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, 20212022
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: 154,041,02427, 2022: 155,624,577 shares.
TABLE OF CONTENTS
2
GLOSSARY
The following terms and abbreviations appearing in the text of this report have the meanings indicated below.
| Annual Report on Form 10-K for the year ended December 31, |
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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 |
|
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Archrock, our, we, us | Archrock, Inc., individually and together with its wholly-owned subsidiaries |
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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 |
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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 |
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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 |
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LIBOR | London Interbank Offered Rate |
| Sale completed in |
Old Ocean Reserves | Old Ocean Reserves, LP, formerly JDH Capital Holdings, L.P. |
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 |
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U.S. | United States of America |
3
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 20202021 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
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARCHROCK, INC.Archrock, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETSCondensed 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, 0 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 |
| | | | | | |
|
| June 30, 2022 |
| December 31, 2021 | ||
Assets |
| |
|
| |
|
Current assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 1,950 | | $ | 1,569 |
Accounts receivable, trade, net of allowance of $2,299 and $2,152, respectively | |
| 129,323 | |
| 104,931 |
Inventory | |
| 77,636 | |
| 72,869 |
Other current assets | |
| 8,126 | |
| 7,201 |
Total current assets | |
| 217,035 | |
| 186,570 |
Property, plant and equipment, net | |
| 2,211,744 | |
| 2,226,526 |
Operating lease ROU assets | |
| 16,796 | |
| 17,491 |
Intangible assets, net | |
| 42,187 | |
| 47,887 |
Contract costs, net | |
| 28,784 | |
| 25,418 |
Deferred tax assets | |
| 41,096 | |
| 47,879 |
Other assets | |
| 34,485 | |
| 28,384 |
Noncurrent assets associated with discontinued operations | |
| 9,199 | |
| 9,811 |
Total assets | | $ | 2,601,326 | | $ | 2,589,966 |
| | | | | | |
Liabilities and Equity | |
|
| |
|
|
Current liabilities: | |
|
| |
|
|
Accounts payable, trade | | $ | 78,108 | | $ | 38,920 |
Accrued liabilities | |
| 66,966 | |
| 82,517 |
Deferred revenue | |
| 6,455 | |
| 3,817 |
Total current liabilities | |
| 151,529 | |
| 125,254 |
Long-term debt | |
| 1,532,438 | |
| 1,530,825 |
Operating lease liabilities | |
| 14,987 | |
| 15,940 |
Deferred tax liabilities | |
| 1,332 | |
| 1,136 |
Other liabilities | |
| 19,254 | |
| 17,505 |
Noncurrent liabilities associated with discontinued operations | |
| 7,868 | |
| 7,868 |
Total liabilities | |
| 1,727,408 | |
| 1,698,528 |
Commitments and contingencies (Note 18) | |
|
| |
|
|
Equity: | |
|
| |
|
|
Preferred stock: $0.01 par value per share, 50,000,000 shares authorized, 0 issued | |
| — | |
| — |
Common stock: $0.01 par value per share, 250,000,000 shares authorized, 163,385,390 and 161,482,852 shares issued, respectively | |
| 1,633 | |
| 1,615 |
Additional paid-in capital | |
| 3,450,603 | |
| 3,440,059 |
Accumulated other comprehensive loss | |
| — | |
| (984) |
Accumulated deficit | |
| (2,489,814) | |
| (2,463,114) |
Treasury stock: 7,740,919 and 7,417,401 common shares, at cost, respectively | |
| (88,504) | |
| (86,138) |
Total equity | |
| 873,918 | |
| 891,438 |
Total liabilities and equity | | $ | 2,601,326 | | $ | 2,589,966 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
ARCHROCK, INC.Archrock, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCondensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Revenue: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Contract operations | | $ | 163,865 | | $ | 187,949 | | $ | 329,899 | | $ | 394,923 | | $ | 166,298 | | $ | 163,865 | | $ | 329,954 | | $ | 329,899 |
Aftermarket services | |
| 31,750 | |
| 32,367 | |
| 61,147 | |
| 75,090 | |
| 49,530 | |
| 31,750 | |
| 83,075 | |
| 61,147 |
Total revenue | |
| 195,615 | |
| 220,316 | |
| 391,046 | |
| 470,013 | |
| 215,828 | |
| 195,615 | |
| 413,029 | |
| 391,046 |
Cost of sales (excluding depreciation and amortization): | |
| | | | | | | | | | | |
| | | | | | | | | | |
Contract operations | |
| 61,387 | |
| 63,390 | |
| 122,752 | |
| 142,041 | |
| 68,355 | |
| 61,387 | |
| 132,856 | |
| 122,752 |
Aftermarket services | |
| 27,490 | |
| 28,686 | |
| 53,273 | |
| 63,677 | |
| 41,710 | |
| 27,490 | |
| 70,348 | |
| 53,273 |
Total cost of sales (excluding depreciation and amortization) | |
| 88,877 | |
| 92,076 | |
| 176,025 | |
| 205,718 | |
| 110,065 | |
| 88,877 | |
| 203,204 | |
| 176,025 |
Selling, general and administrative | |
| 26,077 | |
| 28,745 | |
| 51,161 | |
| 59,371 | |
| 27,691 | |
| 26,077 | |
| 55,464 | |
| 51,161 |
Depreciation and amortization | |
| 44,193 | |
| 48,849 | |
| 89,905 | |
| 98,671 | |
| 41,356 | |
| 44,193 | |
| 84,395 | |
| 89,905 |
Long-lived and other asset impairment | |
| 2,960 | |
| 55,210 | |
| 10,033 | |
| 61,405 | |
| 4,647 | |
| 2,960 | |
| 12,063 | |
| 10,033 |
Goodwill impairment | | | — | | | — | | | — | | | 99,830 | ||||||||||||
Restructuring charges | | | 743 | | | 2,408 | | | 1,640 | | | 4,136 | | | — | | | 743 | | | — | | | 1,640 |
Interest expense | |
| 25,958 | |
| 25,778 | |
| 57,203 | |
| 55,443 | |
| 24,456 | |
| 25,958 | |
| 49,702 | |
| 57,203 |
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) | ||||||||||||
Gain on sale of assets, net | | | (18,948) | | | (3,124) | | | (21,060) | | | (14,156) | ||||||||||||
Other (income) expense, net | |
| 497 | |
| (82) | |
| 533 | |
| (1,971) | ||||||||||||
Income before income taxes | |
| 26,064 | |
| 10,013 | |
| 28,728 | |
| 21,206 | ||||||||||||
Provision for income taxes | |
| 9,318 | |
| 1,261 | |
| 10,261 | |
| 8,285 | ||||||||||||
Net income | | $ | 16,746 | | $ | 8,752 | | $ | 18,467 | | $ | 12,921 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Basic and diluted net income (loss) per common share | | $ | 0.06 | | $ | (0.20) | | $ | 0.08 | | $ | (0.61) | ||||||||||||
Basic and diluted net income per common share | | $ | 0.11 | | $ | 0.06 | | $ | 0.12 | | $ | 0.08 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Basic | |
| 152,033 | |
| 150,743 | |
| 151,537 | |
| 150,628 | |
| 153,033 | |
| 152,033 | |
| 152,857 | |
| 151,537 |
Diluted | |
| 152,203 | |
| 150,743 | |
| 151,699 | |
| 150,628 | |
| 153,164 | |
| 152,203 | |
| 152,982 | |
| 151,699 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
ARCHROCK, INC.Archrock, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)Condensed Consolidated Statements of Comprehensive Income
(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) |
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net income | | $ | 16,746 |
| $ | 8,752 |
| $ | 18,467 |
| $ | 12,921 |
Other comprehensive income, net of tax: | |
|
| |
|
| |
|
| |
|
|
Interest rate swap gain, net of reclassifications to earnings | |
| — | |
| 966 | |
| 574 | |
| 1,962 |
Amortization of dedesignated interest rate swap | |
| — | |
| — | |
| 410 | |
| — |
Total other comprehensive income, net of tax | |
| — | |
| 966 | |
| 984 | |
| 1,962 |
Comprehensive income | | $ | 16,746 | | $ | 9,718 | | $ | 19,451 | | $ | 14,883 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
ARCHROCK, INC.Archrock, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITYCondensed 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.
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | | | | | | | | | | |
| | Common | | Additional | | Other | | | | | Treasury | | | | ||||||||
| | Stock | | Paid-in | | Comprehensive | | Accumulated | | Stock | | | | |||||||||
|
| Amount |
| Shares |
| Capital |
| Loss |
| Deficit |
| Amount |
| Shares |
| Total | ||||||
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 |
| | | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2022 | | $ | 1,629 |
| 162,919,584 | | $ | 3,443,261 | | $ | — | | $ | (2,484,066) | | $ | (88,501) |
| (7,698,812) | | $ | 872,323 |
Treasury stock purchased | |
|
|
|
| |
|
| |
|
| |
|
| |
| (3) |
| (303) | |
| (3) |
Cash dividends ($0.145 per common share) | |
|
|
|
| |
|
| |
|
| |
| (22,494) | |
|
|
|
| |
| (22,494) |
Shares issued under ESPP | |
| — |
| 18,786 | |
| 146 | |
|
| |
|
| |
|
|
|
| |
| 146 |
Stock-based compensation, net of forfeitures | |
| — |
| — | |
| 2,970 | |
|
| |
|
| |
|
|
| (41,804) | |
| 2,970 |
Net proceeds from issuance of common stock | | | 4 | | 447,020 | | | 4,226 | | | | | | | | | | | | | | 4,230 |
Comprehensive income | |
|
|
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
| |
Net income | |
|
|
|
| |
|
| |
|
| |
| 16,746 | |
|
|
|
| |
| 16,746 |
Balance at June 30, 2022 | | $ | 1,633 |
| 163,385,390 | | $ | 3,450,603 | | $ | — | | $ | (2,489,814) | | $ | (88,504) |
| (7,740,919) | | $ | 873,918 |
8
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | 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.
