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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

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 No. 001-33666

Archrock, Inc.

(Exact name of registrant as specified in its charter)

Delaware

74-3204509

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

9807 Katy Freeway, Suite 100, Houston, Texas 77024

(Address of principal executive offices, zip code)

(281) 836-8000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

  

Trading Symbol

  

Name of exchange on which registered

Common stock, $0.01 par value per share

AROC

New York Stock Exchange

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. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

Number of shares of the common stock of the registrant outstanding as of April 28, 2020: 152,925,708 shares.

Table of Contents

TABLE OF CONTENTS

Page

GLOSSARY

3

FORWARD-LOOKING STATEMENTS

4

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

5

Condensed Consolidated Balance Sheets

5

Condensed Consolidated Statements of Operations

6

Condensed Consolidated Statements of Comprehensive Income

7

Condensed Consolidated Statements of Equity

8

Condensed Consolidated Statements of Cash Flows

9

Notes to Condensed Consolidated Financial Statements (unaudited)

10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

30

Item 3. Quantitative and Qualitative Disclosures About Market Risk

37

Item 4. Controls and Procedures

37

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

39

Item 1A. Risk Factors

39

Item 2. Unregistered Sales of Equity Securities

40

Item 3. Defaults Upon Senior Securities

40

Item 4. Mine Safety Disclosures

40

Item 5. Other Information

40

Item 6. Exhibits

41

SIGNATURES

42

2

Table of Contents

GLOSSARY

The following terms and abbreviations appearing in the text of this report have the meanings indicated below.

2013 Plan

Archrock, Inc. 2013 Stock Incentive Plan

2019 Form 10-K

Archrock, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2019

2020 Plan

Archrock, Inc. 2020 Stock Incentive Plan

2021 Notes

$350.0 million of 6% senior notes due April 2021, issued in March 2013

2022 Notes

$350.0 million of 6% senior notes due October 2022, issued in April 2014

2027 Notes

$500.0 million of 6.875% senior notes due April 2027, issued in March 2019

2028 Notes

$500.0 million of 6.25% senior notes due April 2028, issued in December 2019

Archrock, our, we, us

Archrock, Inc., individually and together with its wholly-owned subsidiaries

ASC 606 Revenue

Accounting Standards Codification Topic 606 Revenue from Contracts with Customers

ASC 842 Leases

Accounting Standards Codification Topic 842 Leases

ASU 2016-13

Accounting Standards Update No. 2016-13—Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

ASU 2018-13

Accounting Standards Update No. 2018-13—Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement

ASU 2019-12

Accounting Standards Update No. 2019-12—Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes

ASU 2020-04

Accounting Standards Update No. 2020-04—Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting

CARES Act

Coronavirus Aid, Relief, and Economic Security Act, Public Law No. 116-136, a tax stimulus and economic stabilization bill signed into law on March 27, 2020

COVID-19

Coronavirus disease 2019

Credit Facility

$1.25 billion asset-based revolving credit facility due November 2024, as governed by Amendment No. 2 to Credit Agreement, dated November 8, 2019, which amended that Credit Agreement, dated as of March 30, 2017

EBITDA

Earnings before interest, taxes, depreciation and amortization

Elite Acquisition

Transaction completed on August 1, 2019 pursuant to the Asset Purchase Agreement entered into with Elite Compression on June 23, 2019

Elite Compression

Elite Compression Services, LLC

ERP

Enterprise Resource Planning

Exchange Act

Securities Exchange Act of 1934, as amended

FASB

Financial Accounting Standards Board

Financial Statements

Condensed consolidated financial statements included in Part I Item 1 of this Quarterly Report on Form 10-Q

GAAP

U.S. generally accepted accounting principles

Hilcorp

Hilcorp Energy Company

JDH Capital

JDH Capital Holdings, L.P.

LIBOR

London Interbank Offered Rate

March 2020 Disposition

Sale completed in March 2020 of certain contract operations customer service agreements, compressors and other assets

NOL

Net operating loss

OTC

Over-the-counter, as related to aftermarket services parts and components

Partnership

Archrock Partners, L.P., together with its subsidiaries

ROU

Right-of-use, as related to the lease model under ASC 842 Leases

SEC

U.S. Securities and Exchange Commission

Securities Act

Securities Act of 1933, as amended

SG&A

Selling, general and administrative

Spin-off

Spin-off completed in November 2015 of our international contract operations, international aftermarket services and global fabrication businesses into a standalone public company operating as Exterran Corporation

U.S.

United States of America

3

Table of Contents

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 21E of the Exchange Act, including, without limitation, statements regarding the effects of the COVID-19 pandemic on our business, operations, customers and financial condition; our business growth strategy and projected costs; future financial position; the sufficiency of available cash flows to fund continuing operations and pay dividends; the expected amount of our capital expenditures; anticipated cost savings; future revenue, gross margin and other financial or operational measures related to our business; the future value of our equipment; and plans and objectives of our management for our future operations. You can identify many of these statements by words such as “believe,” “expect,” “intend,” “project,” “anticipate,” “estimate,” “will continue” or similar words or the negative thereof.

Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this Quarterly Report on Form 10-Q. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct. Known material factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include the risk factors described in our 2019 Form 10-K and in Part II Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q, and those set forth from time to time in our filings with the SEC, which are available through our website at www.archrock.com and through the SEC’s website at www.sec.gov.

All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us on the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this Quarterly Report on Form 10-Q.

4

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ARCHROCK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share amounts)

(unaudited)

–––

    

March 31, 2020

    

December 31, 2019

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

3,221

$

3,685

Accounts receivable, trade, net of allowance of $2,523 and $2,210, respectively

 

138,623

 

144,865

Inventory

 

72,931

 

74,467

Other current assets

 

8,969

 

9,186

Total current assets

 

223,744

 

232,203

Property, plant and equipment, net

 

2,561,923

 

2,559,398

Operating lease ROU assets

 

19,156

 

17,901

Goodwill, net

 

 

100,598

Intangible assets, net

 

73,261

 

77,471

Contract costs, net

 

41,314

 

42,927

Deferred tax assets

 

55,175

 

36,642

Other assets

 

29,661

 

29,934

Noncurrent assets associated with discontinued operations

 

12,605

 

12,901

Total assets

$

3,016,839

$

3,109,975

Liabilities and Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable, trade

$

62,289

$

60,215

Accrued liabilities

 

86,015

 

67,845

Deferred revenue

 

8,841

 

10,683

Total current liabilities

 

157,145

 

138,743

Long-term debt

 

1,811,455

 

1,842,549

Operating lease liabilities

 

17,184

 

16,094

Deferred tax liabilities

 

857

 

1,289

Other liabilities

 

22,207

 

16,829

Noncurrent liabilities associated with discontinued operations

 

8,519

 

8,508

Total liabilities

 

2,017,367

 

2,024,012

Commitments and contingencies (Note 21)

 

  

 

  

Equity:

 

  

 

  

Preferred stock: $0.01 par value per share, 50,000,000 shares authorized, zero issued

 

 

Common stock: $0.01 par value per share, 250,000,000 shares authorized, 159,756,498 and 158,636,918 shares issued, respectively

 

1,598

 

1,587

Additional paid-in capital

 

3,415,784

 

3,412,509

Accumulated other comprehensive loss

 

(7,173)

 

(1,387)

Accumulated deficit

 

(2,328,069)

 

(2,244,877)

Treasury stock: 6,830,407 and 6,702,602 common shares, at cost, respectively

 

(82,668)

 

(81,869)

Total equity

 

999,472

 

1,085,963

Total liabilities and equity

$

3,016,839

$

3,109,975

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

Table of Contents

ARCHROCK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

Three Months Ended

March 31, 

    

2020

    

2019

Revenue:

 

  

 

  

Contract operations

$

206,974

$

182,507

Aftermarket services

 

42,723

 

53,652

Total revenue

 

249,697

 

236,159

Cost of sales (excluding depreciation and amortization):

 

  

 

  

Contract operations

 

78,651

 

74,735

Aftermarket services

 

34,991

 

43,902

Total cost of sales (excluding depreciation and amortization)

 

113,642

 

118,637

Selling, general and administrative

 

30,626

 

28,989

Depreciation and amortization

 

49,822

 

44,106

Long-lived asset impairment

 

6,195

 

3,092

Goodwill impairment

99,830

Restatement and other charges

 

 

421

Restructuring charges

1,728

Interest expense

 

29,665

 

23,617

Transaction-related costs

 

 

180

(Gain) loss on sale of assets, net

(4,116)

16

Other income, net

 

(555)

 

(221)

Income (loss) before income taxes

 

(77,140)

 

17,322

Benefit from income taxes

 

(15,953)

 

(2,407)

Income (loss) from continuing operations

(61,187)

19,729

Loss from discontinued operations, net of tax

 

 

(273)

Net income (loss)

$

(61,187)

$

19,456

Basic and diluted net income (loss) per common share

$

(0.41)

$

0.15

Weighted average common shares outstanding:

 

  

 

  

Basic

 

150,550

 

128,209

Diluted

 

150,550

 

128,255

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ARCHROCK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

Three Months Ended

March 31, 

    

2020

    

2019

Net income (loss)

    

$

(61,187)

    

$

19,456

Other comprehensive loss, net of tax:

 

  

 

  

Interest rate swap loss, net of reclassifications to earnings

 

(5,786)

 

(3,225)

Total other comprehensive loss

 

(5,786)

 

(3,225)

Comprehensive income (loss)

$

(66,973)

$

16,231

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ARCHROCK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in thousands, except share and per share amounts)

(unaudited)

Accumulated

Common

Additional

Other

Treasury

Stock

Paid-in

Comprehensive

Accumulated

Stock

    

Amount

    

Shares

    

Capital

    

Income (Loss)

    

Deficit

    

Amount

    

Shares

    

Total

Balance at December 31, 2018

$

1,358

135,787,509

$

3,177,982

$

5,773

$

(2,263,677)

$

(79,862)

(6,381,605)

$

841,574

Treasury stock purchased

 

  

 

  

 

  

 

  

 

  

 

(857)

 

(87,036)

 

(857)

Cash dividends ($0.132 per common share)

 

  

 

  

 

  

 

  

 

(17,231)

 

  

 

  

 

(17,231)

Shares issued in employee stock purchase plan

 

 

29,728

 

218

 

  

 

  

 

  

 

  

 

218

Stock-based compensation, net of forfeitures

 

11

 

1,059,115

 

2,346

 

  

 

  

 

  

 

(15,434)

 

2,357

Comprehensive income

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

Net income

 

  

 

  

 

  

 

  

 

19,456

 

  

 

  

 

19,456

Interest rate swap loss, net of reclassifications to earnings

 

  

 

  

 

  

 

(3,225)

 

  

 

  

 

  

 

(3,225)

Balance at March 31, 2019

$

1,369

 

136,876,352

$

3,180,546

$

2,548

$

(2,261,452)

$

(80,719)

 

(6,484,075)

$

842,292

Balance at December 31, 2019

$

1,587

 

158,636,918

$

3,412,509

$

(1,387)

$

(2,244,877)

$

(81,869)

 

(6,702,602)

$

1,085,963

Treasury stock purchased

 

  

 

  

 

  

 

  

 

  

 

(799)

 

(90,594)

 

(799)

Cash dividends ($0.145 per common share)

 

  

 

  

 

  

 

  

 

(22,171)

 

  

 

  

 

(22,171)

Shares issued in employee stock purchase plan

 

1

 

56,417

 

201

 

  

 

  

 

  

 

  

 

202

Stock-based compensation, net of forfeitures

 

10

 

1,063,163

 

3,074

 

  

 

  

 

  

 

(37,211)

 

3,084

Impact of ASU 2016-13 adoption

166

166

Comprehensive loss

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

Net loss

 

  

 

  

 

  

 

  

 

(61,187)

 

  

 

  

 

(61,187)

Interest rate swap loss, net of reclassifications to earnings

 

  

 

  

 

  

 

(5,786)

 

  

 

  

 

  

 

(5,786)

Balance at March 31, 2020

$

1,598

 

159,756,498

$

3,415,784

$

(7,173)

$

(2,328,069)

$

(82,668)

 

(6,830,407)

$

999,472

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ARCHROCK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Three Months Ended

March 31, 

    

2020

    

2019

Cash flows from operating activities:

  

  

Net income (loss)

$

(61,187)

$

19,456

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

  

 

  

Loss from discontinued operations, net of tax

 

 

273

Depreciation and amortization

 

49,822

 

44,106

Long-lived asset impairment

 

6,195

 

3,092

Goodwill impairment

99,830

Inventory write-downs

 

282

 

222

Amortization of operating lease ROU assets

 

781

 

712

Amortization of deferred financing costs

 

1,533

 

1,509

Amortization of debt discount

 

187

 

366

Interest rate swaps

 

196

 

(410)

Stock-based compensation expense

 

3,006

 

2,357

Non-cash restructuring charges

61

Provision for credit losses

 

752

 

428

(Gain) loss on sale of assets, net

 

(944)

 

16

Gain on March 2020 Disposition

(3,172)

Deferred income tax benefit

 

(15,966)

 

(2,883)

Amortization of contract costs

 

6,805

 

5,117

Deferred revenue recognized in earnings

 

(7,735)

 

(12,749)

Changes in assets and liabilities:

 

  

 

  

Accounts receivable, trade

 

4,803

 

(3,154)

Inventory

 

1,068

 

3,724

Other assets

 

(439)

 

15,165

Contract costs, net

 

(5,537)

 

(6,574)

Accounts payable and other liabilities

 

12,936

 

1,131

Deferred revenue

 

5,783

 

9,467

Other

 

69

 

29

Net cash provided by operating activities

 

99,129

 

81,400

Cash flows from investing activities:

 

  

 

  

Capital expenditures

 

(71,946)

 

(132,697)

Proceeds from March 2020 Disposition

 

24,179

 

Proceeds from sale of property, plant and equipment and other assets

 

2,543

 

11,155

Proceeds from insurance and other settlements

1,083

238

Net cash used in investing activities

 

(44,141)

 

(121,304)

Cash flows from financing activities:

 

  

 

  

Borrowings of long-term debt

 

227,500

 

690,000

Repayments of long-term debt

 

(259,500)

 

(629,000)

Payments for debt issuance costs

 

(596)

 

(7,521)

Proceeds from (payments for) settlement of interest rate swaps that include financing elements

 

(88)

 

393

Dividends paid to stockholders

 

(22,171)

 

(17,231)

Proceeds from stock issued under employee stock purchase plan

 

202

 

218

Purchases of treasury stock

 

(799)

 

(857)

Net cash provided by (used in) financing activities

 

(55,452)

 

36,002

Net decrease in cash and cash equivalents

 

(464)

 

(3,902)

Cash and cash equivalents, beginning of period

 

3,685

 

5,610

Cash and cash equivalents, end of period

$

3,221

$

1,708

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ARCHROCK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Description of Business and Basis of Presentation

We are an energy infrastructure company with a pure-play focus on midstream natural gas compression. We are the leading provider of natural gas compression services to customers in the oil and natural gas industry throughout the U.S. and a leading supplier of aftermarket services to customers that own compression equipment in the U.S. We operate in two business segments: contract operations and aftermarket services. Our predominant segment, contract operations, primarily includes designing, sourcing, owning, installing, operating, servicing, repairing and maintaining our owned fleet of natural gas compression equipment to provide natural gas compression services to our customers. In our aftermarket services business, we sell parts and components and provide operations, maintenance, overhaul and reconfiguration services to customers who own compression equipment.

The accompanying unaudited condensed consolidated financial statements included herein have been prepared in accordance with GAAP and the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP are not required in these interim financial statements and have been condensed or omitted. Management believes that the information furnished includes all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly our consolidated financial position, results of operations and cash flows for the periods indicated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements presented in our 2019 Form 10-K, which contains a more comprehensive summary of our accounting policies. The interim results reported herein are not necessarily indicative of results for a full year. Certain prior year amounts have been reclassified to conform to the current year presentation.

2. Recent Accounting Developments

Accounting Standards Updates Implemented

Credit Losses

In June 2016, the FASB issued ASU 2016-13, which changes the impairment model for financial assets measured at amortized cost and certain other instruments, and requires entities to use a new current expected credit loss model that results in recognition of expected losses over the contractual life of an asset. We adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. The adoption resulted in a $0.2 million decrease in our allowance for credit losses and a corresponding pre-tax cumulative effect adjustment to retained earnings in our condensed consolidated balance sheet at January 1, 2020. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

Our financial assets measured at amortized cost consist of cash equivalents and trade receivables from revenue transactions within the scope of ASC 606 Revenue. We believe our temporary cash investments have a zero loss expectation because we maintain minimal balances in our cash investment accounts and have no history of loss. Trade accounts receivable are due from companies of varying size engaged principally in oil and natural gas activities throughout the U.S. We review the financial condition of customers prior to extending credit and generally do not obtain collateral for trade receivables. Payment terms are on a short-term basis and in accordance with industry practice. We consider this credit risk to be limited due to these companies’ financial resources, the nature of the products and services we provide and the terms of our customer agreements.

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Due to the short-term nature of our trade receivables, we consider the amortized cost to be the same as the carrying amount of the receivable, excluding the allowance for credit losses. We recognize an allowance for credit losses when a receivable is recorded, even when the risk of loss is remote. We utilize an aging schedule to determine our allowance for credit losses, and measure expected credit losses on a collective (pool) basis when similar risk characteristics exist. We rely primarily on ratings assigned by external rating agencies and credit monitoring services to assess credit risk and aggregate customers first by low, medium or high risk asset pools, and then by delinquency status. We also consider the internal risk associated with geographic location and the services we provide to the customer when determining asset pools. If a customer does not share similar risk characteristics with other customers, we evaluate the customer’s outstanding trade receivables for expected credit losses on an individual basis. Trade receivables evaluated individually are not included in our collective assessment. Each reporting period, we reassess our customers’ risk profiles and determine the appropriate asset pool classification, or perform individual assessments of expected credit losses, based on the customers’ risk characteristics at the reporting date.

The contractual life of our trade receivables is primarily 30 days based on the payment terms specified in the contract. Contract operations services are generally billed monthly at the beginning of the month in which service is being provided. Aftermarket services billings typically occur when parts are delivered or service is completed. Loss rates are separately determined for each asset pool based on the length of time a trade receivable has been outstanding. We analyze two years of internal historical loss data, including the effects of prepayments, write-offs and subsequent recoveries, to determine our historical loss experience. Our historical loss information is a relevant data point for estimating credit losses, as the data closely aligns with trade receivables due from our customers. Ratings assigned by external rating agencies and credit monitoring services consider past performance and forecasts of future economic conditions in assessing credit risk. We routinely update our historical loss data to reflect our customers’ current risk profile, to ensure the historical data and loss rates are relevant to the pool of assets for which we are estimating expected credit losses. Judgement is used to determine the expected credit loss for customers that do not share similar risk characteristics with other customers, based on customer specific items such as legal proceedings, past experience with the customer and/or ongoing customer negotiations.

The following table summarizes the changes in the allowance for credit losses balance during the three months ended March 31, 2020 (in thousands):

Balance at December 31, 2019

      

$

2,210

Impact of adoption of ASU 2016-13 on January 1, 2020

(216)

Provision for credit losses

752

Write-offs charged against allowance

(223)

Balance at March 31, 2020

$

2,523

Fair Value Measurements

On January 1, 2020, we adopted ASU 2018-13, which amends the required fair value measurements disclosures related to valuation techniques and inputs used, uncertainty in measurement and changes in measurements applied. These amendments resulted in new, prospective disclosures of the range and weighted average of the significant unobservable inputs used to develop our Level 3 fair value measurements related to our idle and previously-culled compressors. The adoption of ASU 2018-13 had no impact on our condensed consolidated financial statements.

Income Taxes

On January 1, 2020, we adopted ASU 2019-12, which simplifies the accounting for income taxes by, among other things, removing certain exceptions related to the incremental approach for intraperiod tax allocation, the year-to-date loss methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities on outside basis differences. ASU 2019-12 also clarifies other aspects of the accounting for income taxes in order to improve consistency of application. The adoption of ASU 2019-12 had no impact on our condensed consolidated financial statements.

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Accounting Standards Updates Not Yet Implemented

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued as a result of reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. Entities may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. We are currently assessing the impact that ASU 2020-04 may have on our interest rate swap agreements, Credit Facility and other transactions that may be affected by reference rate reform.

3. Business Transactions

March 2020 Disposition

On March 1, 2020, we completed the sale of certain contract operations customer service agreements and approximately 200 compressors, comprising approximately 35,000 horsepower, used to provide compression services under those agreements as well as other assets used to support the operations. We allocated customer and contract-related intangible assets and goodwill based on a ratio of the horsepower sold relative to the total horsepower of the asset group. We recognized a gain on the sale of $3.2 million in gain (loss) on sale of assets, net in our condensed consolidated statements of operations during the three months ended March 31, 2020.

Elite Acquisition

On August 1, 2019, we completed the Elite Acquisition whereby we acquired from Elite Compression substantially all of its assets, including a fleet of predominantly large compressors comprising approximately 430,000 horsepower, vehicles, real property and inventory, and certain liabilities for aggregate consideration consisting of $214.0 million in cash and 21.7 million shares of common stock with an acquisition date fair value of $225.9 million. The cash portion of the acquisition was funded with borrowings on the Credit Facility.

The Elite Acquisition was accounted for using the acquisition method, which requires, among other things, assets acquired and liabilities assumed to be recorded at their fair value on the acquisition date. The excess of the consideration transferred over those fair values is recorded as goodwill. The following table summarizes the purchase price allocation based on the estimated fair values of the acquired assets and liabilities as of the acquisition date (in thousands):

Accounts receivable

    

$

9,007

Inventory

 

7,987

Other current assets

 

608

Property, plant and equipment

 

286,158

Operating lease ROU assets

 

682

Goodwill

 

100,598

Intangible assets

 

40,237

Accounts payable, trade

 

(2,079)

Accrued liabilities

 

(2,973)

Operating lease liabilities

 

(326)

Purchase price

$

439,899

Our valuation methodology and significant inputs for fair value measurements are detailed by asset class below. The fair value measurements for property, plant and equipment and intangible assets are based on significant inputs that are not observable in the market and therefore represent Level 3 measurements.

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Goodwill

The goodwill resulting from the acquisition is attributable to the expansion of our services in various regions in which we currently operate and was allocated to our contract operations segment. All of the goodwill recorded for this acquisition is expected to be deductible for U.S. federal income tax purposes.

Property, Plant and Equipment

The property, plant and equipment is primarily comprised of compression equipment that will be depreciated on a straight-line basis over an estimated average remaining useful life of 15 years. The fair value of the property, plant and equipment was determined using the cost approach, whereby we estimated the replacement cost of the assets by evaluating recent purchases of similar assets or published data, and then adjusted replacement cost for physical deterioration and functional and economic obsolescence, as applicable.

Intangible Assets

The intangible assets consist of customer relationships that have an estimated useful life of 15 years. The amount of intangible assets and their associated useful life were determined based on the period over which the assets are expected to contribute directly or indirectly to our future cash flows. The fair value of the identifiable intangible assets was determined using the multi-period excess earnings method, which is a specific application of the discounted cash flow method, an income approach, whereby we estimated and then discounted the future cash flows of the intangible asset by adjusting overall business revenue for attrition, obsolescence, cost of sales, operating expenses, taxes and the required returns attributable to other contributory assets acquired. Significant estimates made in arriving at expected future cash flows included our expected customer attrition rate and the amount of earnings attributable to the assets. To discount the estimated future cash flows, we utilized a discount rate that was at a premium to our weighted average cost of capital to reflect the less liquid nature of the customer relationships relative to the tangible assets acquired.

