5 years
62.37%
—
A summary of all option activity as of December 31, 2014 and changes during the year then ended is presented below.
Outstanding, December 31, 2013
Granted
Exercised
Canceled/Forfeited
Expired
Outstanding, December 31, 2014
Exercisable, December 31, 2014
Number
of
Stock Options
378,852
$
60,000
(3,500)
(3,083)
—
432,269
340,435
$
$
Weighted
Average
Exercise
Price
15.61
30.06
17.13
22.13
—
17.55
15.34
Weighted
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(in thousands)
5.23
$
4,533
48
24
2,786
2,622
10.10
8.99
$
$
We granted three options to purchase a total of 60,000 shares to non-executive employees in March, July and October
2014 at an exercise price of $30.41, $33.36 and $23.30, respectively with a three year vesting period.
The weighted average grant date fair value of options granted during the years 2014, 2013, and 2012 was $16.56,
$10.30, and $8.22 respectively. The total intrinsic value, or the difference between the exercise price and the market price on the
date of exercise, of options exercised during the years ended December 31, 2014, 2013, and 2012 was approximately $48,000,
$458,000, and $151,000 respectively. Cash received from stock options exercised during the years ended December 31, 2014,
2013, and 2012 was $59,000, $829,000, and $180,000, respectively.
The following table summarizes information about our stock options outstanding at December 31, 2014:
Range of Exercise Prices
Shares
$0.01-9.43
$9.44-15.60
$15.61-18.75
$18.76-33.36
71,352
70,000
146,917
144,000
432,269
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (years)
Weighted
Average
Exercise
Price
1.97
4.06
5.60
6.03
4.89
$
$
$
$
$
8.72
12.51
17.81
24.12
17.55
Weighted
Average
Exercise
Price
8.72
12.30
17.60
20.00
15.34
Shares
71,352
64,166
119,917
85,000
340,435
$
$
$
$
$
The summary of the status of our unvested stock options as of December 31, 2014 and changes during the year then ended is
presented below.
F- 15
Unvested stock options:
Unvested at December 31, 2013
Granted
Vested
Cancelled/Forfeited
Unvested at December 31, 2014
Weighted
Average
Grant Date
Fair Value
9.87
16.56
9.80
12.87
14.19
Shares
63,082
$
60,000
$
(28,915) $
(2,333) $
$
91,834
We recognized stock compensation expense from stock options vesting of $426,000, $198,000, and $440,000 for the
years ended December 31, 2014, 2013 and 2012, respectively. As of December 31, 2014, there was approximately $808,000 of
total unamortized compensation cost related to unvested stock options. We expect to recognize such cost over a weighted-average
period of 3.0 years.
F- 16
9. Commitments and Contingencies
401(k) Plan
We offer a 401(k) Plan to all employees that have reached the age of eighteen and have completed six months of
service. The participants may contribute up to 100% of their salary subject to IRS limitations. Employer contributions are subject
to Board discretion and are subject to a vesting schedule of 20% each year after the first year and 100% after six years. We
contributed $296,000, $294,000, and $283,000 to the 401(k) Plan in 2014, 2013 and 2012, respectively.
Rented Facilities, Vehicles and Equipment
We lease certain of our facilities and equipment under operating leases with terms generally ranging from month-to-
month to five years. Most leases contain renewal options. Remaining future minimum rental payments due under these leases
are as follows:
Years Ending December 31, (in thousands)
2015
2016
2017
2018
2019
Total
$
$
301
268
243
113
15
940
Rent expense under such leases was $380,000, $358,000, and $453,000 for the years ended December 31, 2014, 2013 and
2012, respectively.
Legal Proceedings
From time to time, we are a party to various legal proceedings in the ordinary course of our business. While management
is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not
have a material effect on our financial position, results of operations or cash flow. We are not currently a party to any bankruptcy,
receivership, reorganization, adjustment or similar proceeding, and we are not aware of any other threatened litigation.
10. Quarterly Financial Data (in thousands, except per share data) – Unaudited
2014
Total revenue
Operating income
Net income
Net income per share - Basic
Net income per share - Diluted
2013
Total revenue
Operating income
Net income
Net income per share - Basic
Net income per share - Diluted
Q1
$ 22,322
4,362
2,856
0.23
0.23
Q2
$ 21,952
5,085
3,385
0.27
0.27
Q3
$ 25,599
5,840
3,883
0.31
0.30
Q4
$ 27,101
6,699
4,004
0.32
0.32
Total
$ 96,974
21,986
14,128
1.14
1.11
Q1
$ 23,983
6,138
3,994
0.33
0.32
Q2
$ 20,258
5,844
3,844
0.31
0.31
Q3
$ 21,865
5,088
3,394
0.28
0.27
Q4
$ 23,142
4,950
3,158
0.25
0.25
Total
$ 89,248
22,020
14,390
1.17
1.15
Amounts may not add due to rounding differences.
