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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, 2021

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 23, 2021: 154,041,024 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 (Loss)

7

Condensed Consolidated Statements of Equity

8

Condensed Consolidated Statements of Cash Flows

10

Notes to Condensed Consolidated Financial Statements

11

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

29

Item 3. Quantitative and Qualitative Disclosures About Market Risk

39

Item 4. Controls and Procedures

39

Part II. Other Information

Item 1. Legal Proceedings

40

Item 1A. Risk Factors

40

Item 2. Purchases of Equity Securities by Issuer and Affiliated Purchasers

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.

2020 Form 10-K

Annual Report on Form 10-K for the year ended December 31, 2020

2022 Notes

$350.0 million of 6.00% 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

$800.0 million of 6.25% senior notes due April 2028, $500.0 million of which was issued in December 2019, $300.0 million of which was issued in December 2020

Amendment No. 3

Amendment No. 3 to Credit Agreement, dated February 22, 2021, which amended that Credit Agreement, dated as of March 30, 2017, which governs the Credit Facility

Archrock, our, we, us

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

ASU 2016-13

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

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

ATM Agreement

Equity Distribution Agreement, dated February 23, 2021, entered into with Wells Fargo Securities, LLC and BofA Securities, Inc., as sales agents, relating to the at-the-market offer and sale of shares of our common stock from time to time

COVID-19

Coronavirus disease 2019

Credit Facility

$750.0 million asset-based revolving credit facility due November 2024, as governed by Amendment No. 3 to Credit Agreement, dated February 22, 2021, 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 whereby we acquired from Elite Compression Services, LLC substantially all of its assets and certain liabilities

ERP

Enterprise Resource Planning

ESPP

Employee Stock Purchase Plan

Exchange Act

Securities Exchange Act of 1934, as amended

February 2021 Disposition

Sale completed in February 2021 of certain contract operations customer service agreements, compressors and other assets

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.

July 2020 Disposition

Sale completed in July 2020 of the turbocharger business included within our aftermarket services segment

LIBOR

London Interbank Offered Rate

March 2020 Disposition

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

OTC

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

ROU

Right-of-use, as related to the lease model under Accounting Standards Codification Topic 842 Leases

SEC

U.S. Securities and Exchange Commission

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 2020 Form 10-K 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)

    

June 30, 2021

    

December 31, 2020

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

3,312

$

1,097

Accounts receivable, trade, net of allowance of $2,731 and $3,370, respectively

 

106,393

 

104,425

Inventory

 

65,885

 

63,670

Other current assets

 

12,265

 

12,819

Total current assets

 

187,855

 

182,011

Property, plant and equipment, net

 

2,322,400

 

2,389,674

Operating lease ROU assets

 

18,404

 

19,236

Intangible assets, net

 

54,684

 

61,531

Contract costs, net

 

24,661

 

29,216

Deferred tax assets

 

51,294

 

56,934

Other assets

 

25,936

 

30,084

Noncurrent assets associated with discontinued operations

 

10,424

 

11,036

Total assets

$

2,695,658

$

2,779,722

Liabilities and Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable, trade

$

45,096

$

30,819

Accrued liabilities

 

77,376

 

76,993

Deferred revenue

 

3,078

 

3,880

Total current liabilities

 

125,550

 

111,692

Long-term debt

 

1,612,490

 

1,688,867

Operating lease liabilities

 

16,446

 

16,925

Deferred tax liabilities

 

761

 

725

Other liabilities

 

18,722

 

18,088

Noncurrent liabilities associated with discontinued operations

 

7,868

 

7,868

Total liabilities

 

1,781,837

 

1,844,165

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, 161,339,554 and 160,014,960 shares issued, respectively

 

1,613

 

1,600

Additional paid-in capital

 

3,434,224

 

3,424,624

Accumulated other comprehensive loss

 

(3,044)

 

(5,006)

Accumulated deficit

 

(2,433,553)

 

(2,401,988)

Treasury stock: 7,278,449 and 7,052,769 common shares, at cost, respectively

 

(85,419)

 

(83,673)

Total equity

 

913,821

 

935,557

Total liabilities and equity

$

2,695,658

$

2,779,722

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

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ARCHROCK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2021

    

2020

    

2021

    

2020

Revenue:

 

  

 

  

 

  

 

  

Contract operations

$

163,865

$

187,949

$

329,899

$

394,923

Aftermarket services

 

31,750

 

32,367

 

61,147

 

75,090

Total revenue

 

195,615

 

220,316

 

391,046

 

470,013

Cost of sales (excluding depreciation and amortization):

 

Contract operations

 

61,387

 

63,390

 

122,752

 

142,041

Aftermarket services

 

27,490

 

28,686

 

53,273

 

63,677

Total cost of sales (excluding depreciation and amortization)

 

88,877

 

92,076

 

176,025

 

205,718

Selling, general and administrative

 

26,077

 

28,745

 

51,161

 

59,371

Depreciation and amortization

 

44,193

 

48,849

 

89,905

 

98,671

Long-lived and other asset impairment

 

2,960

 

55,210

 

10,033

 