Unaudited Pro Forma Financial Information

Unaudited pro forma financial information for the three months ended March 31, 2019 was derived by adjusting our historical financial statements in order to give effect to the assets and liabilities acquired in the Elite Acquisition. The Elite Acquisition is presented in this unaudited pro forma financial information as though the acquisition occurred as of January 1, 2019, and reflects the following:

the acquisition of substantially all of Elite Compression’s assets, including a compression fleet of approximately 430,000 horsepower, vehicles, real property and inventory, and certain liabilities; and
borrowings of $214.0 million under the Credit Facility for cash consideration exchanged in the acquisition.

The unaudited pro forma financial information below is presented (in thousands) for informational purposes only and is not necessarily indicative of our results of operations that would have occurred had the transaction been consummated at the beginning of the period presented, nor is it necessarily indicative of future results.

Three Months Ended

March 31, 2019

Revenue

$

254,564

Net income

 

20,967

The results of operations attributable to the assets and liabilities acquired in the Elite Acquisition have been included in our condensed consolidated financial statements as part of our contract operations segment since the date of acquisition.

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4. Discontinued Operations

In 2015 we completed the Spin-off. In order to effect the Spin-off and govern our relationship with Exterran Corporation after the Spin-off, we entered into several agreements with Exterran Corporation which include, but are not limited to, the tax matters agreement. The tax matters agreement governs the respective rights, responsibilities and obligations of Exterran Corporation and us with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and certain other matters regarding taxes. Subject to the provisions of this agreement, we and Exterran Corporation agreed to indemnify the primary obligor of any return for tax periods beginning before and ending before or after the Spin-off (including any ongoing or future amendments and audits for these returns) for the portion of the tax liability (including interest and penalties) that relates to their respective operations reported in the filing.

As of March 31, 2020 and December 31, 2019, we had $8.5 million, respectively, of unrecognized tax benefits (including interest and penalties) related to Exterran Corporation operations prior to the Spin-off recorded to noncurrent liabilities associated with discontinued operations in our condensed consolidated balance sheets. We had an offsetting indemnification asset of $8.5 million related to these unrecognized tax benefits recorded to noncurrent assets associated with discontinued operations as of March 31, 2020 and December 31, 2019, respectively.

The following table presents the balance sheet for our discontinued operations (in thousands):

    

March 31, 2020

    

December 31, 2019

Other assets

$

8,519

$

8,508

Deferred tax assets

4,086

4,393

Total assets associated with discontinued operations

$

12,605

$

12,901

Deferred tax liabilities

$

8,519

$

8,508

Total liabilities associated with discontinued operations

$

8,519

$

8,508

The following table presents the statements of operations for our discontinued operations (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Other income, net

$

(10)

$

(1,432)

Provision for income taxes

 

10

 

1,705

Loss from discontinued operations, net of tax

$

$

(273)

5. Inventory

Inventory consisted of the following (in thousands):

    

March 31, 2020

    

December 31, 2019

Parts and supplies

$

63,889

$

66,121

Work in progress

 

9,042

 

8,346

Inventory

$

72,931

$

74,467

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6. Property, Plant and Equipment, Net

Property, plant and equipment, net consisted of the following (in thousands):

    

March 31, 2020

    

December 31, 2019

Compression equipment, facilities and other fleet assets

$

3,659,907

$

3,653,930

Land and buildings

 

51,031

 

50,743

Transportation and shop equipment

 

114,465

 

116,057

Computer hardware and software

 

93,734

 

93,695

Other

 

17,587

 

15,308

Property, plant and equipment

 

3,936,724

 

3,929,733

Accumulated depreciation

 

(1,374,801)

 

(1,370,335)

Property, plant and equipment, net

$

2,561,923

$

2,559,398

7. Leases

Operating Leases

We determine if an arrangement is a lease at inception. Following ASC 842, we determine lease classification and recognize ROU assets and liabilities on the lease commencement date based on the present value of lease payments over the lease term. As the discount rate implicit in the lease is rarely readily determinable, we estimate our incremental borrowing rate using information available at commencement date in determining the present value of the lease payments. The lease term includes options to extend when we are reasonably certain to exercise the option. Short-term leases, those with an initial term of 12 months or less, are not recorded on the balance sheet. Variable costs such as our proportionate share of actual costs for utilities, common area maintenance, property taxes and insurance are not included in the lease liability and are recognized in the period in which they are incurred. Operating lease expense for lease payments is recognized on a straight-line basis over the term of the lease.

The facility leases discussed below, of which we are the lessee, contain lease and nonlease components for which we have elected to account for as a single lease component, as the nonlease components are not significant to the total consideration of the contract and separating the nonlease component would have no effect on lease classification. As it relates to our contract operations services agreements in which we are the lessor, the services nonlease component is predominant over the compression package lease component and therefore recognition of these agreements will continue to follow the ASC 606 Revenue guidance.

We have operating leases and subleases for office space, temporary housing, storage and shops. Our leases have remaining lease terms of less than one year to 11 years and most include options to extend the lease term, at our discretion, for an additional three to five years. We are not, however, reasonably certain that we will exercise any of the options to extend and as such, they have not been included in the remaining lease terms.

Balance sheet information related to our operating leases was as follows (in thousands):

    

Classification

    

March 31, 2020

 

December 31, 2019

ROU assets

 

Operating lease ROU assets

$

19,156

$

17,901

Lease liabilities

 

  

 

  

 

  

Current

 

Accrued liabilities

$

3,211

$

3,037

Noncurrent

 

Operating lease liabilities

 

17,184

 

16,094

Total lease liabilities

 

  

$

20,395

$

19,131

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The components of lease cost were as follows (in thousands):

    

Three Months Ended

March 31, 

 

2020

2019

Operating lease cost

$

1,031

$

974

Short-term lease cost

 

129

 

173

Variable lease cost

 

349

 

382

Total lease cost

$

1,509

$

1,529

Cash flow and non-cash information related to our operating leases were as follows (in thousands):

    

Three Months Ended

March 31, 

2020

2019

Operating cash flows - cash paid for amounts included in the measurement of operating lease liabilities

$

1,351

$

1,311

Operating lease ROU assets obtained in exchange for new lease liabilities

 

2,037

 

617

Other supplemental information related to our operating leases was as follows:

    

March 31, 2020

December 31, 2019

Weighted average remaining lease term (in years)

 

8.3

8.2

Weighted average discount rate

 

5.1

%

5.3

%

Remaining maturities of lease liabilities governed under ASC 842 Leases as of March 31, 2020 were as follows (in thousands):

2020

    

$

2,808

2021

3,955

2022

 

2,855

2023

 

2,550

2024

 

2,159

2025

1,930

Thereafter

 

8,942

Total lease payments

 

25,199

Less: Interest

 

(4,804)

Total lease liabilities under ASC 842 Leases

$

20,395

8. Goodwill

Our goodwill was recognized in connection with the Elite Acquisition and represents the excess of consideration transferred over the fair value of the assets and liabilities acquired. All of the goodwill was allocated to our contract operations reporting unit. We review the carrying amount of our goodwill in the fourth quarter of every year, or whenever indicators of potential impairment exist, to determine if the carrying amount of our contract operations reporting unit exceeds its fair value, including the goodwill. During the first quarter, the COVID-19 pandemic caused a significant deterioration in global macroeconomic conditions, including a collapse in the demand for oil coupled with an oversupply of oil, which commenced substantial spending cuts by our customers and a decline in production. This global response to the pandemic significantly impacted our market capitalization and estimates of future revenues and cash flows as of March 31, 2020, which triggered the need to perform a quantitative test of the fair value of our contract operations reporting unit as of March 31, 2020. The quantitative test determined that the carrying amount of our contract operations reporting unit exceeded its fair value and we recorded a full impairment loss on goodwill as a result.

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Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions, which have a significant impact on the fair value determined. We determine the fair value of our reporting unit using an equal weighting of both the expected present value of future cash flows and a market approach. The present value of future cash flows is estimated using our most recent forecast and the weighted average cost of capital. The market approach uses a market multiple on the earnings before interest expense, provision for income taxes and depreciation and amortization expense of comparable peer companies. Significant estimates for our reporting unit included in our impairment analysis are our cash flow forecasts, our estimate of the market’s weighted average cost of capital and market multiples.

The following table presents the change in the carrying amount of goodwill during the quarter ended March 31, 2020 (in thousands):

Balance at December 31, 2019

$

100,598

Dispositions

(768)

Impairment loss

 

(99,830)

Balance at March 31, 2020

$

9. Hosting Arrangements

In the fourth quarter of 2018 we began a process and technology transformation project that will, among other things, upgrade or replace our existing ERP, supply chain and inventory management systems and expand the remote monitoring capabilities of our compression fleet. Included in this project are hosting arrangements that are service contracts related to the cloud migration of our ERP system and cloud services for our new mobile workforce, telematics and inventory management tools.

Certain costs incurred for the implementation of our hosting arrangements that are service contracts are capitalized and amortized on a straight-line basis over the term of the respective contract. Amortization begins in the period in which an individual component becomes ready for its intended use. As of March 31, 2020 and December 31, 2019, we capitalized $6.5 million and $5.5 million, respectively, of implementation costs related to our hosting arrangements that are service contracts to other assets in our condensed consolidated balance sheets. Accumulated amortization was $0.1 million at March 31, 2020. We recorded $0.1 million of amortization expense to SG&A in our condensed consolidated statements of operations during the three months ended March 31, 2020.

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10. Long-Term Debt

Long-term debt consisted of the following (in thousands):

    

March 31, 2020

    

December 31, 2019

Credit Facility

$

481,000

$

513,000

2028 Notes

 

500,000

 

500,000

Less: Deferred financing costs, net of amortization

 

(7,851)

 

(8,090)

 

492,149

 

491,910

2027 Notes

500,000

 

500,000

Less: Deferred financing costs, net of amortization

(7,723)

 

(7,999)

492,277

 

492,001

2022 Notes

 

350,000

 

350,000

Less: Debt discount, net of amortization

 

(1,860)

 

(2,046)

Less: Deferred financing costs, net of amortization

 

(2,111)

 

(2,316)

 

346,029

 

345,638

Long-term debt

$

1,811,455

$

1,842,549

Credit Facility

As of March 31, 2020, there were $13.7 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.5%. The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 3.4% and 4.3% at March 31, 2020 and December 31, 2019, respectively. We incurred $0.7 million and $0.5 million in commitment fees on the daily unused amount of the Credit Facility during the three months ended March 31, 2020 and 2019, respectively.

We must maintain certain consolidated financial ratios as defined in our Credit Facility agreement. As a result of these ratio requirements, $651.4 million of the $755.3 million of undrawn capacity was available for additional borrowings as of March 31, 2020. As of March 31, 2020, we were in compliance with all covenants under the Credit Facility agreement.

11. Accumulated Other Comprehensive Income (Loss)

Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with owners. Our accumulated other comprehensive income (loss) consists of changes in the fair value of our interest rate swap derivative instruments, net of tax, which are designated as cash flow hedges.

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The following table presents the changes in accumulated other comprehensive income (loss) of our derivative cash flow hedges, net of tax, during the three months ended March 31, 2020 and 2019 (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Beginning accumulated other comprehensive income (loss)

$

(1,387)

$

5,773

Loss recognized in other comprehensive loss, net of tax benefit of $1,590 and $0, respectively (1)

 

(5,983)

 

(2,299)

(Gain) loss reclassified from accumulated other comprehensive income (loss) to interest expense, net of tax benefit of $51 and $0, respectively (1)

 

197

 

(926)

Other comprehensive loss

 

(5,786)

 

(3,225)

Ending accumulated other comprehensive income (loss)

$

(7,173)

$

2,548

(1)Includes adjustment of $0.7 million related to an increase in the valuation allowance recorded to offset the tax effect of other comprehensive loss recorded during the three months ended March 31, 2019.

See Note 18 (“Derivatives”) for further details on our interest rate swap derivative instruments.

12. Equity

Cash Dividends

The following table summarizes our dividends declared and paid in each of the quarterly periods of 2020 and 2019:

    

Declared Dividends

    

Dividends Paid

    

per Common Share

    

(in thousands)

2020

 

  

 

  

Q1

$

0.145

$

22,171

2019

 

  

 

  

Q1

$

0.132

$

17,231

Q2

 

0.132

 

17,206

Q3

 

0.145

 

22,062

Q4

 

0.145

 

22,031

On April 24, 2020, our Board of Directors declared a quarterly dividend of $0.145 per share of common stock to be paid on May 18, 2020 to stockholders of record at the close of business on May 11, 2020.

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13. Revenue from Contracts with Customers

The following table presents our revenue from contracts with customers disaggregated by revenue source (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Contract operations (1):

  

  

0 - 1,000 horsepower per unit

$

66,740

$

63,739

1,001 - 1,500 horsepower per unit

 

84,852

 

74,340

Over 1,500 horsepower per unit

 

54,591

 

43,425

Other (2)

 

791

 

1,003

Total contract operations (3)

 

206,974

 

182,507

Aftermarket services (1):

 

  

 

  

Services

 

25,450

 

33,521

OTC parts and components sales

 

17,273

 

20,131

Total aftermarket services (4)

 

42,723

 

53,652

Total revenue

$

249,697

$

236,159

(1)We operate in two segments: contract operations and aftermarket services. See Note 23 (“Segments”) for further details regarding our segments.
(2)Primarily relates to fees associated with owned non-compression equipment.
(3)Includes $1.6 million and $2.1 million for the three months ended March 31, 2020 and 2019, respectively, related to billable maintenance on owned compressors that was recognized at a point in time. All other contract operations revenue is recognized over time.
(4)All service revenue within aftermarket services is recognized over time. All OTC parts and components sales revenue is recognized at a point in time.

Performance Obligations

As of March 31, 2020, we had $470.5 million of remaining performance obligations related to our contract operations segment. We have elected to apply the practical expedient to not consider the effects of the time value of money, as the expected time between the transfer of services and payment for such services is less than one year. The remaining performance obligations will be recognized through 2025 as follows (in thousands):

    

2020

    

2021

    

2022

    

2023

    

2024

    

2025

    

Total

Remaining performance obligations

$

244,368

$

157,208

$

60,034

$

7,422

$

1,355

$

119

$

470,506

As of March 31, 2020, we elected to apply the practical expedient to not disclose the aggregate transaction price for the remaining performance obligations for aftermarket services as there are no contracts with customers with an original contract term that is greater than one year.

Contract Assets and Liabilities

As of March 31, 2020 and December 31, 2019, our receivables from contracts with customers, net of allowance for credit losses, were $133.5 million and $139.4 million, respectively.

Freight billings to customers for the transport of compression assets, customer-specified modifications of compression assets and milestone billings on aftermarket services often result in a contract liability. As of March 31, 2020 and December 31, 2019, our contract liabilities were $9.4 million and $11.4 million, respectively, which were included in deferred revenue and other liabilities in our condensed consolidated balance sheets. The decrease in the contract liability balance during the three months ended March 31, 2020 was primarily due to revenue deferral of $5.8 million, partially offset by $7.7 million recognized as revenue during the period, each primarily related to freight billings and aftermarket services.

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14. Long-Lived Asset Impairment

We review long-lived assets, including property, plant and equipment and identifiable intangibles that are being amortized, for impairment whenever events or changes in circumstances, including the removal of compressors from our active fleet, indicate that the carrying amount of an asset may not be recoverable.

We periodically review the future deployment of our idle compression assets for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. Based on these reviews, we determine that certain idle compressors should be retired from the active fleet. The retirement of these units from the active fleet triggers a review of these assets for impairment and as a result of our review, we may record an asset impairment to reduce the book value of each unit to its estimated fair value. The fair value of each unit is estimated based on the expected net sale proceeds compared to other fleet units we recently sold, a review of other units recently offered for sale by third parties or the estimated component value of the equipment we plan to use.

In connection with our review of our idle compression assets, we evaluate for impairment idle units that were culled from our fleet in prior years and are available for sale. Based on that review, we may reduce the expected proceeds from disposition and record additional impairment to reduce the book value of each unit to its estimated fair value.

The following table presents the results of our impairment review as recorded to our contract operations segment (dollars in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Idle compressors retired from the active fleet

 

85

 

20

Horsepower of idle compressors retired from the active fleet

 

23,000

 

15,000

Impairment recorded on idle compressors retired from the active fleet

$

6,195

$

3,092

During the three months ended March 31, 2020, we determined that the impairment of our contract operations reporting unit’s goodwill was an indicator of potential impairment of the carrying amount of our long-lived assets, including our compressor fleet and associated customer and contract-based intangible assets. Accordingly, we performed a quantitative impairment test of our long-lived assets, by which we determined that they were not impaired as of March 31, 2020.

15. Restructuring Charges

During the first quarter of 2020, we completed a series of restructuring activities to further streamline our organization and more fully align our teams to improve our customer service and profitability. We incurred severance costs of $1.7 million in connection with these restructuring activities during the three months ended March 31, 2020, which are reflected as restructuring charges in our condensed consolidated statements of operations.

The following table presents, by segment, the restructuring charges incurred during the three months ended March 31, 2020 (in thousands):

    

Contract

 Aftermarket

 

 

Operations

Services

Other (1)

Total

Three months ended March 31, 2020

$

478

$

625

$

625

$

1,728

(1)Represents expense incurred within our corporate function and not directly attributable to our segments.

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16. Income Taxes

CARES Act

On March 27, 2020, President Trump signed into law the CARES Act, which includes, among other things, refundable payroll tax credits, deferment of employer side social security payments, NOL carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act provisions did not have a material impact on our condensed consolidated financial statements. Future regulatory guidance under the CARES Act or additional legislation enacted by Congress in connection with the COVID-19 pandemic could impact our tax provision in future periods.

Valuation Allowance

The amount of our deferred tax assets considered realizable could be adjusted if projections of future taxable income are reduced or objective negative evidence in the form of a three-year cumulative loss is present or both. Should we no longer have a level of sustained profitability, excluding nonrecurring charges, we will have to rely more on our future projections of taxable income to determine if we have an adequate source of taxable income for the realization of our deferred tax assets, namely NOL carryforwards and tax credit carryforwards. This may result in the need to record a valuation allowance against all or a portion of our deferred tax assets.

Effective Tax Rate

The year-to-date effective tax rate for the three months ended March 31, 2020 differed from our statutory rate primarily due to an increase in unrecognized tax benefits. Our quarterly income tax provision is determined based on our estimated full year effective tax rate, adjusted for tax attributable to infrequent or unusual items, which are recognized on a discrete period basis in the income tax provision in the period in which they occur. Our year-to-date income tax provision included a $22.7 million tax benefit recorded discretely on the nonrecurring goodwill impairment loss of $99.8 million. See Note 8 (“Goodwill”) for further details on the goodwill impairment.

Unrecognized Tax Benefits

As of March 31, 2020, we believe it is reasonably possible that $2.6 million of our unrecognized tax benefits, including penalties, interest and discontinued operations, will be reduced prior to March 31, 2021 due to the settlement of audits or the expiration of statutes of limitations or both. However, due to the uncertain and complex application of the tax regulations, it is possible that the ultimate resolution of these matters may result in liabilities that could materially differ from this estimate.

17. Earnings per Share

Basic net income (loss) per common share is computed using the two-class method, which is an earnings allocation formula that determines net income (loss) per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Under the two-class method, basic net income (loss) per common share is determined by dividing net income (loss), after deducting amounts allocated to participating securities, by the weighted average number of common shares outstanding for the period. Participating securities include unvested restricted stock and stock-settled restricted stock units that have nonforfeitable rights to receive dividends or dividend equivalents, whether paid or unpaid. During periods of net loss, no effect is given to participating securities because they do not have a contractual obligation to participate in our losses.

Diluted net income (loss) per common share is computed using the weighted average number of shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options, performance-based restricted stock units and stock to be issued pursuant to our employee stock purchase plan unless their effect would be anti-dilutive.

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The following table shows net income (loss) used in the calculation of basic and diluted net income (loss) per common share (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Income (loss) from continuing operations

$

(61,187)

$

19,729

Loss from discontinued operations, net of tax

 

 

(273)

Net income (loss)

 

(61,187)

 

19,456

Less: Net income attributable to participating securities

 

(322)

 

(356)

Net income (loss) attributable to common stockholders

$

(61,509)

$

19,100

The following table shows the potential shares of common stock that were included in computing diluted net income (loss) per common share (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Weighted average common shares outstanding including participating securities

152,601

130,238

Less: Weighted average participating securities outstanding

 

(2,051)

 

(2,029)

Weighted average common shares outstanding used in basic net income (loss) per common share

 

150,550

 

128,209

Net dilutive potential common shares issuable:

 

  

 

  

On exercise of options and vesting of performance-based restricted stock units

 

 

40

On settlement of employee stock purchase plan shares

 

 

6

Weighted average common shares outstanding used in diluted net income (loss) per common share

 

150,550

 

128,255

The following table shows the potential shares of common stock issuable that were excluded from computing diluted net income (loss) per common share as their inclusion would have been anti-dilutive (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

On exercise of options where exercise price is greater than average market value for the period

 

126

 

154

On exercise of options and vesting of performance-based restricted stock units

57

On settlement of employee stock purchase plan shares

29

Net dilutive potential common shares issuable

212

154

18. Derivatives

We are exposed to market risks associated with changes in the variable interest rate of the Credit Facility. We use derivative instruments to manage our exposure to fluctuations in this variable interest rate and thereby minimize the risks and costs associated with financial activities. We do not use derivative instruments for trading or other speculative purposes.

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The following interest rate swaps, entered into to offset changes in expected cash flows due to fluctuations in the associated variable interest rates, were outstanding at March 31, 2020 (in millions):

Expiration Date

    

Notional Value

May 2020

$

100

March 2022

 

300

$

400

The counterparties to our derivative agreements are major financial institutions. We monitor the credit quality of these financial institutions and do not expect nonperformance by any counterparty, although such nonperformance could have a material adverse effect on us. We have no collateral posted for the derivative instruments.

We have designated these interest rate swaps as cash flow hedging instruments. Changes in the fair value of the interest rate swaps are recognized as a component of other comprehensive income (loss) until the hedged transaction affects earnings. At that time, amounts are reclassified into earnings to interest expense, the same statement of operations line item to which the earnings effect of the hedged item is recorded. Cash flows from derivatives designated as hedges are classified in our condensed consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions unless the derivative contract contains a significant financing element; in this case, the cash settlements for these derivatives are classified as cash flows from financing activities.

We expect the hedging relationship to be highly effective as the interest rate swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate. We perform quarterly qualitative prospective and retrospective hedge effectiveness assessments unless facts and circumstances related to the hedging relationships change such that we can no longer assert qualitatively that the cash flow hedge relationships were and continue to be highly effective. We estimate that $4.3 million of the deferred pre-tax loss attributable to interest rate swaps included in accumulated other comprehensive loss at March 31, 2020 will be reclassified into earnings as interest expense at then-current values during the next 12 months as the underlying hedged transactions occur.

As of March 31, 2020, the weighted average effective fixed interest rate on our interest rate swaps was 1.8%.

The following table presents the effect of our derivative instruments designated as cash flow hedging instruments on our condensed consolidated balance sheets (in thousands):

    

March 31, 2020

    

December 31, 2019

Other current assets

$

$

12

Total derivative assets

$

$

12

Accrued liabilities

$

(4,317)

$

(593)

Other liabilities

 

(4,764)

 

(1,175)

Total derivative liabilities

$

(9,081)

$

(1,768)

The following tables present the effect of our derivative instruments designated as cash flow hedging instruments on our condensed consolidated statements of operations (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Pre-tax loss recognized in other comprehensive loss

$

(7,573)

$

(2,299)

Pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense

 

(248)

 

926

Total amount of interest expense in which the effects of cash flow hedges are recorded

29,665

23,617

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See Note 11 (“Accumulated Other Comprehensive Income (Loss)”) and Note 19 (“Fair Value Measurements”) for further details on our derivative instruments.

19. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

On a quarterly basis, our interest rate swap derivative instruments are valued based on the income approach (discounted cash flow) using market observable inputs, including LIBOR forward curves. These fair value measurements are classified as Level 2. The following table presents our derivative asset and liability measured at fair value on a recurring basis, with pricing levels as of the date of valuation (in thousands):

    

March 31, 2020

    

December 31, 2019

Derivative asset

$

$

12

Derivative liability

 

(9,081)

 

(1,768)

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Goodwill

In the first quarter of 2020, we determined that the significant deterioration in global macroeconomic conditions caused by the COVID-19 pandemic was an indicator of potential impairment of our goodwill, and we performed a quantitative impairment test as of March 31, 2020 that resulted in a $99.8 million impairment of our goodwill. Significant estimates used in our impairment analysis included cash flow forecasts, our estimate of the market’s weighted average cost of capital and market multiples, which are Level 3 inputs. See Note 8 (“Goodwill”) for further details of the valuation methodology used in connection with the goodwill impairment.

Compressors

During the three months ended March 31, 2020, we recorded nonrecurring fair value measurements related to our idle and previously-culled compressors. Our estimate of the compressors’ fair value was primarily based on the expected net sale proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use. We discounted the expected proceeds, net of selling and other carrying costs, using a weighted average disposal period of four years. These fair value measurements are classified as Level 3.

The fair value of our impaired compressors at March 31, 2020 and December 31, 2019 was as follows:

    

March 31, 2020

    

December 31, 2019

Impaired compressors

$

253

$

5,859

 

The unobservable inputs used to develop the above fair value measurements were weighted by the relative fair value of the compressors being measured. Additional quantitative information related to our significant unobservable inputs follows:

    

Range

    

Weighted Average

Estimated net sale proceeds (1)

$0 - $372 per horsepower

$21 per horsepower

(1)Weighted average is calculated based on an estimated discount for market liquidity of 78%.

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See Note 14 (“Long-Lived Asset Impairment”) for further details.

Other Financial Instruments

The carrying amounts of our cash, receivables and payables approximate fair value due to the short-term nature of those instruments.

The carrying amount of borrowings outstanding under our Credit Facility approximates fair value due to its variable interest rate. The fair value of these outstanding borrowings is a Level 3 measurement.

The fair value of our fixed rate debt is estimated using yields observable in active markets, which are Level 2 inputs. The following table presents the carrying amount and fair value of our fixed rate debt (in thousands):

    

March 31, 2020

    

December 31, 2019

Carrying amount of fixed rate debt (1)

$

1,330,455

$

1,329,549

Fair value of fixed rate debt

 

1,067,000

 

1,400,000

(1)Carrying amounts are shown net of unamortized debt discounts and unamortized deferred financing costs. See Note 10 (“Long-Term Debt”).

20. Stock-Based Compensation

Stock-based compensation expense consisted of the following during the three months ended March 31, 2020 and 2019 (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Equity awards

$

3,006

$

2,357

Liability awards

 

(548)

 

966

Total stock-based compensation expense

$

2,458

$

3,323

The following table presents restricted stock, restricted stock unit, performance-based restricted stock unit and cash-settled performance unit activity during the three months ended March 31, 2020 (shares in thousands):

Weighted

Average

Grant Date

Fair Value

    

Shares

    

Per Share

Non-vested awards, December 31, 2019

 

2,022

$

10.25

Granted

 

1,412

 

9.47

Vested

 

(314)

 

9.44

Canceled

 

(52)

 

10.23

Non-vested awards, March 31, 2020 (1)

 

3,068

 

9.97

(1)Non-vested awards as of March 31, 2020 are comprised of 529,000 cash-settled restricted stock units and cash-settled performance units and 2,539,000 restricted stock and stock-settled performance units.

As of March 31, 2020, we expect $21.5 million of unrecognized compensation cost related to unvested restricted stock, stock-settled restricted stock units, performance units, cash-settled restricted stock units and cash-settled performance units to be recognized over the weighted average period of 2.2 years.

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2020 Plan

The 2020 Plan was adopted in April 2020 and provides for the granting of stock options, restricted stock, restricted stock units, stock appreciation rights, performance awards, other stock-based awards and dividend equivalent rights to employees, directors and consultants of Archrock. Under the 2020 Plan, the maximum number of shares of common stock available for issuance is 8,500,000. Each stock-settled award granted under the 2020 Plan reduces the number of shares available for issuance by one share. No additional grants may be made under the 2013 Plan following the adoption of the 2020 Plan. Previous grants made under the 2013 Plan continue to be governed by that plan and the applicable award agreements.

21. Commitments and Contingencies

Performance Bonds

In the normal course of business we have issued performance bonds to various state authorities that ensure payment of certain obligations. We have also issued a bond to protect our 401(k) retirement plan against losses caused by acts of fraud or dishonesty. The bonds have expiration dates in 2020 through the fourth quarter of 2022 and maximum potential future payments of $2.2 million. As of March 31, 2020, we were in compliance with all obligations to which the performance bonds pertain.

Tax Matters

We are subject to a number of state and local taxes that are not income-based. As many of these taxes are subject to audit by the taxing authorities, it is possible that an audit could result in additional taxes due. We accrue for such additional taxes when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the liability. As of March 31, 2020 and December 31, 2019, we accrued $2.4 million and $2.5 million, respectively, for the outcomes of non-income-based tax audits. We do not expect that the ultimate resolutions of these audits will result in a material variance from the amounts accrued. We do not accrue for unasserted claims for tax audits unless we believe the assertion of a claim is probable, it is probable that it will be determined that the claim is owed and we can reasonably estimate the claim or range of the claim. We believe the likelihood is remote that the impact of potential unasserted claims from non-income-based tax audits could be material to our consolidated financial position, but it is possible that the resolution of future audits could be material to our consolidated results of operations or cash flows.

Subject to the provisions of the tax matters agreement between Exterran Corporation and us, both parties agreed to indemnify the primary obligor of any return for tax periods beginning before and ending before or after the Spin-off (including any ongoing or future amendments and audits for these returns) for the portion of the tax liability (including interest and penalties) that relates to their respective operations reported in the filing. The tax contingencies mentioned above relate to tax matters for which we are responsible in managing the audit. As of March 31, 2020 and December 31, 2019, we recorded an indemnification liability (including penalties and interest), in addition to the tax contingency above, of $2.6 million and $2.8 million, respectively, for our share of non-income-based tax contingencies related to audits being managed by Exterran Corporation.

Insurance Matters

Our business can be hazardous, involving unforeseen circumstances such as uncontrollable flows of natural gas or well fluids and fires or explosions. As is customary in our industry, we review our safety equipment and procedures and carry insurance against some, but not all, risks of our business. Our insurance coverage includes property damage, general liability and commercial automobile liability and other coverage we believe is appropriate. We believe that our insurance coverage is customary for the industry and adequate for our business; however, losses and liabilities not covered by insurance would increase our costs.

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Additionally, we are substantially self-insured for workers’ compensation and employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses up to the deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages. We are also self-insured for property damage to our offshore assets.

Litigation and Claims

In the ordinary course of business, we are involved in various pending or threatened legal actions. While we are unable to predict the ultimate outcome of these actions, we believe that any ultimate liability arising from any of these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends.

22. Related Party Transactions

In connection with the closing of the Elite Acquisition, we issued 21.7 million shares of our common stock to JDH Capital, an affiliate of our customer Hilcorp. As long as JDH Capital, together with affiliates of Hilcorp, owns at least 7.5% of our outstanding common stock, it will have the right to designate one director to our Board of Directors. On August 1, 2019, Jeffery D. Hildebrand, founder and executive chairman of Hilcorp, was elected to our Board of Directors. Mr. Hildebrand receives no compensation for his role as a director. As of March 31, 2020, JDH Capital owned 14.2% of our outstanding common stock.

Revenue from Hilcorp and affiliates was $10.7 million and $5.5 million during the three months ended March 31, 2020 and 2019, respectively. Accounts receivable, net due from Hilcorp and affiliates were $4.1 million and $5.1 million as of March 31, 2020 and December 31, 2019, respectively.

23. Segments

We manage our business segments primarily based on the type of product or service provided. We have two segments which we operate within the U.S.: contract operations and aftermarket services. The contract operations segment primarily provides natural gas compression services to meet specific customer requirements. The aftermarket services segment provides a full range of services to support the compression needs of customers, from parts sales and normal maintenance services to full operation of a customer’s owned assets.

We evaluate the performance of our segments based on gross margin for each segment. Revenue includes only sales to external customers.

The following table presents revenue and gross margin by segment during the three months ended March 31, 2020 and 2019 (in thousands):

    

Contract

    

Aftermarket

    

    

Operations

    

Services

    

Total

Three months ended March 31, 2020

 

  

 

  

 

  

Revenue

$

206,974

$

42,723

$

249,697

Gross margin

 

128,323

 

7,732

 

136,055

Three months ended March 31, 2019

 

  

 

  

 

  

Revenue

$

182,507

$

53,652

$

236,159

Gross margin

 

107,772

 

9,750

 

117,522

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The following table reconciles total gross margin to income (loss) before income taxes (in thousands):

    

Three Months Ended

March 31, 

    

2020

    

2019

Total gross margin

$

136,055

$

117,522

Less:

 

  

 

  

Selling, general and administrative

 

30,626

 

28,989

Depreciation and amortization

 

49,822

 

44,106

Long-lived asset impairment

 

6,195

 

3,092

Goodwill impairment

99,830

Restatement and other charges

 

 

421

Restructuring charges

1,728

Interest expense

 

29,665

 

23,617

Transaction-related costs

 

 

180

(Gain) loss on sale of assets, net

(4,116)

16

Other income, net

 

(555)

 

(221)

Income (loss) before income taxes

$

(77,140)

$

17,322

24. Subsequent Events

2022 Notes Redemption

On April 1, 2020, the 2022 Notes were redeemed at 100% of their $350.0 million aggregate principal amount plus accrued and unpaid interest of $10.5 million with borrowings from the Credit Facility. A debt extinguishment loss of approximately $4.0 million related to the redemption will be recognized in the second quarter of 2020.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q and in conjunction with our 2019 Form 10-K.

Overview

We are an energy infrastructure company with a pure-play focus on midstream natural gas compression. We are the leading provider of natural gas compression services to customers in the oil and natural gas industry throughout the U.S. and a leading supplier of aftermarket services to customers that own compression equipment in the U.S. We operate in two business segments: contract operations and aftermarket services. Our contract operations services primarily include designing, sourcing, owning, installing, operating, servicing, repairing and maintaining our owned fleet of natural gas compression equipment to provide natural gas compression services to our customers. In our aftermarket services business, we sell parts and components and provide operations, maintenance, overhaul and reconfiguration services to customers who own compression equipment.

Recent Business Developments

2022 Notes Redemption

On April 1, 2020, we repaid the 2022 Notes with borrowings from our Credit Facility. See Note 24 (“Subsequent Events”) to our Financial Statements for further details of this transaction.

COVID-19 Pandemic

During the three months ended March 31, 2020 and continuing through the date of this filing, the COVID-19 pandemic has caused a deterioration in global macroeconomic conditions, including a collapse in the demand for oil coupled with an oversupply of oil, which has commenced substantial spending cuts by our customers and a decline in production. This global response to the pandemic has significantly impacted our market capitalization and estimates of future revenues and cash flows.

The key driver of our business is the production of U.S. crude oil and natural gas. Approximately 70% of our operating fleet is deployed for midstream natural gas gathering applications with the remaining fleet being used in wellhead and gas lift applications to enhance oil production. Changes in oil and natural gas production spending therefore typically result in changes in demand for our services. According to the EIA’s April 2020 Short-Term Energy Outlook, both crude oil and dry natural gas production are now expected to decline in 2020 and 2021 as the result of the decrease in commodity prices and demand. U.S. crude oil production is estimated to decrease 4% in 2020 and decline an additional 6% in 2021. U.S. dry natural gas production is estimated to decrease 1% in 2020 and decline an additional 5% in 2021, though with a rise estimated to begin in the second half of 2021 in response to higher prices.

Substantial spending cuts for 2020 have been announced by our customers as a result of the significant and estimated declines in oil and natural gas prices and demand, however, the timing of the impact of the spending cuts on production remain difficult to predict, as does the magnitude and duration of the pandemic and resulting economic downturn. In anticipation of lower customer activity levels, we implemented a plan in the second quarter of 2020 to reduce our 2020 operating, corporate and capital costs by between $75 million and $85 million. Horsepower, utilization and revenue are also expected to decline in 2020 as compared to 2019 in both our contract operations and aftermarket services businesses.

The impact of the COVID-19 pandemic on our first quarter 2020 results is primarily visible in the $99.8 million non-cash impairment of our goodwill and the impairment’s resulting impact on income taxes. See Note 8 (“Goodwill”) and Note 16 (“Income Taxes”) to our Financial Statements for further discussion.

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Operating Highlights

The following table summarizes our available and operating horsepower and horsepower utilization (in thousands, except percentages):

Three Months Ended

 

March 31, 

 

    

2020

    

2019

    

Total available horsepower (at period end)(1)

    

4,386

    

4,035

Total operating horsepower (at period end)(2)

3,883

 

3,561

Average operating horsepower

3,914

 

3,545

Horsepower utilization:

  

 

  

Spot (at period end)

89

%  

88

%

Average

89

%  

89

%

(1)Defined as idle and operating horsepower. New compressors completed by a third party manufacturer that have been delivered to us are included in the fleet.
(2)Defined as horsepower that is operating under contract and horsepower that is idle but under contract and generating revenue such as standby revenue.

Non-GAAP Financial Measures

Management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include the non-GAAP financial measure of gross margin.

We define gross margin as total revenue less cost of sales (excluding depreciation and amortization). Gross margin is included as a supplemental disclosure because it is a primary measure used by our management to evaluate the results of revenue and cost of sales (excluding depreciation and amortization), which are key components of our operations. 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 SG&A activities, our financing methods and income taxes. In addition, depreciation and amortization may not accurately reflect the costs required to maintain and replenish the operational usage of our assets and therefore may not portray the costs of current operating activity. As an indicator of our operating performance, gross margin should not be considered an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP. Our gross margin may not be comparable to a similarly-titled measure of other entities because other entities may not calculate gross margin in the same manner.

Gross margin has certain material limitations associated with its use as compared to net income (loss). These limitations are primarily due to the exclusion of SG&A, depreciation and amortization, impairments, restatement and other charges, restructuring charges, interest expense, transaction-related costs, gain (loss) on sale of assets, net, other income (loss), net, provision for (benefit from) income taxes and loss from discontinued operations, net of tax. Because we intend to finance a portion of our operations through borrowings, interest expense is a necessary element of our costs and our ability to generate revenue. Additionally, because we use capital assets, depreciation expense is a necessary element of our costs and our ability to generate revenue and SG&A is necessary to support our operations and required corporate activities. 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.

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The following table reconciles net income (loss) to gross margin (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Net income (loss)

$

(61,187)

$

19,456

Selling, general and administrative

 

30,626

 

28,989

Depreciation and amortization

 

49,822

 

44,106

Long-lived asset impairment

 

6,195

 

3,092

Goodwill impairment

99,830

Restatement and other charges

 

 

421

Restructuring charges

1,728

Interest expense

 

29,665

 

23,617

Transaction-related costs

 

 

180

(Gain) loss on sale of assets, net

(4,116)

16

Other income, net

 

(555)

 

(221)

Benefit from income taxes

 

(15,953)

 

(2,407)

Loss from discontinued operations, net of tax

 

 

273

Gross margin

$

136,055

$

117,522

Financial Results of Operations

Summary of Results

Revenue. Revenue was $249.7 million and $236.2 million during the three months ended March 31, 2020 and 2019, respectively. The increase in revenue was due to an increase in revenue from our contract operations business, partially offset by a decrease in revenue from our aftermarket services business. See “Contract Operations” and “Aftermarket Services” below for further details.

Net income (loss). We had a net loss of $61.2 million and net income of $19.5 million during the three months ended March 31, 2020 and 2019, respectively. The change from net income to net loss was primarily driven by goodwill impairment of $99.8 million and increases in interest expense, depreciation and amortization and long-lived asset impairment, partially offset by increases in gross margin from our contract operations business and benefit from income taxes and the change in (gain) loss on sale of assets, net.

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

Contract Operations

(dollars in thousands)

 

Three Months Ended

March 31, 

Increase

    

2020

    

2019

    

(Decrease)

Revenue

$

206,974

$

182,507

13

%

Cost of sales (excluding depreciation and amortization expense)

 

78,651

 

74,735

5

%

Gross margin

$

128,323

$

107,772

19

%

Gross margin percentage (1)

 

62

%  

 

59

%  

3

%

(1)Defined as gross margin divided by revenue.

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The increase in revenue during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily due to an increase in contract operations rates driven by increased customer demand in 2019 and $20.1 million of revenue associated with the compression assets acquired in the Elite Acquisition, partially offset by a decrease in average operating horsepower (excluding the horsepower acquired in the Elite Acquisition) driven by sales of compression assets completed since the first quarter of 2019.

Gross margin increased during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to the increase in revenue mentioned above, partially offset by a smaller increase in cost of sales. The increase in cost of sales was primarily driven by increases in maintenance and lube oil expense associated with the horsepower acquired in the Elite Acquisition, as well as an increase in freight expense associated with mobilization and demobilization activity.

Gross margin percentage increased during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to the increase in contract operations rates mentioned above.

Aftermarket Services

(dollars in thousands)

 

Three Months Ended

 

March 31, 

Increase

    

2020

    

2019

    

(Decrease)

Revenue

$

42,723

$

53,652

 

(20)

%

Cost of sales (excluding depreciation and amortization expense)

 

34,991

 

43,902

 

(20)

%

Gross margin

$

7,732

$

9,750

 

(21)

%

Gross margin percentage

 

18

%  

 

18

%  

%

The decrease in revenue during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily due to decreases in service activities and parts sales as customers continued the deferral of maintenance activities that began in the second quarter of 2019.

Gross margin decreased during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 due to the decrease in revenue mentioned above, partially offset by a slightly smaller decrease in cost of sales. The decrease in cost of sales was primarily driven by the decrease in service activities and parts sales.

Costs and Expenses

(dollars in thousands)

 

Three Months Ended

March 31, 

    

2020

    

2019

Selling, general and administrative

$

30,626

$

28,989

Depreciation and amortization

 

49,822

 

44,106

Long-lived asset impairment

 

6,195

 

3,092

Goodwill impairment

99,830

Restatement and other charges

 

 

421

Restructuring charges

1,728

Interest expense

 

29,665

 

23,617

Transaction-related costs

 

 

180

(Gain) loss on sale of assets, net

(4,116)

16

Other income, net

 

(555)

 

(221)

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Selling, general and administrative. The increase in SG&A during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily due to a $0.5 million increase in costs related to our process and technology transformation project, a $0.5 million increase in costs associated with software and cloud subscriptions not yet commenced in the first quarter of 2019, including those related to our technology transformation project and contracts acquired in the Elite Acquisition, a $0.5 million increase in sales and use tax and a $0.3 million increase in bad debt expense.

Depreciation and amortization. The increase in depreciation and amortization expense during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily due to an increase in depreciation expense associated with fixed assets acquired in the Elite Acquisition as well as other fixed asset additions during 2019, partially offset by a decrease in depreciation expense resulting from certain assets reaching the end of their depreciable lives as well as the impact of asset impairments and compression asset sales during 2019.

Long-lived asset impairment. During the three months ended March 31, 2020 and 2019, we reviewed the future deployment of our idle compressors for units that were not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. In addition, we evaluated for impairment idle units that had been culled from our fleet in prior years and were available for sale. See Note 14 (“Long-Lived Asset Impairment”) to our Financial Statements for further details.

The following table presents the results of our impairment review, as recorded to our contract operations segment (dollars in thousands):

 

Three Months Ended

March 31, 

    

2020

    

2019

Idle compressors retired from the active fleet

 

85

 

20

Horsepower of idle compressors retired from the active fleet

 

23,000

 

15,000

Impairment recorded on idle compressors retired from the active fleet

$

6,195

$

3,092

Goodwill impairment. During the three months ended March 31, 2020, we recorded $99.8 million of goodwill impairment due to the decline in the fair value of our contract operations reporting unit. See Note 8 (“Goodwill”) to our Financial Statements for further details.

Restructuring charges. During the three months ended March 31, 2020, we recorded $1.7 million of severance costs related to restructuring activities completed in the first quarter of 2020. See Note 15 (“Restructuring Charges”) to our Financial Statements for further details.

Interest expense. The increase in interest expense during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was due to increases in the average outstanding balance of long-term debt and the weighted average effective interest rate.

(Gain) loss on sale of assets, net. The change in (gain) loss on sale of assets, net was primarily due to a $3.2 million gain on the March 2020 Disposition in the first quarter of 2020, which included a $4.8 million gain on the compression assets sold, as well as a $0.6 million increase in gains recognized on the sale of transportation and shop equipment in the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

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Benefit from Income Taxes

(dollars in thousands)

 

Three Months Ended

 

March 31, 

Increase

    

2020

    

2019

    

(Decrease)

Benefit from income taxes

$

(15,953)

$

(2,407)

 

563

%

Effective tax rate

 

21

%  

 

(14)

%  

35

%

The increase in benefit from income taxes was primarily due to the tax effect of the decrease in book income during the three months ended March 31, 2020 compared to the three months ended March 31, 2019, partially offset by a reduction in a valuation allowance and the release of an unrecognized tax benefit due to the settlement of a tax audit recorded during the three months ended March 31, 2019. See Note 16 (“Income Taxes”) to our Financial Statements for further details of the tax impact on the decrease in book income.

Liquidity and Capital Resources

Overview

Our ability to fund operations, finance capital expenditures and pay dividends depends on the levels of our operating cash flows and access to the capital and credit markets. Our primary sources of liquidity are cash flows generated from our operations and our borrowing availability under the Credit Facility. Our cash flow is affected by numerous factors including prices and demand for our services, oil and natural gas exploration and production spending, conditions in the financial markets and other factors. In the first quarter of 2020 and continuing through the date of this filing, the COVID-19 pandemic has caused a deterioration in global macroeconomic conditions, which has significantly impacted our estimates of future revenues and cash flows. However, we have no near-term maturities and do not expect borrowing availability under the Credit Facility to be significantly restricted by any of our covenants. We believe that our operating cash flows and borrowings under the Credit Facility will be sufficient to meet our future liquidity needs.

We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

Capital Requirements

Our contract operations business is capital intensive, requiring significant investment to maintain and upgrade existing operations. Our capital spending is primarily dependent on the demand for our contract operations services and the availability of the type of compression equipment required for us to provide those contract operations services to our customers. Our capital requirements have consisted primarily of, and we anticipate will continue to consist of, the following:

growth capital expenditures, which are made to expand or to replace partially or fully depreciated assets or to expand the operating capacity or revenue-generating capabilities of existing or new assets; and
maintenance capital expenditures, which are made to maintain the existing operating capacity of our assets and related cash flows, further extending the useful lives of the assets.

