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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, 2024
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 (I.R.S. Employer Identification No.)
incorporation or organization)
or organization)
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 ((s) 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
24, 2024:
156,286,457
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 Equity 7
Condensed Consolidated Statements of Cash Flows 8
Notes to Unaudited Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures 27
Part II. Other Information
Item 1. Legal Proceedings 28
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Mine Safety Disclosures 28
Item 5. Other Information 29
Item 6. Exhibits 30
Signatures 31
2
Table of Contents
GLOSSARY
The following terms and abbreviations appearing in the text of this report
have the meanings indicated below.
2023 Form 10- Annual Report on Form 10-K for the year ended December 31, 2023
K
Share Repurchase Program Share repurchase program approved by our Board
of Directors on April 27, 2023 that allowed us
to repurchase up to $50.0 million of outstanding
common stock for a period of twelve months,
which prior to its expiration was extended on April
25, 2024, for an additional twenty-four-month
period and a replenishment of the authorized
share repurchase amount to $50.0 million.
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
Amended and Restated Credit Agreement Amended and Restated Credit Agreement, dated
May 16, 2023, which amended and restated
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 Accounting Standards Update
Credit Facility $750.0 million asset-based revolving credit facility due
May 2028, as governed by the Amended and Restated Credit
Agreement, dated May 16, 2023, which amended and restated
that Credit Agreement, dated as of March 30, 2017
ECOTEC Ecotec International Holdings, LLC
ESPP Employee Stock Purchase Plan
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
GHG Greenhouse gases (carbon dioxide,
methane and water vapor for example)
Hilcorp Hilcorp Energy Company
Ionada Ionada PLC
LIBOR London Interbank Offered Rate
OTC Over-the-counter, as related to
aftermarket services parts and components
SEC U.S. Securities and Exchange Commission
SG&A Selling, general and administrative
SOFR Secured Overnight Financing Rate
U.S. United States of America
WACC Weighted average cost of capital
3
Table of Contents
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this "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 Form
10-Q are forward-looking statements within the meaning of the Exchange Act,
including, without limitation, 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 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 2023 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
. These risk factors include, but are not limited to, risks related to
pandemics and other public health crises; an increase in inflation; ongoing
international conflicts and tensions; risks related to our operations;
competitive pressures; inability to make acquisitions on economically
acceptable terms; uncertainty to pay dividends in the future; risks related to
a substantial amount of debt and our debt agreements; inability to access the
capital and credit markets or borrow on affordable terms to obtain additional
capital; inability to fund purchases of additional compression equipment;
vulnerability to interest rate increases; uncertainty relating to the phasing
out of LIBOR; erosion of the financial condition of our customers; .risks
related to the loss of our most significant customers; uncertainty of the
renewals for our contract operations service agreements; risks related to
losing management or operational personnel; dependence on particular suppliers
and vulnerability to product shortages and price increases; information
technology and cybersecurity risks; tax-related risks; legal and regulatory
risks, including climate-related and environmental, social and governance
risks.
All forward-looking statements included in this Form 10-Q are based on
information available to us on the date of this 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 Form 10-Q.
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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, 2024 December 31, 2023
Assets
Current assets:
Cash and cash equivalents $ 1,155 $ 1,338
Accounts receivable, net of allowance of $ 105,295 124,069
496
and $
587
, respectively
Inventory 80,358 81,761
Other current assets 6,898 5,989
Total current assets 193,706 213,157
Property, plant and equipment, net 2,332,009 2,301,982
Operating lease right-of-use assets 14,343 14,097
Intangible assets, net 28,737 30,182
Contract costs, net 35,967 37,739
Deferred tax assets 2,847 3,192
Other assets 47,467 47,733
Non-current assets of discontinued operations 7,868 7,868
Total assets $ 2,662,944 $ 2,655,950
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, trade $ 48,717 $ 61,026
Accrued liabilities 98,751 85,381
Deferred revenue 5,778 5,736
Total current liabilities 153,246 152,143
Long-term debt 1,566,566 1,584,869
Operating lease liabilities 12,364 12,271
Deferred tax liabilities 15,986 4,921
Other liabilities 24,834 22,857
Non-current liabilities of discontinued operations 7,868 7,868
Total liabilities 1,780,864 1,784,929
Commitments and contingencies (Note 7)
Equity:
Preferred stock: $ - -
0.01
par value per share,
50,000,000
shares authorized,
zero
issued
Common stock: $ 1,657 1,650
0.01
par value per share,
250,000,000
shares authorized,
165,775,863
and
164,984,401
shares issued, respectively
Additional paid-in capital 3,474,777 3,470,576
Accumulated deficit ( (
2,485,399 2,499,931
) )
Treasury stock: ( (
9,489,406 108,955 101,274
and ) )
9,020,454
common shares, at cost, respectively
Total equity 882,080 871,021
Total liabilities and equity $ 2,662,944 $ 2,655,950
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
March 31,
2024 2023
Revenue:
Contract operations $ 223,051 $ 187,745
Aftermarket services 45,437 42,089
Total revenue 268,488 229,834
Cost of sales (excluding depreciation and amortization):
Contract operations 77,743 79,482
Aftermarket services 35,000 33,908
Total cost of sales (excluding depreciation and amortization) 112,743 113,390
Selling, general and administrative 31,665 26,425
Depreciation and amortization 42,835 40,181
Long-lived and other asset impairment 2,568 2,569
Restructuring charges - 1,047
Interest expense 27,334 26,581
Gain on sale of assets, net ( (
2,381 3,605
) )
Other (income) expense, net 139 603
Income before income taxes 53,585 22,643
Provision for income taxes 13,053 6,158
Net income $ 40,532 $ 16,485
Basic and diluted earnings per common share $ 0.26 $ 0.10
Weighted average common shares outstanding:
Basic 154,187 154,116
Diluted 154,501 154,281
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 shares and per share amounts)
(unaudited)
Additional
Common Paid-in Accumulated Treasury
Stock Stock
Amount Shares Capital Deficit Amount Shares Total
Balance at $ 1,634 163,439,013 $ 3,456,777 $ ( $ ( ( $ 860,693
December 31, 2022 2,509,133 88,585 7,810,548
) ) )
Shares withheld related to net - - - - ( ( (
settlement of equity awards 3,773 383,766 3,773
) ) )
Cash - - - ( - - (
dividends ($ 23,852 23,852
0.150 ) )
per common
share)
Shares issued 1 20,251 169 - - - 170
under ESPP
Stock-based compensation, 14 1,444,636 3,313 - - ( 3,327
net of forfeitures 13,076
)
Net - - - 16,485 - - 16,485
income
Balance at $ 1,649 164,903,900 $ 3,460,259 $ ( $ ( ( $ 853,050
March 31, 2023 2,516,500 92,358 8,207,390
) ) )
Balance at $ 1,650 164,984,401 $ 3,470,576 $ ( $ ( ( $ 871,021
December 31, 2023 2,499,931 101,274 9,020,454
) ) )
Shares - - - - ( ( (
