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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 June 30, 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

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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 June 30, 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 July 24, 2020: 152,949,352 shares.

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 July 24, 2020: 152,949,352 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

10

Notes to Condensed Consolidated Financial Statements (unaudited)

11

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

30

Item 3. Quantitative and Qualitative Disclosures About Market Risk

40

Item 4. Controls and Procedures

40

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

42

Item 1A. Risk Factors

42

Item 2. Unregistered Sales of Equity Securities

43

Item 3. Defaults Upon Senior Securities

43

Item 4. Mine Safety Disclosures

43

Item 5. Other Information

43

Item 6. Exhibits

44

SIGNATURES

45

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

AETR

Annual effective tax rate

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

PDVSA

PDVSA Gas, S.A.

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

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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.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ARCHROCK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share amounts)

(unaudited)

    

June 30, 2020

    

December 31, 2019

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

2,205

$

3,685

Accounts receivable, trade, net of allowance of $3,630 and $2,210, respectively

 

124,587

 

144,865

Inventory

 

70,991

 

74,467

Other current assets

 

11,106

 

9,186

Total current assets

 

208,889

 

232,203

Property, plant and equipment, net

 

2,486,074

 

2,559,398

Operating lease ROU assets

 

20,203

 

17,901

Goodwill, net

 

 

100,598

Intangible assets, net

 

69,603

 

77,471

Contract costs, net

 

37,055

 

42,927

Deferred tax assets

 

63,975

 

36,642

Other assets

 

30,285

 

29,934

Noncurrent assets associated with discontinued operations

 

12,309

 

12,901

Total assets

$

2,928,393

$

3,109,975

Liabilities and Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable, trade

$

35,545

$

60,215

Accrued liabilities

 

78,936

 

67,845

Deferred revenue

 

5,598

 

10,683

Total current liabilities

 

120,079

 

138,743

Long-term debt

 

1,807,937

 

1,842,549

Operating lease liabilities

 

17,993

 

16,094

Deferred tax liabilities

 

1,017

 

1,289

Other liabilities

 

21,965

 

16,829

Noncurrent liabilities associated with discontinued operations

 

8,529

 

8,508

Total liabilities

 

1,977,520

 

2,024,012

Commitments and contingencies (Note 20)

 

  

 

  

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, 159,810,336 and 158,636,918 shares issued, respectively

 

1,598

 

1,587

Additional paid-in capital

 

3,419,512

 

3,412,509

Accumulated other comprehensive loss

 

(6,908)

 

(1,387)

Accumulated deficit

 

(2,380,626)

 

(2,244,877)

Treasury stock: 6,860,984 and 6,702,602 common shares, at cost, respectively

 

(82,703)

 

(81,869)

Total equity

 

950,873

 

1,085,963

Total liabilities and equity

$

2,928,393

$

3,109,975

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

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Table of Contents

ARCHROCK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

Revenue:

 

  

 

  

 

  

 

  

Contract operations

$

187,949

$

186,258

$

394,923

$

368,765

Aftermarket services

 

32,367

 

52,132

 

75,090

 

105,784

Total revenue

 

220,316

 

238,390

 

470,013

 

474,549

Cost of sales (excluding depreciation and amortization):

 

Contract operations

 

63,390

 

70,521

 

142,041

 

145,256

Aftermarket services

 

28,686

 

42,215

 

63,677

 

86,117

Total cost of sales (excluding depreciation and amortization)

 

92,076

 

112,736

 

205,718

 

231,373

Selling, general and administrative

 

28,745

 

28,618

 

59,371

 

57,607

Depreciation and amortization

 

48,849

 

45,482

 

98,671

 

89,588

Long-lived asset impairment

 

55,210

 

8,632

 

61,405

 

11,724

Goodwill impairment

99,830

Restatement and other charges

 

 

24

 

 

445

Restructuring charges

2,408

4,136

Interest expense

 

25,778

 

25,954

 

55,443

 

49,571

Debt extinguishment loss

 

3,971

 

3,653

 

3,971

 

3,653

Transaction-related costs

 

 

2,687

 

 

2,867

(Gain) loss on sale of assets, net

2,189

(1,801)

(1,927)

(1,785)

Other income, net

 

(438)

 

(209)

 

(993)

 

(430)

Income (loss) before income taxes

 

(38,472)

 

12,614

 

(115,612)

 

29,936

Provision for (benefit from) income taxes

 

(8,091)

 

1,191

 

(24,044)

 

(1,216)

Income (loss) from continuing operations

 

(30,381)

 

11,423

(91,568)

31,152

Loss from discontinued operations, net of tax

 

 

 

 

(273)

Net income (loss)

$

(30,381)

$

11,423

$

(91,568)

$

30,879

Basic and diluted net income (loss) per common share

$

(0.20)

$

0.09

$

(0.61)

$

0.24

Weighted average common shares outstanding:

 

  

 

  

 

  

 

  

Basic

 

150,743

 

128,328

 

150,628

 

128,261

Diluted

 

150,743

 

128,354

 

150,628

 

128,297

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

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Table of Contents

ARCHROCK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

Net income (loss)

$

(30,381)

    

$

11,423

    

$

(91,568)

    

$

30,879

Other comprehensive income (loss), net of tax:

 

  

 

  

 

  

 

  

Interest rate swap gain (loss), net of reclassifications to earnings

 

265

 

(5,320)

 

(5,521)

 

(8,545)

Total other comprehensive income (loss)

 

265

 

(5,320)

 

(5,521)

 

(8,545)

Comprehensive income (loss)

$

(30,116)

$

6,103

$

(97,089)

$

22,334

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

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Table of Contents

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 March 31, 2019

$

1,369

136,876,352

$

3,180,546

$

2,548

$

(2,261,452)