9
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 |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | | | | | | | | | | |
| | Common | | Additional | | Other | | | | | Treasury | | | | ||||||||
| | Stock | | Paid-in | | Comprehensive | | Accumulated | | Stock | | | | |||||||||
|
| Amount |
| Shares |
| Capital |
| Loss |
| Deficit |
| Amount |
| Shares |
| Total | ||||||
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 |
| | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2021 | | $ | 1,615 |
| 161,482,852 | | $ | 3,440,059 | | $ | (984) | | $ | (2,463,114) | | $ | (86,138) |
| (7,417,401) | | $ | 891,438 |
Treasury stock purchased | |
|
|
|
| |
|
| |
|
| |
|
| |
| (2,366) |
| (272,706) | |
| (2,366) |
Cash dividends ($0.290 per common share) | |
|
|
|
| |
|
| |
|
| |
| (45,167) | |
|
|
|
| |
| (45,167) |
Shares issued under ESPP | |
| — | | 38,846 | |
| 295 | |
|
| |
|
| |
|
|
|
| |
| 295 |
Stock-based compensation, net of forfeitures | |
| 14 |
| 1,416,672 | |
| 6,023 | |
|
| |
|
| |
|
|
| (50,812) | |
| 6,037 |
Net proceeds from issuance of common stock | | | 4 | | 447,020 | | | 4,226 | | | | | | | | | | | | | | 4,230 |
Comprehensive income | |
|
|
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
| |
Net income | |
|
|
|
| |
|
| |
|
| |
| 18,467 | |
|
|
|
| |
| 18,467 |
Interest rate swap gain, net of reclassifications to earnings | |
|
|
|
| |
|
| |
| 574 | |
|
| |
|
|
|
| |
| 574 |
Amortization of dedesignated interest rate swap | | | | | | | | | | | 410 | | | | | | | | | | | 410 |
Balance at June 30, 2022 | | $ | 1,633 |
| 163,385,390 | | $ | 3,450,603 | | $ | — | | $ | (2,489,814) | | $ | (88,504) |
| (7,740,919) | | $ | 873,918 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
9
Archrock, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| | | | | | |
| | Six Months Ended | ||||
| | June 30, | ||||
|
| 2022 |
| 2021 | ||
Cash flows from operating activities: | | |
| | |
|
Net income | | $ | 18,467 | | $ | 12,921 |
Adjustments to reconcile net income to net cash provided by operating activities: | |
|
| |
|
|
Depreciation and amortization | |
| 84,395 | |
| 89,905 |
Long-lived and other asset impairment | |
| 12,063 | |
| 10,033 |
Inventory write-downs | |
| 721 | |
| 511 |
Amortization of operating lease ROU assets | |
| 1,575 | |
| 1,891 |
Amortization of deferred financing costs | |
| 2,576 | |
| 7,551 |
Amortization of debt premium | | | (1,003) | | | (1,003) |
Amortization of dedesignated interest rate swap | | | 410 | | | — |
Interest rate swaps | |
| 631 | |
| 2,169 |
Stock-based compensation expense | |
| 6,037 | |
| 5,841 |
Provision for credit losses | |
| 365 | |
| (215) |
Gain on sale of assets, net | |
| (4,344) | |
| (8,161) |
Gain on sale of business | | | (16,716) | | | (5,995) |
Deferred income tax provision | |
| 9,473 | |
| 7,995 |
Amortization of contract costs | |
| 9,249 | |
| 10,752 |
Deferred revenue recognized in earnings | |
| (11,541) | |
| (5,048) |
Change in assets and liabilities: | |
|
| |
|
|
Accounts receivable, trade | |
| (30,370) | |
| (2,661) |
Inventory | |
| (5,779) | |
| (3,569) |
Other assets | |
| (1,182) | |
| (244) |
Contract costs, net | |
| (13,007) | |
| (6,467) |
Accounts payable and other liabilities | |
| 13,051 | |
| 6,358 |
Deferred revenue | |
| 14,032 | |
| 4,068 |
Other | |
| 421 | |
| (15) |
Net cash provided by operating activities | |
| 89,524 | |
| 126,617 |
Cash flows from investing activities: | |
|
| |
|
|
Capital expenditures | |
| (106,066) | |
| (38,749) |
Proceeds from sale of business | |
| 55,523 | |
| 18,795 |
Proceeds from sale of property, plant and equipment and other assets | |
| 9,728 | |
| 18,178 |
Proceeds from insurance and other settlements | | | 2,781 | | | 910 |
Investments in unconsolidated entities | | | (8,000) | | | — |
Net cash used in investing activities | |
| (46,034) | |
| (866) |
Cash flows from financing activities: | |
|
| |
|
|
Borrowings of long-term debt | |
| 405,733 | |
| 343,251 |
Repayments of long-term debt | |
| (404,500) | |
| (419,751) |
Payments for debt issuance costs | |
| — | |
| (2,407) |
Payments for settlement of interest rate swaps that include financing elements | |
| (1,334) | |
| (2,169) |
Dividends paid to stockholders | |
| (45,167) | |
| (44,486) |
Net proceeds from issuance of common stock | | | 4,230 | | | 3,401 |
Proceeds from stock issued under ESPP | |
| 295 | |
| 371 |
Purchases of treasury stock | |
| (2,366) | |
| (1,746) |
Net cash used in financing activities | |
| (43,109) | |
| (123,536) |
Net increase in cash and cash equivalents | |
| 381 | |
| 2,215 |
Cash and cash equivalents, beginning of period | |
| 1,569 | |
| 1,097 |
Cash and cash equivalents, end of period | | $ | 1,950 | | $ | 3,312 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
10
ARCHROCK, INC.Archrock, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Condensed Consolidated Financial Statements
(unaudited)
1. Description of Business and Basis of Presentation
We are an energy infrastructure company with a pure-playprimary focus on midstream natural gas compression. We are the leading provider of natural gas compression services to customers in the oil and natural gasenergy 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 2 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 20202021 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 DevelopmentsBusiness Transactions
Accounting Standards Updates ImplementedMay 2022 Disposition
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 TransactionsIn May 2022, we completed the sale of certain contract operations customer service agreements and approximately 380 compressors, comprising approximately 70,000 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 received cash consideration of $55.5 million for the sale and recorded a gain on the sale of $16.7 million in gain on sale of assets, net in our condensed consolidated statements of operations during the three and six months ended June 30, 2022.
February 2021 Disposition
OnIn 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) lossgain on sale of assets, net in our condensed consolidated statements of operations during the six months ended June 30, 2021.
11
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 |
5.3. 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 |
| | | | | | |
(in thousands) |
| June 30, 2022 |
| December 31, 2021 | ||
Parts and supplies | | $ | 61,571 | | $ | 63,628 |
Work in progress | |
| 16,065 | |
| 9,241 |
Inventory | | $ | 77,636 | | $ | 72,869 |
1211
6.4. Property, Plant and Equipment, net
| | | | | | | | | | | | |
(in thousands) |
| June 30, 2021 |
| December 31, 2020 |
| June 30, 2022 |
| December 31, 2021 | ||||
Compression equipment, facilities and other fleet assets | | $ | 3,384,406 | | $ | 3,439,432 | | $ | 3,259,841 | | $ | 3,273,770 |
Land and buildings | |
| 44,721 | |
| 45,167 | |
| 44,205 | |
| 43,540 |
Transportation and shop equipment | |
| 101,115 | |
| 106,868 | |
| 89,866 | |
| 92,490 |
Computer hardware and software | |
| 84,680 | |
| 84,680 | |
| 77,393 | |
| 76,908 |
Other | |
| 21,429 | |
| 14,457 | |
| 6,250 | |
| 6,229 |
Property, plant and equipment | |
| 3,636,351 | |
| 3,690,604 | |
| 3,477,555 | |
| 3,492,937 |
Accumulated depreciation | |
| (1,313,951) | |
| (1,300,930) | |
| (1,265,811) | |
| (1,266,411) |
Property, plant and equipment, net | | $ | 2,322,400 | | $ | 2,389,674 | | $ | 2,211,744 | | $ | 2,226,526 |
7. Goodwill
Our goodwill5. Equity Investments
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 monitoring and management. We have elected the fair value option to account for this investment. As of June 30, 2022, our ownership interest in ECOTEC was recognized14%, which was included in connection with the Elite Acquisition and represents the excess of consideration transferred overother assets in our condensed consolidated balance sheets. Changes in the fair value of the assets and liabilities acquired. All of the goodwill was allocated to our contract operations reporting unit. We review the carrying amount of our goodwillthis investment are recognized in the fourth quarter of every year, or whenever indicators of potential impairment exist, to determine if the carrying amount of our contract operations reporting unit exceeds its fair value, including the goodwill. Beginning in the first quarter of 2020, the COVID-19 pandemic caused a significant deterioration in global macroeconomic conditions, including a collapse in the demand for oil coupled with an oversupply of oil, which commenced substantial spending cuts by our customers and a decline in production. This global response to the pandemic significantly impacted our market capitalization and estimates of future revenues and cash flows, which triggered the need to perform a quantitative test of the fair value of our contract operations reporting unit as of March 31, 2020. The quantitative test determined that the carrying amount of our contract operations reporting unit exceeded its fair value and we recorded a goodwill impairment loss of $99.8 million during the first quarter of 2020.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions, which have a significant impact on the fair value determined. We determined the fair value of our reporting unit using an equal weighting of both the expected present value of future cash flows and a market approach. The present value of future cash flows was estimated using our most recent forecast and the weighted average cost of capital. The market approach uses a market multiple on the earnings before interestother (income) expense, provision for income taxes and depreciation and amortization expense of comparable peer companies. Significant estimates for our reporting unit includednet in our impairment analysis were our cash flow forecasts, our estimatecondensed consolidated statements of the market’s weighted average cost of capital and market multiples.operations.
8.
6. Hosting Arrangements
In the fourth quarter of 2018 we began a process and technology transformation project that will, among other things, upgrade or replace our existing ERP, supply chain and inventory management systems and expand the remote monitoring capabilities of our compression fleet. Included in this project areWe have hosting arrangements that are service contracts related to the cloud migration of our ERP system and cloud services for our new mobile workforce, telematics and inventory management tools.
As of June 30, 20212022 and December 31, 2020,2021, we had $9.8$14.8 million and $7.7$12.7 million, respectively, of capitalized implementation costs related to ourthese hosting arrangements that are service contracts included in other assets in our condensed consolidated balance sheets. Accumulated amortization was $0.5$1.6 million and $0.3$0.7 million at June 30, 20212022 and December 31, 2020,2021, respectively. We recorded $0.5 million and $0.1 million of amortization expense to SG&A in our condensed consolidated statements of operations during each of the three months ended June 30, 2022 and 2021, respectively, and 2020,$0.9 million and $0.2 million and $0.1 million during the six months ended June 30, 2022 and 2021, and 2020, respectively.
13
9.7. Long-Term Debt
| | | | | | | | | | | | |
(in thousands) |
| June 30, 2021 |
| December 31, 2020 |
| June 30, 2022 |
| December 31, 2021 | ||||
Credit Facility | | $ | 316,500 | | $ | 393,000 | | $ | 235,733 | | $ | 234,500 |
| | | | | | | | | | | | |
2028 Notes | | | | | | | | | | | | |
Principal | |
| 800,000 | |
| 800,000 | |
| 800,000 | |
| 800,000 |
Debt premium, net of amortization | | | 13,539 | |
| 14,541 | ||||||
Premium, net of amortization | | | 11,533 | |
| 12,536 | ||||||
Deferred financing costs, net of amortization | |
| (11,192) | |
| (11,766) | |
| (9,574) | |
| (10,406) |
| |
| 802,347 | |
| 802,775 | |
| 801,959 | |
| 802,130 |
| | | | | | | | | | | | |
2027 Notes | | | | | | | | | | | | |
Principal | | | 500,000 | |
| 500,000 | | | 500,000 | |
| 500,000 |
Deferred financing costs, net of amortization | | | (6,357) | |
| (6,908) | | | (5,254) | |
| (5,805) |
| | | 493,643 | |
| 493,092 | | | 494,746 | |
| 494,195 |
| | | | | | | | | | | | |
Long-term debt | | $ | 1,612,490 | | $ | 1,688,867 | | $ | 1,532,438 | | $ | 1,530,825 |
12
Credit Facility
As of June 30, 2021,2022, there were $12.5$5.8 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.4%2.3%. The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 2.5%3.9% and 2.7%2.6% at June 30, 20212022 and December 31, 2020,2021, respectively. We incurred $0.5 million and $0.4 million in commitment fees on the daily unused amount of the Credit Facility during each of the three months ended June 30, 2022 and 2021, and 2020respectively, and $1.0 million and $1.1 million during each of the six months ended June 30, 20212022 and 2020, respectively.2021.
We must maintain certain consolidated financial ratios as defined in our Credit Facility agreement (see below). As of June 30, 2021, the ratio requirements did not constrain our undrawn capacity and as such, $421.0 million was available for additional borrowings. As of June 30, 2021,2022, we were in compliance with all covenants under theour Credit Facility agreement. As a result of the facility’s financial ratio requirements, $476.6 million of the $508.5 million of undrawn capacity was available for additional borrowings as of June 30, 2022.
Amendment No. 3
OnIn February 22, 2021, we amended our Credit Facility to, among other things:
things, reduce the aggregate revolving commitment from $1.25 billion to $750.0 |
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|
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We incurred $1.8 million in transaction costs related to Amendment No. 3, 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, weadjust certain financial ratios. We wrote off $4.9 million of unamortized deferred financing costs as a result of the amendment, which was recorded to interest expense in our condensed consolidated statements of operations during the six months ended June 30, 2021.
14
2022 Notes Redemption
In April 2020, the 2022 Notes were redeemed at 100% of their $350.0 million aggregate principal amount plus accrued and unpaid interest of $10.5 million with borrowings under the Credit Facility. A debt extinguishment loss of $4.0 million related to the redemption was recognized during the three and six months ended June 30, 2020.
10.8. Accumulated Other Comprehensive Loss
Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with owners. Our accumulated other comprehensive income (loss)loss consists of changes in the fair value of our interest rate swap derivative instruments, net of tax, which are designated as cash flow hedges.