repurchased 1,230 82,972 1,230
) ) )
Shares withheld related to net - - - - ( ( (
settlement of equity awards 6,451 385,980 6,451
) ) )
Cash - - - ( - - (
dividends ($ 26,000 26,000
0.165 ) )
per common
share)
Shares issued - 17,800 244 - - - 244
under ESPP
Stock-based compensation, 7 773,662 3,957 - - - 3,964
net of forfeitures
Net - - - 40,532 - - 40,532
income
Balance at $ 1,657 165,775,863 $ 3,474,777 $ ( $ ( ( $ 882,080
March 31, 2024 2,485,399 108,955 9,489,406
) ) )
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)
Three Months Ended
March 31,
2024 2023
Cash flows from operating activities:
Net income $ 40,532 $ 16,485
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 42,835 40,181
Long-lived and other asset impairment 2,568 2,569
Non-cash restructuring charges - 927
Unrealized change in fair value of investment in unconsolidated affiliate - 254
Inventory write-downs 199 216
Amortization of operating lease right-of-use assets 947 823
Amortization of deferred financing costs 1,193 1,288
Amortization of debt premium ( (
501 501
) )
Amortization of capitalized implementation costs 738 597
Stock-based compensation expense 3,964 3,327
Benefit from credit losses ( (
75 340
) )
Gain on sale of assets, net ( (
2,381 3,605
) )
Deferred income tax provision 12,460 5,881
Amortization of contract costs 5,768 5,090
Deferred revenue recognized in earnings ( (
2,859 4,476
) )
Changes in operating assets and liabilities:
Accounts receivable, net 19,819 7,632
Inventory 1,246 (
4,131
)
Other assets ( 609
1,785
)
Contract costs ( (
3,996 6,352
) )
Accounts payable and other liabilities 13,958 18,219
Deferred revenue 3,070 3,179
Other 2 (
16
)
Net cash provided by operating activities 137,702 87,856
Cash flows from investing activities:
Capital expenditures ( (
99,755 84,392
) )
Proceeds from sale of property, equipment and other assets 13,844 28,726
Proceeds from insurance and other settlements 45 -
Investments in unconsolidated entities ( (
57 2,000
) )
Net cash used in investing activities ( (
85,923 57,666
) )
Cash flows from financing activities:
Borrowings of long-term debt 244,525 158,850
Repayments of long-term debt ( (
263,050 160,100
) )
Dividends paid to stockholders ( (
26,000 23,852
) )
Repurchases of common stock ( -
1,230
)
Taxes paid related to net share settlement of equity awards ( (
6,451 3,773
) )
Proceeds from stock issued under ESPP 244 170
Net cash used in financing activities ( (
51,962 28,705
) )
Net increase (decrease) in cash and cash equivalents ( 1,485
183
)
Cash and cash equivalents, beginning of period 1,338 1,566
Cash and cash equivalents, end of period $ 1,155 $ 3,051
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
8
Table of Contents
Archrock, Inc.
Notes to Condensed Consolidated Financial Statements
1. Description of Business and Basis of Presentation
We are an energy infrastructure company with a primary focus on midstream
natural gas compression. We are a premier provider of natural gas compression
services to customers in the energy 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 consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include
all information and disclosures required by GAAP. Therefore, this information
should be read in conjunction with our consolidated financial statements and
notes contained in our 2023 Form 10-K. The information furnished herein
reflects all adjustments that are, in the opinion of management, of a normal
recurring nature and considered necessary for a fair statement of the results
of the interim periods reported. All intercompany balances and transactions
have been eliminated in consolidation. Operating results for the three months
ended March 31, 2024 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2024.
2. Recent Accounting Developments
Accounting Standards Updates Not Yet Implemented
Income Tax Disclosures
In December 2023, the FASB issued ASU 2023-09,
Income Taxes (Topic 740): Improvements to Income Tax Disclosures,
which will require significant additional disclosures, primarily focused on
the disclosure of income taxes paid and the rate reconciliation table. ASU
2023-09 is effective for fiscal years beginning after December 15, 2024, and
interim periods within fiscal years beginning after December 15, 2025 and
should be applied on a prospective basis, with a retrospective option. Early
adoption is permitted. We are evaluating the impact that the adoption of ASU
2023-09 will have on our consolidated financial statements and related
disclosures.
Segment Reporting
In November 2023, the FASB issued ASU 2023-07,
Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,
which will require disclosures of significant expenses for each reportable
segment, as well as certain other disclosures to help investors understand how
the chief operating decision maker evaluates segment expenses and operating
results. ASU 2023-07 will also allow disclosure of multiple measures of
segment profitability if those measures are used to allocate resources and
assess performance. ASU 2023-07 is effective for fiscal years beginning after
December 15, 2023, and interim periods within fiscal years beginning after
December 15, 2024, and should be applied on a retrospective basis, unless
impracticable. Early adoption is permitted. We are evaluating the impact that
the adoption of ASU 2023-07 will have on our consolidated financial statements
and related disclosures.
9
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Archrock, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
Business Combinations - Joint Venture Formations
In August 2023, the FASB issued ASU 2023-05, to reduce diversity in practice
and provide decision-useful information to a joint venture's investors by
requiring that a joint venture apply a new basis of accounting upon formation.
By applying a new basis of accounting, a joint venture will recognize and
initially measure its assets and liabilities at fair value, with exceptions to
fair value measurement that are consistent with the business combinations
guidance, on the date of formation. ASU 2023-05 is effective prospectively for
all joint venture formations with a formation date on or after January 1,
2025. Additionally, a joint venture that was formed before January 1, 2025,
may elect to apply the amendments retrospectively if it has sufficient
information to do so. Early adoption is permitted in any interim or annual
period in which financial statements have not been issued or been made
available for issuance, either prospectively or retrospectively. We expect
that the adoption of ASU 2023-05 will have no impact on our consolidated
financial statements.
3. Inventory
Inventory is comprised of the following:
March 31, December 31,
(in thousands) 2024 2023
Parts and supplies $ 68,176 $ 70,759
Work in progress 12,182 11,002
Inventory $ 80,358 $ 81,761
4. Property, Plant and Equipment, Net
Property, plant and equipment, net is comprised of the following:
March 31, December 31,
(in thousands) 2024 2023
Compression equipment, facilities and other fleet assets $ 3,377,588 $ 3,326,919
Land and buildings 31,019 30,169
Transportation and shop equipment 100,725 100,474
Computer hardware and software 77,705 77,532
Other 5,779 5,678
Property, plant and equipment 3,592,816 3,540,772
Accumulated depreciation ( (
1,260,807 1,238,790
) )
Property, plant and equipment, net $ 2,332,009 $ 2,301,982
5. Investments in Unconsolidated Affiliates
Investments in which we are deemed to exert significant influence, but not
control, are accounted for using the equity method of accounting, except in
cases where the fair value option is elected. For such investments where we
have elected the fair value option, the election is irrevocable and is applied
on an investment-by-investment basis at initial recognition.