61,405

Goodwill impairment

99,830

Restructuring charges

743

2,408

1,640

4,136

Interest expense

 

25,958

 

25,778

 

57,203

 

55,443

Debt extinguishment loss

 

 

3,971

 

 

3,971

(Gain) loss on sale of assets, net

(3,124)

2,189

(14,156)

(1,927)

Other income, net

 

(82)

 

(438)

 

(1,971)

 

(993)

Income (loss) before income taxes

 

10,013

 

(38,472)

 

21,206

 

(115,612)

Provision for (benefit from) income taxes

 

1,261

 

(8,091)

 

8,285

 

(24,044)

Net income (loss)

$

8,752

$

(30,381)

$

12,921

$

(91,568)

Basic and diluted net income (loss) per common share

$

0.06

$

(0.20)

$

0.08

$

(0.61)

Weighted average common shares outstanding:

 

  

 

  

 

  

 

  

Basic

 

152,033

 

150,743

 

151,537

 

150,628

Diluted

 

152,203

 

150,743

 

151,699

 

150,628

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

Six Months Ended

June 30, 

June 30, 

    

2021

    

2020

    

2021

    

2020

Net income (loss)

$

8,752

    

$

(30,381)

    

$

12,921

    

$

(91,568)

Other comprehensive income (loss), net of tax:

 

  

 

  

 

  

 

  

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

 

966

 

265

 

1,962

 

(5,521)

Total other comprehensive income (loss), net of tax

 

966

 

265

 

1,962

 

(5,521)

Comprehensive income (loss)

$

9,718

$

(30,116)

$

14,883

$

(97,089)

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

    

Loss

    

Deficit

    

Amount

    

Shares

    

Total

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 under ESPP

 

 

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

Balance at March 31, 2021

$

1,613

 

161,323,492

$

3,430,910

$

(4,010)

$

(2,419,974)

$

(85,415)

 

(7,263,173)

$

923,124

Treasury stock purchased

 

  

 

  

 

  

 

  

 

  

 

(4)

 

(383)

 

(4)

Cash dividends ($0.145 per common share)

 

  

 

  

 

  

 

  

 

(22,331)

 

  

 

  

 

(22,331)

Shares issued under ESPP

 

 

16,062

 

136

 

  

 

  

 

  

 

  

 

136

Stock-based compensation, net of forfeitures

 

 

 

3,178

 

  

 

  

 

  

 

(14,893)

 

3,178

Comprehensive income

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

Net income

 

  

 

  

 

  

 

  

 

8,752

 

  

 

  

 

8,752

Interest rate swap gain, net of reclassifications to earnings

 

  

 

  

 

  

 

966

 

  

 

  

 

  

 

966

Balance at June 30, 2021

$

1,613

 

161,339,554

$

3,434,224

$

(3,044)

$

(2,433,553)

$

(85,419)

 

(7,278,449)

$

913,821

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

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Accumulated

Common

Additional

Other

Treasury

Stock

Paid-in

Comprehensive

Accumulated

Stock

  

Amount

  

Shares

  

Capital

  

Loss

  

Deficit

  

Amount

  

Shares

  

Total

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 under ESPP

 

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

Balance at December 31, 2020

$

1,600

 

160,014,960

$

3,424,624

$

(5,006)

$

(2,401,988)

$

(83,673)

 

(7,052,769)

$

935,557

Treasury stock purchased

 

  

 

  

 

  

 

  

 

  

 

(1,746)

 

(184,776)

 

(1,746)

Cash dividends ($0.290 per common share)

 

  

 

  

 

  

 

  

 

(44,486)

 

  

 

  

 

(44,486)

Shares issued under ESPP

 

44,116

 

371

 

  

 

  

 

  

 

  

 

371

Stock-based compensation, net of forfeitures

 

9

 

923,330

 

5,832

 

  

 

  

 

  

 

(40,904)

 

5,841

Net proceeds from issuance of common stock

4

357,148

3,397

3,401

Comprehensive income

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

Net income

 

  

 

  

 

  

 

  

 

12,921

 

  

 

  

 

12,921

Interest rate swap gain, net of reclassifications to earnings

 

  

 

  

 

  

 

1,962

 

  

 

  

 

  

 

1,962

Balance at June 30, 2021

$

1,613

 

161,339,554

$

3,434,224

$

(3,044)

$

(2,433,553)

$

(85,419)

 

(7,278,449)

$

913,821

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)

Six Months Ended

June 30, 

    

2021

    

2020

Cash flows from operating activities:

  

  

Net income (loss)

$

12,921

$

(91,568)

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

 

  

 

  

Depreciation and amortization

 

89,905

 

98,671

Long-lived and other asset impairment

 

10,033

 

61,405

Goodwill impairment

99,830

Inventory write-downs

 

511

 

695

Amortization of operating lease ROU assets

 

1,891

 

1,627

Amortization of deferred financing costs

 

7,551

 

2,856

Amortization of debt discount

 

 

187

Amortization of debt premium

(1,003)

Debt extinguishment loss

 

 

3,971

Interest rate swaps

 

2,169

 

928

Stock-based compensation expense

 