$

(80,719)

(6,484,075)

$

842,292

Cash dividends ($0.132 per common share)

 

  

 

  

 

  

 

  

 

(17,206)

 

  

 

  

 

(17,206)

Shares issued in employee stock purchase plan

 

 

19,073

 

189

 

  

 

  

 

  

 

  

 

189

Stock-based compensation, net of forfeitures

 

 

3,872

 

1,512

 

  

 

  

 

  

 

(93,483)

 

1,512

Comprehensive income

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

Net income

 

  

 

  

 

  

 

  

 

11,423

 

  

 

  

 

11,423

Interest rate swap loss, net of reclassifications to earnings

 

  

 

  

 

  

 

(5,320)

 

  

 

  

 

  

 

(5,320)

Balance at June 30, 2019

$

1,369

 

136,899,297

$

3,182,247

$

(2,772)

$

(2,267,235)

$

(80,719)

 

(6,577,558)

$

832,890

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

Treasury stock purchased

 

  

 

  

 

  

 

  

 

  

 

(35)

 

(5,563)

 

(35)

Cash dividends ($0.145 per common share)

 

  

 

  

 

  

 

  

 

(22,176)

 

  

 

  

 

(22,176)

Shares issued in employee stock purchase plan

 

 

53,838

 

165

 

  

 

  

 

  

 

  

 

165

Stock-based compensation, net of forfeitures

 

 

 

2,885

 

  

 

  

 

  

 

(25,014)

 

2,885

Contribution from Exterran Corporation

678

678

Comprehensive loss

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

Net loss

 

  

 

  

 

  

 

  

 

(30,381)

 

  

 

  

 

(30,381)

Interest rate swap gain, net of reclassifications to earnings

 

  

 

  

 

  

 

265

 

  

 

  

 

  

 

265

Balance at June 30, 2020

$

1,598

 

159,810,336

$

3,419,512

$

(6,908)

$

(2,380,626)

$

(82,703)

 

(6,860,984)

$

950,873

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

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Table of Contents

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 ($0.264 per common share)

 

  

 

  

 

  

 

  

 

(34,437)

 

  

 

  

 

(34,437)

Shares issued in employee stock purchase plan

 

 

48,801

 

407

 

  

 

  

 

  

 

  

 

407

Stock-based compensation, net of forfeitures

 

11

 

1,062,987

 

3,858

 

  

 

  

 

  

 

(108,917)

 

3,869

Comprehensive income

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

Net income

 

  

 

  

 

  

 

  

 

30,879

 

  

 

  

 

30,879

Interest rate swap loss, net of reclassifications to earnings

 

  

 

  

 

  

 

(8,545)

 

  

 

  

 

  

 

(8,545)

Balance at June 30, 2019

$

1,369

 

136,899,297

$

3,182,247

$

(2,772)

$

(2,267,235)

$

(80,719)

 

(6,577,558)

$

832,890

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

 

  

 

  

 

  

 

  

 

  

 

(834)

 

(96,157)

 

(834)

Cash dividends ($0.290 per common share)

 

  

 

  

 

  

 

  

 

(44,347)

 

  

 

  

 

(44,347)

Shares issued in employee stock purchase plan

 

1

 

110,255

 

366

 

  

 

  

 

  

 

  

 

367

Stock-based compensation, net of forfeitures

 

10

 

1,063,163

 

5,959

 

  

 

  

 

  

 

(62,225)

 

5,969

Contribution from Exterran Corporation

678

678

Impact of ASU 2016-13 adoption

 

 

 

 

  

 

166

 

  

 

  

 

166

Comprehensive loss

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

Net loss

 

  

 

  

 

  

 

  

 

(91,568)

 

  

 

  

 

(91,568)

Interest rate swap loss, net of reclassifications to earnings

 

  

 

  

 

  

 

(5,521)

 

  

 

  

 

  

 

(5,521)

Balance at June 30, 2020

$

1,598

 

159,810,336

$

3,419,512

$

(6,908)

$

(2,380,626)

$

(82,703)

 

(6,860,984)

$

950,873

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

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Table of Contents

ARCHROCK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Six Months Ended

June 30, 

    

2020

    

2019

Cash flows from operating activities:

  

  

Net income (loss)

$

(91,568)

$

30,879

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

 

  

 

  

Loss from discontinued operations, net of tax

 

 

273

Depreciation and amortization

 

98,671

 

89,588

Long-lived asset impairment

 

61,405

 

11,724

Goodwill impairment

99,830

Inventory write-downs

 

695

 

492

Amortization of operating lease ROU assets

 

1,627

 

1,425

Amortization of deferred financing costs

 

2,856

 

3,041

Amortization of debt discount

 

187

 

545

Debt extinguishment loss

 

3,971

 

3,653

Interest rate swaps

 

928

 

(802)

Stock-based compensation expense

 

5,778

 

3,869

Non-cash restructuring charges

162

Provision for credit losses

 

2,282

 

335

(Gain) loss on sale of assets, net

 

1,245

 

(1,785)

Gain on March 2020 Disposition

(3,172)

Deferred income tax benefit

 

(24,117)

 

(1,819)

Amortization of contract costs

 

13,656

 

10,724

Deferred revenue recognized in earnings

 

(12,762)

 

(25,227)

Changes in assets and liabilities:

 

  

 

  

Accounts receivable, trade

 

17,569

 

(5,015)

Inventory

 

2,615

 

2,160

Other assets

 

(4,268)

 

12,817

Contract costs, net

 

(8,129)

 

(14,128)

Accounts payable and other liabilities

 

(10,829)

 

6,102

Deferred revenue

 

8,253