In April 2022, we agreed to acquire for cash a
25
% equity interest in ECOTEC, a company specializing in methane emissions
detection, monitoring and management. We have elected the fair value option to
account for this investment, and during the three months ended March 31, 2023,
we recognized an unrealized loss of $
0.3
million related to the change in fair value of our investment (see Note 14
("Fair Value Measurements")). Changes in the fair value of this investment are
recognized in other (income) expense, net in our consolidated statements of
operations. As of March 31, 2024, our ownership interest in ECOTEC is
25
%, which is included in other assets in our consolidated balance sheets.
10
Table of Contents
Archrock, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
For ownership interests that are not accounted for under the equity method and
that do not have readily determinable fair values, we have elected the fair
value measurement alternative to record these investments at cost minus
impairment, if any, including adjustments for observable price changes in
orderly transactions for an identical or similar investment of the same
issuer. Investments in equity securities measured using the fair value
measurement alternative are reviewed for impairment or observable price
changes in orderly transactions each reporting period.
In November 2023, we agreed to serve as the lead investor in a series A
preferred financing round for Ionada, a global carbon capture technology
company committed to reducing GHG emissions and creating a sustainable future.
Ionada has developed a post-combustion carbon capture solution to reduce
carbon dioxide emissions from various small to mid-sized industrial emitters
in the energy, marine and e-fuels industries, among others. We have elected
the fair value measurement alternative to account for this investment (see
Note 14 ("Fair Value Measurements")). Adjustments to the carrying value are
recognized in other (income) expense, net in our condensed consolidated
statements of operations. Our initial investment in Ionada was $
3.8
million and as of March 31, 2024, our fully diluted ownership interest in
Ionada is
10
%, which is included in other assets in our consolidated balance sheets.
Subject to certain conditions, our ownership interest will increase to
24
% over the next
two years
.
6. Long-Term Debt
Long-term debt is comprised of the following:
(in thousands) March 31, 2024 December 31, 2023
Credit Facility $ 268,500 $ 287,025
6.25
% senior notes due April 2028:
Principal outstanding 800,000 800,000
Unamortized debt premium 8,023 8,524
Unamortized debt issuance costs ( (
6,647 7,081
) )
801,376 801,443
6.875
% senior notes due April 2027:
Principal outstanding 500,000 500,000
Unamortized debt issuance costs ( (
3,310 3,599
) )
496,690 496,401
Long-term debt $ 1,566,566 $ 1,584,869
As of March 31, 2024, there were $
3.8
million letters of credit outstanding under the Credit Facility and the
applicable margin on borrowings outstanding was
2.2
%. The weighted average annual interest rate on the outstanding balance under
the Credit Facility was
7.8
% and
7.7
% at March 31, 2024 and December 31, 2023, respectively. We incurred $
0.4
million and $
0.5
million of commitment fees on the daily unused amount of the Credit Facility
during the three months ended March 31, 2024 and 2023, respectively.
As of March 31, 2024, we were in compliance with all covenants under our
Credit Facility agreement. Additionally, all undrawn capacity on our Credit
Facility was available for borrowings as of March 31, 2024.
11
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Archrock, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
Amended and Restated Credit Agreement
On May 16, 2023, we amended and restated our Credit Facility to, among other
things:
extend the maturity date of the Credit Facility from November 8, 2024 to May 16, 2028 (or December 2, 2026 or
December 3, 2027 if any portion of 2027 Notes and 2028 Notes, respectively, remain outstanding at such date);
change the referenced rate from LIBOR to SOFR so that borrowings under the Credit Facility bear
interest at, based on our election, either a base rate or SOFR, plus an applicable margin; and
increase the portion of the Credit Facility available for the issuance of swing line loans from
$
50.0
million to
$
75.0
million.
During the second quarter of 2023, we incurred $
6.0
million in transaction costs related to the Amended and Restated Credit
Agreement, which were included in other assets in our condensed consolidated
balance sheets and are being amortized over the remaining term of the Credit
Facility. In addition, during the second quarter of 2023, we wrote off $
1.0
million of unamortized deferred financing costs as a result of the Amended and
Restated Credit Agreement, which was recorded to interest expense in our
condensed consolidated statements of operations.
7. Commitments and Contingencies
Insurance Matters
Our business can be hazardous, involving unforeseen circumstances such as
uncontrollable flows of natural gas or well fluids and fires or explosions. As
is customary in our industry, we review our safety equipment and procedures
and carry insurance against some, but not all, risks of our business. Our
insurance coverage includes property damage, general liability and commercial
automobile liability and other coverage we believe is appropriate. We believe
that our insurance coverage is customary for the industry and adequate for our
business, however, losses and liabilities not covered by insurance would
increase our costs.
Additionally, we are substantially self-insured for workers' compensation and
employee group health claims in view of the relatively high per-incident
deductibles we absorb under our insurance arrangements for these risks. Losses
up to the deductible amounts are estimated and accrued based upon known facts,
historical trends and industry averages.
We are also self-insured for property damage to our offshore assets.
Tax Matters
We are subject to a number of state and local taxes that are not income-based.
As many of these taxes are subject to audit by the taxing authorities, it is
possible that an audit could result in additional taxes due. We accrue for
such additional taxes when we determine that it is probable that we have
incurred a liability and we can reasonably estimate the amount of the
liability. As of March 31, 2024 and December 31, 2023, we had $
4.1
million and $
3.9
million, respectively, accrued for the outcomes of non-income-based tax
audits. We do not expect that the ultimate resolutions of these audits will
result in a material variance from the amounts accrued. We do not accrue for
unasserted claims for tax audits unless we believe the assertion of a claim is
probable, it is probable that it will be determined that the claim is owed and
we can reasonably estimate the claim or range of the claim. We believe the
likelihood is remote that the impact of potential unasserted claims from
non-income-based tax audits could be material to our consolidated financial
position, but it is possible that the resolution of future audits could be
material to our consolidated results of operations or cash flows.
During the years ended December 31, 2022 and 2021, certain of our sales and
use tax audits advanced from the audit review phase to the contested hearing
phase. As of March 31, 2024 and December 31, 2023, we accrued $
0.6
million for these audits.
12
Table of Contents
Archrock, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
Litigation and Claims
In the ordinary course of business, we are involved in various pending or
threatened legal actions. While we are unable to predict the ultimate outcome
of these actions, we believe that any ultimate liability arising from any of
these actions will not have a material adverse effect on our consolidated
financial position, results of operations or cash flows, including our ability
to pay dividends. However, because of the inherent uncertainty of litigation
and arbitration proceedings, we cannot provide assurance that the resolution
of any particular claim or proceeding to which we are a party will not have a
material adverse effect on our consolidated financial position, results of
operations or cash flows, including our ability to pay dividends.