The following table presents the changes in accumulated other comprehensive loss of our derivative cash flow hedges, net of tax:tax.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Beginning accumulated other comprehensive loss | | $ | (4,010) | | $ | (7,173) | | $ | (5,006) | | $ | (1,387) | | $ | — | | $ | (4,010) | | $ | (984) | | $ | (5,006) |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | ||||||||||||
Loss recognized in other comprehensive income (loss), net of tax benefit of $16, $155, $18 and $1,745, respectively | |
| (63) | |
| (583) | |
| (71) | |
| (6,566) | ||||||||||||
Loss reclassified from accumulated other comprehensive loss to interest expense, net of tax benefit of $273, $225, $540 and $277, respectively | |
| 1,029 | |
| 848 | |
| 2,033 | |
| 1,045 | ||||||||||||
Total other comprehensive income (loss) | |
| 966 | |
| 265 | |
| 1,962 | |
| (5,521) | ||||||||||||
Other comprehensive income, net of tax: | | | | | | | | | | | | | ||||||||||||
Loss recognized in other comprehensive income, net of tax benefit of $0, $16, $107 and $18, respectively | |
| — | |
| (63) | |
| (405) | |
| (71) | ||||||||||||
Loss reclassified from accumulated other comprehensive loss to interest expense, net of tax benefit of $0, $273, $369 and $540, respectively | |
| — | |
| 1,029 | |
| 1,389 | |
| 2,033 | ||||||||||||
Total other comprehensive income | |
| — | |
| 966 | |
| 984 | |
| 1,962 | ||||||||||||
Ending accumulated other comprehensive loss | | $ | (3,044) | | $ | (6,908) | | $ | (3,044) | | $ | (6,908) | | $ | — | | $ | (3,044) | | $ | — | | $ | (3,044) |
See Note 1715 (“Derivatives”) for further details on our interest rate swap derivative instruments.
11.9. Equity
At-the-Market Continuous Equity Offering Program
On February 23, 2021,During the three and six months ended June 30, 2022, we entered into the ATM Agreement, pursuant to which we may offer and sell shares of our common stock from time to time for an aggregate offering price of up to $50.0 million. We intend to use the net proceeds of these offerings, after deducting sales agent fees and offering expenses, for general corporate purposes. Offerings of common stock pursuant to the ATM Agreement will terminate upon the earlier of (i) the sale of allsold 447,020 shares of common stock subjectfor net proceeds of $4.2 million pursuant to theour ATM Agreement or (ii) the termination of the ATM Agreement by us or by each of the sales agents. Any sales agent may also terminate the ATM Agreement but only with respect to itself.agreement.
During the six months ended June 30, 2021, we sold 357,148 shares of common stock under the program for net proceeds of $3.4 million pursuant to the ATM Agreement.million.
1513
Cash Dividends
The following table summarizes our dividends declared and paid in each of the quarterly periods of 20212022 and 2020:2021:
| | | | | | | | | | | | |
|
| Declared Dividends |
| Dividends Paid |
| Declared Dividends |
| Dividends Paid | ||||
|
| per Common Share |
| (in thousands) |
| per Common Share |
| (in thousands) | ||||
2021 | |
|
| |
|
| ||||||
2022 | |
|
| |
|
| ||||||
Q2 | | $ | 0.145 | | $ | 22,331 | | $ | 0.145 | | $ | 22,494 |
Q1 | | | 0.145 | | | 22,155 | | | 0.145 | | | 22,673 |
| | | | | | | | | | | | |
2020 |
| |
|
| |
| ||||||
2021 |
| |
|
| |
| ||||||
Q4 | | $ | 0.145 | | $ | 22,177 | | $ | 0.145 | | $ | 22,351 |
Q3 | |
| 0.145 | |
| 22,308 | |
| 0.145 | |
| 22,506 |
Q2 | |
| 0.145 | |
| 22,176 | |
| 0.145 | |
| 22,331 |
Q1 | |
| 0.145 | |
| 22,171 | |
| 0.145 | |
| 22,155 |
On July 28, 2021,2022, our Board of Directors declared a quarterly dividend of $0.145 per share of common stock to be paid on August 16, 20212022 to stockholders of record at the close of business on August 9, 2021.2022.
12.10. Revenue from Contracts with Customers
The following table presents our revenue from contracts with customers by segment (see Note 2220 (“Segments”)) and disaggregated by revenue source:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Contract operations: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
0 ― 1,000 horsepower per unit | | $ | 45,918 | | $ | 57,728 | | $ | 92,837 | | $ | 124,468 | | $ | 40,489 | | $ | 45,918 | | $ | 82,331 | | $ | 92,837 |
1,001 ― 1,500 horsepower per unit | |
| 66,852 | |
| 78,026 | |
| 135,316 | |
| 162,878 | |
| 68,697 | |
| 66,852 | |
| 135,698 | |
| 135,316 |
Over 1,500 horsepower per unit | |
| 50,939 | |
| 51,618 | |
| 101,342 | |
| 106,209 | |
| 56,885 | |
| 50,939 | |
| 111,479 | |
| 101,342 |
Other (1) | |
| 156 | |
| 577 | |
| 404 | |
| 1,368 | |
| 227 | |
| 156 | |
| 446 | |
| 404 |
Total contract operations revenue (2) | |
| 163,865 | |
| 187,949 | |
| 329,899 | |
| 394,923 | |
| 166,298 | |
| 163,865 | |
| 329,954 | |
| 329,899 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Aftermarket services: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Services | |
| 17,008 | |
| 19,081 | |
| 33,900 | |
| 44,531 | |
| 26,001 | |
| 17,008 | |
| 43,138 | |
| 33,900 |
OTC parts and components sales | |
| 14,742 | |
| 13,286 | |
| 27,247 | |
| 30,559 | |
| 23,529 | |
| 14,742 | |
| 39,937 | |
| 27,247 |
Total aftermarket services revenue (3) | |
| 31,750 | |
| 32,367 | |
| 61,147 | |
| 75,090 | |
| 49,530 | |
| 31,750 | |
| 83,075 | |
| 61,147 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total revenue | | $ | 195,615 | | $ | 220,316 | | $ | 391,046 | | $ | 470,013 | | $ | 215,828 | | $ | 195,615 | | $ | 413,029 | | $ | 391,046 |
(1) | Primarily relates to fees associated with owned non-compression equipment. |
(2) | Includes |
(3) |
1614
Performance Obligations
As of June 30, 2021,2022, we had $286.6 million of remaining performance obligations related to our contract operations segment, which will be recognized through 20252027 as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| Total |
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| Total | |||||||||||||
Remaining performance obligations | | $ | 155,764 | | $ | 106,352 | | $ | 20,785 | | $ | 3,512 | | $ | 144 | | $ | 286,557 | | $ | 156,370 | | $ | 93,290 | | $ | 31,041 | | $ | 4,819 | | $ | 914 | | $ | 190 | | $ | 286,624 |
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 of June 30, 20212022 and December 31, 2020,2021, our receivables from contracts with customers, net of allowance for credit losses, were $96.0$121.0 million and $95.6$84.7 million, respectively.
Allowance for Credit Losses
Trade accounts receivable are due from companies of varying size engaged principally in oil and natural gas activities throughout the U.S. We review the financial condition of customers prior to extending credit and generally do not obtain collateral for trade receivables. Payment terms are on a short-term basis and in accordance with industry practice. We consider this credit risk to be limited due to these companies’ financial resources, the nature of the products and services we provide and the terms of our customer agreements.
Due to the short-term nature of our trade receivables, we consider the amortized cost to be the same as the carrying amount of the receivable, excluding the allowance for credit losses. We recognize an allowance for credit losses when a receivable is recorded, even when the risk of loss is remote. We utilize an aging schedule to determine our allowance for credit losses and measure expected credit losses on a collective (pool) basis when similar risk characteristics exist. We rely primarily on ratings assigned by external rating agencies and credit monitoring services to assess credit risk and aggregate customers first by low, medium or high risk asset pools, and then by delinquency status. We also consider the internal risk associated with geographic location and the services we provide to the customer when determining asset pools. If a customer does not share similar risk characteristics with other customers, we evaluate the customer’s outstanding trade receivables for expected credit losses on an individual basis. Trade receivables evaluated individually are not included in our collective assessment. Each reporting period, we reassess our customers’ risk profiles and determine the appropriate asset pool classification, or perform individual assessments of expected credit losses, based on the customers’ risk characteristics at the reporting date.
The contractual life of our trade receivables is primarily 30 days based on the payment terms specified in the contract. Contract operations services are generally billed monthly at the beginning of the month in which service is being provided. Aftermarket services billings typically occur when parts are delivered or service is completed. Loss rates are separately determined for each asset pool based on the length of time a trade receivable has been outstanding. We analyze two years of internal historical loss data, including the effects of prepayments, write-offs and subsequent recoveries, to determine our historical loss experience. Our historical loss information is a relevant data point for estimating credit losses, as the data closely aligns with trade receivables due from our customers. Ratings assigned by external rating agencies and credit monitoring services consider past performance and forecasts of future economic conditions in assessing credit risk. We routinely update our historical loss data to reflect our customers’ current risk profile, to ensure the historical data and loss rates are relevant to the pool of assets for which we are estimating expected credit losses.
1715
Our allowance for credit losses balance changed as follows during the six months ended June 30, 2021:2022:
| | | | | | |
(in thousands) | | | | | | |
Balance at December 31, 2020 |
| $ | 3,370 | |||
Provision for (benefit from) credit losses | | | (215) | |||
Balance at December 31, 2021 |
| $ | 2,152 | |||
Provision for credit losses | | | 365 | |||
Write-offs charged against allowance | | | (424) | | | (218) |
Balance at June 30, 2021 | | $ | 2,731 | |||
Balance at June 30, 2022 | | $ | 2,299 |
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. AsOur contract liabilities were $6.9 million and $4.4 million as of June 30, 20212022 and December 31, 2020, our contract liabilities were $3.6 million2021, respectively, and $4.6 million, respectively, which were included in deferred revenue and other liabilities in our condensed consolidated balance sheets. The decrease in the contract liability balance duringDuring the six months ended June 30, 2021 was primarily due to $5.02022, we deferred revenue of $14.0 million and recognized $11.5 million as revenue. The revenue recognized and deferred during the period partially offset by revenue deferral of $4.1 million, each primarily related to freight billings and milestone billings on aftermarket services.
13.11. 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.
In the first quarter of 2020, we determined that the impairment of our contract operations reporting unit’s goodwill was an indicator of potential impairment of the carrying amount of our long-lived assets, including our compressor fleet and associated customer and contract-based intangible assets. Accordingly, we performed a quantitative impairment test of our long-lived assets, by which we determined that they were not also impaired. No similar impairment has been indicated subsequent to the first quarter of 2020.
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.
18
The following table presents the results of our compression fleet impairment review as recorded to our contract operations segment:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Idle compressors retired from the active fleet |
| | 45 |
| | 450 |
| | 115 |
| | 535 |
| | 30 |
| | 45 |
| | 75 |
| | 115 |
Horsepower of idle compressors retired from the active fleet |
| | 13,000 |
| | 184,000 |
| | 37,000 |
| | 207,000 |
| | 26,000 |
| | 13,000 |
| | 57,000 |
| | 37,000 |
Impairment recorded on idle compressors retired from the active fleet | | $ | 2,832 | | $ | 55,210 | | $ | 9,844 | | $ | 61,405 | | $ | 4,647 | | $ | 2,832 | | $ | 12,056 | | $ | 9,844 |
14. Restructuring Charges
During the first quarter of 2020, we completed restructuring activities to further streamline our organization and more fully align our teams to improve our customer service and profitability. We incurred severance costs of $1.7 million related to these activities during the first quarter of 2020. NaN additional costs will be incurred for this organizational restructuring.
In response to the decreased activity level of our customers that resulted from the COVID-19 pandemic beginning in the second quarter of 2020, we have incurred severance costs of $6.8 million to right-size our business. We do not expect to incur additional material severance costs under this restructuring plan.
During the third quarter of 2020, a plan to dispose of certain non-core properties was approved by management. We have incurred $1.5 million of restructuring costs as a result of our property disposals and do not expect to incur additional material property disposal costs under this restructuring plan.
The severance and property disposal costs incurred under the above restructuring plans were recorded to restructuring charges in our condensed consolidated statements of operations.
1916
12. Restructuring Charges
In response to the decreased activity level of our customers that resulted from the coronavirus pandemic beginning in the second quarter of 2020, we incurred severance costs totaling $7.0 million to right-size our business in 2020 and 2021. NaN additional costs will be incurred under this restructuring plan.
During the third quarter of 2020, a plan to dispose of certain non-core properties was approved by management. We incurred $1.5 million of costs in 2020 and 2021 as a result of these property disposals. NaN additional costs will be incurred under this restructuring plan.
The severance and property disposal costs incurred under the above restructuring plans were recorded to restructuring charges in our condensed consolidated statements of operations.