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The majority of our growth capital expenditures are related to the acquisition cost of new compressors that we add to our fleet. In addition to the cost of newly-acquired compressors, growth capital expenditures can also include the upgrading of major components on an existing compression package where the current configuration of the compression package is no longer in demand and the compressor is not likely to return to an operating status without the capital expenditures. These latter expenditures substantially modify the operating parameters of the compression package such that it can be used in applications for which it previously was not suited. Maintenance capital expenditures are related to major overhauls of significant components of a compression package, such as the engine, compressor and cooler, which return the components to a like-new condition, but do not modify the applications for which the compression package was designed.

We generally invest funds necessary to purchase fleet additions when our idle equipment cannot be reconfigured to economically fulfill a project’s requirements and the new equipment expenditure is expected to generate economic returns over its expected useful life that exceed our cost of capital. In response to the impact that we anticipate the COVID-19 pandemic will have on our customer demand, we have decreased our planned capital expenditures for 2020, and currently plan to spend a total of approximately $140 million to $170 million, primarily consisting of approximately $70 million to $90 million for growth capital expenditures and approximately $47 million to $53 million for maintenance capital expenditures.

Financial Resources

Revolving Credit Facility

During the three months ended March 31, 2020 and 2019, the Credit Facility had an average daily balance of $508.4 million and $808.8 million, respectively. The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 3.4% and 4.3% at March 31, 2020 and December 31, 2019, respectively. As of March 31, 2020, there were $13.7 million letters of credit outstanding under the Credit Facility. We must maintain certain consolidated financial ratios as defined in our Credit Facility agreement. As a result of these ratio requirements, $651.4 million of the $755.3 million of undrawn capacity was available for additional borrowings as of March 31, 2020. As of March 31, 2020, we were in compliance with all covenants under the Credit Facility.

2022 Notes Redemption

On April 1, 2020, the 2022 Notes were redeemed at 100% of their $350.0 million aggregate principal amount plus accrued and unpaid interest of $10.5 million with borrowings from the Credit Facility. A debt extinguishment loss of approximately $4.0 million related to the redemption will be recognized in the second quarter of 2020. See Note 24 (“Subsequent Events”) to our Financial Statements for further details.

Cash Flows

Our cash flows from operating, investing and financing activities, as reflected in our condensed consolidated statements of cash flows, are summarized below (in thousands):

 

Three Months Ended

March 31, 

    

2020

    

2019

Net cash provided by (used in):

 

  

 

  

Operating activities

$

99,129

$

81,400

Investing activities

 

(44,141)

 

(121,304)

Financing activities

 

(55,452)

 

36,002

Net decrease in cash and cash equivalents

$

(464)

$

(3,902)

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Operating Activities

The increase in net cash provided by operating activities during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily due to the increase in revenue from our contract operations business, the decrease in costs of sales of our aftermarket services business, an increase in accounts payable and other liabilities and a decrease in accounts receivable. These cash inflows were partially offset by the receipt of cash proceeds in the first quarter of 2019 pursuant to a settlement of certain sales and use tax audits and an increase in interest paid on our debt instruments in the first quarter of 2020 as compared to the first quarter of 2019.

Investing Activities

The decrease in net cash used in investing activities during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily due to a $60.8 million decrease in capital expenditures and the receipt of proceeds of $24.2 million from the March 2020 Disposition in the first quarter of 2020, partially offset by an $8.6 million decrease in proceeds from other sales of property, plant and equipment.

Financing Activities

The change in net cash provided by (used in) financing activities during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily due to $32.0 million of net repayments of long-term debt in 2020 compared to $61.0 million of net borrowings in 2019 and a $4.9 million increase in dividends paid to stockholders, partially offset by a $6.9 million decrease in payments for debt issuance costs.

Dividends

On April 24, 2020, our Board of Directors declared a quarterly dividend of $0.145 per share of common stock to be paid on May 18, 2020 to stockholders of record at the close of business on May 11, 2020. Any future determinations to pay cash dividends to our stockholders will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations and credit and loan agreements in effect at that time and other factors deemed relevant by our Board of Directors.

Off-Balance Sheet Arrangements

For information on our obligations with respect to letters of credit and performance bonds see Note 10 (“Long-Term Debt”) and Note 21 (“Commitments and Contingencies”), respectively, to our Financial Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk, see Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our 2019 Form 10-K. Our exposures as of March 31, 2020 have not changed materially since December 31, 2019.

Item 4. Controls and Procedures

This Item 4 includes information concerning the controls and controls evaluation referred to in the certifications of our Chief Executive Officer and Chief Financial Officer required by Rule 13a-14 of the Exchange Act included in this Quarterly Report as Exhibits 31.1 and 31.2.

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Management’s Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosures.

As of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act), which are designed to provide reasonable assurance that we are able to record, process, summarize and report the information required to be disclosed in our reports under the Exchange Act within the time periods specified in the rules and forms of the SEC. Based on the evaluation, as of March 31, 2020 our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to management, and made known to our principal executive officer and principal financial officer, on a timely basis to ensure that it is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of business, we are involved in various pending or threatened legal actions. While we are unable to predict the ultimate outcome of these actions, we believe that any ultimate liability arising from any of these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends.

Item 1A. Risk Factors

The following risk factors became significant to us in the first quarter of 2020 and should be read in conjunction with the risk factors previously disclosed in our 2019 Form 10-K.

The COVID-19 pandemic is expected to significantly reduce demand for our services, and may have a material adverse impact on our financial condition, results of operations and cash flows.

The effects of the COVID-19 pandemic, including actions taken by businesses and governments, have resulted in a significant and swift reduction in U.S. economic activity. These effects have materially adversely affected the demand for oil and, to a lesser extent, natural gas, and are expected to have a negative impact on demand for our services and products. The collapse in the demand for oil caused by this unprecedented global health and economic crisis, coupled with oil oversupply, is expected to adversely impact the demand for our services, which in turn could adversely impact our financial condition, results of operations and cash flows.

While the magnitude and duration of potential social, economic and labor instability as a direct result of the COVID-19 pandemic cannot be estimated at this time, we are closely monitoring the effects of the pandemic on commodity demands and on our customers, as well as on our operations and employees. These effects may include adverse revenue and net income effects; disruptions to our operations and supply chain; customer shutdowns of oil and gas exploration and production; employee impacts from illness, school closures and other community response measures; and temporary inaccessibility or closures of our facilities or the facilities of our customers and suppliers.

The extent to which our operating and financial results are affected by the COVID-19 pandemic will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic; additional actions by businesses and governments in response to the pandemic; and the speed and effectiveness of responses to combat the virus. The COVID-19 pandemic, and the volatile regional and global economic conditions stemming from the pandemic, could also aggravate the other risk factors that we identify in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The COVID-19 pandemic also may materially adversely affect our operating and financial results in a manner that is not currently known to us or that we do not currently consider to present significant risks to our operations.

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Our ability to use NOLs to offset future income may be limited.

 

Our ability to use any NOLs generated by us could be substantially limited if we were to experience an “ownership change” as defined under Section 382 of the Code. In general, an “ownership change” would occur if our “5-percent stockholders,” as defined under Section 382 of the Code, including certain groups of persons treated as “5-percent stockholders,” collectively increased their ownership in us by more than 50 percentage points over a rolling three-year period. An ownership change can occur as a result of a public offering of our common stock, as well as through secondary market purchases of our common stock and certain types of reorganization transactions. We have experienced ownership changes, which may result in an annual limitation on the use of its pre-ownership change NOLs (and certain other losses and/or credits) equal to the equity value of our stock immediately before the ownership change, multiplied by the long-term tax-exempt rate for the month in which the ownership change occurs. Market volatility due to reduced demand from the COVID-19 pandemic and oil oversupply may cause increased interest in our common stock, which may result in an additional ownership change. Due to the COVID-19 pandemic, the U.S. Federal Reserve has lowered the long-term tax-exempt rate. Additionally, our equity value has decreased due to the above-mentioned impacts of the COVID-19 pandemic and oil oversupply. Both of these changes could further limit our use of pre-ownership change NOLs if we experienced an additional ownership change. Furthermore, the IRS has recently proposed regulations that would prevent us from using unrealized built-in gains to increase this limitation. If these regulations were finalized and we experienced an ownership change our ability to use our NOLs may be limited. Such a limitation could, for any given year, have the effect of increasing the amount of our U.S. federal income tax liability, which would negatively impact the amount of after-tax cash available for distribution to our stockholders and our financial condition.

Item 2. Unregistered Sales of Equity Securities

The following table summarizes our repurchases of equity securities during the three months ended March 31, 2020:

Maximum

Number of Shares

Total Number of

That May Yet be

Average

Shares Purchased

Purchased Under

Total Number

Price

as Part of Publicly

the Publicly

of Shares

Paid per

Announced Plans

Announced Plans

Repurchased (1)

Share

or Programs

or Programs

January 1, 2020 — January 31, 2020

    

90,594

    

$

8.82

    

N/A

    

N/A

February 1, 2020 — February 29, 2020

 

 

 

N/A

 

N/A

March 1, 2020 — March 31, 2020

 

 

 

N/A

 

N/A

Total

 

90,594

$

8.82

 

N/A

 

N/A

(1)Represents shares withheld to satisfy employees’ tax withholding obligations in connection with the vesting of restricted stock awards during the period.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

40

Table of Contents

Item 6. Exhibits

Exhibit No.

    

Description

2.1

Asset Purchase Agreement, dated as of June 23, 2019, by and among Archrock Services, L.P., Archrock, Inc. and Elite Compression Services, LLC, incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on June 24, 2019

2.2

Asset Purchase Agreement, dated as of June 23, 2019, by and between Archrock Services, L.P. and Harvest Four Corners, LLC, incorporated by reference to Exhibit 2.2 of the Registrant’s Current Report on Form 8-K filed on June 24, 2019

3.1

Composite Certificate of Incorporation of Archrock, Inc. (as amended as of November 3, 2015), incorporated by reference to Exhibit 3.3 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015

3.2

Third Amended and Restated Bylaws of Exterran Holdings, Inc. (now Archrock, Inc.), incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on March 20, 2013

4.1

Indenture, dated as of March 21, 2019, by and among Archrock Partners, L.P., Archrock Partners Finance Corp., the guarantors party thereto and Wells Fargo Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed on March 21, 2019

4.2

Indenture, dated as of December 20, 2019, by and among Archrock Partners, L.P., Archrock Partners Finance Corp., the guarantors party thereto and Wells Fargo Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed on December 20, 2019

10.1

Separation Agreement, dated effective as of January 31, 2020 between Archrock, Inc. and Sean K. Clawges, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8 K filed on February 11, 2020

31.1*

Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.1*

Interactive data files pursuant to Rule 405 of Regulation S-T

104.1*

Cover page interactive data files pursuant to Rule 406 of Regulation S-T

*      Filed herewith.

**    Furnished, not filed.

41

Table of Contents

SIGNATURES

Pursuant to the requirements 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.

Archrock, Inc.

By:

/s/ Douglas S. Aron

Douglas S. Aron

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

By:

/s/ Donna A. Henderson

Donna A. Henderson

Vice President and Chief Accounting Officer

(Principal Accounting Officer)

May 5, 2020

42

Exhibit 31.1

Certification

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, D. Bradley Childers, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Archrock, 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 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 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.

Date: May 5, 2020

By:

/s/ D. BRADLEY CHILDERS

Name:  D. Bradley Childers

Title:    President and Chief Executive Officer

(Principal Executive Officer)


Exhibit 31.2

Certification

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Douglas S. Aron, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Archrock, 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 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 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.

Date: May 5, 2020

By:

/s/ DOUGLAS S. ARON

Name:  Douglas S. Aron

Title:    Senior Vice President and Chief Financial Officer

(Principal Financial Officer)


Exhibit 32.1

Certification of CEO Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Archrock, Inc. (the “Company”) for the quarter ended March 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), D. Bradley Childers, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

1.the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ D. BRADLEY CHILDERS

Name:  D. Bradley Childers

Title:    President and Chief Executive Officer

Date: May 5, 2020

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.


Exhibit 32.2

Certification of CFO Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Archrock, Inc. (the “Company”) for the quarter ended March 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Douglas S. Aron, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

1.the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ DOUGLAS S. ARON

Name:   Douglas S. Aron

Title:     Senior Vice President and Chief Financial Officer

Date: May 5, 2020

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.


v3.20.1
Recent Accounting Developments (Policies)
3 Months Ended
Mar. 31, 2020
New Accounting Pronouncements and Changes in Accounting Principles [Abstract]  
Credit Losses

Credit Losses

In June 2016, the FASB issued ASU 2016-13, which changes the impairment model for financial assets measured at amortized cost and certain other instruments, and requires entities to use a new current expected credit loss model that results in recognition of expected losses over the contractual life of an asset. We adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. The adoption resulted in a $0.2 million decrease in our allowance for credit losses and a corresponding pre-tax cumulative effect adjustment to retained earnings in our condensed consolidated balance sheet at January 1, 2020. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

Our financial assets measured at amortized cost consist of cash equivalents and trade receivables from revenue transactions within the scope of ASC 606 Revenue. We believe our temporary cash investments have a zero loss expectation because we maintain minimal balances in our cash investment accounts and have no history of loss. Trade accounts receivable are due from companies of varying size engaged principally in oil and natural gas activities throughout the U.S. We review the financial condition of customers prior to extending credit and generally do not obtain collateral for trade receivables. Payment terms are on a short-term basis and in accordance with industry practice. We consider this credit risk to be limited due to these companies’ financial resources, the nature of the products and services we provide and the terms of our customer agreements.

Due to the short-term nature of our trade receivables, we consider the amortized cost to be the same as the carrying amount of the receivable, excluding the allowance for credit losses. We recognize an allowance for credit losses when a receivable is recorded, even when the risk of loss is remote. We utilize an aging schedule to determine our allowance for credit losses, and measure expected credit losses on a collective (pool) basis when similar risk characteristics exist. We rely primarily on ratings assigned by external rating agencies and credit monitoring services to assess credit risk and aggregate customers first by low, medium or high risk asset pools, and then by delinquency status. We also consider the internal risk associated with geographic location and the services we provide to the customer when determining asset pools. If a customer does not share similar risk characteristics with other customers, we evaluate the customer’s outstanding trade receivables for expected credit losses on an individual basis. Trade receivables evaluated individually are not included in our collective assessment. Each reporting period, we reassess our customers’ risk profiles and determine the appropriate asset pool classification, or perform individual assessments of expected credit losses, based on the customers’ risk characteristics at the reporting date.

The contractual life of our trade receivables is primarily 30 days based on the payment terms specified in the contract. Contract operations services are generally billed monthly at the beginning of the month in which service is being provided. Aftermarket services billings typically occur when parts are delivered or service is completed. Loss rates are separately determined for each asset pool based on the length of time a trade receivable has been outstanding. We analyze two years of internal historical loss data, including the effects of prepayments, write-offs and subsequent recoveries, to determine our historical loss experience. Our historical loss information is a relevant data point for estimating credit losses, as the data closely aligns with trade receivables due from our customers. Ratings assigned by external rating agencies and credit monitoring services consider past performance and forecasts of future economic conditions in assessing credit risk. We routinely update our historical loss data to reflect our customers’ current risk profile, to ensure the historical data and loss rates are relevant to the pool of assets for which we are estimating expected credit losses. Judgement is used to determine the expected credit loss for customers that do not share similar risk characteristics with other customers, based on customer specific items such as legal proceedings, past experience with the customer and/or ongoing customer negotiations.

The following table summarizes the changes in the allowance for credit losses balance during the three months ended March 31, 2020 (in thousands):

Balance at December 31, 2019

      

$

2,210

Impact of adoption of ASU 2016-13 on January 1, 2020

(216)

Provision for credit losses

752

Write-offs charged against allowance

(223)

Balance at March 31, 2020

$

2,523

Fair Value Measurements

Fair Value Measurements

On January 1, 2020, we adopted ASU 2018-13, which amends the required fair value measurements disclosures related to valuation techniques and inputs used, uncertainty in measurement and changes in measurements applied. These amendments resulted in new, prospective disclosures of the range and weighted average of the significant unobservable inputs used to develop our Level 3 fair value measurements related to our idle and previously-culled compressors. The adoption of ASU 2018-13 had no impact on our condensed consolidated financial statements.

Income Taxes

Income Taxes

On January 1, 2020, we adopted ASU 2019-12, which simplifies the accounting for income taxes by, among other things, removing certain exceptions related to the incremental approach for intraperiod tax allocation, the year-to-date loss methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities on outside basis differences. ASU 2019-12 also clarifies other aspects of the accounting for income taxes in order to improve consistency of application. The adoption of ASU 2019-12 had no impact on our condensed consolidated financial statements.

Accounting Standards Updates Not Yet Implemented

Accounting Standards Updates Not Yet Implemented

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued as a result of reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. Entities may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. We are currently assessing the impact that ASU 2020-04 may have on our interest rate swap agreements, Credit Facility and other transactions that may be affected by reference rate reform.

v3.20.1
Inventory (Tables)
3 Months Ended
Mar. 31, 2020
Inventory Disclosure [Abstract]  
Schedule of inventory, net of reserves

Inventory consisted of the following (in thousands):

    

March 31, 2020

    

December 31, 2019

Parts and supplies

$

63,889

$

66,121

Work in progress

 

9,042

 

8,346

Inventory

$

72,931

$

74,467

v3.20.1
Long-Term Debt
3 Months Ended
Mar. 31, 2020
Debt Disclosure [Abstract]  
Long-Term Debt

10. Long-Term Debt

Long-term debt consisted of the following (in thousands):

    

March 31, 2020

    

December 31, 2019

Credit Facility

$

481,000

$

513,000

2028 Notes

 

500,000

 

500,000

Less: Deferred financing costs, net of amortization

 

(7,851)

 

(8,090)

 

492,149

 

491,910

2027 Notes

500,000

 

500,000

Less: Deferred financing costs, net of amortization

(7,723)

 

(7,999)

492,277

 

492,001

2022 Notes

 

350,000

 

350,000

Less: Debt discount, net of amortization

 

(1,860)

 

(2,046)

Less: Deferred financing costs, net of amortization

 

(2,111)

 

(2,316)

 

346,029

 

345,638

Long-term debt

$

1,811,455

$

1,842,549

Credit Facility

As of March 31, 2020, there were $13.7 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.5%. The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 3.4% and 4.3% at March 31, 2020 and December 31, 2019, respectively. We incurred $0.7 million and $0.5 million in commitment fees on the daily unused amount of the Credit Facility during the three months ended March 31, 2020 and 2019, respectively.

We must maintain certain consolidated financial ratios as defined in our Credit Facility agreement. As a result of these ratio requirements, $651.4 million of the $755.3 million of undrawn capacity was available for additional borrowings as of March 31, 2020. As of March 31, 2020, we were in compliance with all covenants under the Credit Facility agreement.

v3.20.1
Property, Plant and Equipment, Net
3 Months Ended
Mar. 31, 2020
Property, Plant and Equipment [Abstract]  
Property, Plant and Equipment, Net

6. Property, Plant and Equipment, Net

Property, plant and equipment, net consisted of the following (in thousands):

    

March 31, 2020

    

December 31, 2019

Compression equipment, facilities and other fleet assets

$

3,659,907

$

3,653,930

Land and buildings

 

51,031

 

50,743

Transportation and shop equipment

 

114,465

 

116,057

Computer hardware and software

 

93,734

 

93,695

Other

 

17,587

 

15,308

Property, plant and equipment

 

3,936,724

 

3,929,733

Accumulated depreciation

 

(1,374,801)

 

(1,370,335)

Property, plant and equipment, net

$

2,561,923

$

2,559,398

v3.20.1
Recent Accounting Developments
3 Months Ended
Mar. 31, 2020
New Accounting Pronouncements and Changes in Accounting Principles [Abstract]  
Recent Accounting Developments

2. Recent Accounting Developments

Accounting Standards Updates Implemented

Credit Losses

In June 2016, the FASB issued ASU 2016-13, which changes the impairment model for financial assets measured at amortized cost and certain other instruments, and requires entities to use a new current expected credit loss model that results in recognition of expected losses over the contractual life of an asset. We adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. The adoption resulted in a $0.2 million decrease in our allowance for credit losses and a corresponding pre-tax cumulative effect adjustment to retained earnings in our condensed consolidated balance sheet at January 1, 2020. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

Our financial assets measured at amortized cost consist of cash equivalents and trade receivables from revenue transactions within the scope of ASC 606 Revenue. We believe our temporary cash investments have a zero loss expectation because we maintain minimal balances in our cash investment accounts and have no history of loss. Trade accounts receivable are due from companies of varying size engaged principally in oil and natural gas activities throughout the U.S. We review the financial condition of customers prior to extending credit and generally do not obtain collateral for trade receivables. Payment terms are on a short-term basis and in accordance with industry practice. We consider this credit risk to be limited due to these companies’ financial resources, the nature of the products and services we provide and the terms of our customer agreements.

Due to the short-term nature of our trade receivables, we consider the amortized cost to be the same as the carrying amount of the receivable, excluding the allowance for credit losses. We recognize an allowance for credit losses when a receivable is recorded, even when the risk of loss is remote. We utilize an aging schedule to determine our allowance for credit losses, and measure expected credit losses on a collective (pool) basis when similar risk characteristics exist. We rely primarily on ratings assigned by external rating agencies and credit monitoring services to assess credit risk and aggregate customers first by low, medium or high risk asset pools, and then by delinquency status. We also consider the internal risk associated with geographic location and the services we provide to the customer when determining asset pools. If a customer does not share similar risk characteristics with other customers, we evaluate the customer’s outstanding trade receivables for expected credit losses on an individual basis. Trade receivables evaluated individually are not included in our collective assessment. Each reporting period, we reassess our customers’ risk profiles and determine the appropriate asset pool classification, or perform individual assessments of expected credit losses, based on the customers’ risk characteristics at the reporting date.

The contractual life of our trade receivables is primarily 30 days based on the payment terms specified in the contract. Contract operations services are generally billed monthly at the beginning of the month in which service is being provided. Aftermarket services billings typically occur when parts are delivered or service is completed. Loss rates are separately determined for each asset pool based on the length of time a trade receivable has been outstanding. We analyze two years of internal historical loss data, including the effects of prepayments, write-offs and subsequent recoveries, to determine our historical loss experience. Our historical loss information is a relevant data point for estimating credit losses, as the data closely aligns with trade receivables due from our customers. Ratings assigned by external rating agencies and credit monitoring services consider past performance and forecasts of future economic conditions in assessing credit risk. We routinely update our historical loss data to reflect our customers’ current risk profile, to ensure the historical data and loss rates are relevant to the pool of assets for which we are estimating expected credit losses. Judgement is used to determine the expected credit loss for customers that do not share similar risk characteristics with other customers, based on customer specific items such as legal proceedings, past experience with the customer and/or ongoing customer negotiations.

The following table summarizes the changes in the allowance for credit losses balance during the three months ended March 31, 2020 (in thousands):

Balance at December 31, 2019

      

$

2,210

Impact of adoption of ASU 2016-13 on January 1, 2020

(216)

Provision for credit losses

752

Write-offs charged against allowance

(223)

Balance at March 31, 2020

$

2,523

Fair Value Measurements

On January 1, 2020, we adopted ASU 2018-13, which amends the required fair value measurements disclosures related to valuation techniques and inputs used, uncertainty in measurement and changes in measurements applied. These amendments resulted in new, prospective disclosures of the range and weighted average of the significant unobservable inputs used to develop our Level 3 fair value measurements related to our idle and previously-culled compressors. The adoption of ASU 2018-13 had no impact on our condensed consolidated financial statements.

Income Taxes

On January 1, 2020, we adopted ASU 2019-12, which simplifies the accounting for income taxes by, among other things, removing certain exceptions related to the incremental approach for intraperiod tax allocation, the year-to-date loss methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities on outside basis differences. ASU 2019-12 also clarifies other aspects of the accounting for income taxes in order to improve consistency of application. The adoption of ASU 2019-12 had no impact on our condensed consolidated financial statements.

