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Basis of Presentation and Summary of Significant Accounting Policies (Policies) | 6 Months Ended
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Jun. 30, 2018
Accounting Policies [Abstract] |
Basis of Accounting | These notes apply to the unaudited condensed consolidated financial statements of Natural Gas Services Group, Inc. a Colorado corporation (the "Company", “NGSG”, "Natural Gas Services Group", "we" or "our"). The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, its subsidiary, NGSG Properties, LLC and the rabbi trust associated with the Company's deferred compensations plan, see Note 4. All significant intercompany accounts and transactions for the periods presented have been eliminated in consolidation. These financial statements include all adjustments, consisting of only normal recurring adjustments, which are necessary to make our financial position at June 30, 2018 and the results of our operations for the three and six months ended June 30, 2018 and 2017 not misleading. As permitted by the rules and regulations of the Securities and Exchange Commission (SEC), the accompanying condensed consolidated financial statements do not include all disclosures normally required by generally accepted accounting principles in the United States of America (GAAP). These financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 on file with the SEC. In our opinion, the condensed consolidated financial statements are a fair presentation of the financial position, results of operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2018.
Revenue Recogntion | Revenue Recognition Policy The Company adopted ASC 606, Revenue from Contracts with Customers ("ASC 606") on January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed below. The Company applied ASC 606 using the cumulative effect method. We had no significant changes in our recognition of revenue at adoption and our review of all open revenue from contracts with customers on January 1, 2018 indicated we had no adjustment to be made. If an adjustment had been needed, we would have recognized the cumulative effect of initially applying ASC 606 with an adjustment to the opening balance of equity at January 1, 2018. Therefore, our consolidated financial statements for 2017 reported under ASC 605 are comparable to the consolidated financial statements for 2018 reported under ASC 606, since an adjustment was not needed, except for the respective additional disclosures as detailed below. Revenue is measured based on a consideration specified in a customer’s contract, excluding any sale incentives and taxes collected on behalf of third parties (i.e. sales and property taxes). We recognize revenue once a performance obligation has been satisfied and control over a product or service has transferred to the customer. Shipping and handling costs incurred are accounted for as fulfillment costs and are included in cost of revenues in our condensed consolidated income statement. Nature of goods and Services The following is a description of principal activities from which the Company generates its revenue: Rental Revenue. The Company generates revenue from renting compressors and flare systems to our customers. These contracts may also include a fee for servicing the compressor or flare during the rental contract. Our rental contracts range from six to twenty-four months, with revenue being recognized over time, in equal payments over the term of the contract. After the terms of the contract have expired, a customer may renew their contract or continue renting on a monthly basis thereafter. In accordance with generally accepted accounting principles, the revenue earned from servicing rental equipment is recognized in accordance with ASC 606, while the revenue earned from the rental of the equipment is recognized in accordance with ASC 840 - Leases. Sales Revenue. The Company generates revenue by the sale of custom/fabricated compressors, flare systems and parts, as well as, exchange/rebuilding customer owned compressors and sale of used rental equipment. Custom/fabricated compressors and flare systems - The Company designs and fabricates compressors and flares based on the customer’s specifications outlined in their contract. Though the equipment being built is customized by the customer, control under these contracts does not pass to the customer until the compressor or flare package is complete and shipped, or in accordance with a bill and hold arrangements the customer accepts title and assumes the risk and rewards of ownership. We request some of our customers to make progressive payments as the product is being built; these payments are recorded as a contract liability on the Deferred Income line on the condensed consolidated balance sheet until control has been transferred. These contracts also may include an assurance warranty clause to guarantee the product is free from defects in material and workmanship for a set duration of time; this is a standard industry practice and is not considered a performance obligation. From time to time, upon the customer’s written request, we recognize revenue when manufacturing is complete and the equipment is ready for shipment. At the customer’s request, we will bill the customer upon completing all performance obligations, but before shipment. The customer will formally request we ship the equipment per their direction from our manufacturing facility at a later specified date and that we segregate the equipment from our finished goods, such that they are not available to fill other orders. Per the customer’s agreement change of control is passed to the customer once the equipment is complete and ready for shipment. We have operated using bill and hold agreements with certain customers for many years, with consistent satisfactory results for both the customer and us. The credit terms on these agreements are consistent with the credit terms on all other sales. All control shouldered by the customer, and there are no exceptions to the customer’s commitment to accept and pay for the manufactured equipment. Revenues recognized at the completion of manufacturing for the six months ended June 30, 2018 was approximately $6.3 million. Parts - Revenue is recognized after the customer obtains control of the parts. Control is passed either by the customer taking physical possession or the parts being shipped. The amount of revenue recognized is not adjusted for expected returns, as our historical part returns have been de minimis. Exchange or rebuilding customer owned compressors - Based on the contract, the Company will either exchange a new/rebuilt compressor for the customer’s malfunctioning compressor or rebuild the customer’s compressor. Revenue is recognized after control of the replacement compressor has transferred to the customer by physical delivery, delivery and installment or shipment of the compressor. Used compressors or flares - From time to time, a customer may request to purchase a used compressor or flare out of our rental fleet. Revenue from the sale of rental equipment is recognized when the control has passed to the customer, when the customer has taken physical possession or the equipment has been shipped. Service and Maintenance Revenue. The Company provides routine or call-out services on customer owned equipment. Revenue is recognized after services in the contract are rendered. Payment terms for sales revenue and service and maintenance revenue discussed above are generally 30 to 60 days although terms for specific customers can vary. Also, the transaction prices are not subject to variable consideration constraints.