8. Stockholders' Equity
Share Repurchase Program
On April 27, 2023, our Board of Directors authorized a share repurchase
program that allowed us to repurchase up to $
50.0
million of outstanding common stock. Under the Share Repurchase Program,
shares of our common stock may be repurchased periodically, including in the
open market, privately negotiated transactions, or otherwise in accordance
with applicable federal securities laws, at any time. On April 25, 2024, our
Board of Directors approved an extension of the Share Repurchase Program upon
expiry of the current authorization on April 27, 2024, for an additional
twenty-four-month
period. Through March 31, 2024, the Company had repurchased
833,346
common shares at an average price of $
12.11
per share for an aggregate of $
10.1
million. In connection with the extension, the Board of Directors replenished
the amount of shares authorized for repurchase under the Share Repurchase
Program, resulting in available capacity of $
50.0
million. The actual timing, manner, number, and value of shares repurchased
under the program will be determined by us at our discretion.
The following table summarizes shares repurchased under the Share Repurchase
Program:
Three Months Ended
(dollars in thousands, except per share amounts) March 31, 2024
Total cost of shares repurchased $ 1,230
Average price per share $ 14.83
Total number of shares repurchased 82,972
Cash Dividends
The following table summarizes our dividends declared and paid in each of the
quarterly periods of 2024 and 2023:
Dividends per
(dollars in thousands, except per share amounts) Common Share Dividends Paid
2024
Q1 $ 0.165 $ 26,000
2023
Q4 $ 0.155 $ 24,190
Q3 0.155 24,250
Q2 0.150 23,504
Q1 0.150 23,852
On April 25, 2024, our Board of Directors declared a quarterly dividend of $
0.165
per share of common stock to be
paid
on May 14, 2024 to stockholders of record at the close of business on May 7,
2024.
13
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Archrock, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
9. Revenue from Contracts with Customers
The following table presents our revenue from contracts with customers by
segment and disaggregated by revenue source:
Three Months Ended
March 31,
(in thousands) 2024 2023
Contract operations:
0 $ 45,327 $ 39,954
1,000
horsepower per unit
1,001 95,670 81,807
1,500
horsepower per unit
Over 81,865 65,714
1,500
horsepower per unit
Other 189 270
(1)
Total contract operations revenue 223,051 187,745
(2)
Aftermarket services:
Services 25,438 21,249
OTC parts and components sales 19,999 20,840
Total aftermarket services revenue 45,437 42,089
(3)
Total revenue $ 268,488 $ 229,834
(1) Primarily relates to fees associated with owned non-compression equipment.
(2) Includes
$
1.1
million and
$
0.8
million for the three months ended March 31, 2024 and 2023, 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.
(3) Services revenue within aftermarket services is recognized over time. OTC
parts and components sales revenue is recognized at a point in time.
See Note 16 ("Segment Information") for further information on segments.
Performance Obligations
As of March 31, 2024, we had $
569.7
million of remaining performance obligations related to our contract
operations segment, which will be recognized through 2029 as follows:
(in thousands) 2024 2025 2026 2027 2028 2029 Total
Remaining performance obligations $ 263,793 $ 184,333 $ 98,640 $ 15,076 $ 7,526 $ 342 $ 569,710
We do 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
Contract Assets
As March 31, 2024 and December 31, 2023, our receivables from contracts with
customers, net of allowance for credit losses, were $
95.9
million and $
119.7
million, respectively.
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Archrock, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
Allowance for Credit Losses
Our allowance for credit losses balance changed as follows during the three
months ended March 31, 2024:
(in thousands)
Balance at beginning of period $ 587
Benefit from credit losses (
75
)
Write-offs charged against allowance (
16
)
Balance at end of period $ 496
Contract Liabilities
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,
2024 and December 31, 2023, our contract liabilities were $
7.2
million and $
7.0
million, respectively.
During the three months ended March 31, 2024, we deferred revenue of
$
3.1
million and recognized
$
2.9
million as revenue.
The revenue recognized during the period primarily related to freight billings
and milestone billings on aftermarket services.
10. Long-Lived and Other 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.
Compression Fleet
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 compression fleet impairment
review as recorded in our contract operations segment:
Three Months Ended
March 31,
(dollars in thousands) 2024 2023
Idle compressors retired from the active fleet 25 30
Horsepower of idle compressors retired from the active fleet 14,000 14,000
Impairment recorded on idle compressors retired from the active fleet $ 2,568 $ 2,569
See Note 14 ("Fair Value Measurements") for further details on fair value
accounting.
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Archrock, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
11. Restructuring Charges
During the first quarter of 2023, a plan to further streamline our
organization and more fully align our teams to improve our customer service
and profitability was approved by management. While we did
no
t incur restructuring charges during the three months ended March 31, 2024, we
expect to incur additional restructuring charges of $
0.1
million related to these restructuring activities.
The following table presents restructuring charges incurred by segment during
the three months ended March 31, 2023:
Contract Aftermarket
(in thousands) Operations Services Other Total
(1)
Organizational restructuring $ 203 $ - $ 844 $ 1,047
Total restructuring charges $ 203 $ - $ 844 $ 1,047
(1) Represents expense incurred within our corporate function and not directly attributable to our segments.
The following table presents restructuring charges incurred by cost type:
Three Months Ended
(in thousands) March 31, 2024
Organizational Restructuring
Severance costs $ 789
Consulting costs 258
Total restructuring costs $ 1,047
12. Income Taxes
Valuation Allowance
The amount of our deferred tax assets considered realizable could be adjusted
if projections of future taxable income are reduced or objective negative
evidence in the form of a three-year cumulative loss is present or both.
Should we no longer have a level of sustained profitability, excluding
nonrecurring charges, we will have to rely more on our future projections of
taxable income to determine if we have an adequate source of taxable income
for the realization of our deferred tax assets, namely net operating loss,
interest expense limitation and tax credit carryforwards. This may result in
the need to record a valuation allowance against all or a portion of our
deferred tax assets.
Effective Tax Rate
The year-to-date effective tax rate for the three months ended March 31, 2024
differed significantly from our statutory rate primarily due to state taxes,
unrecognized tax benefits and the limitation on executive compensation offset
by the benefit from equity-settled long term incentive compensation.
Unrecognized Tax Benefits
As of March 31, 2024, we believe it is reasonably possible that $
3.3
million of our unrecognized tax benefits, including penalties, interest and
discontinued operations, will be reduced prior to March 31, 2025 due to the
settlement of audits or the expiration of statutes of limitations or both.
However, due to the uncertain and complex application of the tax regulations,
it is possible that the ultimate resolution of these matters may result in
liabilities that could materially differ from this estimate.
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Archrock, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
13. Earnings Per Common Share
Basic earnings per common share is computed using the two-class method, which
is an earnings allocation formula that determines earnings per share for each
class of common stock and participating security according to dividends
declared and participation rights in undistributed earnings. Under the
two-class method, basic earnings per common share is determined by dividing
net income, after deducting amounts allocated to participating securities, by
the weighted average number of common shares outstanding for the period.