The following table presents restructuring charges incurred by segment:
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| Contract | | Aftermarket | | | | | | |
| Contract | | Aftermarket | | | | | | | ||||
(in thousands) | | Operations | | Services | | Other (1) | | Total | | Operations | | Services | | Other (1) | | Total | ||||||||
Three months ended June 30, 2021 | | | | | | | | | | | | | | | | | | | | | | | | |
Pandemic restructuring | | $ | 337 | | $ | 121 | | $ | 147 | | $ | 605 | | $ | 337 | | $ | 121 | | $ | 147 | | $ | 605 |
Property restructuring | | | — | | | — | | | 7 | | | 7 | ||||||||||||
2020 property restructuring | | | — | | | — | | | 7 | | | 7 | ||||||||||||
Other restructuring | | | — | | | — | | | 131 | | | 131 | | | — | | | — | | | 131 | | | 131 |
Total restructuring charges | | $ | 337 | | $ | 121 | | $ | 285 | | $ | 743 | | $ | 337 | | $ | 121 | | $ | 285 | | $ | 743 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended June 30, 2020 | | | | | | | | | | | | | ||||||||||||
Pandemic restructuring | | $ | 1,386 | | $ | 286 | | $ | 736 | | $ | 2,408 | ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Six months ended June 30, 2021 | | | | | | | | | | | | | | | | | | | | | | | | |
Pandemic restructuring | | $ | 616 | | $ | 145 | | $ | 732 | | $ | 1,493 | | $ | 616 | | $ | 145 | | $ | 732 | | $ | 1,493 |
Property restructuring | | | — | | | — | | | 16 | | | 16 | ||||||||||||
2020 property restructuring | | | — | | | — | | | 16 | | | 16 | ||||||||||||
Other restructuring | | | — | | | — | | | 131 | | | 131 | | | — | | | — | | | 131 | | | 131 |
Total restructuring charges | | $ | 616 | | $ | 145 | | $ | 879 | | $ | 1,640 | | $ | 616 | | $ | 145 | | $ | 879 | | $ | 1,640 |
| | | | | | | | | | | | | ||||||||||||
Six months ended June 30, 2020 | | | | | | | | | | | | | ||||||||||||
Organizational restructuring | | $ | 478 | | $ | 625 | | $ | 625 | | $ | 1,728 | ||||||||||||
Pandemic restructuring | | | 1,386 | | | 286 | | | 736 | | | 2,408 | ||||||||||||
Total restructuring charges | | $ | 1,864 | | $ | 911 | | $ | 1,361 | | $ | 4,136 |
(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 | | Six Months Ended | | | | | | | ||||||||
| | June 30, | | June 30, | | Three Months Ended | | Six Months Ended | ||||||||||
(in thousands) | | 2021 | | 2020 | | 2021 | | 2020 | | June 30, 2021 |
| June 30, 2021 | ||||||
Severance costs |
| | | | | | | | | | | | | $ | 605 | | $ | 1,493 |
Organizational restructuring | | $ | — | | $ | — | | $ | — | | $ | 1,728 | ||||||
Pandemic restructuring | | | 605 |
| | 2,408 |
| | 1,493 |
| | 2,408 | ||||||
Total severance costs | | | 605 | | | 2,408 | | | 1,493 | | | 4,136 | ||||||
Property disposal costs | | | | | | | | | | | | | | | | | | |
Impairment loss | | | — | | | — | | | 9 | | | — | ||||||
Impairment | | | — | | | 9 | ||||||||||||
Other exit costs | | | 7 | | | — | | | 7 | | | — | | | 7 | | | 7 |
Total property disposal costs |
| | 7 |
| | — |
| | 16 |
| | — | | | 7 | | | 16 |
Other restructuring costs | | | 131 | | | — | | | 131 | | | — | | | 131 | | | 131 |
Total restructuring charges | | $ | 743 | | $ | 2,408 | | $ | 1,640 | | $ | 4,136 | | $ | 743 | | $ | 1,640 |
15.17
13. 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, carryforwardsinterest 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.
20
Effective Tax Rate
The year-to-date effective tax rate for the six months ended June 30, 20212022 differed significantly from our statutory rate primarily due to unrecognized tax benefits and the limitation on executive compensation.
Unrecognized Tax Benefits
As of June 30, 2021,2022, we believe it is reasonably possible that $2.8$2.7 million of our unrecognized tax benefits, including penalties, interest and discontinued operations, will be reduced prior to June 30, 20222023 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.
16.14. Earnings per Share
Basic net income (loss) per common share is computed using the two-class method, which is an earnings allocation formula that determines net income (loss) per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Under the two-class method, basic net income (loss) per common share is determined by dividing net income (loss), after deducting amounts allocated to participating securities, by the weighted average number of common shares outstanding for the period. Participating securities include unvested restricted stock and stock-settled restricted stock units that have nonforfeitable rights to receive dividends or dividend equivalents, whether paid or unpaid. During periods of net loss, 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 net income (loss) per common share is computed using the weighted average number of shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options, performance-based restricted stock units and stock to be issued pursuant to our ESPP unless their effect would be anti-dilutive.
The following table shows the calculation for net income (loss) attributable to common stockholders, which is used in the calculation of basic and diluted net income (loss) per common share:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Net income (loss) | | $ | 8,752 | | $ | (30,381) | | $ | 12,921 | | $ | (91,568) | ||||||||||||
Net income | | $ | 16,746 | | $ | 8,752 | | $ | 18,467 | | $ | 12,921 | ||||||||||||
Less: Earnings attributable to participating securities | |
| (285) | |
| (321) | |
| (454) | |
| (643) | |
| (305) | |
| (285) | |
| (819) | |
| (454) |
Net income (loss) attributable to common stockholders | | $ | 8,467 | | $ | (30,702) | | $ | 12,467 | | $ | (92,211) | ||||||||||||
Net income attributable to common stockholders | | $ | 16,441 | | $ | 8,467 | | $ | 17,648 | | $ | 12,467 |
2118
The following table shows the potential shares of common stock that were included in computing diluted net income (loss) per common share:
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
Weighted average common shares outstanding including participating securities | | 154,047 | | 152,937 | | 153,334 | | 152,750 | | 155,188 | | 154,047 | | 155,005 | | 153,334 |
Less: Weighted average participating securities outstanding |
| (2,014) |
| (2,194) |
| (1,797) |
| (2,122) |
| (2,155) |
| (2,014) |
| (2,148) |
| (1,797) |
Weighted average common shares outstanding used in basic net income (loss) per common share |
| 152,033 |
| 150,743 |
| 151,537 |
| 150,628 | ||||||||
Weighted average common shares outstanding used in basic net income per common share |
| 153,033 |
| 152,033 |
| 152,857 |
| 151,537 | ||||||||
Net dilutive potential common shares issuable: |
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
On exercise of options and vesting of performance-based restricted stock units |
| 169 | | — |
| 159 |
| — | ||||||||
On vesting of restricted stock units |
| 128 | | 169 |
| 123 |
| 159 | ||||||||
On settlement of ESPP shares |
| 1 | | — |
| 3 |
| — |
| 3 | | 1 |
| 2 |
| 3 |
Weighted average common shares outstanding used in diluted net income (loss) per common share |
| 152,203 |
| 150,743 |
| 151,699 |
| 150,628 | ||||||||
Weighted average common shares outstanding used in diluted net income per common share |
| 153,164 |
| 152,203 |
| 152,982 |
| 151,699 |
The following table shows the potential shares of common stock issuable that were excluded from computing diluted net income (loss) per common share as their inclusion would have been anti-dilutive:
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
On exercise of options where exercise price is greater than average market value for the period | | 22 |
| 95 |
| 33 |
| 111 | | — |
| 22 |
| — |
| 33 |
On exercise of options and vesting of performance-based restricted stock units | | — | | 57 | | — | | 57 | ||||||||
On settlement of ESPP shares | | — | | 22 | | — | | 25 | ||||||||
Net dilutive potential common shares issuable | | 22 | | 174 | | 33 | | 193 |
17.15. Derivatives
We are exposed to market risks associated with changes in the variable interest rate of our Credit Facility. We usehave used derivative instruments, in the form of interest rate swaps, to manage our exposure to fluctuations in this variable interest rate and thereby minimize the risks and costs associated with financial activities. We do not use derivative instruments for trading or other speculative purposes.
As of June 30, 2021, we hadIn March 2022, our $300.0 million notional value of interest rate swaps outstanding, which expire in March 2022 and wereexpired. We previously entered into these swaps to offset changes in expected cash flows due to fluctuations in the associated variable interest rates. The counterparties to these derivative agreements are major financial institutions. We monitor the credit quality of these financial institutionsrates and do not expectdesignated them as cash flow hedges. There was no nonperformance by any counterparty although such nonperformance could have a material adverse effect on us. We have noduring the terms of the interest rate swaps and 0 collateral was posted for our derivativethe instruments.
We have designatedPrior to expiration, during the third quarter of 2021, we dedesignated $125.0 million notional value of our interest rate swaps. The fair value of this interest rate swap immediately prior to dedesignation was a liability of $1.6 million. The associated amount in accumulated other comprehensive loss related to this interest rate swap was amortized into interest expense over the remaining term of the swap through March 2022. Changes in the fair value of the dedesignated interest rate swap after dedesignation and prior to expiration were recorded in interest expense.
The remaining $175.0 million notional value of our interest rate swaps were designated as (highly effective) cash flow hedging instruments.instruments until their expiration. Changes in the fair value of cash flow hedging instruments are recognized as a component of other comprehensive income (loss) until the hedged transaction affects earnings. At that time, amounts are reclassified into earnings to interest expense, the same statement of operations line item to which the earnings effect of the hedged item is recorded. Cash flows from derivatives designated as hedges are classified in our condensed consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions unless the derivative contract contains a significant financing element, in which case, the cash settlements for thesethose derivatives are classified as cash flows from financing activities.
2219
We expect the hedging relationship to be highly effective as the interest rate swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate. We estimate that $3.9 million of the deferred pre-tax loss attributable to interest rate swaps included in accumulated other comprehensive loss at June 30, 2021 will be reclassified into earnings as interest expense at then-current values during the next 12 months as the underlying hedged transactions occur.
As of June 30, 2021, the weighted average effective fixed interest rate of our interest rate swaps was 1.8%.
The following table presents the effect of our derivative instruments designated as cash flow hedging instruments on our condensed consolidated balance sheets:
| | | | | | | | | | | | |
(in thousands) |
| June 30, 2021 |
| December 31, 2020 |
| June 30, 2022 |
| December 31, 2021 | ||||
Interest rate swaps designated as cash flow hedging instruments | | | | | | | ||||||
Accrued liabilities | | $ | 3,853 | | $ | 4,810 | | $ | — | | $ | 727 |
Other liabilities | |
| — | |
| 1,527 | ||||||
| | | | | | | ||||||
Interest rate swaps not designated as hedging instruments | | | | | | | ||||||
Accrued liabilities | | | — | | | 523 | ||||||
| | | | | | | ||||||
Total derivative liabilities | | $ | 3,853 | | $ | 6,337 | | $ | — | | $ | 1,250 |
The following table presents the effect of our derivative instruments designated as cash flow hedging instruments on our condensed consolidated statements of operations:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Pre-tax loss recognized in other comprehensive income (loss) | | $ | (79) | | $ | (738) | | $ | (89) | | $ | (8,311) | ||||||||||||
Total amount of interest expense in which the effects of cash flow hedges and undesignated interest rate swaps are recorded | | $ | 24,456 | | $ | 25,958 | | $ | 49,702 | | $ | 57,203 | ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Interest rate swaps designated as cash flow hedging instruments | | | | | | | | | | | | | ||||||||||||
Pre-tax loss recognized in other comprehensive income | | $ | — | | $ | (79) | | $ | (512) | | $ | (89) | ||||||||||||
Pre-tax loss reclassified from accumulated other comprehensive loss into interest expense | |
| (1,302) | |
| (1,073) | |
| (2,573) | |
| (1,322) | |
| — | |
| (1,302) | |
| (1,758) | |
| (2,573) |
Total amount of interest expense in which the effects of cash flow hedges are recorded | | | 25,958 | | | 25,778 | | | 57,203 | | | 55,443 | ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Interest rate swaps not designated as hedging instruments | | | | | | | | | | | | | ||||||||||||
Gain recognized in interest expense | | $ | — | | $ | — | | $ | 523 | | $ | — |
See Note 108 (“Accumulated Other Comprehensive Loss”) and Note 1816 (“Fair Value Measurements”) for further details on our derivative instruments.