Accounting Standards Updates Not Yet Implemented

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued as a result of reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. Entities may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. We are currently assessing the impact that ASU 2020-04 may have on our interest rate swap agreements, Credit Facility and other transactions that may be affected by reference rate reform.

v3.20.1
Long-Term Debt - Schedule of Long-term Debt (Details) - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Debt Instrument    
Long-term debt $ 1,811,455 $ 1,842,549
Credit Facility    
Debt Instrument    
Long-term debt 481,000 513,000
2028 Notes    
Debt Instrument    
Long term debt gross 500,000 500,000
Less: Deferred financing costs, net of amortization (7,851) (8,090)
Long-term debt 492,149 491,910
2027 Notes    
Debt Instrument    
Long term debt gross 500,000 500,000
Less: Deferred financing costs, net of amortization (7,723) (7,999)
Long-term debt 492,277 492,001
2022 Notes    
Debt Instrument    
Long term debt gross 350,000 350,000
Less: Debt discount, net of amortization (1,860) (2,046)
Less: Deferred financing costs, net of amortization (2,111) (2,316)
Long-term debt $ 346,029 $ 345,638
v3.20.1
Income Taxes (Details)
$ in Thousands
3 Months Ended
Mar. 31, 2020
USD ($)
Income Tax Disclosure [Abstract]  
Tax benefit on goodwill impairment $ 22,700
Goodwill impairment 99,830
Potential decrease in unrecognized tax benefit $ 2,600
v3.20.1
Derivatives - Interest Rate Risk - Narratives (Details) - Derivatives Designated as Hedging Instruments - Interest Rate Swaps
$ in Millions
Mar. 31, 2020
USD ($)
Derivatives  
Deferred pre-tax losses to be reclassified during next 12 months $ 4.3
Weighted average effective fixed interest rate on interest rate swaps (as a percent) 1.80%
v3.20.1
Revenue from Contract with Customers - Disaggregate Revenue (Details)
$ in Thousands
3 Months Ended
Mar. 31, 2020
USD ($)
segment
Mar. 31, 2019
USD ($)
Disaggregation of Revenue    
Contract revenue $ 249,697 $ 236,159
Number of reportable segments | segment 2  
Contract Operations | Transferred at Point in Time    
Disaggregation of Revenue    
Contract revenue $ 1,600 2,100
Contract Operations | Contract operations    
Disaggregation of Revenue    
Contract revenue 206,974 182,507
Contract Operations | 0 - 1,000 horsepower per unit    
Disaggregation of Revenue    
Contract revenue 66,740 63,739
Contract Operations | 1,001 - 1,500 horsepower per unit    
Disaggregation of Revenue    
Contract revenue 84,852 74,340
Contract Operations | Over 1,500 horsepower per unit    
Disaggregation of Revenue    
Contract revenue 54,591 43,425
Contract Operations | Other    
Disaggregation of Revenue    
Contract revenue 791 1,003
Aftermarket Services | Aftermarket services    
Disaggregation of Revenue    
Contract revenue 42,723 53,652
Aftermarket Services | Services    
Disaggregation of Revenue    
Contract revenue 25,450 33,521
Aftermarket Services | OTC parts and components sales    
Disaggregation of Revenue    
Contract revenue $ 17,273 $ 20,131
v3.20.1
Restructuring Charges - Description (Details)
$ in Thousands
3 Months Ended
Mar. 31, 2020
USD ($)
Restructuring Charges  
Restructuring costs $ 1,728
v3.20.1
Fair Value Measurements - Measured on Nonrecurring Basis (Details)
$ in Thousands
3 Months Ended
Mar. 31, 2020
USD ($)
$ / hp
Mar. 31, 2019
USD ($)
Valuation of our interest rate swaps and impaired assets    
Goodwill impairment | $ $ 99,830  
Nonrecurring Basis | Level 3    
Valuation of our interest rate swaps and impaired assets    
Impaired compressors | $ $ 253 $ 5,859
Measurement Input, Discount for market liquidity | Weighted average    
Valuation of our interest rate swaps and impaired assets    
Measurement input 0.78  
Impaired Long-Lived Assets | Measurement Input, Sale proceeds | Level 3 | Minimum    
Valuation of our interest rate swaps and impaired assets    
Measurement input 0  
Impaired Long-Lived Assets | Measurement Input, Sale proceeds | Level 3 | Maximum    
Valuation of our interest rate swaps and impaired assets    
Measurement input 372  
Impaired Long-Lived Assets | Measurement Input, Sale proceeds | Level 3 | Weighted average    
Valuation of our interest rate swaps and impaired assets    
Measurement input 21  
v3.20.1
Business Transactions - Assets Acquired (Details) - Elite Acquisition
Aug. 01, 2019
Business Acquisition [Line Items]  
Property plant and equipment remaining useful life 15 years
Estimated average remaining life intangible assets 15 years
v3.20.1
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY - USD ($)
$ in Thousands
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Treasury Stock
Accumulated Deficit
Total
Beginning balance at Dec. 31, 2018 $ 1,358 $ 3,177,982 $ 5,773 $ (79,862) $ (2,263,677) $ 841,574
Beginning, shares at Dec. 31, 2018 135,787,509     (6,381,605)    
Increase (Decrease) in Stockholders' Equity            
Treasury stock purchased       $ (857)   (857)
Treasury stock purchased, shares       (87,036)    
Cash dividends         (17,231) (17,231)
Shares issued in employee stock purchase plan   218       218
Shares issued in employee stock purchase plan, shares 29,728          
Stock-based compensation, net of forfeitures $ 11 2,346       2,357
Stock-based compensation, net of forfeitures, shares 1,059,115     (15,434)    
Comprehensive income            
Net income         19,456 19,456
Interest rate swap loss, net of reclassifications to earnings     (3,225)     (3,225)
Ending balance at Mar. 31, 2019 $ 1,369 3,180,546 2,548 $ (80,719) (2,261,452) 842,292
Ending, shares at Mar. 31, 2019 136,876,352     (6,484,075)    
Increase (Decrease) in Stockholders' Equity            
Impact of ASU 2016-13 adoption         166 166
Beginning balance at Dec. 31, 2019 $ 1,587 3,412,509 (1,387) $ (81,869) (2,244,877) 1,085,963
Beginning, shares at Dec. 31, 2019 158,636,918     (6,702,602)    
Increase (Decrease) in Stockholders' Equity            
Treasury stock purchased       $ (799)   (799)
Treasury stock purchased, shares       (90,594)    
Cash dividends         (22,171) (22,171)
Shares issued in employee stock purchase plan $ 1 201       202
Shares issued in employee stock purchase plan, shares 56,417          
Stock-based compensation, net of forfeitures $ 10 3,074       3,084
Stock-based compensation, net of forfeitures, shares 1,063,163     (37,211)    
Comprehensive income            
Net income         (61,187) (61,187)
Interest rate swap loss, net of reclassifications to earnings     (5,786)     (5,786)
Ending balance at Mar. 31, 2020 $ 1,598 $ 3,415,784 $ (7,173) $ (82,668) $ (2,328,069) $ 999,472
Ending, shares at Mar. 31, 2020 159,756,498     (6,830,407)    
v3.20.1
CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 3,221 $ 3,685
Accounts receivable, trade, net of allowance of $2,523 and $2,210, respectively 138,623 144,865
Inventory 72,931 74,467
Other current assets 8,969 9,186
Total current assets 223,744 232,203
Property, plant and equipment, net 2,561,923 2,559,398
Operating lease ROU assets 19,156 17,901
Goodwill, net   100,598
Intangible assets, net 73,261 77,471
Contract costs, net 41,314 42,927
Deferred tax assets 55,175 36,642
Other assets 29,661 29,934
Noncurrent assets associated with discontinued operations 12,605 12,901
Total assets 3,016,839 3,109,975
Current liabilities:    
Accounts payable, trade 62,289 60,215
Accrued liabilities 86,015 67,845
Deferred revenue 8,841 10,683
Total current liabilities 157,145 138,743
Long-term debt 1,811,455 1,842,549
Operating lease liabilities 17,184 16,094
Deferred tax liabilities 857 1,289
Other liabilities 22,207 16,829
Noncurrent liabilities associated with discontinued operations 8,519 8,508
Total liabilities 2,017,367 2,024,012
Commitments and contingencies (Note 21)
Equity:    
Common stock: $0.01 par value per share, 250,000,000 shares authorized, 159,756,498 and 158,636,918 shares issued, respectively 1,598 1,587
Additional paid-in capital 3,415,784 3,412,509
Accumulated other comprehensive income (loss) (7,173) (1,387)
Accumulated deficit (2,328,069) (2,244,877)
Treasury stock: 6,830,407 and 6,702,602 common shares, at cost, respectively (82,668) (81,869)
Total equity 999,472 1,085,963
Total liabilities and equity $ 3,016,839 $ 3,109,975
v3.20.1
Organization (Details)
3 Months Ended
Mar. 31, 2020
segment
Accounting Policies [Abstract]  
Number of reportable segments 2
v3.20.1
Segments - Revenue and Gross Margin by Reportable Segment (Details) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Revenue and other financial information by reportable segment    
Revenues $ 249,697 $ 236,159
Gross margin 136,055 117,522
Contract Operations    
Revenue and other financial information by reportable segment    
Gross margin 128,323 107,772
Contract Operations | Contract operations    
Revenue and other financial information by reportable segment    
Revenues 206,974 182,507
Aftermarket Services    
Revenue and other financial information by reportable segment    
Gross margin 7,732 9,750
Aftermarket Services | Aftermarket services    
Revenue and other financial information by reportable segment    
Revenues $ 42,723 $ 53,652
v3.20.1
Leases - Maturity Schedule (Details) - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Operating Lease Liabilities, Payments Due    
2020 $ 2,808  
2021 3,955  
2022 2,855  
2023 2,550  
2024 2,159  
2025 1,930  
Thereafter 8,942  
Total lease payments 25,199  
Less: Interest (4,804)  
Total lease liabilities under ASC 842 Leases $ 20,395 $ 19,131
v3.20.1
Leases - Balance Sheet Information (Details) - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Leases [Abstract]    
ROU assets $ 19,156 $ 17,901
Lease liabilities    
Current 3,211 3,037
Noncurrent 17,184 16,094
Total lease liabilities $ 20,395 $ 19,131
v3.20.1
Commitments and Contingencies - Guarantees Not Recorded on Balance Sheet (Details)
$ in Millions
Mar. 31, 2020
USD ($)
Performance Bonds  
Commitments and contingencies  
Maximum potential undiscounted payments $ 2.2
v3.20.1
Fair Value Measurements - Fair Value of Debt (Details) - Fixed Rate Debt - Level 2 - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Carrying Amount    
Fair Value, Balance Sheet Grouping, Financial Statement Captions    
Long-term debt, fair value $ 1,330,455 $ 1,329,549
Fair Value    
Fair Value, Balance Sheet Grouping, Financial Statement Captions    
Long-term debt, fair value $ 1,067,000 $ 1,400,000
v3.20.1
Discontinued Operations - Income Statement Data for Discontinued Operations (Details) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Disposal Group, Including Discontinued Operation, Income Statement Disclosures    
Loss from discontinued operations, net of tax   $ (273)
Spinoff | Exterran Corporation    
Disposal Group, Including Discontinued Operation, Income Statement Disclosures    
Other income, net $ (10) (1,432)
Provision for income taxes $ 10 1,705
Loss from discontinued operations, net of tax   $ (273)
v3.20.1
Equity (Tables)
3 Months Ended
Mar. 31, 2020
Equity [Abstract]  
Summary of entity's dividends per common share

    

Declared Dividends

    

Dividends Paid

    

per Common Share

    

(in thousands)

2020

 

  

 

  

Q1

$

0.145

$

22,171

2019

 

  

 

  

Q1

$

0.132

$

17,231

Q2

 

0.132

 

17,206

Q3

 

0.145

 

22,062

Q4

 

0.145

 

22,031

v3.20.1
Earnings Per Share (Tables)
3 Months Ended
Mar. 31, 2020
Earnings Per Share [Abstract]  
Summary of net income (loss) attributable to Archrock common stockholders used in the calculation of basic and diluted income (loss) per common share

The following table shows net income (loss) used in the calculation of basic and diluted net income (loss) per common share (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Income (loss) from continuing operations

$

(61,187)

$

19,729

Loss from discontinued operations, net of tax

 

 

(273)

Net income (loss)

 

(61,187)

 

19,456

Less: Net income attributable to participating securities

 

(322)

 

(356)

Net income (loss) attributable to common stockholders

$

(61,509)

$

19,100

Schedule of potential shares of common stock that were included in computing diluted income (loss) attributable to Archrock common stockholders per common share

The following table shows the potential shares of common stock that were included in computing diluted net income (loss) per common share (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Weighted average common shares outstanding including participating securities

152,601

130,238

Less: Weighted average participating securities outstanding

 

(2,051)

 

(2,029)

Weighted average common shares outstanding used in basic net income (loss) per common share

 

150,550

 

128,209

Net dilutive potential common shares issuable:

 

  

 

  

On exercise of options and vesting of performance-based restricted stock units

 

 

40

On settlement of employee stock purchase plan shares

 

 

6

Weighted average common shares outstanding used in diluted net income (loss) per common share

 

150,550

 

128,255

Schedule of potential shares of common stock issuable, excluded from computation of diluted income (loss), attributable to Archrock common stockholders per common share

The following table shows the potential shares of common stock issuable that were excluded from computing diluted net income (loss) per common share as their inclusion would have been anti-dilutive (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

On exercise of options where exercise price is greater than average market value for the period

 

126

 

154

On exercise of options and vesting of performance-based restricted stock units

57

On settlement of employee stock purchase plan shares

29

Net dilutive potential common shares issuable

212

154

v3.20.1
Derivatives
3 Months Ended
Mar. 31, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives

18. Derivatives

We are exposed to market risks associated with changes in the variable interest rate of the Credit Facility. We use derivative instruments to manage our exposure to fluctuations in this variable interest rate and thereby minimize the risks and costs associated with financial activities. We do not use derivative instruments for trading or other speculative purposes.

The following interest rate swaps, entered into to offset changes in expected cash flows due to fluctuations in the associated variable interest rates, were outstanding at March 31, 2020 (in millions):

Expiration Date

    

Notional Value

May 2020

$

100

March 2022

 

300

$

400

The counterparties to our derivative agreements are major financial institutions. We monitor the credit quality of these financial institutions and do not expect nonperformance by any counterparty, although such nonperformance could have a material adverse effect on us. We have no collateral posted for the derivative instruments.

We have designated these interest rate swaps as cash flow hedging instruments. Changes in the fair value of the interest rate swaps are recognized as a component of other comprehensive income (loss) until the hedged transaction affects earnings. At that time, amounts are reclassified into earnings to interest expense, the same statement of operations line item to which the earnings effect of the hedged item is recorded. Cash flows from derivatives designated as hedges are classified in our condensed consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions unless the derivative contract contains a significant financing element; in this case, the cash settlements for these derivatives are classified as cash flows from financing activities.

We expect the hedging relationship to be highly effective as the interest rate swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate. We perform quarterly qualitative prospective and retrospective hedge effectiveness assessments unless facts and circumstances related to the hedging relationships change such that we can no longer assert qualitatively that the cash flow hedge relationships were and continue to be highly effective. We estimate that $4.3 million of the deferred pre-tax loss attributable to interest rate swaps included in accumulated other comprehensive loss at March 31, 2020 will be reclassified into earnings as interest expense at then-current values during the next 12 months as the underlying hedged transactions occur.

As of March 31, 2020, the weighted average effective fixed interest rate on our interest rate swaps was 1.8%.

The following table presents the effect of our derivative instruments designated as cash flow hedging instruments on our condensed consolidated balance sheets (in thousands):

    

March 31, 2020

    

December 31, 2019

Other current assets

$

$

12

Total derivative assets

$

$

12

Accrued liabilities

$

(4,317)

$

(593)

Other liabilities

 

(4,764)

 

(1,175)

Total derivative liabilities

$

(9,081)

$

(1,768)

The following tables present the effect of our derivative instruments designated as cash flow hedging instruments on our condensed consolidated statements of operations (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Pre-tax loss recognized in other comprehensive loss

$

(7,573)

$

(2,299)

Pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense

 

(248)

 

926

Total amount of interest expense in which the effects of cash flow hedges are recorded

29,665

23,617

See Note 11 (“Accumulated Other Comprehensive Income (Loss)”) and Note 19 (“Fair Value Measurements”) for further details on our derivative instruments.

v3.20.1
Long-Lived Asset Impairment
3 Months Ended
Mar. 31, 2020
Asset Impairment Charges [Abstract]  
Long-Lived Asset Impairment

14. Long-Lived Asset Impairment

We review long-lived assets, including property, plant and equipment and identifiable intangibles that are being amortized, for impairment whenever events or changes in circumstances, including the removal of compressors from our active fleet, indicate that the carrying amount of an asset may not be recoverable.

We periodically review the future deployment of our idle compression assets for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. Based on these reviews, we determine that certain idle compressors should be retired from the active fleet. The retirement of these units from the active fleet triggers a review of these assets for impairment and as a result of our review, we may record an asset impairment to reduce the book value of each unit to its estimated fair value. The fair value of each unit is estimated based on the expected net sale proceeds compared to other fleet units we recently sold, a review of other units recently offered for sale by third parties or the estimated component value of the equipment we plan to use.

In connection with our review of our idle compression assets, we evaluate for impairment idle units that were culled from our fleet in prior years and are available for sale. Based on that review, we may reduce the expected proceeds from disposition and record additional impairment to reduce the book value of each unit to its estimated fair value.

The following table presents the results of our impairment review as recorded to our contract operations segment (dollars in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Idle compressors retired from the active fleet

 

85

 

20

Horsepower of idle compressors retired from the active fleet

 

23,000

 

15,000

Impairment recorded on idle compressors retired from the active fleet

$

6,195

$

3,092

During the three months ended March 31, 2020, we determined that the impairment of our contract operations reporting unit’s goodwill was an indicator of potential impairment of the carrying amount of our long-lived assets, including our compressor fleet and associated customer and contract-based intangible assets. Accordingly, we performed a quantitative impairment test of our long-lived assets, by which we determined that they were not impaired as of March 31, 2020.

v3.20.1
Leases - Components of Lease Costs (Details) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Leases [Abstract]    
Operating lease cost $ 1,031 $ 974
Short-term lease cost 129 173
Variable lease cost 349 382
Total lease cost $ 1,509 $ 1,529
v3.20.1
Commitments and Contingencies (Narratives) (Details) - USD ($)
$ in Millions
Mar. 31, 2020
Dec. 31, 2019
Loss contingency    
Accrued liability for the outcomes of non-income based tax audits $ 2.4 $ 2.5
Indemnification liability $ 2.6 $ 2.8
v3.20.1
Stock-Based Compensation - Allocated Compensation (Details) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost    
Total stock-based compensation expense $ 2,458 $ 3,323
Equity awards    
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost    
Total stock-based compensation expense 3,006 2,357
Liability awards    
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost    
Total stock-based compensation expense $ (548) $ 966
v3.20.1
Inventory (Details) - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Composition of Inventory net of reserves    
Parts and supplies $ 63,889 $ 66,121
Work in progress 9,042 8,346
Inventory $ 72,931 $ 74,467
v3.20.1
Segments - Reconciliation of Net Income to Gross Margin (Details) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Reconciliation Net Income (Loss) to Gross Margin    
Total gross margin $ 136,055 $ 117,522
Less:    
Selling, general and administrative 30,626 28,989
Depreciation and amortization 49,822 44,106
Long-lived asset impairment 6,195 3,092
Goodwill impairment 99,830  
Restatement and other charges   421
Restructuring costs 1,728  
Interest expense 29,665 23,617
Transaction-related costs   180
(Gain) loss on sale of assets, net (4,116) 16
Other income, net (555) (221)
Income (loss) before income taxes $ (77,140) $ 17,322
v3.20.1
Goodwill (Details)
$ in Thousands
3 Months Ended
Mar. 31, 2020
USD ($)
Change in the carrying value of goodwill  
Goodwill, net as of beginning of period $ 100,598
Dispositions (768)
Impairment loss $ (99,830)
v3.20.1
Accumulated Other Comprehensive Income (Loss) (Tables)
3 Months Ended
Mar. 31, 2020
Equity [Abstract]  
Schedule of Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive income (loss) of our derivative cash flow hedges, net of tax, during the three months ended March 31, 2020 and 2019 (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Beginning accumulated other comprehensive income (loss)

$

(1,387)

$

5,773

Loss recognized in other comprehensive loss, net of tax benefit of $1,590 and $0, respectively (1)

 

(5,983)

 

(2,299)

(Gain) loss reclassified from accumulated other comprehensive income (loss) to interest expense, net of tax benefit of $51 and $0, respectively (1)

 

197

 

(926)

Other comprehensive loss

 

(5,786)

 

(3,225)

Ending accumulated other comprehensive income (loss)

$

(7,173)

$

2,548

(1)Includes adjustment of $0.7 million related to an increase in the valuation allowance recorded to offset the tax effect of other comprehensive loss recorded during the three months ended March 31, 2019.
v3.20.1
Restructuring Charges (Tables)
3 Months Ended
Mar. 31, 2020
Restructuring Charges  
Schedule of restructuring charges by segment

The following table presents, by segment, the restructuring charges incurred during the three months ended March 31, 2020 (in thousands):

    

Contract

 Aftermarket

 

 

Operations

Services

Other (1)

Total

Three months ended March 31, 2020

$

478

$

625

$

625

$

1,728

(1)Represents expense incurred within our corporate function and not directly attributable to our segments.
v3.20.1
Fair Value Measurements
3 Months Ended
Mar. 31, 2020
Fair Value Disclosures [Abstract]  
Fair Value Measurements

19. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

On a quarterly basis, our interest rate swap derivative instruments are valued based on the income approach (discounted cash flow) using market observable inputs, including LIBOR forward curves. These fair value measurements are classified as Level 2. The following table presents our derivative asset and liability measured at fair value on a recurring basis, with pricing levels as of the date of valuation (in thousands):

    

March 31, 2020

    

December 31, 2019

Derivative asset

$

$

12

Derivative liability

 

(9,081)

 

(1,768)

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Goodwill

In the first quarter of 2020, we determined that the significant deterioration in global macroeconomic conditions caused by the COVID-19 pandemic was an indicator of potential impairment of our goodwill, and we performed a quantitative impairment test as of March 31, 2020 that resulted in a $99.8 million impairment of our goodwill. Significant estimates used in our impairment analysis included cash flow forecasts, our estimate of the market’s weighted average cost of capital and market multiples, which are Level 3 inputs. See Note 8 (“Goodwill”) for further details of the valuation methodology used in connection with the goodwill impairment.

Compressors

During the three months ended March 31, 2020, we recorded nonrecurring fair value measurements related to our idle and previously-culled compressors. Our estimate of the compressors’ fair value was primarily based on the expected net sale proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use. We discounted the expected proceeds, net of selling and other carrying costs, using a weighted average disposal period of four years. These fair value measurements are classified as Level 3.

The fair value of our impaired compressors at March 31, 2020 and December 31, 2019 was as follows:

    

March 31, 2020

    

December 31, 2019

Impaired compressors

$

253

$

5,859

 

The unobservable inputs used to develop the above fair value measurements were weighted by the relative fair value of the compressors being measured. Additional quantitative information related to our significant unobservable inputs follows:

    

Range

    

Weighted Average

Estimated net sale proceeds (1)

$0 - $372 per horsepower

$21 per horsepower

(1)Weighted average is calculated based on an estimated discount for market liquidity of 78%.