Participating securities include unvested restricted stock and stock-settled
restricted stock units that have nonforfeitable rights to receive dividends or
dividend equivalents, whether paid or unpaid. During periods of net loss, only
distributed earnings (dividends) are allocated to participating securities, as
participating securities do not have a contractual obligation to participate
in our undistributed losses.
Diluted earnings per common share is computed using the weighted average
number of common shares outstanding adjusted for the incremental common stock
equivalents attributed to outstanding performance-based restricted stock units
and stock to be issued pursuant to our ESPP unless their effect would have
been anti-dilutive.
The following table shows the calculation of net income attributable to common
stockholders, which is used in the calculation of basic and diluted earnings
per common share, potential shares of common stock that were included in
computing diluted earnings per common share and the potential shares of common
stock issuable that were excluded from computing diluted earnings per common
share as their inclusion would have been anti-dilutive:
Three Months Ended
March 31,
(in thousands) 2024 2023
Net income $ 40,532 $ 16,485
Less: Allocation of earnings to participating securities ( (
748 735
) )
Net income attributable to common stockholders $ 39,784 $ 15,750
Less: Allocation of earnings to cash or share settled restricted stock units ( -
85
)
Diluted net income attributable to common stockholders $ 39,699 $ 15,750
Weighted average common shares outstanding used in basic earnings per common share 154,187 154,116
Effect of dilutive securities:
Performance-based restricted stock units 310 162
ESPP shares 4 3
Weighted average common shares outstanding used in diluted earnings per common share 154,501 154,281
14. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of March 31, 2024, we owned a
25
% equity interest in ECOTEC (see Note 5 ("Investments in Unconsolidated
Affiliates")). We have elected the fair value option to account for this
investment. The fair value determination of this investment primarily
consisted of unobservable inputs, which creates uncertainty in the measurement
of fair value as of the reporting date. The significant unobservable inputs
used in the fair value measurement, which was valued through an average of an
income approach (discounted cash flow method) and a market approach (guideline
public company method), are the WACC and the revenue multiples. Significant
increases (decreases) in these inputs in isolation would result in a
significantly higher (lower) fair value measurement. As of March 31, 2024, the
fair value of our investment in ECOTEC was $
14.9
million.
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Archrock, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
This fair value measurement is classified as Level 3. The significant
unobservable inputs are as follows:
Significant Three Months Ended Three Months Ended
Unobservable March 31, 2024 March 31, 2023
Inputs Range Median Range Median
Valuation technique:
Discounted cash flow WACC 0.4 13.5 0.0 11.3
% - % % - %
20.0 22.1
% %
Guideline public company Revenue multiple 1.5 3.8 1.7 3.9
x - x x - x
7.2 8.0
x x
The reconciliation of changes in the fair value of our investment in ECOTEC is
as follows:
Three Months Ended
March 31,
(in thousands) 2024 2023
Balance at beginning of period $ 14,905 $ 12,803
Purchases of equity interests - 2,000
Unrealized loss - (
(1) 254
)
Balance at end of period $ 14,905 $ 14,549
(1) Included in other expense (income), net in our unaudited condensed consolidated statement of operations.
See Note 5 ("Investments in Unconsolidated Affiliates") for further details.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Investment in Ionada
As of March 31, 2024, we had a fully diluted ownership equity interest in
Ionada of
10
% (see Note 5 ("Investments in Unconsolidated Affiliates")). We have elected
the fair value measurement alternative to account for this investment. As of
March 31, 2024, the carrying value of our investment in Ionada was $
4.3
million.
The reconciliation of changes in the carrying value of our investment in
Ionada is as follows:
Three Months Ended
March 31,
(in thousands) 2024
Balance at beginning of period $ 4,205
Purchases of equity interests -
Transaction costs capitalized as investment activity 57
Cost basis 4,262
Adjustments -
Carrying value $ 4,262
Subject to certain contractual conditions, we will invest, on the same terms
and conditions as the initial investment, $
1.2
million on November 1, 2024, $
1.3
million on November 1, 2025, and $
4.8
million prior to July 1, 2026, for a fully diluted ownership interest of
12
%,
15
% and
24
%, respectively.
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Archrock, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
Compressors
During the three months ended March 31, 2024, we recorded nonrecurring fair
value measurements related to our idle compressors. Our estimate of the
compressors' fair value was primarily based on the expected net sale proceeds
compared with other fleet units we recently sold and/or a review of other
units recently offered for sale by third parties, or the estimated component
value of the equipment we plan to use. We discounted the expected proceeds,
net of selling and other carrying costs, using a weighted average disposal
period of
four
years. These fair value measurements are classified as Level 3. The fair value
of our compressors impaired as of March 31, 2024 and December 31, 2023 was as
follows:
March 31, 2024 December 31, 2023
(in thousands)
Impaired compressors $ 263 $ 1,423
The significant unobservable inputs used to develop the above fair value
measurements were weighted by the relative fair value of the compressors being
measured. Additional quantitative information related to our significant
unobservable inputs follows:
Range
Weighted Average
(1)
Estimated net sale proceeds:
As of March 31, 2024 $ $
0 50
- $ per horsepower
211
per horsepower
As of December 31, 2023 $ $
0 50
- $ per horsepower
294
per horsepower
(1) Calculated based on an estimated discount for market liquidity
30
%
and
33
%
as of March 31, 2024 and December 31, 2023, respectively.
See Note 10 ("Long-Lived and Other Asset Impairments") for further details.
Other Financial Instruments
The carrying amounts of our cash, accounts receivable and accounts payable
approximate fair value due to the short-term nature of these instruments.
The carrying amount of borrowings outstanding under our Credit Facility
approximates fair value due to the variable interest rate. The measurement of
the fair value of these outstanding borrowings is a Level 3 measurement.
The fair value of our fixed rate debt is estimated using yields observable in
active markets, which are Level 2 inputs, and was as follows:
March 31, 2024 December 31, 2023
(in thousands)
Carrying amount of fixed rate debt $ 1,298,066 $ 1,297,844
(1)
Fair value of fixed rate debt 1,294,000 1,289,000
(1)
Carrying amounts are shown net of unamortized premium and deferred financing
costs. See Note 6 ("Long-Term Debt").
15. Related Party Transactions
From August 2019 to present, our Board of Directors has included a member
affiliated with our customer Hilcorp or its subsidiaries or affiliates.
Revenue from Hilcorp and affiliates was $
10.5
million and $
9.1
million during the three months ended March 31, 2024 and 2023, respectively.
Accounts receivable, net due from Hilcorp and affiliates was $
3.6
million and $
3.8
million as of March 31, 2024 and December 31, 2023, respectively.
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Archrock, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
16. Segment Information
We manage our business segments primarily based on the type of product or
service provided. We have
two
segments that we operate within the U.S.: contract operations and aftermarket
services. Our contract operations segment primarily provides natural gas
compression services to meet specific customer requirements. Our aftermarket
services segment provides a full range of services to support the compression
needs of customers, from parts sales and normal maintenance services to full
operation of a customer's owned assets.
We evaluate the performance of our segments based on gross margin, defined as
revenue less cost of sales (excluding depreciation and amortization) for each
segment. Segment revenue includes only sales to external customers.