F- 17
********
INDEX TO EXHIBITS
Exhibit No.
Description
3.1
3.2
4.1
4.2
10.1
10.2
10.3
Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of the 10-QSB filed and dated
November 10, 2004)
Bylaws (Incorporated by reference to Exhibit 3.4 of the Registrant's Registration Statement on Form SB-2,
No. 333-88314)
Non-Statutory Stock Option Agreement (Incorporated by reference to Exhibit 10.2 to Form 8-K filed with the SEC
on August 30, 2005)
Form of Senior Indenture (Incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement on
Form S-3 (No. 333-161346) and filed on August 14, 2009)
Lease Agreement, dated March 26, 2008, between WNB Tower, LTD and Natural Gas Services Group, Inc.
(Incorporated by reference to Exhibit 10.15 of the Registrant’s Form 10-K for the fiscal year ended December 31,
2008 and filed with the Securities and Exchange Commission on March 9, 2009)
2009 Restricted Stock/Unit Plan (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on
Form 8-K dated September 18, 2009 and filed with the Securities and Exchange Commission on September 18,
2009.)
1998 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report
on Form 8-K dated September 18, 2009 and filed with the Securities and Exchange Commission on September 18,
2009.)
E-1
10.4
10.5
10.6
10.7
10.8
10.9
10.10
*23.1
*31.1
*31.2
*32.1
*32.2
Lease Agreement, dated December 11, 2008, between Klement-Wes Partnership, LTD and Natural Gas Services
Group, Inc. and commencing on January 1, 2009
Credit Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated December
10, 2010 (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 24, 2014.)
Third Amendment of Credit Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank,
N.A., dated November 19, 2014 (Incorporated by reference to Exhibit 10.1 of the Registrant's Current report on
Form 8-K filed with the Securities and Exchange Commission on January 9, 2012.)
Security Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated December
10, 2010 (Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 16, 2011.)
First Amendment of Security Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank,
N.A., dated December 31, 2011 (Incorporated by reference to Exhibit 10.2 of the Registrant's Current report on
Form 8-K filed with the Securities and Exchange Commission on January 9, 2012.)
Promissory Note in the aggregate amount of $30,000,000 issued to JPMorgan Chase Bank, N.A., dated December
31, 2014, in connection with the revolving credit line under the Credit Agreement with JPMorgan Chase Bank,
N.A. (Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 24, 2014.)
Employment Agreement between Natural Gas Services Group, Inc. and Stephen C. Taylor dated October 23, 2013
(Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on October 25, 2013)
Consent of BDO USA, LLP
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith.
E-2
Certifications
Exhibit 31.1
I, Stephen C. Taylor, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Natural Gas Services Group, Inc;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Dated: March 13, 2015
Natural Gas Services Group, Inc.
By:
/s/ Stephen C. Taylor
Stephen C. Taylor,
President, CEO and Chairman of the Board of Directors
(Principal Executive Officer)
Exhibit 31.2
I, G. Larry Lawrence, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Natural Gas Services Group, Inc;
Certifications
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
2.
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
3.
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
4.
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
5.
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Dated: March 13, 2015
Natural Gas Services Group, Inc.
By:
/s/ G. Larry Lawrence
G. Larry Lawrence
Vice President, Chief Financial Officer
(Principal Accounting Officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Natural Gas Services Group, Inc. (the “Company”) on Form 10-K for the period ended
December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen C.
Taylor, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that:
1.
amended; and
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
2.
operations of the Company.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
Dated: March 13, 2015
Natural Gas Services Group, Inc.
By:
/s/ Stephen C. Taylor
Stephen C. Taylor,
President, CEO and Chairman of the Board of Directors
(Principal Executive Officer)
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being
filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference
into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language
in such filing.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Natural Gas Services Group, Inc. (the “Company”) on Form 10-K for the period ended
December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, G. Larry
Lawrence, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that:
1.
amended; and
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
2.
operations of the Company.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
Dated: March 13, 2015
Natural Gas Services Group, Inc.
By:
/s/ G. Larry Lawrence
G. Larry Lawrence,
Vice President and Chief Financial Officer
(Principal Accounting Officer)
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being
filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference
into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language
in such filing.