See Note 14 (“Long-Lived Asset Impairment”) for further details.

Other Financial Instruments

The carrying amounts of our cash, receivables and payables approximate fair value due to the short-term nature of those instruments.

The carrying amount of borrowings outstanding under our Credit Facility approximates fair value due to its variable interest rate. The fair value of these outstanding borrowings is a Level 3 measurement.

The fair value of our fixed rate debt is estimated using yields observable in active markets, which are Level 2 inputs. The following table presents the carrying amount and fair value of our fixed rate debt (in thousands):

    

March 31, 2020

    

December 31, 2019

Carrying amount of fixed rate debt (1)

$

1,330,455

$

1,329,549

Fair value of fixed rate debt

 

1,067,000

 

1,400,000

(1)Carrying amounts are shown net of unamortized debt discounts and unamortized deferred financing costs. See Note 10 (“Long-Term Debt”).

v3.20.1
Restructuring Charges
3 Months Ended
Mar. 31, 2020
Restructuring Charges  
Restructuring Charges

15. Restructuring Charges

During the first quarter of 2020, we completed a series of restructuring activities to further streamline our organization and more fully align our teams to improve our customer service and profitability. We incurred severance costs of $1.7 million in connection with these restructuring activities during the three months ended March 31, 2020, which are reflected as restructuring charges in our condensed consolidated statements of operations.

The following table presents, by segment, the restructuring charges incurred during the three months ended March 31, 2020 (in thousands):

    

Contract

 Aftermarket

 

 

Operations

Services

Other (1)

Total

Three months ended March 31, 2020

$

478

$

625

$

625

$

1,728

(1)Represents expense incurred within our corporate function and not directly attributable to our segments.

v3.20.1
Subsequent Events
3 Months Ended
Mar. 31, 2020
Subsequent Events  
Subsequent Events

24. Subsequent Events

2022 Notes Redemption

On April 1, 2020, the 2022 Notes were redeemed at 100% of their $350.0 million aggregate principal amount plus accrued and unpaid interest of $10.5 million with borrowings from the Credit Facility. A debt extinguishment loss of approximately $4.0 million related to the redemption will be recognized in the second quarter of 2020.

v3.20.1
Discontinued Operations (Tables)
3 Months Ended
Mar. 31, 2020
Discontinued Operations and Disposal Groups [Abstract]  
Summary of operating results and balance sheet data for discontinued operations

The following table presents the balance sheet for our discontinued operations (in thousands):

    

March 31, 2020

    

December 31, 2019

Other assets

$

8,519

$

8,508

Deferred tax assets

4,086

4,393

Total assets associated with discontinued operations

$

12,605

$

12,901

Deferred tax liabilities

$

8,519

$

8,508

Total liabilities associated with discontinued operations

$

8,519

$

8,508

The following table presents the statements of operations for our discontinued operations (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Other income, net

$

(10)

$

(1,432)

Provision for income taxes

 

10

 

1,705

Loss from discontinued operations, net of tax

$

$

(273)

v3.20.1
Leases
3 Months Ended
Mar. 31, 2020
Leases [Abstract]  
Leases

7. Leases

Operating Leases

We determine if an arrangement is a lease at inception. Following ASC 842, we determine lease classification and recognize ROU assets and liabilities on the lease commencement date based on the present value of lease payments over the lease term. As the discount rate implicit in the lease is rarely readily determinable, we estimate our incremental borrowing rate using information available at commencement date in determining the present value of the lease payments. The lease term includes options to extend when we are reasonably certain to exercise the option. Short-term leases, those with an initial term of 12 months or less, are not recorded on the balance sheet. Variable costs such as our proportionate share of actual costs for utilities, common area maintenance, property taxes and insurance are not included in the lease liability and are recognized in the period in which they are incurred. Operating lease expense for lease payments is recognized on a straight-line basis over the term of the lease.

The facility leases discussed below, of which we are the lessee, contain lease and nonlease components for which we have elected to account for as a single lease component, as the nonlease components are not significant to the total consideration of the contract and separating the nonlease component would have no effect on lease classification. As it relates to our contract operations services agreements in which we are the lessor, the services nonlease component is predominant over the compression package lease component and therefore recognition of these agreements will continue to follow the ASC 606 Revenue guidance.

We have operating leases and subleases for office space, temporary housing, storage and shops. Our leases have remaining lease terms of less than one year to 11 years and most include options to extend the lease term, at our discretion, for an additional three to five years. We are not, however, reasonably certain that we will exercise any of the options to extend and as such, they have not been included in the remaining lease terms.

Balance sheet information related to our operating leases was as follows (in thousands):

    

Classification

    

March 31, 2020

 

December 31, 2019

ROU assets

 

Operating lease ROU assets

$

19,156

$

17,901

Lease liabilities

 

  

 

  

 

  

Current

 

Accrued liabilities

$

3,211

$

3,037

Noncurrent

 

Operating lease liabilities

 

17,184

 

16,094

Total lease liabilities

 

  

$

20,395

$

19,131

The components of lease cost were as follows (in thousands):

    

Three Months Ended

March 31, 

 

2020

2019

Operating lease cost

$

1,031

$

974

Short-term lease cost

 

129

 

173

Variable lease cost

 

349

 

382

Total lease cost

$

1,509

$

1,529

Cash flow and non-cash information related to our operating leases were as follows (in thousands):

    

Three Months Ended

March 31, 

2020

2019

Operating cash flows - cash paid for amounts included in the measurement of operating lease liabilities

$

1,351

$

1,311

Operating lease ROU assets obtained in exchange for new lease liabilities

 

2,037

 

617

Other supplemental information related to our operating leases was as follows:

    

March 31, 2020

December 31, 2019

Weighted average remaining lease term (in years)

 

8.3

8.2

Weighted average discount rate

 

5.1

%

5.3

%

Remaining maturities of lease liabilities governed under ASC 842 Leases as of March 31, 2020 were as follows (in thousands):

2020

    

$

2,808

2021

3,955

2022

 

2,855

2023

 

2,550

2024

 

2,159

2025

1,930

Thereafter

 

8,942

Total lease payments

 

25,199

Less: Interest

 

(4,804)

Total lease liabilities under ASC 842 Leases

$

20,395

v3.20.1
Business Transactions
3 Months Ended
Mar. 31, 2020
Business Combinations [Abstract]  
Business Transactions

3. Business Transactions

March 2020 Disposition

On March 1, 2020, we completed the sale of certain contract operations customer service agreements and approximately 200 compressors, comprising approximately 35,000 horsepower, used to provide compression services under those agreements as well as other assets used to support the operations. We allocated customer and contract-related intangible assets and goodwill based on a ratio of the horsepower sold relative to the total horsepower of the asset group. We recognized a gain on the sale of $3.2 million in gain (loss) on sale of assets, net in our condensed consolidated statements of operations during the three months ended March 31, 2020.

Elite Acquisition

On August 1, 2019, we completed the Elite Acquisition whereby we acquired from Elite Compression substantially all of its assets, including a fleet of predominantly large compressors comprising approximately 430,000 horsepower, vehicles, real property and inventory, and certain liabilities for aggregate consideration consisting of $214.0 million in cash and 21.7 million shares of common stock with an acquisition date fair value of $225.9 million. The cash portion of the acquisition was funded with borrowings on the Credit Facility.

The Elite Acquisition was accounted for using the acquisition method, which requires, among other things, assets acquired and liabilities assumed to be recorded at their fair value on the acquisition date. The excess of the consideration transferred over those fair values is recorded as goodwill. The following table summarizes the purchase price allocation based on the estimated fair values of the acquired assets and liabilities as of the acquisition date (in thousands):

Accounts receivable

    

$

9,007

Inventory

 

7,987

Other current assets

 

608

Property, plant and equipment

 

286,158

Operating lease ROU assets

 

682

Goodwill

 

100,598

Intangible assets

 

40,237

Accounts payable, trade

 

(2,079)

Accrued liabilities

 

(2,973)

Operating lease liabilities

 

(326)

Purchase price

$

439,899

Our valuation methodology and significant inputs for fair value measurements are detailed by asset class below. The fair value measurements for property, plant and equipment and intangible assets are based on significant inputs that are not observable in the market and therefore represent Level 3 measurements.

Goodwill

The goodwill resulting from the acquisition is attributable to the expansion of our services in various regions in which we currently operate and was allocated to our contract operations segment. All of the goodwill recorded for this acquisition is expected to be deductible for U.S. federal income tax purposes.

Property, Plant and Equipment

The property, plant and equipment is primarily comprised of compression equipment that will be depreciated on a straight-line basis over an estimated average remaining useful life of 15 years. The fair value of the property, plant and equipment was determined using the cost approach, whereby we estimated the replacement cost of the assets by evaluating recent purchases of similar assets or published data, and then adjusted replacement cost for physical deterioration and functional and economic obsolescence, as applicable.

Intangible Assets

The intangible assets consist of customer relationships that have an estimated useful life of 15 years. The amount of intangible assets and their associated useful life were determined based on the period over which the assets are expected to contribute directly or indirectly to our future cash flows. The fair value of the identifiable intangible assets was determined using the multi-period excess earnings method, which is a specific application of the discounted cash flow method, an income approach, whereby we estimated and then discounted the future cash flows of the intangible asset by adjusting overall business revenue for attrition, obsolescence, cost of sales, operating expenses, taxes and the required returns attributable to other contributory assets acquired. Significant estimates made in arriving at expected future cash flows included our expected customer attrition rate and the amount of earnings attributable to the assets. To discount the estimated future cash flows, we utilized a discount rate that was at a premium to our weighted average cost of capital to reflect the less liquid nature of the customer relationships relative to the tangible assets acquired.

Unaudited Pro Forma Financial Information

Unaudited pro forma financial information for the three months ended March 31, 2019 was derived by adjusting our historical financial statements in order to give effect to the assets and liabilities acquired in the Elite Acquisition. The Elite Acquisition is presented in this unaudited pro forma financial information as though the acquisition occurred as of January 1, 2019, and reflects the following:

the acquisition of substantially all of Elite Compression’s assets, including a compression fleet of approximately 430,000 horsepower, vehicles, real property and inventory, and certain liabilities; and
borrowings of $214.0 million under the Credit Facility for cash consideration exchanged in the acquisition.

The unaudited pro forma financial information below is presented (in thousands) for informational purposes only and is not necessarily indicative of our results of operations that would have occurred had the transaction been consummated at the beginning of the period presented, nor is it necessarily indicative of future results.

Three Months Ended

March 31, 2019

Revenue

$

254,564

Net income

 

20,967

The results of operations attributable to the assets and liabilities acquired in the Elite Acquisition have been included in our condensed consolidated financial statements as part of our contract operations segment since the date of acquisition.

v3.20.1
Accumulated Other Comprehensive Income (Loss)
3 Months Ended
Mar. 31, 2020
Equity [Abstract]  
Accumulated Other Comprehensive Income (Loss)

11. Accumulated Other Comprehensive Income (Loss)

Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with owners. Our accumulated other comprehensive income (loss) consists of changes in the fair value of our interest rate swap derivative instruments, net of tax, which are designated as cash flow hedges.

The following table presents the changes in accumulated other comprehensive income (loss) of our derivative cash flow hedges, net of tax, during the three months ended March 31, 2020 and 2019 (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Beginning accumulated other comprehensive income (loss)

$

(1,387)

$

5,773

Loss recognized in other comprehensive loss, net of tax benefit of $1,590 and $0, respectively (1)

 

(5,983)

 

(2,299)

(Gain) loss reclassified from accumulated other comprehensive income (loss) to interest expense, net of tax benefit of $51 and $0, respectively (1)

 

197

 

(926)

Other comprehensive loss

 

(5,786)

 

(3,225)

Ending accumulated other comprehensive income (loss)

$

(7,173)

$

2,548

(1)Includes adjustment of $0.7 million related to an increase in the valuation allowance recorded to offset the tax effect of other comprehensive loss recorded during the three months ended March 31, 2019.

See Note 18 (“Derivatives”) for further details on our interest rate swap derivative instruments.

v3.20.1
Long-Lived Asset Impairment (Details)
hp in Thousands, $ in Thousands
3 Months Ended
Mar. 31, 2020
USD ($)
CompressorUnit
hp
Mar. 31, 2019
USD ($)
CompressorUnit
hp
Impaired Long-Lived Assets Held and Used    
Impairment recorded on idle compressor units retired from the active fleet (in dollars) $ 6,195 $ 3,092
Idle Compressor Units    
Impaired Long-Lived Assets Held and Used    
Idle compressor units retired from the active fleet (compressors) | CompressorUnit 85 20
Horsepower of idle compressor units retired from the active fleet (horsepower) | hp 23 15
Impairment recorded on idle compressor units retired from the active fleet (in dollars) $ 6,195 $ 3,092
v3.20.1
Fair Value Measurements - Measured on Recurring Basis (Details) - Recurring Basis - Level 2 - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Fair value measurement of assets and liabilities    
Derivative asset   $ 12
Derivative liability $ (9,081) $ (1,768)
v3.20.1
Hosting Arrangements (Details) - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2020
Dec. 31, 2019
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]    
Hosting arrangements, Capitalized costs $ 6.5 $ 5.5
Hosting arrangements, Accumulated amortization 0.1  
Hosting arrangements, Amortization $ 0.1  
v3.20.1
Restructuring Charges - By segment (Details)
$ in Thousands
Mar. 31, 2020
USD ($)
Expected restructuring charges  
Three months ended March 31, 2020 $ 1,728
Corporate  
Expected restructuring charges  
Three months ended March 31, 2020 625
Contract Operations | Operating Segments  
Expected restructuring charges  
Three months ended March 31, 2020 478
Aftermarket Services | Operating Segments  
Expected restructuring charges  
Three months ended March 31, 2020 $ 625
v3.20.1
Derivatives - Interest Rate Swaps (Details) - Derivatives Designated as Hedging Instruments
$ in Millions
Mar. 31, 2020
USD ($)
Interest Rate Swaps  
Notional Disclosures  
Notional amount of interest rate swaps $ 400
May 2020  
Notional Disclosures  
Notional amount of interest rate swaps 100
March 2022  
Notional Disclosures  
Notional amount of interest rate swaps $ 300
v3.20.1
Equity - Cash Dividends (Details) - USD ($)
$ / shares in Units, $ in Thousands
3 Months Ended
Apr. 24, 2020
Mar. 31, 2020
Dec. 31, 2019
Sep. 30, 2019
Jun. 30, 2019
Mar. 31, 2019
Distributions            
Dividends per Common Share (in dollars per share)   $ 0.145 $ 0.145 $ 0.145 $ 0.132 $ 0.132
Total Dividends   $ 22,171 $ 22,031 $ 22,062 $ 17,206 $ 17,231
Subsequent Event            
Distributions            
Dividend declared per common stock (in dollars per share) $ 0.145          
v3.20.1
Business Transactions - Pro forma (Details)
hp in Thousands, $ in Thousands
3 Months Ended
Aug. 01, 2019
USD ($)
hp
Mar. 31, 2019
USD ($)
Pro forma financial information    
Revenue   $ 254,564
Net income   $ 20,967
Elite Acquisition    
Business Transactions    
Compressor units horsepower (horsepower) | hp 430  
Cash consideration $ 214,000  
v3.20.1
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Parentheticals) - $ / shares
3 Months Ended
Mar. 31, 2020
Dec. 31, 2019
Sep. 30, 2019
Jun. 30, 2019
Mar. 31, 2019
Statement of Stockholders' Equity [Abstract]          
Dividends declared and paid per common share (in dollars per share) $ 0.145 $ 0.145 $ 0.145 $ 0.132 $ 0.132
v3.20.1
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Statement of Financial Position [Abstract]    
Accounts receivable, allowance $ 2,523 $ 2,210
Preferred stock, par value (in dollars per share) $ 0.01 $ 0.01
Preferred stock, shares authorized (in shares) 50,000,000 50,000,000
Preferred stock, shares issued (in shares) 0 0
Common stock, par value (in dollars per share) $ 0.01 $ 0.01
Common stock, shares authorized (in shares) 250,000,000 250,000,000
Common stock, shares issued (in shares) 159,756,498 158,636,918
Treasury stock, common shares (in shares) 6,830,407 6,702,602
v3.20.1
Recent Accounting Developments (Details) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Jan. 01, 2020
Credit Losses      
Payment term of trade receivables 30 days    
Period for analyzing historical loss data to determine loss experience 2 years    
Changes in the allowance for credit losses balance      
Balance at beginning of period $ 2,210    
Provision for credit losses 752 $ 428  
Write-offs charged against the allowance (223)    
Balance at end of period 2,523    
Accounts Receivable, Allowance for Credit Loss, Current 2,210    
ASU 2016-13      
New Accounting Pronouncements or Change in Accounting Principle      
Change in Accounting Principle, Accounting Standards Update, Adopted     true
Change in Accounting Principle, Accounting Standards Update, Transition Option Elected     Modified Retrospective
ASU 2016-13 | Reclassification      
Changes in the allowance for credit losses balance      
Balance at beginning of period (216)    
Accounts Receivable, Allowance for Credit Loss, Current $ (216)    
ASU 2018-13      
New Accounting Pronouncements or Change in Accounting Principle      
Change in Accounting Principle, Accounting Standards Update, Adopted     true
v3.20.1
Goodwill (Tables)
3 Months Ended
Mar. 31, 2020
Goodwill  
Schedule of change in the carrying value of goodwill

The following table presents the change in the carrying amount of goodwill during the quarter ended March 31, 2020 (in thousands):

Balance at December 31, 2019

$

100,598

Dispositions

(768)

Impairment loss

 

(99,830)

Balance at March 31, 2020

$

v3.20.1
Revenue from Contract with Customers (Tables)
3 Months Ended
Mar. 31, 2020
Revenue from Contract with Customer [Abstract]  
Disaggregation of Revenue

The following table presents our revenue from contracts with customers disaggregated by revenue source (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Contract operations (1):

  

  

0 - 1,000 horsepower per unit

$

66,740

$

63,739

1,001 - 1,500 horsepower per unit

 

84,852

 

74,340

Over 1,500 horsepower per unit

 

54,591

 

43,425

Other (2)

 

791

 

1,003

Total contract operations (3)

 

206,974

 

182,507

Aftermarket services (1):

 

  

 

  

Services

 

25,450

 

33,521

OTC parts and components sales

 

17,273

 

20,131

Total aftermarket services (4)

 

42,723

 

53,652

Total revenue

$

249,697

$

236,159

(1)We operate in two segments: contract operations and aftermarket services. See Note 23 (“Segments”) for further details regarding our segments.
(2)Primarily relates to fees associated with owned non-compression equipment.
(3)Includes $1.6 million and $2.1 million for the three months ended March 31, 2020 and 2019, respectively, related to billable maintenance on owned compressors that was recognized at a point in time. All other contract operations revenue is recognized over time.
(4)All service revenue within aftermarket services is recognized over time. All OTC parts and components sales revenue is recognized at a point in time.
Remaining Performance Obligation The remaining performance obligations will be recognized through 2025 as follows (in thousands):

    

2020

    

2021

    

2022

    

2023

    

2024

    

2025

    

Total

Remaining performance obligations

$

244,368

$

157,208

$

60,034

$

7,422

$

1,355

$

119

$

470,506

v3.20.1
Derivatives (Tables)
3 Months Ended
Mar. 31, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Schedule of interest rate swaps

The following interest rate swaps, entered into to offset changes in expected cash flows due to fluctuations in the associated variable interest rates, were outstanding at March 31, 2020 (in millions):

Expiration Date

    

Notional Value

May 2020

$

100

March 2022

 

300

$

400

Effect of derivative instruments on consolidated financial position

The following table presents the effect of our derivative instruments designated as cash flow hedging instruments on our condensed consolidated balance sheets (in thousands):

    

March 31, 2020

    

December 31, 2019

Other current assets

$

$

12

Total derivative assets

$

$

12

Accrued liabilities

$

(4,317)

$

(593)

Other liabilities

 

(4,764)

 

(1,175)

Total derivative liabilities

$

(9,081)

$

(1,768)

Effect of derivative instruments on results of operations

The following tables present the effect of our derivative instruments designated as cash flow hedging instruments on our condensed consolidated statements of operations (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Pre-tax loss recognized in other comprehensive loss

$

(7,573)

$

(2,299)

Pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense

 

(248)

 

926

Total amount of interest expense in which the effects of cash flow hedges are recorded

29,665

23,617

v3.20.1
Leases - Other Supplemental Information (Details)
Mar. 31, 2020
Dec. 31, 2019
Leases [Abstract]    
Weighted average remaining lease term (in years) 8 years 3 months 18 days 8 years 2 months 12 days
Weighted average discount rate (percent) 5.10% 5.30%
v3.20.1
Segments (Narratives) (Details)
3 Months Ended
Mar. 31, 2020
segment
Segment Reporting [Abstract]  
Number of reportable segments 2
v3.20.1
Stock-Based Compensation - Unrecognized cost and 2020 Plan (Details) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Apr. 30, 2020
Dec. 31, 2019
Stock-Based Compensation      
Additional paid-in capital $ 3,415,784   $ 3,412,509
2020 Plan | Subsequent Event      
Unrecognized compensation      
Number of shares authorized for issuance   8,500,000  
Reduction in number of shares available for issuance for each stock-settled award granted   1  
Cash Settled Restricted Stock Units and Cash Settled Performance Units      
Stock-Based Compensation      
Non-vested awards at the end of the period (in shares) 529,000    
Restricted Stock and Stock-settled Performance Units [Member]      
Stock-Based Compensation      
Non-vested awards at the end of the period (in shares) 2,539,000    
Restricted Stock, Restricted Stock Units, Performance Units, Cash Settled Restricted Stock Units and Cash Settled Performance Units      
Stock-Based Compensation      
Non-vested awards at the end of the period (in shares) 3,068,000   2,022,000
Unrecognized compensation      
Expected unrecognized compensation cost related to unvested awards (in dollars) $ 21,500    
Weighted-average period over which the expected unrecognized compensation cost related to unvested stock options will be recognized 2 years 2 months 12 days    
v3.20.1
Leases - (Narratives) (Details)
3 Months Ended
Mar. 31, 2020
Minimum  
Lessee, Lease, Description  
Weighted average remaining lease term (in years) 1 year
Operating lease renewal term (in years) 3 years
Maximum  
Lessee, Lease, Description  
Weighted average remaining lease term (in years) 11 years
Operating lease renewal term (in years) 5 years
v3.20.1
Commitments and Contingencies
3 Months Ended
Mar. 31, 2020
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies

21. Commitments and Contingencies

Performance Bonds

In the normal course of business we have issued performance bonds to various state authorities that ensure payment of certain obligations. We have also issued a bond to protect our 401(k) retirement plan against losses caused by acts of fraud or dishonesty. The bonds have expiration dates in 2020 through the fourth quarter of 2022 and maximum potential future payments of $2.2 million. As of March 31, 2020, we were in compliance with all obligations to which the performance bonds pertain.

Tax Matters

We are subject to a number of state and local taxes that are not income-based. As many of these taxes are subject to audit by the taxing authorities, it is possible that an audit could result in additional taxes due. We accrue for such additional taxes when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the liability. As of March 31, 2020 and December 31, 2019, we accrued $2.4 million and $2.5 million, respectively, for the outcomes of non-income-based tax audits. We do not expect that the ultimate resolutions of these audits will result in a material variance from the amounts accrued. We do not accrue for unasserted claims for tax audits unless we believe the assertion of a claim is probable, it is probable that it will be determined that the claim is owed and we can reasonably estimate the claim or range of the claim. We believe the likelihood is remote that the impact of potential unasserted claims from non-income-based tax audits could be material to our consolidated financial position, but it is possible that the resolution of future audits could be material to our consolidated results of operations or cash flows.