Summarized financial information for our reporting segments is shown below:
Contract Aftermarket
(in thousands) Operations Services Total
Three months ended March 31, 2024
Revenue $ 223,051 $ 45,437 $ 268,488
Gross margin 145,308 10,437 155,745
Three months ended March 31, 2023
Revenue $ 187,745 $ 42,089 $ 229,834
Gross margin 108,263 8,181 116,444
The following table reconciles total gross margin to income before income taxes:
Three Months Ended
March 31,
(in thousands) 2024 2023
Total gross margin $ 155,745 $ 116,444
Less:
Selling, general and administrative 31,665 26,425
Depreciation and amortization 42,835 40,181
Long-lived and other asset impairment 2,568 2,569
Restructuring charges - 1,047
Interest expense 27,334 26,581
Gain on sale of assets, net ( (
2,381 3,605
) )
Other (income) expense, net 139 603
Income before income taxes $ 53,585 $ 22,643
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with our unaudited Financial
Statements and the notes thereto included in this Form 10-Q and in conjunction
with our 2023 Form 10-K.
OVERVIEW
We are an energy infrastructure company with a pure-play focus on midstream
natural gas compression. We are a premier provider of natural gas compression
services, in terms of total compression fleet horsepower, to customers in the
energy industry throughout the U.S., and a leading supplier of aftermarket
services to customers that own compression equipment in the U.S. We operate in
two business segments: contract operations and aftermarket services. Our
contract operations services primarily include designing, sourcing, owning,
installing, operating, servicing, repairing and maintaining our owned fleet of
natural gas compression equipment to provide natural gas compression services
to our customers. In our aftermarket services business, we sell parts and
components and provide operations, maintenance, overhaul and reconfiguration
services to customers who own compression equipment.
Operating Highlights
Three Months Ended
March 31,
(horsepower in thousands) 2024 2023
Total available horsepower (at period end) 3,780 3,729
(1)
Total operating horsepower (at period end) 3,593 3,504
(2)
Average operating horsepower 3,606 3,475
Horsepower utilization:
Spot (at period end) 95 % 94 %
Average 96 % 93 %
(1) Defined as idle and operating horsepower. Includes new compressors
completed by third party manufacturers that have been delivered to us.
(2) Defined as horsepower that is operating under contract and horsepower that
is idle but under contract and generating revenue such as standby revenue.
Non-GAAP Financial Measures
Management uses a variety of financial and operating metrics to analyze our
performance. These metrics are significant factors in assessing our operating
results and profitability and include the non-GAAP financial measure of gross
margin.
We define gross margin as total revenue less cost of sales (excluding
depreciation and amortization). Gross margin is included as a supplemental
disclosure because it is a primary measure used by our management to evaluate
the results of revenue and cost of sales (excluding depreciation and
amortization), which are key components of our operations. We believe gross
margin is important because it focuses on the current operating performance of
our operations and excludes the impact of the prior historical costs of the
assets acquired or constructed that are utilized in those operations, the
indirect costs associated with our SG&A activities, our financing methods and
income taxes. In addition, depreciation and amortization may not accurately
reflect the costs required to maintain and replenish the operational usage of
our assets and therefore may not portray the costs of current operating
activity. As an indicator of our operating performance, gross margin should
not be considered an alternative to, or more meaningful than, net income
(loss) as determined in accordance with GAAP. Our gross margin may not be
comparable to a similarly-titled measure of other entities because other
entities may not calculate gross margin in the same manner.
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Gross margin has certain material limitations associated with its use as
compared to net income. These limitations are primarily due to the exclusion
of SG&A, depreciation and amortization, impairments, restructuring charges,
interest expense, gain on sale of assets, net, other expense (income), net and
provision for income taxes. Because we intend to finance a portion of our
operations through borrowings, interest expense is a necessary element of our
costs and our ability to generate revenue. Additionally, because we use
capital assets, depreciation expense is a necessary element of our costs and
our ability to generate revenue and SG&A is necessary to support our
operations and required corporate activities. To compensate for these
limitations, management uses this non-GAAP measure as a supplemental measure
to other GAAP results to provide a more complete understanding of our
performance.
The following table reconciles net income to gross margin:
Three Months Ended
March 31,
(in thousands) 2024 2023
Net income $ 40,532 $ 16,485
Selling, general and administrative 31,665 26,425
Depreciation and amortization 42,835 40,181
Long-lived and other asset impairment 2,568 2,569
Restructuring charges - 1,047
Interest expense 27,334 26,581
Gain on sale of assets, net (2,381) (3,605)
Other (income) expense, net 139 603
Provision for income taxes 13,053 6,158
Gross margin $ 155,745 $ 116,444
RESULTS OF OPERATIONS
Summary of Results
Revenue was $268.5 million and $229.8 million during the three months ended
March 31, 2024 and 2023, respectively. The increase in consolidated revenue
was primarily due to increased revenue from both our contract operations
business and aftermarket services business during the three months ended March
31, 2024. See "Contract Operations" and "Aftermarket Services" below for
further details.
Net income was $40.5 million and $16.5 million during the three months ended
March 31, 2024 and 2023, respectively. The increase was primarily driven by
higher gross margin from both our contract operations business and aftermarket
services business. These changes were partially offset by increases in SG&A
and depreciation and amortization expense, and a decrease in the gain on sale
of assets.
Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023
Contract Operations
Three Months Ended
March 31, Increase
(dollars in thousands) 2024 2023 (Decrease)
Revenue $ 223,051 $ 187,745 19 %
Cost of sales (excluding depreciation and amortization) 77,743 79,482 (2) %
Gross margin $ 145,308 $ 108,263 34 %
Gross margin percentage 65 % 58 % 7 %
(1)
(1) Defined as gross margin divided by revenue.
Revenue in our contract operations business increased primarily due to higher
rates and an increase in average operating horsepower for contract compression
in response to market conditions.
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The decrease in cost of sales was primarily due to a $4.8 million decrease in
startup expenses resulting from average horsepower utilization for the fleet
at record levels as well as fewer unit stops. This decrease was partially
offset by a $1.5 million increase in total employee compensation expense and a
$0.8 million increase in parts expense.
Aftermarket Services
Three Months Ended
March 31, Increase
(dollars in thousands) 2024 2023 (Decrease)
Revenue $ 45,437 $ 42,089 8 %
Cost of sales (excluding depreciation and amortization) 35,000 33,908 3 %
Gross margin $ 10,437 $ 8,181 28 %
Gross margin percentage 23 % 19 % 4 %
Revenue in our aftermarket services business increased primarily due to higher
levels of service activities driven by an increase in customer demand,
partially offset by a decrease in part sales.
Gross margin increased in our aftermarket services business as a result of
increased revenue which exceeded the increase in cost of sales due to
differences in the scope, timing and type of services performed.