18.16. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
OnInvestment in ECOTEC
During the three months ended June 30, 2022, we acquired a quarterly basis,14% equity interest in ECOTEC. To provide for greater transparency, we elected the fair value option to account for this investment. The fair value is internally calculated using a market approach and is classified as a Level 3 measurement. At June 30, 2022, the fair value of our equity interest in ECOTEC was as follows:
| | | |
(in thousands) |
| June 30, 2022 | |
Investment in ECOTEC | | $ | 8,000 |
20
Interest Rate Swaps
Prior to their expiration in the first quarter of 2022, our interest rate swap derivative instruments arewere valued quarterly based on the income approach (discounted cash flow) using market observable inputs, including LIBOR forward curves. These fair value measurements arewere classified as Level 2. The following table presents our derivative position measured at fair value on a recurring basis, with pricing levels as of the date of valuation:
| | | | | | | | | | | | |
(in thousands) |
| June 30, 2021 |
| December 31, 2020 |
| June 30, 2022 |
| December 31, 2021 | ||||
Derivative liability | | $ | 3,853 | | $ | 6,337 | ||||||
Derivative liabilities | | $ | 0 | | $ | 1,250 |
23
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Goodwill
In the first quarter of 2020, we determined that the significant deterioration in global macroeconomic conditions caused by the COVID-19 pandemic was an indicator of potential impairment of our goodwill, and we performed a quantitative impairment test as of March 31, 2020 that resulted in a $99.8 million impairment of our goodwill. Significant estimates used in our impairment analysis included cash flow forecasts, our estimate of the market’s weighted average cost of capital and market multiples, which are Level 3 inputs. See Note 7 (“Goodwill”) for further details of the valuation methodology used in connection with the goodwill impairment.
Compressors
During the six months ended June 30, 2021,2022, we recorded nonrecurring fair value measurements related to our idle and previously-culled compressors. Our estimate of the compressors’ fair value was primarily based on the expected net sale proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use. We discounted the expected proceeds, net of selling and other carrying costs, using a weighted average disposal period of 4 years. These fair value measurements are classified as Level 3. The following table presents the fair value of our compressors impaired during 2022 and 2021 and 2020:was as follows:
| | | | | | | | | | | | |
(in thousands) |
| June 30, 2021 |
| December 31, 2020 |
| June 30, 2022 |
| December 31, 2021 | ||||
Impaired compressors | | $ | 3,462 | | $ | 19,046 | | $ | 1,010 | | $ | 4,380 |
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 June 30, 2022 | | $0 - $621 per horsepower | | $41 per horsepower |
As of December 31, 2021 | | $0 - $621 per horsepower | | $ |
|
|
|
|
|
(1) | Calculated based on an estimated discount for market liquidity of |
See Note 1311 (“Long-Lived and Other Asset Impairment”) for further details.
Other Financial Instruments
The carrying amounts of our cash, receivables and payables approximate fair value due to the short-term nature of those instruments.
The carrying amount of borrowings outstanding under our Credit Facility approximates fair value due to its variable interest rate. The fair value of these outstanding borrowings is a Level 3 measurement.
The fair value of our fixed rate debt is estimated using yields observable in active markets, which are Level 2 inputs, and was as follows:
| | | | | | | | | | | | |
(in thousands) |
| June 30, 2021 |
| December 31, 2020 |
| June 30, 2022 |
| December 31, 2021 | ||||
Carrying amount of fixed rate debt (1) | | $ | 1,295,990 | | $ | 1,295,867 | | $ | 1,296,705 | | $ | 1,296,325 |
Fair value of fixed rate debt | |
| 1,366,000 | |
| 1,371,000 | |
| 1,161,000 | |
| 1,361,000 |
(1) | Carrying amounts are shown net of unamortized |
2421
19.17. Stock-Based Compensation
We recognize stock-based compensation expense related to restricted stock awards, restricted stock units, performance-based restricted stock units and shares issued under our ESPP.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Equity award expense | | $ | 3,178 | | $ | 2,772 | | $ | 5,841 | | $ | 5,778 | | $ | 2,970 | | $ | 3,178 | | $ | 6,037 | | $ | 5,841 |
Liability award expense | |
| 408 | |
| 842 | |
| 994 | |
| 294 | |
| 377 | |
| 408 | |
| 880 | |
| 994 |
Total stock-based compensation expense | | $ | 3,586 | | $ | 3,614 | | $ | 6,835 | | $ | 6,072 | | $ | 3,347 | | $ | 3,586 | | $ | 6,917 | | $ | 6,835 |
The following table presents the activity of our stock-settled restricted stock awards, restricted stock units and performance-based restricted stock units and our cash-settled performance-based restricted stock unitsactivity during the six months ended June 30, 2021:2022:
| | | | | | | | | | |
| | | | Weighted | | | | Weighted | ||
| | | | Average | | | | Average | ||
| | | | Grant Date | | | | Grant Date | ||
| | | | Fair Value | | Shares | | Fair Value | ||
(shares in thousands) |
| Shares |
| Per Share | ||||||
Non-vested, December 31, 2020 |
| 2,446 | | $ | 9.69 | |||||
|
| (in thousands) |
| Per Share | ||||||
Non-vested restricted stock, December 31, 2021 |
| 2,578 | | $ | 10.35 | |||||
Granted |
| 1,279 | |
| 11.22 |
| 1,861 | |
| 9.03 |
Vested |
| (620) | |
| 9.36 |
| (1,106) | |
| 10.31 |
Canceled |
| (41) | |
| 9.82 |
| (188) | |
| 9.35 |
Non-vested, June 30, 2021 (1) |
| 3,064 | |
| 10.39 | |||||
Non-vested restricted stock, June 30, 2022 (1) |
| 3,145 | |
| 9.64 |
(1) | Comprised of |
As of June 30, 2021,2022, we expect $20.0$21.3 million of unrecognized compensation cost related to our non-vested awards and units to be recognized over the weighted average period of 2.02.1 years.
20.18. Commitments and Contingencies
Performance BondsInsurance Matters
InOur 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 normal courseindustry 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 businessthe relatively high per-incident deductibles we have issued performance bondsabsorb under our insurance arrangements for these risks. Losses up to various state authorities that ensure paymentthe 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.
22
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 June 30, 20212022 and December 31, 2020,2021, we accrued $5.4had $3.9 million and $5.6$5.8 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.
25
Subjectour sales and use tax audits advanced from the audit review phase to the provisionscontested hearing phase. We had $0.6 million accrued for this audit as of the tax matters agreement between Exterran Corporationboth June 30, 2022 and us, both parties agreed to indemnify the primary obligor of any return for tax periods beginning before and ending before or after the Spin-off (including any ongoing or future amendments and audits for these returns) for the portion of the tax liability (including interest and penalties) that relates to their respective operations reported in the filing. The tax contingencies mentioned above relate to tax matters for which we are responsible in managing the audit. As of December 31, 2020, we had an indemnification liability (including penalties and interest), in addition to the tax contingency above, of $1.6 million for our share of non-income-based tax contingencies related to audits being managed by Exterran Corporation. During the six months ended June 30, 2021, these audits were settled and our indemnification liability was reduced to 0.
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.2021.
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.
21.19. Related Party Transactions
In connection with the closing of the Elite Acquisition, we issued 21.7 million shares of our common stock to JDH Capital,Old Ocean Reserves, an affiliate of our customer Hilcorp. AsHilcorp, has the right to designate 1 director to serve on our Board of Directors as long as JDH Capital, togetherOld Ocean Reserves or its successors (together with affiliates of Hilcorp,its affiliates) owns at least 7.5% of our outstanding common stock, it will have the right to designate 1 director to our Board of Directors.stock. As of June 30, 2021, JDH Capital2022, Old Ocean Reserves owned 11.1%10.7% of our outstanding common stock.
Jeffery D. Hildebrand, founder and executive chairman of Hilcorp, was appointed Director in August 2019 and served until his resignation on July 29, 2020, at which time Jason C. Rebrook, PresidentChief Executive Officer and Director of Harvest Midstream Company, a Hilcorp was appointed Director to fill the resulting vacancy. Mr. Hildebrand did 0t receive compensation in his roleaffiliate, has served as Director and Mr. Rebrook received 0 compensation in his role as Director inOld Ocean Reserves’ representative director since July 2020. In December 2020, the Board of Directors voted to approve the payment of Director cash and equity compensation to Mr. Rebrook beginning in 2021.
Revenue from Hilcorp and affiliates was $9.6$9.2 million and $10.2$9.6 million during the three months ended June 30, 2022 and 2021, and 2020, respectively, and $18.6 million and $19.1 million and $20.8 million during the six months ended June 30, 2022 and 2021, and 2020, respectively.respectively. Accounts receivable, net due from Hilcorp and affiliates was $4.4$4.3 million and $3.9$3.7 million as of June 30, 20212022 and December 31, 2020,2021, respectively.
26
22.20. Segments
We manage our business segments primarily based on the type of product or service provided. We have 2 segments which we operate within the U.S.: contract operations and aftermarket services. The contract operations segment primarily provides natural gas compression services to meet specific customer requirements. The aftermarket services segment provides a full range of services to support the compression needs of customers, from parts sales and normal maintenance services to full operation of a customer’s owned assets.
We evaluate the performance of our segments based on gross margin for each segment. Revenue includes only sales to external customers.
| | | | | | | | | |
|
| Contract |
| Aftermarket |
| | | ||
(in thousands) |
| Operations |
| Services |
| Total | |||
Three months ended June 30, 2021 |
| |
|
| |
|
| |
|
Revenue | | $ | 163,865 | | $ | 31,750 | | $ | 195,615 |
Gross margin | |
| 102,478 | |
| 4,260 | |
| 106,738 |
| | | | | | | | | |
Three months ended June 30, 2020 | |
|
| |
|
| |
|
|
Revenue | | $ | 187,949 | | $ | 32,367 | | $ | 220,316 |
Gross margin | |
| 124,559 | |
| 3,681 | |
| 128,240 |
| | | | | | | | | |
Six months ended June 30, 2021 | |
|
| |
|
| |
|
|
Revenue | | $ | 329,899 | | $ | 61,147 | | $ | 391,046 |
Gross margin | |
| 207,147 | |
| 7,874 | |
| 215,021 |
| | | | | | | | | |
Six months ended June 30, 2020 | |
|
| |
|
| |
|
|
Revenue | | $ | 394,923 | | $ | 75,090 | | $ | 470,013 |
Gross margin | |
| 252,882 | |
| 11,413 | |
| 264,295 |
The following table reconciles total gross margin to income (loss) before income taxes:
| | | | | | | | | | | | |
| | Three Months Ended |
| Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Total gross margin | | $ | 106,738 | | $ | 128,240 | | $ | 215,021 | | $ | 264,295 |
Less: | |
|
| |
|
| |
|
| |
|
|
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) |
27
23. Subsequent Events
July 2021 Dispositions
In July 2021, we completed sales consisting of certain contract operations customer service agreements and approximately 575 compressors, comprising approximately 100,000 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. Total cash consideration for the sales will approximate $61.0 million and a gain on the sales of approximately $13.5 million will be recognized in the third quarter of 2021.
The proceeds received in July from the sales were used to repay borrowings outstanding under our Credit Facility. On July 1, 2021, we dedesignated $125.0 million notional value of our interest rate swaps. Amounts previously recognized in accumulated other comprehensive loss will remain there until the expected cash flows impact earnings or become probable of not occurring. Changes in the value of the dedesignated interest rate swaps will be recorded in earnings.