Subject to the provisions of the tax matters agreement between Exterran Corporation and us, both parties agreed to indemnify the primary obligor of any return for tax periods beginning before and ending before or after the Spin-off (including any ongoing or future amendments and audits for these returns) for the portion of the tax liability (including interest and penalties) that relates to their respective operations reported in the filing. The tax contingencies mentioned above relate to tax matters for which we are responsible in managing the audit. As of March 31, 2020 and December 31, 2019, we recorded an indemnification liability (including penalties and interest), in addition to the tax contingency above, of $2.6 million and $2.8 million, respectively, for our share of non-income-based tax contingencies related to audits being managed by Exterran Corporation.

Insurance Matters

Our business can be hazardous, involving unforeseen circumstances such as uncontrollable flows of natural gas or well fluids and fires or explosions. As is customary in our industry, we review our safety equipment and procedures and carry insurance against some, but not all, risks of our business. Our insurance coverage includes property damage, general liability and commercial automobile liability and other coverage we believe is appropriate. We believe that our insurance coverage is customary for the industry and adequate for our business; however, losses and liabilities not covered by insurance would increase our costs.

Additionally, we are substantially self-insured for workers’ compensation and employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses up to the deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages. We are also self-insured for property damage to our offshore assets.

Litigation and Claims

In the ordinary course of business, we are involved in various pending or threatened legal actions. While we are unable to predict the ultimate outcome of these actions, we believe that any ultimate liability arising from any of these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends.

v3.20.1
Earnings Per Share
3 Months Ended
Mar. 31, 2020
Earnings Per Share [Abstract]  
Earnings Per Share

17. Earnings per Share

Basic net income (loss) per common share is computed using the two-class method, which is an earnings allocation formula that determines net income (loss) per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Under the two-class method, basic net income (loss) per common share is determined by dividing net income (loss), after deducting amounts allocated to participating securities, by the weighted average number of common shares outstanding for the period. Participating securities include unvested restricted stock and stock-settled restricted stock units that have nonforfeitable rights to receive dividends or dividend equivalents, whether paid or unpaid. During periods of net loss, no effect is given to participating securities because they do not have a contractual obligation to participate in our losses.

Diluted net income (loss) per common share is computed using the weighted average number of shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options, performance-based restricted stock units and stock to be issued pursuant to our employee stock purchase plan unless their effect would be anti-dilutive.

The following table shows net income (loss) used in the calculation of basic and diluted net income (loss) per common share (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Income (loss) from continuing operations

$

(61,187)

$

19,729

Loss from discontinued operations, net of tax

 

 

(273)

Net income (loss)

 

(61,187)

 

19,456

Less: Net income attributable to participating securities

 

(322)

 

(356)

Net income (loss) attributable to common stockholders

$

(61,509)

$

19,100

The following table shows the potential shares of common stock that were included in computing diluted net income (loss) per common share (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Weighted average common shares outstanding including participating securities

152,601

130,238

Less: Weighted average participating securities outstanding

 

(2,051)

 

(2,029)

Weighted average common shares outstanding used in basic net income (loss) per common share

 

150,550

 

128,209

Net dilutive potential common shares issuable:

 

  

 

  

On exercise of options and vesting of performance-based restricted stock units

 

 

40

On settlement of employee stock purchase plan shares

 

 

6

Weighted average common shares outstanding used in diluted net income (loss) per common share

 

150,550

 

128,255

The following table shows the potential shares of common stock issuable that were excluded from computing diluted net income (loss) per common share as their inclusion would have been anti-dilutive (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

On exercise of options where exercise price is greater than average market value for the period

 

126

 

154

On exercise of options and vesting of performance-based restricted stock units

57

On settlement of employee stock purchase plan shares

29

Net dilutive potential common shares issuable

212

154

v3.20.1
Revenue from Contract with Customers
3 Months Ended
Mar. 31, 2020
Revenue from Contract with Customer [Abstract]  
Revenue from Contracts with Customers

13. Revenue from Contracts with Customers

The following table presents our revenue from contracts with customers disaggregated by revenue source (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Contract operations (1):

  

  

0 - 1,000 horsepower per unit

$

66,740

$

63,739

1,001 - 1,500 horsepower per unit

 

84,852

 

74,340

Over 1,500 horsepower per unit

 

54,591

 

43,425

Other (2)

 

791

 

1,003

Total contract operations (3)

 

206,974

 

182,507

Aftermarket services (1):

 

  

 

  

Services

 

25,450

 

33,521

OTC parts and components sales

 

17,273

 

20,131

Total aftermarket services (4)

 

42,723

 

53,652

Total revenue

$

249,697

$

236,159

(1)We operate in two segments: contract operations and aftermarket services. See Note 23 (“Segments”) for further details regarding our segments.
(2)Primarily relates to fees associated with owned non-compression equipment.
(3)Includes $1.6 million and $2.1 million for the three months ended March 31, 2020 and 2019, respectively, related to billable maintenance on owned compressors that was recognized at a point in time. All other contract operations revenue is recognized over time.
(4)All service revenue within aftermarket services is recognized over time. All OTC parts and components sales revenue is recognized at a point in time.

Performance Obligations

As of March 31, 2020, we had $470.5 million of remaining performance obligations related to our contract operations segment. We have elected to apply the practical expedient to not consider the effects of the time value of money, as the expected time between the transfer of services and payment for such services is less than one year. The remaining performance obligations will be recognized through 2025 as follows (in thousands):

    

2020

    

2021

    

2022

    

2023

    

2024

    

2025

    

Total

Remaining performance obligations

$

244,368

$

157,208

$

60,034

$

7,422

$

1,355

$

119

$

470,506

As of March 31, 2020, we elected to apply the practical expedient to not disclose the aggregate transaction price for the remaining performance obligations for aftermarket services as there are no contracts with customers with an original contract term that is greater than one year.

Contract Assets and Liabilities

As of March 31, 2020 and December 31, 2019, our receivables from contracts with customers, net of allowance for credit losses, were $133.5 million and $139.4 million, respectively.

Freight billings to customers for the transport of compression assets, customer-specified modifications of compression assets and milestone billings on aftermarket services often result in a contract liability. As of March 31, 2020 and December 31, 2019, our contract liabilities were $9.4 million and $11.4 million, respectively, which were included in deferred revenue and other liabilities in our condensed consolidated balance sheets. The decrease in the contract liability balance during the three months ended March 31, 2020 was primarily due to revenue deferral of $5.8 million, partially offset by $7.7 million recognized as revenue during the period, each primarily related to freight billings and aftermarket services.

v3.20.1
Hosting Arrangements
3 Months Ended
Mar. 31, 2020
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]  
Hosting Arrangements

9. Hosting Arrangements

In the fourth quarter of 2018 we began a process and technology transformation project that will, among other things, upgrade or replace our existing ERP, supply chain and inventory management systems and expand the remote monitoring capabilities of our compression fleet. Included in this project are hosting arrangements that are service contracts related to the cloud migration of our ERP system and cloud services for our new mobile workforce, telematics and inventory management tools.

Certain costs incurred for the implementation of our hosting arrangements that are service contracts are capitalized and amortized on a straight-line basis over the term of the respective contract. Amortization begins in the period in which an individual component becomes ready for its intended use. As of March 31, 2020 and December 31, 2019, we capitalized $6.5 million and $5.5 million, respectively, of implementation costs related to our hosting arrangements that are service contracts to other assets in our condensed consolidated balance sheets. Accumulated amortization was $0.1 million at March 31, 2020. We recorded $0.1 million of amortization expense to SG&A in our condensed consolidated statements of operations during the three months ended March 31, 2020.

v3.20.1
Inventory
3 Months Ended
Mar. 31, 2020
Inventory Disclosure [Abstract]  
Inventory

5. Inventory

Inventory consisted of the following (in thousands):

    

March 31, 2020

    

December 31, 2019

Parts and supplies

$

63,889

$

66,121

Work in progress

 

9,042

 

8,346

Inventory

$

72,931

$

74,467

v3.20.1
Related Party Transactions
3 Months Ended
Mar. 31, 2020
Related Party Transactions [Abstract]  
Related Party Transactions

22. Related Party Transactions

In connection with the closing of the Elite Acquisition, we issued 21.7 million shares of our common stock to JDH Capital, an affiliate of our customer Hilcorp. As long as JDH Capital, together with affiliates of Hilcorp, owns at least 7.5% of our outstanding common stock, it will have the right to designate one director to our Board of Directors. On August 1, 2019, Jeffery D. Hildebrand, founder and executive chairman of Hilcorp, was elected to our Board of Directors. Mr. Hildebrand receives no compensation for his role as a director. As of March 31, 2020, JDH Capital owned 14.2% of our outstanding common stock.

Revenue from Hilcorp and affiliates was $10.7 million and $5.5 million during the three months ended March 31, 2020 and 2019, respectively. Accounts receivable, net due from Hilcorp and affiliates were $4.1 million and $5.1 million as of March 31, 2020 and December 31, 2019, respectively.

v3.20.1
Recent Accounting Developments (Tables)
3 Months Ended
Mar. 31, 2020
New Accounting Pronouncements and Changes in Accounting Principles [Abstract]  
Summary of changes in the allowance for credit losses balance

The following table summarizes the changes in the allowance for credit losses balance during the three months ended March 31, 2020 (in thousands):

Balance at December 31, 2019

      

$

2,210

Impact of adoption of ASU 2016-13 on January 1, 2020

(216)

Provision for credit losses

752

Write-offs charged against allowance

(223)

Balance at March 31, 2020

$

2,523

v3.20.1
Property, Plant and Equipment, Net (Tables)
3 Months Ended
Mar. 31, 2020
Property, Plant and Equipment [Abstract]  
Schedule of property, plant and equipment, net

Property, plant and equipment, net consisted of the following (in thousands):

    

March 31, 2020

    

December 31, 2019

Compression equipment, facilities and other fleet assets

$

3,659,907

$

3,653,930

Land and buildings

 

51,031

 

50,743

Transportation and shop equipment

 

114,465

 

116,057

Computer hardware and software

 

93,734

 

93,695

Other

 

17,587

 

15,308

Property, plant and equipment

 

3,936,724

 

3,929,733

Accumulated depreciation

 

(1,374,801)

 

(1,370,335)

Property, plant and equipment, net

$

2,561,923

$

2,559,398

v3.20.1
Organization and Basis of Presentation
3 Months Ended
Mar. 31, 2020
Accounting Policies [Abstract]  
Organization and Basis of Presentation

1. Description of Business and Basis of Presentation

We are an energy infrastructure company with a pure-play focus on midstream natural gas compression. We are the leading provider of natural gas compression services to customers in the oil and natural gas industry throughout the U.S. and a leading supplier of aftermarket services to customers that own compression equipment in the U.S. We operate in two business segments: contract operations and aftermarket services. Our predominant segment, contract operations, primarily includes designing, sourcing, owning, installing, operating, servicing, repairing and maintaining our owned fleet of natural gas compression equipment to provide natural gas compression services to our customers. In our aftermarket services business, we sell parts and components and provide operations, maintenance, overhaul and reconfiguration services to customers who own compression equipment.

The accompanying unaudited condensed consolidated financial statements included herein have been prepared in accordance with GAAP and the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP are not required in these interim financial statements and have been condensed or omitted. Management believes that the information furnished includes all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly our consolidated financial position, results of operations and cash flows for the periods indicated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements presented in our 2019 Form 10-K, which contains a more comprehensive summary of our accounting policies. The interim results reported herein are not necessarily indicative of results for a full year. Certain prior year amounts have been reclassified to conform to the current year presentation.

v3.20.1
Discontinued Operations - Balance Sheet Data for Discontinued Operations (Details) - Spinoff - Exterran Corporation - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Summary of balance sheet data for discontinued operations    
Other assets $ 8,519 $ 8,508
Deferred tax assets 4,086 4,393
Total assets associated with discontinued operations 12,605 12,901
Deferred tax liabilities 8,519 8,508
Total liabilities associated with discontinued operations $ 8,519 $ 8,508
v3.20.1
Business Transactions - Elite Acquisition (Details)
hp in Thousands, $ in Thousands, shares in Millions
Aug. 01, 2019
USD ($)
hp
shares
Dec. 31, 2019
USD ($)
Purchase price allocation    
Goodwill   $ 100,598
Elite Acquisition    
Business Transactions    
Compressor units horsepower (horsepower) | hp 430  
Cash consideration $ 214,000  
Purchase price allocation    
Accounts receivable 9,007  
Inventory 7,987  
Other current assets 608  
Property, plant and equipment 286,158  
Operating lease ROU assets 682  
Goodwill 100,598  
Intangible assets 40,237  
Accounts payable, trade (2,079)  
Accrued liabilities (2,973)  
Operating lease liabilities (326)  
Purchase price $ 439,899  
Elite Acquisition | Common Stock    
Business Transactions    
Shares issued as compensation for asset acquisition (shares) | shares 21.7  
Fair value of equity consideration $ 225,900  
v3.20.1
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Statement of Comprehensive Income [Abstract]    
Net income (loss) $ (61,187) $ 19,456
Other comprehensive loss, net of tax:    
Interest rate swap loss, net of reclassifications to earnings (5,786) (3,225)
Total other comprehensive loss (5,786) (3,225)
Comprehensive income (loss) $ (66,973) $ 16,231
v3.20.1
Cover - shares
3 Months Ended
Mar. 31, 2020
Apr. 28, 2020
Cover page.    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Mar. 31, 2020  
Document Transition Report false  
Commission File Number 001-33666  
Entity Registrant Name Archrock, Inc.  
Entity Incorporation, State or Country Code DE  
Entity Tax Identification Number 74-3204509  
Entity Street Address 9807 Katy Freeway  
Entity Suite Number Suite 100  
Entity City Houston  
Entity State TX  
Entity Postal Zip Code 77024  
City Area Code 281  
Local Phone Number 836-8000  
Title of each class Common stock, $0.01 par value per share  
Trading Symbol AROC  
Name of exchange on which registered NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   152,925,708
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q1  
Entity Central Index Key 0001389050  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
v3.20.1
Segments (Tables)
3 Months Ended
Mar. 31, 2020
Segment Reporting [Abstract]  
Revenue and other financial information by reportable segment

The following table presents revenue and gross margin by segment during the three months ended March 31, 2020 and 2019 (in thousands):

    

Contract

    

Aftermarket

    

    

Operations

    

Services

    

Total

Three months ended March 31, 2020

 

  

 

  

 

  

Revenue

$

206,974

$

42,723

$

249,697

Gross margin

 

128,323

 

7,732

 

136,055

Three months ended March 31, 2019

 

  

 

  

 

  

Revenue

$

182,507

$

53,652

$

236,159

Gross margin

 

107,772

 

9,750

 

117,522

Reconciliation of net income (loss) to gross margin

The following table reconciles total gross margin to income (loss) before income taxes (in thousands):

    

Three Months Ended

March 31, 

    

2020

    

2019

Total gross margin

$

136,055

$

117,522

Less:

 

  

 

  

Selling, general and administrative

 

30,626

 

28,989

Depreciation and amortization

 

49,822

 

44,106

Long-lived asset impairment

 

6,195

 

3,092

Goodwill impairment

99,830

Restatement and other charges

 

 

421

Restructuring charges

1,728

Interest expense

 

29,665

 

23,617

Transaction-related costs

 

 

180

(Gain) loss on sale of assets, net

(4,116)

16

Other income, net

 

(555)

 

(221)

Income (loss) before income taxes

$

(77,140)

$

17,322

v3.20.1
Long-Term Debt - Credit Facility (Details) - Credit Facility - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Dec. 31, 2019
Line of Credit Facility      
Letter of credit outstanding $ 13.7    
Debt instrument, variable rate (percentage) 2.50%    
Debt instrument weighted average interest rate (percent) 3.40%   4.30%
Commitment fee amount $ 0.7 $ 0.5  
Current borrowing capacity 651.4    
Undrawn capacity under revolving credit facility $ 755.3    
v3.20.1
Earnings Per Share - Net Income Attributable to Common Stockholders (Details) - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Summary of net income attributable to Archrock common stockholders used in the calculation of basic and diluted income per common share    
Income (loss) from continuing operations $ (61,187) $ 19,729
Loss from discontinued operations, net of tax   (273)
Net income (loss) (61,187) 19,456
Less: Net income attributable to participating securities (322) (356)
Net income attributable to common stockholders $ (61,509) $ 19,100
Potential shares of common stock included in computing diluted income attributable to Exterran common stockholders per common share    
Weighted average common shares outstanding including participating securities (in shares) 152,601 130,238
Less: Weighted average participating securities outstanding (in shares) (2,051) (2,029)
Weighted average common shares outstanding - used in basic net income (loss) per common share (in shares) 150,550 128,209
Weighted average common shares outstanding - used in diluted net income (loss) per common share (in shares) 150,550 128,255
On exercise of options and vesting of performance-based restricted stock units    
Potential shares of common stock included in computing diluted income attributable to Exterran common stockholders per common share    
Net dilutive potential common shares issuable (in shares)   40
On settlement of employee stock purchase plan shares    
Potential shares of common stock included in computing diluted income attributable to Exterran common stockholders per common share    
Net dilutive potential common shares issuable (in shares)   6
v3.20.1
Derivatives - Effect of Derivative Instruments on Balance Sheet (Details) - Derivatives Designated as Hedging Instruments - Interest Rate Swaps - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Fair Value Asset    
Derivative assets   $ 12
Derivative liability $ (9,081) (1,768)
Other current assets    
Fair Value Asset    
Derivative assets   12
Accrued liabilities    
Fair Value Asset    
Derivative liability (4,317) (593)
Other liabilities    
Fair Value Asset    
Derivative liability $ (4,764) $ (1,175)
v3.20.1
Revenue from Contract with Customers - Remaining Performance Obligation (Details)
$ in Thousands
Mar. 31, 2020
USD ($)
Revenue from Contract with Customer [Abstract]  
Remaining performance obligations $ 470,506
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2020-04-01  
Revenue from Contract with Customer [Abstract]  
Remaining performance obligations $ 244,368
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]  
Performance obligations expected to be satisfied, expected timing 9 months
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2021-01-01  
Revenue from Contract with Customer [Abstract]  
Remaining performance obligations $ 157,208
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]  
Performance obligations expected to be satisfied, expected timing 1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2022-01-01  
Revenue from Contract with Customer [Abstract]  
Remaining performance obligations $ 60,034
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]  
Performance obligations expected to be satisfied, expected timing 1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2023-01-01  
Revenue from Contract with Customer [Abstract]  
Remaining performance obligations $ 7,422
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]  
Performance obligations expected to be satisfied, expected timing 1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2024-01-01  
Revenue from Contract with Customer [Abstract]  
Remaining performance obligations $ 1,355
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]  
Performance obligations expected to be satisfied, expected timing 1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2025-01-01  
Revenue from Contract with Customer [Abstract]  
Remaining performance obligations $ 119
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]  
Performance obligations expected to be satisfied, expected timing 1 year
v3.20.1
Goodwill
3 Months Ended
Mar. 31, 2020
Goodwill  
Goodwill

8. Goodwill

Our goodwill was recognized in connection with the Elite Acquisition and represents the excess of consideration transferred over the fair value of the assets and liabilities acquired. All of the goodwill was allocated to our contract operations reporting unit. We review the carrying amount of our goodwill in the fourth quarter of every year, or whenever indicators of potential impairment exist, to determine if the carrying amount of our contract operations reporting unit exceeds its fair value, including the goodwill. During the first quarter, the COVID-19 pandemic caused a significant deterioration in global macroeconomic conditions, including a collapse in the demand for oil coupled with an oversupply of oil, which commenced substantial spending cuts by our customers and a decline in production. This global response to the pandemic significantly impacted our market capitalization and estimates of future revenues and cash flows as of March 31, 2020, which triggered the need to perform a quantitative test of the fair value of our contract operations reporting unit as of March 31, 2020. The quantitative test determined that the carrying amount of our contract operations reporting unit exceeded its fair value and we recorded a full impairment loss on goodwill as a result.

Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions, which have a significant impact on the fair value determined. We determine the fair value of our reporting unit using an equal weighting of both the expected present value of future cash flows and a market approach. The present value of future cash flows is estimated using our most recent forecast and the weighted average cost of capital. The market approach uses a market multiple on the earnings before interest expense, provision for income taxes and depreciation and amortization expense of comparable peer companies. Significant estimates for our reporting unit included in our impairment analysis are our cash flow forecasts, our estimate of the market’s weighted average cost of capital and market multiples.

The following table presents the change in the carrying amount of goodwill during the quarter ended March 31, 2020 (in thousands):

Balance at December 31, 2019

$

100,598

Dispositions

(768)

Impairment loss

 

(99,830)

Balance at March 31, 2020

$

v3.20.1
Discontinued Operations
3 Months Ended
Mar. 31, 2020
Discontinued Operations and Disposal Groups [Abstract]  
Discontinued Operations

4. Discontinued Operations

In 2015 we completed the Spin-off. In order to effect the Spin-off and govern our relationship with Exterran Corporation after the Spin-off, we entered into several agreements with Exterran Corporation which include, but are not limited to, the tax matters agreement. The tax matters agreement governs the respective rights, responsibilities and obligations of Exterran Corporation and us with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and certain other matters regarding taxes. Subject to the provisions of this agreement, we and Exterran Corporation agreed to indemnify the primary obligor of any return for tax periods beginning before and ending before or after the Spin-off (including any ongoing or future amendments and audits for these returns) for the portion of the tax liability (including interest and penalties) that relates to their respective operations reported in the filing.

As of March 31, 2020 and December 31, 2019, we had $8.5 million, respectively, of unrecognized tax benefits (including interest and penalties) related to Exterran Corporation operations prior to the Spin-off recorded to noncurrent liabilities associated with discontinued operations in our condensed consolidated balance sheets. We had an offsetting indemnification asset of $8.5 million related to these unrecognized tax benefits recorded to noncurrent assets associated with discontinued operations as of March 31, 2020 and December 31, 2019, respectively.

