Summary of Significant Accounting Policies | 12 Months Ended |
Dec. 31, 2013 |
Accounting Policies [Abstract] | ' |
Summary of Significant Accounting Policies | ' |
Summary of Significant Accounting Policies |
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Organization and Principles of Consolidation |
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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. |
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Nature of Operations |
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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 and tight gas). 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. |
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Use of Estimates |
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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. |
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Cash Equivalents |
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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. |
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Accounts Receivable |
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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 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 $436,000 and $437,000 at December 31, 2013 and 2012, respectively. Management believes that the allowance is adequate; however, actual write-offs may exceed the recorded allowance. |
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Revenue Recognition |
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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. |
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Major Customers and Concentration of Credit Risk |
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Sales and rental income to EOG Resources, Inc. ("EOG") and Devon Energy Production, Inc. ("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, respectively. Sales and rental income to EOG and Devon in 2011 amounted to 17% and 16% of revenue. No other single customer accounted for more than 10% of our revenues in 2013, 2012 or 2011. EOG and Devon amounted to 18% and 14% of our accounts receivable as of December 31, 2013. EOG amounted to 17% of our accounts receivable as of December 31, 2012. No other customers amounted to more than 10% of our accounts receivable as of December 31, 2013 and 2012. |
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Inventory |
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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 $128,000 and $211,000 at December 31, 2013 and 2012, respectively. There were no new completed compressor units at December 31, 2013 or at December 31, 2012 available for sale or for use in our rental fleet. At December 31, 2013 and 2012, inventory consisted of the following (in thousands): |
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| 2013 | | 2012 | | | | |
Raw materials | $ | 20,524 | | | $ | 19,654 | | | | | |
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Work in process | 6,308 | | | 6,855 | | | | | |
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Total | $ | 26,832 | | | $ | 26,509 | | | | | |
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Property and Equipment |
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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. |
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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. |
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Goodwill |
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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. |
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Intangibles |
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At December 31, 2013, NGSG had intangible assets, which relate to developed technology, acquired customer contracts, distribution agreements and non-compete agreements. The carrying amount net of accumulated amortization at December 31, 2013 and 2012 was $2.0 million and $2.2 million respectively. Intangible assets are amortized on a straight-line basis with useful lives ranging from 5 to 20 years, with a weighted average remaining life of approximately ten years as of December 31, 2013. Amortization expense recognized in each of the years ending December 31, 2013, 2012, and 2011 was $130,000, $125,000 and $179,000 respectively. NGSG has an intangible asset with a gross carrying value of $654,000 at December 31, 2013 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. |
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The following table represents estimated future amortization expense: |
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Years Ending December 31, (in thousands) | | | | | | | | |
2014 | $ | 125 | | | | | | | | | |
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2015 | 125 | | | | | | | | | |
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2016 | 125 | | | | | | | | | |
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2017 | 125 | | | | | | | | | |
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2018 | 125 | | | | | | | | | |
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Thereafter | 748 | | | | | | | | | |
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Total | $ | 1,373 | | | | | | | | | |
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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 believe no impairment of intangible assets exists as of December 31, 2013. |
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Warranty |
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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 $28,000 and $336,000 for December 31, 2013 and 2012, respectively, and is included in accrued liabilities on the balance sheet. |
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Financial Instruments and Concentrations of Credit Risk |
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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. |
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Per Share Data |
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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 2013, 2012, and 2011. |
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The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts): |
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| Year Ended December 31, |
| 2013 | | 2012 | | 2011 |
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Net income | $ | 14,390 | | | $ | 12,685 | | | $ | 9,760 | |
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Denominator for basic net income per common share: | | | | | | | |
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Weighted average common shares outstanding | 12,324 | | | 12,220 | | | 12,148 | |
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Denominator for diluted net income per share: | | | | | | | |
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Weighted average common shares outstanding | 12,324 | | | 12,220 | | | 12,148 | |
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Dilutive effect of stock options and restricted shares | 226 | | | 100 | | | 102 | |
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Diluted weighted average shares | 12,550 | | | 12,320 | | | 12,250 | |
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Earnings per common share: | | | | | | | |
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Basic | $ | 1.17 | | | $ | 1.04 | | | $ | 0.8 | |
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Diluted | $ | 1.15 | | | $ | 1.03 | | | $ | 0.8 | |
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Income Taxes |
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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. |
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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, 2013 or 2012. |
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Fair Value Measurement |
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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: |
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Level 1- quoted prices in an active market for identical assets or liabilities; |
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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 |
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Level 3- valuation methodology with unobservable inputs that are significant to the fair value measurement. |
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The Company categorizes $577,000 and $897,000 of debt at December 31, 2013 and 2012, respectively as Level 2 measurements. Management believes that the fair value of our cash and cash equivalents, trade receivables, accounts payable and line of credit at December 31, 2013 and 2012 approximate their carrying values due to the short-term nature of the instruments or the use of prevailing market interest rates. |
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Segments and Related Information |
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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. Therefore discrete financial information is not available by product line and our CODM does not make resource allocation decisions or assess 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. |
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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: |
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• | The nature of the products and services; | | | | | | | | | | |
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• | The nature of the production processes; | | | | | | | | | | |
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• | The type or class of customer for their products and services; | | | | | | | | | | |
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• | The methods used to distribute their products or provide their services; and | | | | | | | | | | |
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• | The nature of the regulatory environment, if applicable. | | | | | | | | | | |
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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. |