Costs and Expenses
Three Months Ended
March 31,
(in thousands) 2024 2023
Selling, general and administrative $ 31,665 $ 26,425
Depreciation and amortization 42,835 40,181
Long-lived and other asset impairment 2,568 2,569
Restructuring charges - 1,047
Interest expense 27,334 26,581
Gain on sale of assets, net (2,381) (3,605)
Other expense (income), net 139 603
Selling, general and administrative.
The increase in SG&A includes a $3.4 million increase in long-term incentive
compensation expense, a $0.7 million increase in software and maintenance
expense, a $0.3 million increase in short-term incentive compensation expense
and a $0.3 million reduction in benefit from credit losses, partially offset
by a $0.5 million decrease in professional expense.
Depreciation and amortization.
The increase in depreciation and amortization expense was primarily due to
fixed assets additions and accelerated depreciation associated with certain
assets. These increases were partially offset by a decrease in depreciation
expense associated with assets reaching the end of their depreciable lives,
the impact of compression and other asset sales, and long-lived asset
impairments.
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Long-lived and other asset impairment
.
We periodically review the future deployment of our idle compressors for units
that are not of the type, configuration, condition, make or model that are
cost efficient to maintain and operate. We also evaluate for impairment our
idle units that have been culled from our compression fleet in prior years and
are available for sale. During the three months ended March 31, 2024 and 2023,
we recognized $2.6 million of impairment charges to write down these
compressors to their fair value.
See Note 10 ("Long-Lived Asset and Other Impairments") for further details on
these impairment charges. The following table presents the results of our
compression fleet impairment review, as recorded in our contract operations
segment:
Three Months Ended
March 31,
(dollars in thousands) 2024 2023
Idle compressors retired from the active fleet 25 30
Horsepower of idle compressors retired from the active fleet 14,000 14,000
Impairment recorded on idle compressors retired from the active fleet $ 2,568 $ 2,569
Restructuring charges.
Restructuring charges of $1.0 million during the three months ended March 31,
2023 consisted of severance and consulting costs related to our restructuring
activities. See Note 11 ("Restructuring Charges") for further details on these
restructuring charges.
Interest expense.
The increase in interest expense was due to a higher average outstanding
balance of long-term debt, and an increase in interest rates.
Gain on sale of assets, net
. The decrease in gain on sale of assets was primarily due to gains of $2.2
million on compression asset sales during the three months ended March 31,
2024, compared to gains of $3.3 million on compression asset sales during the
three months ended March 31, 2023.
Provision for Income Taxes
The increase in provision for income taxes was primarily due to the tax effect
of the increase in book income and the limitation on executive compensation
offset by the benefit from equity-settled long term incentive compensation
during the three months ended March 31, 2024 compared with the three months
ended March 31, 2023.
Three Months Ended
March 31, Increase
(dollars in thousands) 2024 2023 (Decrease)
Provision for income taxes $ 13,053 $ 6,158 112 %
Effective tax rate 24 % 27 % (3) %
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our ability to fund operations, finance capital expenditures and pay dividends
depends on the levels of our operating cash flows and access to the capital
and credit markets. Our primary sources of liquidity are cash flows generated
from our operations and our borrowing availability under our Credit Facility.
Our cash flow is affected by numerous factors including prices and demand for
our services, oil and natural gas exploration and production spending,
conditions in the financial markets and other factors. We have no near-term
maturities and believe that our operating cash flows and borrowings under the
Credit Facility will be sufficient to meet our future liquidity needs.
We may from time to time seek to retire or purchase our outstanding debt
through cash purchases and/or exchanges for equity or debt securities in open
market purchases, privately negotiated transactions or otherwise. Such
repurchases or exchanges, if any, may be material, will be upon terms and
prices as we may determine and will depend on prevailing market conditions,
our liquidity requirements, contractual restrictions and other factors.
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Cash Requirements
Our contract operations business is capital intensive, requiring significant
investment to maintain and upgrade existing operations. Our capital spending
is primarily dependent on the demand for our contract operations services and
the availability of the type of compression equipment required for us to
provide those contract operations services to our customers. Our capital
requirements have consisted primarily of, and we anticipate will continue to
consist of, the following:
. operating expenses, namely employee compensation and benefits and inventory and lube oil purchases;
. growth capital expenditures;
. maintenance capital expenditures;
. interest on our outstanding debt obligations; and
. dividend payments to our stockholders.
Capital Expenditures
Growth Capital Expenditures
. The majority of our growth capital expenditures are related to the
acquisition cost of new compressors when our idle equipment cannot be
reconfigured to economically fulfill a project's requirements and the new
compressor is expected to generate economic returns that exceed our cost of
capital over the compressor's expected useful life. In addition to
newly-acquired compressors, growth capital expenditures include the upgrading
of major components on an existing compression package where the current
configuration of the compression package is no longer in demand and the
compressor is not likely to return to an operating status without the capital
expenditures. These expenditures substantially modify the operating parameters
of the compression package such that it can be used in applications for which
it previously was not suited.
Maintenance Capital Expenditures
. Maintenance capital expenditures are related to major overhauls of
significant components of a compression package, such as the engine,
compressor and cooler, which return the components to a like-new condition,
but do not modify the application for which the compression package was
designed.
Projected Capital Expenditures
.
While market activity continues to be strong, we currently anticipate reduced
capital expenditures in 2024 compared to 2023 which supports free cash flow
generation after dividends, and
plan to spend approximately $290 million to $300 million in capital
expenditures during 2024, primarily consisting of approximately $190 million
for growth capital expenditures and approximately $80 million to $85 million
for maintenance capital expenditures.
Dividends
On April 25, 2024, our Board of Directors declared a quarterly dividend of
$0.165 per share of common stock to be paid on May 14, 2024 to stockholders of
record at the close of business on May 7, 2024. Any future determinations to
pay cash dividends to our stockholders will be at the discretion of our Board
of Directors and will be dependent upon our financial condition, results of
operations and credit and loan agreements in effect at that time and other
factors deemed relevant by our Board of Directors.
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Share Repurchase Program
On April 27, 2023, our Board of Directors authorized a share repurchase
program that allowed us to repurchase up to $50.0 million of outstanding
common stock. Under the Share Repurchase Program, shares of our common stock
may be repurchased periodically, including in the open market, privately
negotiated transactions, or otherwise in accordance with applicable federal
securities laws, at any time. On April 25, 2024, our Board of Directors
approved an extension of the Share Repurchase Program upon expiry of the
current authorization on April 27, 2024, for an additional twenty-four-month
period. Through March 31, 2024, the Company had repurchased 833,346 common
shares at an average price of $12.11 per share for an aggregate of $10.1
million. In connection with the extension, the Board of Directors replenished
the amount of shares authorized for repurchase under the Share Repurchase
Program, resulting in available capacity of $50.0 million. The actual timing,
manner, number, and value of shares repurchased under the program will be
determined by us at our discretion.