The following table presents the balance sheet for our discontinued operations (in thousands):

    

March 31, 2020

    

December 31, 2019

Other assets

$

8,519

$

8,508

Deferred tax assets

4,086

4,393

Total assets associated with discontinued operations

$

12,605

$

12,901

Deferred tax liabilities

$

8,519

$

8,508

Total liabilities associated with discontinued operations

$

8,519

$

8,508

The following table presents the statements of operations for our discontinued operations (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Other income, net

$

(10)

$

(1,432)

Provision for income taxes

 

10

 

1,705

Loss from discontinued operations, net of tax

$

$

(273)

v3.20.1
Leases (Tables)
3 Months Ended
Mar. 31, 2020
Leases [Abstract]  
Leases Balance Sheet Location

Balance sheet information related to our operating leases was as follows (in thousands):

    

Classification

    

March 31, 2020

 

December 31, 2019

ROU assets

 

Operating lease ROU assets

$

19,156

$

17,901

Lease liabilities

 

  

 

  

 

  

Current

 

Accrued liabilities

$

3,211

$

3,037

Noncurrent

 

Operating lease liabilities

 

17,184

 

16,094

Total lease liabilities

 

  

$

20,395

$

19,131

Components of Lease Costs

The components of lease cost were as follows (in thousands):

    

Three Months Ended

March 31, 

 

2020

2019

Operating lease cost

$

1,031

$

974

Short-term lease cost

 

129

 

173

Variable lease cost

 

349

 

382

Total lease cost

$

1,509

$

1,529

Cash flow and non-cash information related to our operating leases were as follows (in thousands):

    

Three Months Ended

March 31, 

2020

2019

Operating cash flows - cash paid for amounts included in the measurement of operating lease liabilities

$

1,351

$

1,311

Operating lease ROU assets obtained in exchange for new lease liabilities

 

2,037

 

617

Other supplemental information related to our operating leases was as follows:

    

March 31, 2020

December 31, 2019

Weighted average remaining lease term (in years)

 

8.3

8.2

Weighted average discount rate

 

5.1

%

5.3

%

Operating Lease Maturity Schedule

Remaining maturities of lease liabilities governed under ASC 842 Leases as of March 31, 2020 were as follows (in thousands):

2020

    

$

2,808

2021

3,955

2022

 

2,855

2023

 

2,550

2024

 

2,159

2025

1,930

Thereafter

 

8,942

Total lease payments

 

25,199

Less: Interest

 

(4,804)

Total lease liabilities under ASC 842 Leases

$

20,395

v3.20.1
Subsequent Events (Details) - USD ($)
$ in Thousands
3 Months Ended
Apr. 01, 2020
Jun. 30, 2020
Mar. 31, 2020
Mar. 31, 2019
Subsequent Events        
Repayments of long-term debt     $ 259,500 $ 629,000
2022 Notes | Subsequent Event        
Subsequent Events        
Redemption rate (as a percent) 100.00%      
Repayments of long-term debt $ 350,000      
Interest paid $ 10,500      
Debt extinguishment loss   $ 4,000    
v3.20.1
Segments
3 Months Ended
Mar. 31, 2020
Segment Reporting [Abstract]  
Segments

23. Segments

We manage our business segments primarily based on the type of product or service provided. We have two segments which we operate within the U.S.: contract operations and aftermarket services. The contract operations segment primarily provides natural gas compression services to meet specific customer requirements. The aftermarket services segment provides a full range of services to support the compression needs of customers, from parts sales and normal maintenance services to full operation of a customer’s owned assets.

We evaluate the performance of our segments based on gross margin for each segment. Revenue includes only sales to external customers.

The following table presents revenue and gross margin by segment during the three months ended March 31, 2020 and 2019 (in thousands):

    

Contract

    

Aftermarket

    

    

Operations

    

Services

    

Total

Three months ended March 31, 2020

 

  

 

  

 

  

Revenue

$

206,974

$

42,723

$

249,697

Gross margin

 

128,323

 

7,732

 

136,055

Three months ended March 31, 2019

 

  

 

  

 

  

Revenue

$

182,507

$

53,652

$

236,159

Gross margin

 

107,772

 

9,750

 

117,522

The following table reconciles total gross margin to income (loss) before income taxes (in thousands):

    

Three Months Ended

March 31, 

    

2020

    

2019

Total gross margin

$

136,055

$

117,522

Less:

 

  

 

  

Selling, general and administrative

 

30,626

 

28,989

Depreciation and amortization

 

49,822

 

44,106

Long-lived asset impairment

 

6,195

 

3,092

Goodwill impairment

99,830

Restatement and other charges

 

 

421

Restructuring charges

1,728

Interest expense

 

29,665

 

23,617

Transaction-related costs

 

 

180

(Gain) loss on sale of assets, net

(4,116)

16

Other income, net

 

(555)

 

(221)

Income (loss) before income taxes

$

(77,140)

$

17,322

v3.20.1
Business Transactions (Tables)
3 Months Ended
Mar. 31, 2020
Business Combinations [Abstract]  
Asset Acquisitions The following table summarizes the purchase price allocation based on the estimated fair values of the acquired assets and liabilities as of the acquisition date (in thousands):

Accounts receivable

    

$

9,007

Inventory

 

7,987

Other current assets

 

608

Property, plant and equipment

 

286,158

Operating lease ROU assets

 

682

Goodwill

 

100,598

Intangible assets

 

40,237

Accounts payable, trade

 

(2,079)

Accrued liabilities

 

(2,973)

Operating lease liabilities

 

(326)

Purchase price

$

439,899

Pro Forma Information

The unaudited pro forma financial information below is presented (in thousands) for informational purposes only and is not necessarily indicative of our results of operations that would have occurred had the transaction been consummated at the beginning of the period presented, nor is it necessarily indicative of future results.

Three Months Ended

March 31, 2019

Revenue

$

254,564

Net income

 

20,967

v3.20.1
Business Transactions - March 2020 Disposition (Details)
hp in Thousands, $ in Thousands
3 Months Ended
Mar. 01, 2020
USD ($)
hp
CompressorUnit
Mar. 31, 2020
USD ($)
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]    
Gain on March 2020 Disposition   $ 3,172
Disposed of by Sale | March 2020 Disposition    
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]    
Number of compressors | CompressorUnit 200  
Compressor units horsepower (horsepower) | hp 35  
Gain on March 2020 Disposition $ 3,200  
v3.20.1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Revenue:    
Revenues $ 249,697 $ 236,159
Total cost of sales (excluding depreciation and amortization) 113,642 118,637
Selling, general and administrative 30,626 28,989
Depreciation and amortization 49,822 44,106
Long-lived asset impairment 6,195 3,092
Goodwill impairment 99,830  
Restatement and other charges   421
Restructuring costs 1,728  
Interest expense 29,665 23,617
Transaction-related costs   180
(Gain) loss on sale of assets, net (4,116) 16
Other income, net (555) (221)
Income (loss) before income taxes (77,140) 17,322
Benefit from income taxes (15,953) (2,407)
Income (loss) from continuing operations (61,187) 19,729
Loss from discontinued operations, net of tax   (273)
Net income (loss) $ (61,187) $ 19,456
Basic and diluted net income (loss) per common share (in dollars per share) $ (0.41) $ 0.15
Weighted average common shares outstanding:    
Basic (in shares) 150,550 128,209
Diluted (in shares) 150,550 128,255
Contract Operations | Contract operations    
Revenue:    
Revenues $ 206,974 $ 182,507
Total cost of sales (excluding depreciation and amortization) 78,651 74,735
Aftermarket Services | Aftermarket services    
Revenue:    
Revenues 42,723 53,652
Total cost of sales (excluding depreciation and amortization) $ 34,991 $ 43,902
v3.20.1
Stock-Based Compensation (Tables)
3 Months Ended
Mar. 31, 2020
Share-based Payment Arrangement [Abstract]  
Schedule of Allocation of Total Stock-based Compensation

Stock-based compensation expense consisted of the following during the three months ended March 31, 2020 and 2019 (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Equity awards

$

3,006

$

2,357

Liability awards

 

(548)

 

966

Total stock-based compensation expense

$

2,458

$

3,323

Schedule of Restricted Stock, Restricted Stock Unit, Performance Unit, Cash Settled Restricted Stock Unit and Cash Settled Performance Unit Activity

The following table presents restricted stock, restricted stock unit, performance-based restricted stock unit and cash-settled performance unit activity during the three months ended March 31, 2020 (shares in thousands):

Weighted

Average

Grant Date

Fair Value

    

Shares

    

Per Share

Non-vested awards, December 31, 2019

 

2,022

$

10.25

Granted

 

1,412

 

9.47

Vested

 

(314)

 

9.44

Canceled

 

(52)

 

10.23

Non-vested awards, March 31, 2020 (1)

 

3,068

 

9.97

(1)Non-vested awards as of March 31, 2020 are comprised of 529,000 cash-settled restricted stock units and cash-settled performance units and 2,539,000 restricted stock and stock-settled performance units.
v3.20.1
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Dec. 31, 2019
Jun. 30, 2019
Mar. 31, 2019
Cash flows from operating activities:        
Net income (loss) $ (61,187)     $ 19,456
Adjustments to reconcile net income to cash provided by operating activities:        
Loss from discontinued operations, net of tax       273
Depreciation and amortization 49,822     44,106
Long-lived asset impairment 6,195     3,092
Goodwill impairment 99,830      
Inventory write-downs 282     222
Amortization of operating lease ROU assets 781     712
Amortization of deferred financing costs 1,533     1,509
Amortization of debt discount 187     366
Interest rate swaps 196     (410)
Stock-based compensation expense 3,006     2,357
Non-cash restructuring charges 61      
Provision for credit losses 752     428
(Gain) loss on sale of assets, net (944)     16
Gain on March 2020 Disposition (3,172)      
Deferred income tax benefit (15,966)     (2,883)
Amortization of contract costs 6,805     5,117
Deferred revenue recognized in earnings (7,735)     (12,749)
Changes in assets and liabilities:        
Accounts receivable, trade 4,803     (3,154)
Inventory 1,068     3,724
Other assets (439)     15,165
Contract costs, net (5,537)     (6,574)
Accounts payable and other liabilities 12,936     1,131
Deferred revenue 5,783     9,467
Other 69     29
Net cash provided by operating activities 99,129     81,400
Cash flows from investing activities:        
Capital expenditures (71,946)     (132,697)
Proceeds from March 2020 Disposition 24,179      
Proceeds from sale of property, plant and equipment and other assets 2,543     11,155
Proceeds from insurance and other settlements 1,083     238
Net cash used in investing activities (44,141)     (121,304)
Cash flows from financing activities:        
Borrowings of long-term debt 227,500     690,000
Repayments of long-term debt (259,500)     (629,000)
Payments for debt issuance costs (596)     (7,521)
Proceeds from (payments for) settlement of interest rate swaps that include financing elements (88)     393
Dividends paid to stockholders (22,171) $ (22,031) $ (17,206) (17,231)
Proceeds from stock issued under employee stock purchase plan 202     218
Purchases of treasury stock (799)     (857)
Net cash provided by (used in ) financing activities (55,452)     36,002
Net decrease in cash and cash equivalents (464)     (3,902)
Cash and cash equivalents, beginning of period 3,685   $ 1,708 5,610
Cash and cash equivalents, end of period $ 3,221 $ 3,685   $ 1,708
v3.20.1
Discontinued Operations - Description (Details) - Exterran Corporation - Spinoff - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Discontinued Operations    
Deferred tax liabilities $ 8,519 $ 8,508
Indemnification asset $ 8,519 $ 8,508
v3.20.1
Accumulated Other Comprehensive Income (Loss) (Details) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Increase (Decrease) in Stockholders' Equity    
Beginning balance $ 1,085,963 $ 841,574
Total other comprehensive loss (5,786) (3,225)
Ending balance 999,472 842,292
Accumulated Other Comprehensive Income (Loss)    
Increase (Decrease) in Stockholders' Equity    
Beginning balance (1,387) 5,773
Loss recognized in other comprehensive loss, net of tax benefit of $1,590 and $0, respectively (5,983) (2,299)
(Gain) loss reclassified from accumulated other comprehensive income (loss) to interest expense, net of tax benefit of $51 and $0, respectively 197 (926)
Total other comprehensive loss (5,786) (3,225)
Ending balance (7,173) 2,548
Loss recognized in other comprehensive income, tax expense (benefit) (1,590) 0
(Gain) loss reclassified from accumulated other comprehensive loss, tax expense (benefit) $ (51) 0
Valuation adjustment   $ 700
v3.20.1
Earnings Per Share - Anti-dilutive Shares (Details) - shares
shares in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Anti-dilutive effect of the calculation of net dilutive potential shares of common stock issuable    
Net dilutive potential common shares issuable (shares) 212 154
On exercise of options where exercise price is greater than average market value for the period    
Anti-dilutive effect of the calculation of net dilutive potential shares of common stock issuable    
Net dilutive potential common shares issuable (shares) 126 154
On exercise of options and vesting of performance-based restricted stock units    
Anti-dilutive effect of the calculation of net dilutive potential shares of common stock issuable    
Net dilutive potential common shares issuable (shares) 57  
On settlement of employee stock purchase plan shares    
Anti-dilutive effect of the calculation of net dilutive potential shares of common stock issuable    
Net dilutive potential common shares issuable (shares) 29  
v3.20.1
Derivatives - Effect of Derivative Instruments on Income Statement (Details) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Effect of derivative instruments on results of operations    
Total amount of interest expense in which the effects of cash flow hedges are recorded $ 29,665 $ 23,617
Interest Rate Swaps    
Effect of derivative instruments on results of operations    
Pre-tax loss recognized in other comprehensive loss (7,573) (2,299)
Pre-tax income (loss) reclassified from accumulated other comprehensive income (loss) into interest expense (248) 926
Total amount of interest expense in which the effects of cash flow hedges are recorded $ 29,665 $ 23,617
v3.20.1
Revenue from Contract with Customers - Contract Balances (Details) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Dec. 31, 2019
Disaggregation of Revenue      
Accounts receivable, trade $ 138,623   $ 144,865
Contract liability with customer 9,400   11,400
Deferred revenue 5,783 $ 9,467  
Deferred revenue recognized in earnings 7,735 $ 12,749  
Contract with Customers      
Disaggregation of Revenue      
Accounts receivable, trade $ 133,500   $ 139,400
v3.20.1
Fair Value Measurements (Tables)
3 Months Ended
Mar. 31, 2020
Fair Value Disclosures [Abstract]  
Summary of assets and liabilities measured at fair value on recurring basis The following table presents our derivative asset and liability measured at fair value on a recurring basis, with pricing levels as of the date of valuation (in thousands):

    

March 31, 2020

    

December 31, 2019

Derivative asset

$

$

12

Derivative liability

 

(9,081)

 

(1,768)

Schedule of non-recurring fair value assets

The fair value of our impaired compressors at March 31, 2020 and December 31, 2019 was as follows:

    

March 31, 2020

    

December 31, 2019

Impaired compressors

$

253

$

5,859

 

Schedule of additional quantitative information related to our significant unobservable inputs

    

Range

    

Weighted Average

Estimated net sale proceeds (1)

$0 - $372 per horsepower

$21 per horsepower

(1)Weighted average is calculated based on an estimated discount for market liquidity of 78%.
Schedule of carrying value and estimated fair value of debt instruments The following table presents the carrying amount and fair value of our fixed rate debt (in thousands):

    

March 31, 2020

    

December 31, 2019

Carrying amount of fixed rate debt (1)

$

1,330,455

$

1,329,549

Fair value of fixed rate debt

 

1,067,000

 

1,400,000

(1)Carrying amounts are shown net of unamortized debt discounts and unamortized deferred financing costs. See Note 10 (“Long-Term Debt”).
v3.20.1
Long-Term Debt (Tables)
3 Months Ended
Mar. 31, 2020
Debt Disclosure [Abstract]  
Schedule of long-term debt

Long-term debt consisted of the following (in thousands):

    

March 31, 2020

    

December 31, 2019

Credit Facility

$

481,000

$

513,000

2028 Notes

 

500,000

 

500,000

Less: Deferred financing costs, net of amortization

 

(7,851)

 

(8,090)

 

492,149

 

491,910

2027 Notes

500,000

 

500,000

Less: Deferred financing costs, net of amortization

(7,723)

 

(7,999)

492,277

 

492,001

2022 Notes

 

350,000

 

350,000

Less: Debt discount, net of amortization

 

(1,860)

 

(2,046)

Less: Deferred financing costs, net of amortization

 

(2,111)

 

(2,316)

 

346,029

 

345,638

Long-term debt

$

1,811,455

$

1,842,549

v3.20.1
Long-Lived Assets Impairment (Tables)
3 Months Ended
Mar. 31, 2020
Asset Impairment Charges [Abstract]  
Schedule of impairment of long-lived assets

The following table presents the results of our impairment review as recorded to our contract operations segment (dollars in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Idle compressors retired from the active fleet

 

85

 

20

Horsepower of idle compressors retired from the active fleet

 

23,000

 

15,000

Impairment recorded on idle compressors retired from the active fleet

$

6,195

$

3,092

v3.20.1
Leases - Cash Flow and Non-cash Information (Details) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Leases [Abstract]    
Operating cash flows - cash paid for amounts included in the measurement of operating lease liabilities $ 1,351 $ 1,311
Operating lease ROU assets obtained in exchange for new lease liabilities $ 2,037 $ 617
v3.20.1
Related Party Transactions (Details)
shares in Millions, $ in Millions
3 Months Ended
Aug. 01, 2019
USD ($)
director
shares
Mar. 31, 2020
USD ($)
Mar. 31, 2019
USD ($)
Dec. 31, 2019
USD ($)
Affiliated Entity | JDH Capital | Archrock, Inc.        
Related Party Transaction        
Ownership interest (percent)   14.20%    
Affiliated Entity | JDH Capital        
Related Party Transaction        
Number of directors shareholder and affiliates have right to designate | director 1      
Affiliated Entity | JDH Capital | Elite Acquisition | Common Stock        
Related Party Transaction        
Minimum ownership interest of outstanding shares required to elect a board of director (percent)   7.50%    
Affiliated Entity | Hilcorp        
Related Party Transaction        
Revenue from related party transactions   $ 10.7 $ 5.5  
Due from related party   $ 4.1   $ 5.1
Affiliated Entity | Jeffery D. Hildebrand        
Related Party Transaction        
Compensation paid by entity to individual in role as Director $ 0.0      
Elite Acquisition | Common Stock        
Related Party Transaction        
Shares issued as compensation for asset acquisition (shares) | shares 21.7      
Elite Acquisition | JDH Capital | Common Stock        
Related Party Transaction        
Shares issued as compensation for asset acquisition (shares) | shares 21.7      
v3.20.1
Stock-Based Compensation - Award Activity (Details) - Restricted Stock, Restricted Stock Units, Performance Units, Cash Settled Restricted Stock Units and Cash Settled Performance Units
shares in Thousands
3 Months Ended
Mar. 31, 2020
$ / shares
shares
Shares  
Non-vested awards at the beginning of the period (in shares) | shares 2,022
Granted (in shares) | shares 1,412
Vested (in shares) | shares (314)
Canceled (in shares) | shares (52)
Non-vested awards at the end of the period (in shares) | shares 3,068
Weighted Average Grant Date Fair Value Per Share  
Non-vested awards at the beginning of the period (in dollars per share) | $ / shares $ 10.25
Granted (in dollars per share) | $ / shares 9.47
Vested (in dollars per share) | $ / shares 9.44
Canceled (in dollars per share) | $ / shares 10.23
Non-vested awards at the end of the period (in dollars per share) | $ / shares $ 9.97
v3.20.1
Property, Plant and Equipment, Net (Details) - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Property, Plant and Equipment    
Property, plant and equipment, gross $ 3,936,724 $ 3,929,733
Accumulated depreciation (1,374,801) (1,370,335)
Property, plant and equipment, net 2,561,923 2,559,398
Compression equipment, facilities and other fleet assets    
Property, Plant and Equipment    
Property, plant and equipment, gross 3,659,907 3,653,930
Land and buildings    
Property, Plant and Equipment    
Property, plant and equipment, gross 51,031 50,743
Transportation and shop equipment    
Property, Plant and Equipment    
Property, plant and equipment, gross 114,465 116,057
Computer hardware and software    
Property, Plant and Equipment    
Property, plant and equipment, gross 93,734 93,695
Other    
Property, Plant and Equipment    
Property, plant and equipment, gross $ 17,587 $ 15,308
v3.20.1
Income Taxes
3 Months Ended
Mar. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes

16. Income Taxes

CARES Act

On March 27, 2020, President Trump signed into law the CARES Act, which includes, among other things, refundable payroll tax credits, deferment of employer side social security payments, NOL carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act provisions did not have a material impact on our condensed consolidated financial statements. Future regulatory guidance under the CARES Act or additional legislation enacted by Congress in connection with the COVID-19 pandemic could impact our tax provision in future periods.

Valuation Allowance

The amount of our deferred tax assets considered realizable could be adjusted if projections of future taxable income are reduced or objective negative evidence in the form of a three-year cumulative loss is present or both. Should we no longer have a level of sustained profitability, excluding nonrecurring charges, we will have to rely more on our future projections of taxable income to determine if we have an adequate source of taxable income for the realization of our deferred tax assets, namely NOL carryforwards and tax credit carryforwards. This may result in the need to record a valuation allowance against all or a portion of our deferred tax assets.

Effective Tax Rate

The year-to-date effective tax rate for the three months ended March 31, 2020 differed from our statutory rate primarily due to an increase in unrecognized tax benefits. Our quarterly income tax provision is determined based on our estimated full year effective tax rate, adjusted for tax attributable to infrequent or unusual items, which are recognized on a discrete period basis in the income tax provision in the period in which they occur. Our year-to-date income tax provision included a $22.7 million tax benefit recorded discretely on the nonrecurring goodwill impairment loss of $99.8 million. See Note 8 (“Goodwill”) for further details on the goodwill impairment.

Unrecognized Tax Benefits

As of March 31, 2020, we believe it is reasonably possible that $2.6 million of our unrecognized tax benefits, including penalties, interest and discontinued operations, will be reduced prior to March 31, 2021 due to the settlement of audits or the expiration of statutes of limitations or both. However, due to the uncertain and complex application of the tax regulations, it is possible that the ultimate resolution of these matters may result in liabilities that could materially differ from this estimate.

v3.20.1
Equity
3 Months Ended
Mar. 31, 2020
Equity [Abstract]  
Equity

12. Equity

Cash Dividends

The following table summarizes our dividends declared and paid in each of the quarterly periods of 2020 and 2019:

    

Declared Dividends

    

Dividends Paid

    

per Common Share

    

(in thousands)

2020

 

  

 

  

Q1

$

0.145

$

22,171

2019

 

  

 

  

Q1

$

0.132

$

17,231

Q2

 

0.132

 

17,206

Q3

 

0.145

 

22,062

Q4

 

0.145

 

22,031

On April 24, 2020, our Board of Directors declared a quarterly dividend of $0.145 per share of common stock to be paid on May 18, 2020 to stockholders of record at the close of business on May 11, 2020.

v3.20.1
Stock-Based Compensation
3 Months Ended
Mar. 31, 2020
Share-based Payment Arrangement [Abstract]  
Stock-Based Compensation

20. Stock-Based Compensation

Stock-based compensation expense consisted of the following during the three months ended March 31, 2020 and 2019 (in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Equity awards

$

3,006

$

2,357

Liability awards

 

(548)

 

966

Total stock-based compensation expense

$

2,458

$

3,323

The following table presents restricted stock, restricted stock unit, performance-based restricted stock unit and cash-settled performance unit activity during the three months ended March 31, 2020 (shares in thousands):

Weighted

Average

Grant Date

Fair Value

    

Shares

    

Per Share

Non-vested awards, December 31, 2019

 

2,022

$

10.25

Granted

 

1,412

 

9.47

Vested

 

(314)

 

9.44

Canceled

 

(52)

 

10.23

Non-vested awards, March 31, 2020 (1)

 

3,068

 

9.97

(1)Non-vested awards as of March 31, 2020 are comprised of 529,000 cash-settled restricted stock units and cash-settled performance units and 2,539,000 restricted stock and stock-settled performance units.

As of March 31, 2020, we expect $21.5 million of unrecognized compensation cost related to unvested restricted stock, stock-settled restricted stock units, performance units, cash-settled restricted stock units and cash-settled performance units to be recognized over the weighted average period of 2.2 years.

2020 Plan

The 2020 Plan was adopted in April 2020 and provides for the granting of stock options, restricted stock, restricted stock units, stock appreciation rights, performance awards, other stock-based awards and dividend equivalent rights to employees, directors and consultants of Archrock. Under the 2020 Plan, the maximum number of shares of common stock available for issuance is 8,500,000. Each stock-settled award granted under the 2020 Plan reduces the number of shares available for issuance by one share. No additional grants may be made under the 2013 Plan following the adoption of the 2020 Plan. Previous grants made under the 2013 Plan continue to be governed by that plan and the applicable award agreements.