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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 deter