The following table summarizes shares repurchased under the Share Repurchase
Program during the three months ended March 31, 2024:
Three Months Ended
(dollars in thousands, except per share amounts) March 31, 2024
Total cost of shares repurchased $ 1,230
Average price per share $ 14.83
Total number of shares repurchased 82,972
Sources of Cash
Revolving Credit Facility
During the three months ended March 31, 2024 and 2023, our Credit Facility had
an average debt balance of $274.6 million and $252.3 million, respectively.
The weighted average annual interest rate on the outstanding balance under the
Credit Facility was 7.8% and 7.7% at March 31, 2024 and December 31, 2023,
respectively. As of March 31, 2024, there were $3.8 million letters of credit
outstanding under the Credit Facility and the applicable margin on borrowings
outstanding was 2.2%.
As of March 31, 2024, we were in compliance with all covenants under our
Credit Facility. Additionally, all undrawn capacity on our Credit Facility was
available for borrowings as of March 31, 2024.
Cash Flows
Our cash flows, as reflected in our unaudited condensed consolidated
statements of cash flows, are summarized below:
Three Months Ended
March 31,
(in thousands) 2024 2023
Net cash provided by (used in):
Operating activities $ 137,702 $ 87,856
Investing activities (85,923) (57,666)
Financing activities (51,962) (28,705)
Net increase (decrease) in cash and cash equivalents $ (183) $ 1,485
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Operating Activities
The increase in net cash provided by operating activities was primarily due to
increased cash inflows of $39.0 million from gross margin, excluding deferred
revenue recognized in earnings and amortization of freight and mobilization
charges, changes of $12.2 million in accounts receivable due to increased cash
receipts from customers, of $6.6 million in deferred income tax provision due
to increased usage of tax attributes and of $5.4 million of inventory as a
result of improvement in the lead time for parts. Partially offsetting these
increases was a decrease in accounts payable and other liabilities of $4.3
million.
Investing Activities
The increase in net cash used in investing activities was primarily due to a
$15.4 million increase in capital expenditures and a $14.9 million decrease in
proceeds from the sale of property, plant and equipment, partially offset by a
$1.9 million decrease in investments in non-consolidated affiliates.
Financing Activities
The increase in net cash used in financing activities was primarily due to a
$17.3 million increase in net repayments of long-term debt, a $2.7 million
increase in taxes paid related to net share settlement of equity awards, a
$2.0 million increase in dividends paid to stockholders and a $1.2 million
increase in common stock purchased under the Share Repurchase Program.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks associated with changes in the variable
interest rate of our Credit Facility. A 1% increase in the effective interest
rate on our Credit Facility's outstanding balance at March 31, 2024 would have
resulted in an annual increase in our interest expense of $2.7 million.
ITEM 4. CONTROLS AND PROCEDURES
This Item 4 includes information concerning the controls and controls
evaluation referred to in the certifications of our Chief Executive Officer
and Chief Financial Officer required by Rule 13a-14 of the Exchange Act
included in this Form 10-Q as Exhibits 31.1 and 31.2.
Management's Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) are designed to ensure that information
required to be disclosed in reports filed or submitted under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that such
information is accumulated and communicated to management to allow timely
decisions regarding required disclosures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, our
principal executive officer and principal financial officer evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) of the Exchange Act), which are designed to provide reasonable
assurance that we are able to record, process, summarize and report the
information required to be disclosed in our reports under the Exchange Act
within the time periods specified in the rules and forms of the SEC. Based on
the evaluation, as of March 31, 2024 our principal executive officer and
principal financial officer concluded that our disclosure controls and
procedures were effective to provide reasonable assurance that the information
required to be disclosed in reports that we file or submit under the Exchange
Act is accumulated and communicated to management, and made known to our
principal executive officer and principal financial officer, on a timely basis
to ensure that it is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms.
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Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the last fiscal
quarter that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, we are involved in various pending or
threatened legal actions. While we are unable to predict the ultimate outcome
of these actions, we believe that any ultimate liability arising from any of
these actions will not have a material adverse effect on our consolidated
financial position, results of operations or cash flows, including our ability
to pay dividends. However, because of the inherent uncertainty of litigation
and arbitration proceedings, we cannot provide assurance that the resolution
of any particular claim or proceeding to which we are a party will not have a
material adverse effect on our consolidated financial position, results of
operations or cash flows, including our ability to pay dividends.
ITEM 1A. RISK FACTORS
There have been no material changes or updates to the risk factors previously
disclosed in our Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES BY ISSUER AND USE OF PROCEEDS
Sales of Unregistered Securities
None
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
The following table summarizes our share repurchase activity for the three
months ended March 31, 2024:
Approximate Dollar
Value of Shares
Total Number of That May Yet be
Average Shares Purchased Purchased Under
Total Number Price as Part of Publicly the Publicly
of Shares Paid per Announced Plans Announced Plans
(dollars in thousands, except per share amounts) Purchased Share or Programs or Programs
(1) (2)
January 1, 2024 - January 31, 2024 346,568 $ 15.72 82,972 $ 39,910
February 1, 2024 - February 29, 2024 - - - 39,910
March 1, 2024 - March 31, 2024 122,384 18.27 - 39,910
Total 468,952 $ 16.38 82,972
(1) Represents shares of common stock purchased from employees to satisfy tax withholding
obligations in connection with the vesting of restricted stock awards and
shares repurchased under the Share Repurchase Program during the period. See Note
8 ("Stockholders' Equity") for further details on the Share Repurchase Program.
(2) Average price paid per share includes costs associated with the repurchase, as applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. OTHER INFORMATION
Insider Trading Arrangements
During the three months ended March 31, 2024, none of our directors or officers
adopted
or
terminated
a "Rule 10b5-1 trading arrangement" or a "
non-Rule 10b5-1
trading arrangement
," as each term is defined in Item 408(a) of Regulation S-K.
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ITEM 6. EXHIBITS
The exhibits listed below are filed or furnished as part of this report:
3.1 Composite Certificate of Incorporation of Archrock, Inc., as amended as of November 3, 2015, (incorporated by
reference to Exhibit 3.3 to Archrock Inc.'s Annual Report on Form 10-K for the year ended December 31, 2015
)
3.2 Fourth Amended and Restated Bylaws of Exterran Holdings, Inc., now Archrock, Inc. (incorporated
by reference to Exhibit 3.1 of Archrock Inc.'s Current Report on Form 8-K filed on July 27, 2023)
10.1 Retention Incentive Agreement, dated January 25, 2024, by and between Archrock, Inc. and D. Bradley Childers,
(incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on January 26, 2024)
31.1* Certification of the Principal Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Certification of the Principal Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1** Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2** Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.1* Interactive data files (formatted in Inline
XBRL) pursuant to Rule 405 of Regulation S-T
104.1* Cover page interactive data file (formatted in
Inline XBRL) pursuant to Rule 406 of Regulation S-T
Management contract or compensatory plan or arrangement.
*
Filed herewith
**
Furnished, not filed
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Archrock, Inc.
By: /s/ Douglas S. Aron
Douglas S. Aron
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
By: /s/ Donna A. Henderson
Donna A. Henderson
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
May 1, 2024
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