5,841

 

5,778

Non-cash restructuring charges

162

Provision for (benefit from) credit losses

 

(215)

 

2,282

(Gain) loss on sale of assets, net

 

(8,161)

 

1,245

Gain on sale of business

(5,995)

(3,172)

Deferred income tax provision (benefit)

 

7,995

 

(24,117)

Amortization of contract costs

 

10,752

 

13,656

Deferred revenue recognized in earnings

 

(5,048)

 

(12,762)

Change in assets and liabilities:

 

  

 

  

Accounts receivable, trade

 

(2,661)

 

17,569

Inventory

 

(3,569)

 

2,615

Other assets

 

(244)

 

(4,268)

Contract costs, net

 

(6,467)

 

(8,129)

Accounts payable and other liabilities

 

6,358

 

(10,829)

Deferred revenue

 

4,068

 

8,253

Other

 

(15)

 

189

Net cash provided by operating activities

 

126,617

 

167,074

Cash flows from investing activities:

 

  

 

  

Capital expenditures

 

(38,749)

 

(113,289)

Proceeds from sale of business

 

18,795

 

24,179

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

 

18,178

 

5,071

Proceeds from insurance and other settlements

910

1,351

Net cash used in investing activities

 

(866)

 

(82,688)

Cash flows from financing activities:

 

  

 

  

Borrowings of long-term debt

 

343,251

 

722,500

Repayments of long-term debt

 

(419,751)

 

(762,500)

Payments for debt issuance costs

 

(2,407)

 

(943)

Payments for settlement of interest rate swaps that include financing elements

 

(2,169)

 

(787)

Dividends paid to stockholders

 

(44,486)

 

(44,347)

Net proceeds from issuance of common stock

3,401

Proceeds from stock issued under ESPP

 

371

 

367

Purchases of treasury stock

 

(1,746)

 

(834)

Contribution from Exterran Corporation

 

 

678

Net cash used in financing activities

 

(123,536)

 

(85,866)

Net increase (decrease) in cash and cash equivalents

 

2,215

 

(1,480)

Cash and cash equivalents, beginning of period

 

1,097

 

3,685

Cash and cash equivalents, end of period

$

3,312

$

2,205

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 reflects all normal recurring adjustments necessary to fairly present 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 2020 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

Reference Rate Reform

On June 10, 2021, we prospectively adopted 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. On June 10, 2021, we amended one of our interest rate swap agreements and determined that the modifications meet the criteria for the optional expedients and exceptions, which allow us to forego de-designation of the hedging relationship and to subsequently assess effectiveness on a qualitative basis. The adoption of ASU 2020-04 did not have a material impact on our consolidated financial statements. In the first quarter, we evaluated Amendment No. 3 to our Credit Facility and determined that ASU 2020-04 was not applicable. We will continue to assess any modifications to our interest rate swap and Credit Facility agreements during the effective period of this update and will apply the amendments as applicable.

3. Business Transactions

February 2021 Disposition

On February 10, 2021, we completed the sale of certain contract operations customer service agreements and approximately 300 compressors, comprising approximately 40,000 horsepower, used to provide compression services under those agreements as well as other assets used to support the operations. We allocated customer-related and contract-based intangible assets based on a ratio of the horsepower sold relative to the total horsepower of the asset group. We recorded a gain on the sale of $6.0 million in (gain) loss on sale of assets, net in our condensed consolidated statements of operations during the six months ended June 30, 2021.

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July 2020 Disposition

In July 2020, we completed the sale of the turbocharger business included within our aftermarket services segment. In connection with the sale, we entered into a supply agreement to purchase a minimum amount of turbocharger goods and services over a two-year term. In addition to cash of $9.5 million received upon closing, an additional $3.0 million was received on the first anniversary of the closing date in July 2021, and $3.5 million is being received through the purchase of turbocharger goods and services under the supply agreement. We received cash proceeds of $1.5 million and $0.7 million under the supply agreement during the six months ended June 30, 2021 and December 31, 2020, respectively.

March 2020 Disposition

In March 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-related and contract-based 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 six months ended June 30, 2020.

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, including a tax matters agreement, which governs the respective rights, responsibilities and obligations of Exterran Corporation and us with respect to certain tax matters.

As of each of June 30, 2021 and December 31, 2020, we had $7.9 million 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 $7.9 million related to these unrecognized tax benefits recorded to noncurrent assets associated with discontinued operations as of each of June 30, 2021 and December 31, 2020.

The following table presents the balance sheets for our discontinued operations:

(in thousands)

    

June 30, 2021

    

December 31, 2020

Other assets

$

7,868

$

7,868

Deferred tax assets

2,556

3,168

Total assets associated with discontinued operations

$

10,424

$

11,036

Deferred tax liabilities

$

7,868

$

7,868

Total liabilities associated with discontinued operations

$

7,868

$

7,868

5. Inventory

(in thousands)

    

June 30, 2021

    

December 31, 2020

Parts and supplies

$

58,331

$

57,433

Work in progress

 

7,554

 

6,237

Inventory

$

65,885

$

63,670

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6. Property, Plant and Equipment, net