2823
| | | | | | | | | |
|
| Contract |
| Aftermarket |
| | | ||
(in thousands) |
| Operations |
| Services |
| Total | |||
Three months ended June 30, 2022 |
| |
|
| |
|
| |
|
Revenue | | $ | 166,298 | | $ | 49,530 | | $ | 215,828 |
Gross margin | |
| 97,943 | |
| 7,820 | |
| 105,763 |
| | | | | | | | | |
Three months ended June 30, 2021 | |
|
| |
|
| |
|
|
Revenue | | $ | 163,865 | | $ | 31,750 | | $ | 195,615 |
Gross margin | |
| 102,478 | |
| 4,260 | |
| 106,738 |
| | | | | | | | | |
Six months ended June 30, 2022 | |
|
| |
|
| |
|
|
Revenue | | $ | 329,954 | | $ | 83,075 | | $ | 413,029 |
Gross margin | |
| 197,098 | |
| 12,727 | |
| 209,825 |
| | | | | | | | | |
Six months ended June 30, 2021 | |
|
| |
|
| |
|
|
Revenue | | $ | 329,899 | | $ | 61,147 | | $ | 391,046 |
Gross margin | |
| 207,147 | |
| 7,874 | |
| 215,021 |
The following table reconciles total gross margin to income before income taxes:
| | | | | | | | | | | | |
| | Three Months Ended |
| Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Total gross margin | | $ | 105,763 | | $ | 106,738 | | $ | 209,825 | | $ | 215,021 |
Less: | |
|
| |
|
| |
|
| |
|
|
Selling, general and administrative | |
| 27,691 | |
| 26,077 | |
| 55,464 | |
| 51,161 |
Depreciation and amortization | |
| 41,356 | |
| 44,193 | |
| 84,395 | |
| 89,905 |
Long-lived and other asset impairment | |
| 4,647 | |
| 2,960 | |
| 12,063 | |
| 10,033 |
Restructuring charges | | | — | | | 743 | | | — | | | 1,640 |
Interest expense | |
| 24,456 | |
| 25,958 | |
| 49,702 | |
| 57,203 |
Gain on sale of assets, net | | | (18,948) | | | (3,124) | | | (21,060) | | | (14,156) |
Other (income) expense, net | |
| 497 | |
| (82) | |
| 533 | |
| (1,971) |
Income before income taxes | | $ | 26,064 | | $ | 10,013 | | $ | 28,728 | | $ | 21,206 |
21. Impact of Hurricane
In August 2021, Hurricane Ida caused operational disruptions, damage to compressors and a temporary shutdown of facilities in Louisiana that negatively impacted our financial performance in the quarter. At December 31, 2021, we had an insurance recovery receivable of $2.8 million related to the facility and compressor damages, which we received in cash in the first quarter of 2022. The remaining portion of our insurance claim pertaining to business interruption is in process. Any amount recovered will not be subject to an additional deductible and will be recognized upon notice of final settlement.
22. Subsequent Event
On July 1, 2022, we acquired an additional 5% equity interest in ECOTEC, which increased our total ownership interest to 19%.
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q and in conjunction with our 20202021 Form 10-K.
Overview
We are an energy infrastructure company with a pure-playprimary focus on midstream natural gas compression. We are the leading provider of natural gas compression services to customers in the oil and natural gasenergy industry throughout the U.S. and a leading supplier of aftermarket services to customers that own compression equipment in the U.S. We operate in two business segments: contract operations and aftermarket services. Our contract operations services primarily include designing, sourcing, owning, installing, operating, servicing, repairing and maintaining our owned fleet of natural gas compression equipment to provide natural gas compression services to our customers. In our aftermarket services business, we sell parts and components and provide operations, maintenance, overhaul and reconfiguration services to customers who own compression equipment.
Recent Business Developments
February 2021May 2022 Disposition
On February 10, 2021,
In May 2022, we completed the sale of certain contract operations customer service agreements and approximately 300380 compressors, comprising approximately 40,00070,000 horsepower, used to provide compression services under those agreements, as well as other assets used to support the operations. We received cash consideration of $55.5 million for the sale and recorded a gain on the sale of $6.0$16.7 million during the three and six months ended June 30, 2021.2022. See Note 32 (“Business Transactions”) to our Financial Statements for further details of this transaction.
Investment in ECOTEC
COVID-19 Pandemic
BeginningIn April 2022, we agreed to acquire for cash a 25% equity interest in the first quarterECOTEC, a company specializing in methane emissions monitoring and management. As of 2020, the COVID-19 pandemic caused a deterioration in global macroeconomic conditions, including a collapse in the demand for natural gas and crude oil coupled with an oversupply of crude oil, which led to substantial spending cuts byJune 30, 2022, our customers and a decline in natural gas and crude oil production. This global response to the pandemic has adversely impacted our revenue and cash flows. Though demand has shown improvement since the lows reached in the second quarter of 2020 as economies have reopened and vaccine rollout is underway globally, the potential for additional surges and variants of the disease remains and as such, uncertainty still exists around the timing and magnitude of a full economic recovery.
The key driver of our business is the production of U.S. natural gas and crude oil. Changes in natural gas and crude oil production spending therefore typically result in changes in demand for our services. According to the U.S. Energy Information Administration’s July 2021 Short-Term Energy Outlook, U.S. dry natural gas and crude oil production is expected to increase 1% and decline 2%, respectively, in 2021 as producers limit drilling and completion activity to achieve maintenance levels of production and cash flows in the course of the COVID-19 pandemic. U.S. production of both commodities is expected to increase in 2022 at a rate of 2% for dry natural gas and 7% for crude oil.
Our customers substantially cut spending and activity beginning in the second quarter of 2020 as a result of the significant declines in natural gas and crude oil prices and demand. Our horsepower, utilization and revenue have experienced declines and are expected to remain at lower levels in 2021 as compared to the first quarter of 2020 and periods prior in both our contract operations and aftermarket services businesses. However, U.S. onshore activity is on the rise, which we expect will provide prospects for growth in our businesses beginning as early as the second half of 2021.
29
The impact of the COVID-19 pandemic on our results is primarily visible in the $99.8 million non-cash impairment of goodwill and the impairment’s resulting $22.7 million tax benefit in the first quarter of 2020. Revenue, cost of sales, SG&A, long-lived and other asset impairment and restructuring charges have also been significantly impacted.ownership interest was 14%. See “Financial Results of Operations” below and Note 75 (“Goodwill”), Note 13 (“Long-Lived and Other Asset Impairment”) and Note 14 (“Restructuring Charges”Equity Investments”) to our Financial Statements for further discussion.details.
Operating Highlights
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended |
| | Three Months Ended | | | Six Months Ended |
| ||||||||
| | June 30, | | | June 30, |
| | June 30, | | | June 30, |
| ||||||||
(in thousands) |
| 2021 |
| 2020 |
|
| 2021 |
| 2020 |
| ||||||||||
(horsepower in thousands) |
| 2022 |
| 2021 |
|
| 2022 |
| 2021 |
| ||||||||||
Total available horsepower (at period end)(1) |
| 4,041 |
| 4,203 |
|
| 4,041 |
| 4,203 | |
| 3,810 |
| 4,041 |
|
| 3,810 |
| 4,041 | |
Total operating horsepower (at period end)(2) | | 3,295 |
| 3,613 |
| | 3,295 |
| 3,613 | | | 3,322 |
| 3,295 |
| | 3,322 |
| 3,295 | |
Average operating horsepower | | 3,316 |
| 3,752 |
| | 3,339 |
| 3,826 | | | 3,297 |
| 3,316 |
| | 3,277 |
| 3,339 | |
Horsepower utilization: | |
|
|
|
| |
|
|
| | |
|
|
|
| |
|
|
| |
Spot (at period end) | | 82 | % | 86 | % | | 82 | % | 86 | % | | 87 | % | 82 | % | | 87 | % | 82 | % |
Average | | 82 | % | 86 | % | | 82 | % | 87 | % | | 86 | % | 82 | % | | 85 | % | 82 | % |
(1) | Defined as idle and operating horsepower. |
(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.
25
We define gross margin as total revenue less cost of sales (excluding depreciation and amortization). Gross margin is included as a supplemental disclosure because it is a primary measure used by our management to evaluate the results of revenue and cost of sales (excluding depreciation and amortization), which are key components of our operations. We believe gross margin is important because it focuses on the current operating performance of our operations and excludes the impact of the prior historical costs of the assets acquired or constructed that are utilized in those operations, the indirect costs associated with our SG&A activities, our financing methods and income taxes. In addition, depreciation and amortization may not accurately reflect the costs required to maintain and replenish the operational usage of our assets and therefore may not portray the costs of current operating activity. As an indicator of our operating performance, gross margin should not be considered an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP. Our gross margin may not be comparable to a similarly-titled measure of other entities because other entities may not calculate gross margin in the same manner.
Gross margin has certain material limitations associated with its use as compared to net income (loss). These limitations are primarily due to the exclusion of SG&A, depreciation and amortization, impairments, restructuring charges, interest expense, debt extinguishment loss, (gain) loss on sale of assets, net, other (income) loss,expense, net and provision for (benefit from) 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.
30
The following table reconciles net income (loss) to gross margin:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Net income (loss) | | $ | 8,752 | | $ | (30,381) | | $ | 12,921 | | $ | (91,568) | ||||||||||||
Net income | | $ | 16,746 | | $ | 8,752 | | $ | 18,467 | | $ | 12,921 | ||||||||||||
Selling, general and administrative | |
| 26,077 | |
| 28,745 | |
| 51,161 | |
| 59,371 | |
| 27,691 | |
| 26,077 | |
| 55,464 | |
| 51,161 |
Depreciation and amortization | |
| 44,193 | |
| 48,849 | |
| 89,905 | |
| 98,671 | |
| 41,356 | |
| 44,193 | |
| 84,395 | |
| 89,905 |
Long-lived and other asset impairment | |
| 2,960 | |
| 55,210 | |
| 10,033 | |
| 61,405 | |
| 4,647 | |
| 2,960 | |
| 12,063 | |
| 10,033 |
Goodwill impairment | | | — | | | — | | | — | | | 99,830 | ||||||||||||
Restructuring charges | | | 743 | | | 2,408 | | | 1,640 | | | 4,136 | | | — | | | 743 | | | — | | | 1,640 |
Interest expense | |
| 25,958 | |
| 25,778 | |
| 57,203 | |
| 55,443 | |
| 24,456 | |
| 25,958 | |
| 49,702 | |
| 57,203 |
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) | ||||||||||||
Provision for (benefit from) income taxes | |
| 1,261 | |
| (8,091) | |
| 8,285 | |
| (24,044) | ||||||||||||
Gain on sale of assets, net | | | (18,948) | | | (3,124) | | | (21,060) | | | (14,156) | ||||||||||||
Other (income) expense, net | |
| 497 | |
| (82) | |
| 533 | |
| (1,971) | ||||||||||||
Provision for income taxes | |
| 9,318 | |
| 1,261 | |
| 10,261 | |
| 8,285 | ||||||||||||
Gross margin | | $ | 106,738 | | $ | 128,240 | | $ | 215,021 | | $ | 264,295 | | $ | 105,763 | | $ | 106,738 | | $ | 209,825 | | $ | 215,021 |
Results of Operations: Summary of Results
Revenue
Revenue was $195.6$215.8 million and $220.3$195.6 million during the three months ended June 30, 2022 and 2021, respectively, and 2020,$413.0 million and $391.0 million and $470.0 million during the six months ended June 30, 20212022 and 2020,2021, respectively. The decreasesincreases in consolidated revenue during these periods were primarily due to decreases inincreased revenue from our contract operations and aftermarket services businesses.business. See “Contract Operations” and “Aftermarket Services” below for further details.
Net Income (Loss)
We had netNet income of $8.8was $16.7 million and a net loss of $30.4$8.8 million during the three months ended June 30, 2022 and 2021, and 2020, respectively, and net income of $12.9 million and a net loss of $91.6 million during the six months ended June 30, 2021 and 2020, respectively.
The change from net loss to net income during the three months ended June 30, 2021 compared to the three months ended June 30, 2020increase was primarily driven by decreasesincreases in long-lived and other asset impairment, depreciation and amortization, debt extinguishment loss and SG&A as well as the change from a net loss to a net gain on sale of assets.assets, net and gross margin from our aftermarket services business, as well as decreases in depreciation and amortization and interest expense. These changes were partially offset by a decrease in gross margin from our contract operations business and the change from a benefit from to aincreases in our provision for income taxes.
The change from net loss to net income during the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily driven by decreases in goodwill impairment,taxes, SG&A and long-lived and other asset impairment, depreciation and amortization and SG&A as well as an increase in gain on sale of assets, net. These changes were partially offset by decreases in gross margin from our contract operations and aftermarket services businesses and the change from a benefit from to a provision for income taxes.impairment.
3126
Net income was $18.5 million and $12.9 million during the six months ended June 30, 2022 and 2021, respectively. The increase was primarily driven by increases in gain on sale of assets, net and gross margin from our aftermarket services business, as well as decreases in interest expense, depreciation and amortization and restructuring charges. These changes were partially offset by a decrease in gross margin from our contract operations business, increases in SG&A, long-lived and other asset impairment and provision for income taxes and a change from net other income to net other expense.