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
Natural Gas Services Group, Inc.
Midland, Texas
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-196578,
333-147311, 333-110954, 333-160068, 333-160063 and 333-153874) and Form S-3 (No. 333-184672) of Natural
Gas Services Group, Inc. of our reports dated March 13, 2015, relating to the financial statements and the
effectiveness of Natural Gas Services Group, Inc.’s internal control over financial reporting, which appear in this
Annual Report on Form 10-K.
/s/ BDO USA, LLP
Houston, Texas
March 13, 2015
EXECUTIVE OFFICERS & DIRECTORS
Stephen C. Taylor
Chairman of the Board, President
and Chief Executive Officer
G. Larry Lawrence
Vice President and Chief Financial
Officer
James R. Hazlett
Vice President –Technical Services
David L. Bradshaw
Director, Oil and Gas Investor,
Former Chairman and CEO,
Tipperary Corporation
John W. Chisholm
Director, Founder, Wellogix, Inc.;
President, CEO, Chairman of the
Board, Flotek Industries
Charles G. Curtis
Director, Retired, Former President
and Chief Executive
Officer of Curtis One Inc. dba
Roll Stair
William F. Hughes
Director, Co-Owner, The
Whole Wheatery, LLC
Independent Auditors
BDO USA, LLP
333 Clay St., Suite 4700
Houston, Texas 77002
Investor Relations
Alicia M. Dada
Natural Gas Services Group
Investor Relations Coordinator
Annual Meeting of
Shareholders
June 18, 2015
8:30 A.M. CDT
Petroleum Club of Midland
501 West Wall Street
Midland, Texas 79701
Legal Counsel
David A. Thayer
Jones & Keller, P.C.
1999 Broadway, Suite #3150
Denver, Colorado 80202
Transfer Agent & Registrar
Computershare Trust Company,
Inc., Golden, Colorado
About Natural Gas Services Group, Inc.
Headquartered in Midland, TX, Natural Gas Services Group (NGS) maintains a growing rental fleet of high quality rotary
screw and reciprocating wellhead compressors in the 50-500 horsepower range. At the end of 2014 the rental fleet
totaled 2879 compressor units…the largest rental compressor fleet in the U.S. dedicated to the small-medium
horsepower, wellhead market. Repair and maintenance services for rental fleet units is provided through a network of
district offices in Midland, Bridgeport and Godley, TX, Farmington, NM, Vernal, UT, Tulsa, OK, Loveland, CO and Lewiston,
MI. Rental compressor fabrication facilities are located in Midland, TX. NGS designs, fabricates and sells custom
engineered rotary screw and reciprocating compressor packages through our Engineered Products line in Tulsa, OK. This
custom equipment ranges up to 2,500 horsepower per unit and can be natural gas engine or electric motor driven. NGS
also designs, manufactures and fabricates a proprietary reciprocating compressor product line. The CiP (Cylinders in Plane)
reciprocating compressor is a unique and efficient, small horsepower design that is utilized in our rental fleet and sold to
compressor packagers, distributors and end-users throughout North America. Additionally, the Company designs,
fabricates, sells, installs and services technologically advanced and patented industrial flare and combustion systems
through our Flare King product line for use in onshore and offshore oil and natural gas production facilities. NGS is a public
company, and has been listed on the New York Stock Exchange (NYSE:NGS) since 2008.
Headquarters
508 West Wall Street,
Suite 550
Midland, Texas 79701
(432) 262-2700
(432) 262-2701 fax
www.ngsgi.com
Michigan
3690 CR 491
Lewiston, Michigan 49756
(989) 786-3788
(989) 786-5182 fax
Utah
374 South 800 E
Vernal, Utah 84078
(435) 789-3280
New Mexico
3900 N. 1st
Bloomfield, New Mexico 87413
(505) 632-4566
(505) 632-1364 fax
Texas
Bldg 107 PR 1420
Bridgeport, Texas 76426
(940) 683-5322
(940) 683-5113 fax
4721 N. Hwy 171
Cleburne, Texas 76033
(817) 645-5559
(817) 645-6809 fax
Oklahoma
575 Bird Creek Avenue
Catoosa, Oklahoma 74015
(918) 266-3330
(918) 971-1818 fax
West Texas
12301 W. CR 125
Odessa, Texas 79765
(432) 262-2700
(432) 561-5480 fax
Colorado
3555 S. Lincoln Ave
Loveland, CO 80537
(970) 683-5322
(970) 667-4257 fax