Contract Costs | Contract Costs The Company applies the practical expedient in ASC 340-40-25-4 and recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in selling, general and administrative expense on our consolidated income statement.
Fair Value of Financial Instruments | Fair Value of Financial Instruments Our financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, deferred compensation plan (cash portion) and our line of credit. Pursuant to ASC 820 (Accounting Standards Codification), the fair value of our cash equivalents is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. We believe that the recorded values of all of our other financial instruments approximate their fair values because of their nature and relatively short maturity dates or durations.
Recently Issued Accounting Pronouncements | Recently Issued Accounting Pronouncements On February 25, 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842). Under the new guidance, a lessee will be required to recognize assets and liabilities for finance and operating leases with lease terms of more than 12 months. Additionally, this ASU will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. The ASU initially required a modified retrospective transition method where a company applies the new leases standard at the beginning of the earliest period presented in the financial statements, but in July 2018 the FASB issued ASU 2018-11. ASU 2018-11 added an optional transition method where a company applies the new leases standard at the adoption date and recognizes a cumulative effect adjustment to the opening balance of retained earnings. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The new standard will be effective during our first quarter ending March 31, 2019. We are in the process of reviewing our leases and evaluating what impact the new standard will have on our accounting policies, internal controls and condensed consolidated balance sheet. We expect there will be an increase in assets and liabilities on the condensed consolidated balance sheets at adoption due to recording the right-of-use assets and corresponding lease liabilities, but do not believe this to be a significant impact at this time. We also expect an increase in our disclosures revolving around leases. We anticipate our review to be completed in the latter half of 2018.
Reclassification of Prior Period Balances | Reclassification of Prior Period Balances Certain reclassifications have been made to prior period amounts to conform to the current-year presentation. These reclassifications had no effect on the reported results of operations.
Segment Information | ASC 280-10-50, “Operating Segments", defines 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 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 and crude oil. 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.
For the three months ended June 30, 2018 (in thousands): |  |  |  |  |  |  |  |  |  |  |
| Rental |  | Sales |  | Service & Maintenance |  |  |  | Corporate |  | Total
Revenue | $ | 11,427 |  | $ | 6,383 |  | $ | 394 |  |  |  | $ | — |  | $ | 18,204
Operating costs and corporate expenses | 5,195 |  | 4,924 |  | 101 |  |  |  | 7,758 |  | 17,978
Total other income, net | — |  | — |  | — |  |  |  | 75 |  | 75
Income before provision for income taxes | $ | 6,232 |  | $ | 1,459 |  | $ | 293 |  |  |  | $ | (7,683) |  | $ | 301
For the three months ended June 30, 2017 (in thousands): |  |  |  |  |  |  |  |  |  |  |
| Rental |  | Sales |  | Service & Maintenance |  |  |  | Corporate |  | Total
Revenue | $ | 11,420 |  | $ | 4,407 |  | $ | 391 |  |  |  | $ | — |  | $ | 16,218
Operating costs and corporate expenses | 4,255 |  | 3,745 |  | 104 |  |  |  | 7,700 |  | 15,804
Total other income, net | — |  | — |  | — |  |  |  | 1 |  | 1
Income before provision for income taxes | $ | 7,165 |  | $ | 662 |  | $ | 287 |  |  |  | $ | (7,699) |  | $ | 415
For the six months ended June 30, 2018 (in thousands): |  |  |  |  |  |  |  |  |  |  |
| Rental |  | Sales |  | Service & Maintenance |  |  |  | Corporate |  | Total
Revenue | $ | 22,898 |  | $ | 9,381 |  | $ | 643 |  |  |  | $ | — |  | $32,922
Operating costs and corporate expenses | 9,899 |  | 7,115 |  | 166 |  |  |  | 15,166 |  | 32,346
Total other income, net | — |  | — |  | — |  |  |  | (1) |  | (1)
Income before provision for income taxes | $ | 12,999 |  | $ | 2,266 |  | $ | 477 |  |  |  | $ | (15,167) |  | $ | 575
For the six months ended June 30, 2017 (in thousands): |  |  |  |  |  |  |  |  |  |  |
| Rental |  | Sales |  | Service & Maintenance |  |  |  | Corporate |  | Total
Revenue | $ | 23,342 |  | $ | 11,044 |  | $ | 734 |  |  |  | $ | — |  | $35,120
Operating costs and corporate expenses | 8,923 |  | 9,168 |  | 198 |  |  |  | 16,074 |  | 34,363
Total other income, net | — |  | — |  | — |  |  |  | 2 |  | 2
Income before provision for income taxes | $ | 14,419 | $ | — | $ | 1,876 | $ | — | $ | 536 | $ | — |  |  | $ | (16,072) | $ | — | $ | 759

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