Results of Operations: Three Months Ended June 30, 20212022 Compared to Three Months Ended June 30, 20202021
Contract Operations
| | | | | | | | | | | | | | | | | | |
|
| Three Months Ended | | | |
| Three Months Ended | | | | ||||||||
| | June 30, | | Increase | | | June 30, | | Increase | | ||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| (Decrease) | |
| 2022 |
| 2021 |
| (Decrease) | | ||||
Revenue | | $ | 163,865 | | $ | 187,949 | | (13) | % | | $ | 166,298 | | $ | 163,865 | | 1 | % |
Cost of sales (excluding depreciation and amortization) | |
| 61,387 | |
| 63,390 | | (3) | % | |
| 68,355 | |
| 61,387 | | 11 | % |
Gross margin | | $ | 102,478 | | $ | 124,559 | | (18) | % | | $ | 97,943 | | $ | 102,478 | | (4) | % |
Gross margin percentage (1) | |
| 63 | % |
| 66 | % | (3) | % | |
| 59 | % |
| 63 | % | (4) | % |
(1) | Defined as gross margin divided by revenue. |
Revenue decreasedincreased primarily due to returnsan increase in contract operations rates in response to improving market conditions and units returning to operating status from standby, which was partially offset by the impact of horsepower amidst the market downturn and the strategic disposition of 147,000 horsepower in 2020 and the first2021. Adjusting for these dispositions, operating horsepower increased quarter of 2021.over quarter.
GrossDespite this increase in revenue, gross margin decreased due to the decrease in revenue, however, the decline was moderately mitigated by the decreasea larger increase in cost of sales. The lower operating horsepower discussed above drove a decrease inStart-up, maintenance, freightlube oil and other operating expenses. The impact of horsepower returns was partially offsetexpenses increased, driven by an increase inhigher pricing throughout our supply chain, as well as increased volumes associated with unit redeployment as customer activity accelerated. Partially offsetting these cost increases was the decrease in expense attributable to the second quarter of 2021, whichhorsepower sold in turn led to an increase in mobilization expense.2021.
Aftermarket Services
| | | | | | | | | | | | | | | | | | |
|
| Three Months Ended |
| | |
| Three Months Ended |
| | | ||||||||
| | June 30, | | Increase | | | June 30, | | Increase | | ||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| (Decrease) | |
| 2022 |
| 2021 |
| (Decrease) | | ||||
Revenue | | $ | 31,750 | | $ | 32,367 |
| (2) | % | | $ | 49,530 | | $ | 31,750 |
| 56 | % |
Cost of sales (excluding depreciation and amortization) | |
| 27,490 | |
| 28,686 |
| (4) | % | |
| 41,710 | |
| 27,490 |
| 52 | % |
Gross margin | | $ | 4,260 | | $ | 3,681 |
| 16 | % | | $ | 7,820 | | $ | 4,260 |
| 84 | % |
Gross margin percentage | |
| 13 | % |
| 11 | % | 2 | % | |
| 16 | % |
| 13 | % | 3 | % |
Revenue decreasedincreased primarily due to the impact of the sale of our turbocharger business in July 2020. Partially offsetting this decrease was an increaseincreases in parts sales and service activities, as a result ofthe market recovery drove an increase in customer demand beginning indemand.
Gross margin increased due to the second quarter of 2021.
Despite the decreaseincrease in revenue gross margin improved due to a larger decrease in cost of sales. The decreaseand despite an increase in cost of sales, which was primarily driven by the result of the sale of our turbocharger business. Excluding the impact of the July 2020 Disposition, cost of sales was flat quarter over quarter and gross margin increased as a result of the increasesame increases in parts sales revenue mentioned above.and service activities.
3227
Costs and Expenses
| | | | | | | | | | | | |
|
| Three Months Ended |
| Three Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
Selling, general and administrative | | $ | 26,077 | | $ | 28,745 | | $ | 27,691 | | $ | 26,077 |
Depreciation and amortization | |
| 44,193 | |
| 48,849 | |
| 41,356 | |
| 44,193 |
Long-lived and other asset impairment | |
| 2,960 | |
| 55,210 | |
| 4,647 | |
| 2,960 |
Restructuring charges | | | 743 | | | 2,408 | | | — | | | 743 |
Interest expense | |
| 25,958 | |
| 25,778 | |
| 24,456 | |
| 25,958 |
Debt extinguishment loss | | | — | | | 3,971 | ||||||
(Gain) loss on sale of assets, net | | | (3,124) | | | 2,189 | ||||||
Other income, net | |
| (82) | |
| (438) | ||||||
Gain on sale of assets, net | | | (18,948) | | | (3,124) | ||||||
Other (income) expense, net | |
| 497 | |
| (82) |
Selling, general and administrative. The decreaseincrease in SG&A was primarily due to a $2.0$0.7 million decreaseincrease in bad debt expense a $0.4 million decrease in sales and use tax and a $0.3$0.7 million decreaseincrease in compensationinformation technology expense, which largely consisted of increased service agreement costs and benefits.amortization of capitalized implementation costs related to the substantial completion of our process and technology transformation project at the end of 2021.
Depreciation and amortization. The decrease in depreciation and amortization expense was primarily due to a decrease in depreciation expense resulting from assets reaching the end of their depreciable lives and the impact of compression and other asset impairments and sales during 2020 and early 2021 and a decrease in amortization expense as certain intangible assets reached the end of their useful lives.sales. These decreases were partially offset by an increase in depreciation expense associated with fixed asset additions during 2020 and early 2021.additions.
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. In addition, we evaluate for impairment idle units that have been culled from our compression fleet in prior years and are available for sale. See Note 1311 (“Long-Lived and Other Asset Impairment”) to our Financial Statements for further details. The following table presents the results of our compression fleet impairment review, as recorded in our contract operations segment:
| | | | | | | | | | | | |
|
| Three Months Ended |
| Three Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
Idle compressors retired from the active fleet |
| | 45 |
| | 450 |
| | 30 |
| | 45 |
Horsepower of idle compressors retired from the active fleet |
| | 13,000 |
| | 184,000 |
| | 26,000 |
| | 13,000 |
Impairment recorded on idle compressors retired from the active fleet | | $ | 2,832 | | $ | 55,210 | | $ | 4,647 | | $ | 2,832 |
Restructuring charges. Restructuring charges of $0.7 million and $2.4 million during the three months ended June 30, 2021 and 2020, respectively, primarily consisted of severance costs related to our pandemic restructuring activities. See Note 1412 (“Restructuring Charges”) to our Financial Statements for further details.
Interest expense. InterestThe decrease in interest expense was flatprimarily due to an increase in the weighted average effective interest rate and an offsettinga decrease in the average outstanding balance of long-term debt.
Debt extinguishment loss. We recorded a debt extinguishment loss of $4.0 million during the three months ended June 30, 2020 as a result of the redemption of the 2022 Notes. See Note 9 (“Long-Term Debt”) to our Financial Statements for further details.
(Gain) lossGain on sale of assets, net. The changeincrease in (gain) lossgain on sale of assets, net was primarily due to a $2.1the $16.7 million gain on the May 2022 Disposition and gains of $1.8 million recognized on other compression assets sold during the three months ended June 30, 2021,2022, compared to a $2.9gains of $2.1 million lossand $1.1 million recognized on sales of compression assets soldand transportation and shop assets, respectively, during the three months ended June 30, 2020.2021.
3328
Provision for (Benefit from) Income Taxes
| | | | | | | | | | | | | | | | | | |
|
| Three Months Ended |
| | |
| Three Months Ended |
| | | ||||||||
| | June 30, | | Increase | | | June 30, | | Increase | | ||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| (Decrease) | |
| 2022 |
| 2021 |
| (Decrease) | | ||||
Provision for (benefit from) income taxes | | $ | 1,261 | | $ | (8,091) |
| (116) | % | |||||||||
Provision for income taxes | | $ | 9,318 | | $ | 1,261 |
| 639 | % | |||||||||
Effective tax rate | |
| 13 | % |
| 21 | % | (8) | % | |
| 36 | % |
| 13 | % | 23 | % |
The change from a benefit from to aincrease in provision for income taxes was primarily due to the tax effect of the increase in book income during the three months ended June 30, 20212022 compared to the three months ended June 30, 2020.2021.
Results of Operations: Six Months Ended June 30, 20212022 Compared to Six Months Ended June 30, 20202021
Contract Operations
| | | | | | | | | | | | | | | | | | |
|
| Six Months Ended | | | |
| Six Months Ended | | | | ||||||||
| | June 30, | | Increase | | | June 30, | | Increase | | ||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| (Decrease) | |
| 2022 |
| 2021 |
| (Decrease) | | ||||
Revenue | | $ | 329,899 | | $ | 394,923 | | (16) | % | | $ | 329,954 | | $ | 329,899 | | — | % |
Cost of sales (excluding depreciation and amortization) | |
| 122,752 | |
| 142,041 | | (14) | % | |
| 132,856 | |
| 122,752 | | 8 | % |
Gross margin | | $ | 207,147 | | $ | 252,882 | | (18) | % | | $ | 197,098 | | $ | 207,147 | | (5) | % |
Gross margin percentage | |
| 63 | % |
| 64 | % | (1) | % | |
| 60 | % |
| 63 | % | (3) | % |
Revenue decreasedwas unchanged primarily due to returns of horsepower and a decreasean increase in contract operations rates amidstin response to improving market conditions and units returning to operating status from standby, and the market downturn, as well asoffsetting impact of the strategic disposition of 147,000 horsepower in 2020 and the first quarter of 2021. Adjusting for these dispositions, operating horsepower increased year over year.
GrossWith revenue unchanged, gross margin decreased due towith the decrease in revenue, however, the decline was significantly mitigated by the decreaseincrease in cost of sales. The lower operating horsepower discussed above drove a decrease inStart-up, maintenance, lube oil freight and other operating expenses.expenses increased, driven by higher pricing throughout our supply chain, as well as increased volumes associated with unit redeployment as customer activity accelerated. Partially offsetting these cost increases was the decrease in expense attributable to the horsepower sold in 2021.
Aftermarket Services
| | | | | | | | | | | | | | | | | | |
|
| Six Months Ended |
| | |
| Six Months Ended |
| | | ||||||||
| | June 30, | | Increase | | | June 30, | | Increase | | ||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| (Decrease) | |
| 2022 |
| 2021 |
| (Decrease) | | ||||
Revenue | | $ | 61,147 | | $ | 75,090 |
| (19) | % | | $ | 83,075 | | $ | 61,147 |
| 36 | % |
Cost of sales (excluding depreciation and amortization) | |
| 53,273 | |
| 63,677 |
| (16) | % | |
| 70,348 | |
| 53,273 |
| 32 | % |
Gross margin | | $ | 7,874 | | $ | 11,413 |
| (31) | % | | $ | 12,727 | | $ | 7,874 |
| 62 | % |
Gross margin percentage | |
| 13 | % |
| 15 | % | (2) | % | |
| 15 | % |
| 13 | % | 2 | % |
Revenue decreasedincreased primarily due to decreasesincreases in parts sales and service activities, and parts sales, which were primarily driven by reduced customer demand and customer deferral of maintenance activities amidstas the market downturn, as well as the impact of the sale of our turbocharger businessrecovery drove an increase in July 2020.customer demand.
Gross margin decreasedincreased due to the decreaseincrease in revenue however, the decline was largely mitigated by the decrease in cost of sales. The decreaseand despite an increase in cost of sales, which was primarily driven by the same decreasesincreases in service activities and parts sales discussed above and the impact of the July 2020 Disposition.service activities.
3429
Costs and Expenses
| | | | | | | | | | | | |
|
| Six Months Ended |
| Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
Selling, general and administrative | | $ | 51,161 | | $ | 59,371 | | $ | 55,464 | | $ | 51,161 |
Depreciation and amortization | |
| 89,905 | | | 98,671 | |
| 84,395 | | | 89,905 |
Long-lived and other asset impairment | |
| 10,033 | | | 61,405 | |
| 12,063 | | | 10,033 |
Goodwill impairment | | | — | | | 99,830 | ||||||
Restructuring charges | | | 1,640 | | | 4,136 | | | — | | | 1,640 |
Interest expense | |
| 57,203 | | | 55,443 | |
| 49,702 | | | 57,203 |
Debt extinguishment loss | |
| — | | | 3,971 | ||||||
Gain on sale of assets, net | | | (14,156) | | | (1,927) | | | (21,060) | | | (14,156) |
Other income, net | |
| (1,971) | | | (993) | ||||||
Other (income) expense, net | |
| 533 | | | (1,971) |
Selling, general and administrative. The decreaseincrease in SG&A was primarily due to a $2.5$1.8 million decrease in bad debt expense, a $2.4 million decreaseincrease in sales and use tax a $1.6 million decreasethat was mainly driven by audit settlements in compensation2021 and benefits, a $0.8 million decreaseno comparable settlements in employee travel and meeting expenses and2022, a $0.7 million decreaseincrease in information technology expense, which largely consisted of increased service agreement costs and amortization of capitalized implementation costs related to the substantial completion of our process and technology transformation project. at the end of 2021, and $0.6 million increases in each of employee travel and meeting expense and bad debt expense.
Depreciation and amortization. The decrease in depreciation and amortization expense was primarily due to a decrease in depreciation expense resulting from assets reaching the end of their depreciable lives, the impact of compression and other asset impairmentssales and sales during 2020 and early 2021impairments and a decrease in amortization expense as certain intangible assets reached the end of their useful lives. These decreases were partially offset by an increase in depreciation expense associated with fixed asset additions during 2020 and early 2021.additions.
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. In addition, we evaluate for impairment idle units that have been culled from our compression fleet in prior years and are available for sale. See Note 1311 (“Long-Lived and Other Asset Impairment”) to our Financial Statements for further details. The following table presents the results of our compression fleet impairment review, as recorded in our contract operations segment:
| | | | | | | | | | | | |
|
| Six Months Ended |
| Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
Idle compressors retired from the active fleet |
| | 115 |
| | 535 |
| | 75 |
| | 115 |
Horsepower of idle compressors retired from the active fleet |
| | 37,000 |
| | 207,000 |
| | 57,000 |
| | 37,000 |
Impairment recorded on idle compressors retired from the active fleet | | $ | 9,844 | | $ | 61,405 | | $ | 12,056 | | $ | 9,844 |
Goodwill impairment. During the six months ended June 30, 2020, we recorded goodwill impairment of $99.8 million due to the decline in the fair value of our contract operations reporting unit. See Note 7 (“Goodwill”) to our Financial Statements for further details.
Restructuring charges. Restructuring charges of $1.6 million and $4.1 million during the six months ended June 30, 2021 and 2020, respectively, primarily consisted of severance costs related to our organizational and pandemic restructuring activities. See Note 1412 (“Restructuring Charges”) to our Financial Statements for further details.
Interest expense. The increasedecrease in interest expense was primarily due to the $4.9 million write-off of unamortized deferred financing costs related to Amendment No. 3 and an increasethe amendment of our Credit Facility in the weighted average effective interest rate, partially offset byfirst quarter of 2021 and a decrease in the average outstanding balance of long-term debt.
35
Debt extinguishment loss. We recorded a debt extinguishment loss of $4.0 million during the six months ended June 30, 2020 as a result of the redemption of the 2022 Notes. See Note 9 (“Long-Term Debt”) to our Financial Statements for further details.
Gain on sale of assets, net. Our net gain on the sale of assets during the six months ended June 30, 2022 was primarily due to the $16.7 million gain on the May 2022 Disposition and gains of $3.2 million and $1.1 million recognized on sales of other compression assets and transportation and shop assets, respectively, during the period.
30
Our net gain on the sale of assets during the six months ended June 30, 2021 was primarily the result ofdue to the $6.0 million gain on the February 2021 Disposition and agains of $6.4 million gainand $2.1 million recognized on other compression asset sales. Our net gain on salesales of assets during the six months ended June 30, 2020 was primarily due to the $3.2 million gain recorded on the March 2020 Disposition, which was partially offset by a $2.8 million loss on other compression assets sold. See Note 3 (“Business Transactions”) to our Financial Statements for further details of these sales.and transportation and shop assets, respectively, during the period.
Other income,(income) expense, net. The increase inchange from net other income to net other expense was primarily due to a $0.7$0.9 million decreasereduction in indemnification expense remittedin 2021 due to the settlement of an audit pursuant to our tax matters agreement with Exterran Corporation.Corporation, as well as income in 2021 of $0.3 million and $0.3 million related to compressor parts recycling and equipment damaged at a customer site, respectively.
Provision for (Benefit from) Income Taxes
| | | | | | | | | | | | | | | | | | |
|
| Six Months Ended |
| | |
| Six Months Ended |
| | | ||||||||
| | June 30, | | Increase | | | June 30, | | Increase | | ||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| (Decrease) | |
| 2022 |
| 2021 |
| (Decrease) | | ||||
Provision for (benefit from) income taxes | | $ | 8,285 | | $ | (24,044) |
| (134) | % | |||||||||
Provision for income taxes | | $ | 10,261 | | $ | 8,285 |
| 24 | % | |||||||||
Effective tax rate | |
| 39 | % |
| 21 | % | 18 | % | |
| 36 | % |
| 39 | % | (3) | % |
The change from a benefit from to aincrease in provision for income taxes was primarily due to the tax effect of the increase in book income during the six months ended June 30, 20212022 compared to the six months ended June 30, 2020.2021.
Liquidity and Capital Resources
Capital Requirements
Our contract operations business is capital intensive, requiring significant investment to maintain and upgrade existing operations. Our capital spending is primarily dependent on the demand for our contract operations services and the availability of the type of compression equipment required for us to provide those contract operations services to our customers. Our capital requirements have primarily consisted of, and we anticipate will continue to consist of, the following:
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 over its expected useful life that exceed our cost of capital. 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 are related to major overhauls or 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.
36
Projected Capital Spend
We currently plan to spend approximately $80 million to $106 million in capital expenditures during 2021, primarily consisting of approximately $30 million to $50 million for growth capital expenditures and approximately $40 million to $45 million for maintenance capital expenditures. We anticipate decreased 2021 capital expenditures, particularly growth capital expenditures, as compared to 2020 due to the impact that we expect the COVID-19 pandemic will continue to have on customer demand.
Financial 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. Beginning in the first quarter of 2020, the COVID-19 pandemic caused a deterioration in global macroeconomic conditions, which adversely impacted our estimates of future revenues and cash flows. However, weWe 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.
Credit FacilityCash Requirements
During the six months ended June 30, 2021Our contract operations business is capital intensive, requiring significant investment to maintain and 2020, the Credit Facility had an average daily balance of $345.3 million and $675.5 million, respectively. The weighted average annual interest rateupgrade existing operations. Our capital spending is primarily dependent on the outstanding balance underdemand for our contract operations services and the Credit Facility, excludingavailability of the effecttype of interest rate swaps, was 2.5%compression equipment required for us to provide those contract operations services to our customers. Our capital requirements have consisted primarily of, and 2.7% at June 30, 2021 and December 31, 2020, respectively. Aswe anticipate will continue to consist of, June 30, 2021, there were $12.5 million letters of credit outstanding under the Credit Facility.
We must maintain certain consolidated financial ratios as defined in our Credit Facility agreement (see below). As of June 30, 2021, the ratio requirements did not constrain our undrawn capacity and as such, $421.0 million was available for additional borrowings. As of June 30, 2021, we were in compliance with all covenants under the Credit Facility agreement.
Amendment No. 3. On February 22, 2021, we amended our Credit Facility to, among other things:following:
• | growth capital expenditures; |
• | maintenance capital expenditures; |
• | interest on our outstanding debt obligations; and |
|
|
|
|
| |
| ||
|
|
|
|
| |
|
|
See Note 9 (“Long-Term Debt”) to our Financial Statements for further details on Amendment No. 3.
3731
At-the-Market Continuous Equity Offering ProgramCapital Expenditures
On February 23, 2021, we entered into the ATM Agreement whereby we may sell from time to time sharesGrowth Capital Expenditures. The majority of our common stock having an aggregate offering price of up to $50.0 million. We intend to use the net proceeds of these offerings for general corporate purposes. During the six months ended June 30, 2021, we sold 357,148 shares of common stock for net proceeds of $3.4 million pursuantgrowth capital expenditures are related to the ATM Agreement. See Note 11 (“Equity”)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 Financial Statements for further detailscost 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 ATM Agreement.
Business Dispositions
In July 2021, we completed salescurrent configuration of compressorsthe compression package is no longer in demand and other assetsthe 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 total consideration will approximate $61.0 million. The proceeds received in July fromit 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 sales were used to repay borrowings outstanding under our Credit Facility. See Note 23 (“Subsequent Events”) to our Financial Statements for further details on these sales.
Cash Flows
Our cash flows from operating, investingengine, compressor and financing activities, as reflected in our condensed consolidated statements of cash flows, are summarized below:
| | | | | | |
|
| Six Months Ended | ||||
| | June 30, | ||||
(in thousands) |
| 2021 |
| 2020 | ||
Net cash provided by (used in): |
| |
|
| |
|
Operating activities | | $ | 126,617 | | $ | 167,074 |
Investing activities | |
| (866) | |
| (82,688) |
Financing activities | |
| (123,536) | |
| (85,866) |
Net increase (decrease) in cash and cash equivalents | | $ | 2,215 | | $ | (1,480) |
Operating Activities
The decrease in net cash provided by operating activities was primarily due to reduced cash inflows from revenue, deferred revenue and accounts receivable, as well as increased cash outflow for inventory, partially offset by decreased cash outflows for cost of sales, SG&A expenses, accounts payable and other liabilities, interest paid on long-term debt and restructuring charges.
Investing Activities
The decrease in net cash used in investing activities was primarily duecooler, which return the components to a $74.5like-new condition, but do not modify the application for which the compression package was designed.
Projected Capital Expenditures. We currently plan to spend approximately $230 million decreaseto $235 million in capital expenditures during 2022, primarily consisting of approximately $150 million for growth capital expenditures and a $13.1approximately $70 million increase in proceeds from sales of property, plant and equipment, partially offset by a $5.4to $75 million decrease in proceeds from business dispositions.
Financing Activities
The increase in net cash used in financing activities was primarilyfor maintenance capital expenditures. We anticipate increased 2022 capital expenditures, particularly growth capital expenditures, as compared to 2021 due to increased investment in new compression equipment as a $36.5 million increase in net repaymentsresult of long-term debt, partially offset by $3.4 million of net proceeds from the issuance of common stock under the ATM Agreement during the six months ended June 30, 2021.higher customer demand.
38
Dividends
On July 28, 2021,2022, our Board of Directors declared a quarterly dividend of $0.145 per share of common stock to be paid on August 16, 20212022 to stockholders of record at the close of business on August 9, 2021.2022. Any future determinations to pay cash dividends to our stockholders will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations and credit and loan agreements in effect at that time and other factors deemed relevant by our Board of Directors.
Off-Balance Sheet ArrangementsSources of Cash
For informationRevolving Credit Facility
During the six months ended June 30, 2022 and 2021, the Credit Facility had an average daily balance of $231.5 million and $345.3 million, respectively. The weighted average annual interest rate on our obligations with respect tothe outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 3.9% and 2.6% at June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022, there were $5.8 million letters of credit outstanding under the Credit Facility and performance bonds seethe applicable margin on borrowings outstanding was 2.3%.
As of June 30, 2022, we were in compliance with all covenants under our Credit Facility. As a result of the facility’s financial ratio requirements, $476.6 million of the $508.5 million of undrawn capacity was available for additional borrowings as of June 30, 2022.
At-the-Market Continuous Equity Offering Program
During the six months ended June 30, 2022 and 2021, we sold 447,020 and 357,148 shares of common stock for net proceeds of $4.2 million and $3.4 million, respectively, pursuant to our ATM agreement. See Note 9 (“Long-Term Debt”Equity”) and Note 20 (“Commitments and Contingencies”), respectively, to our Financial Statements.Statements for further details.
32
Cash Flows
Our cash flows, as reflected in our condensed consolidated statements of cash flows, are summarized below:
| | | | | | |
|
| Six Months Ended | ||||
| | June 30, | ||||
(in thousands) |
| 2022 |
| 2021 | ||
Net cash provided by (used in): |
| |
|
| |
|
Operating activities | | $ | 89,524 | | $ | 126,617 |
Investing activities | |
| (46,034) | |
| (866) |
Financing activities | |
| (43,109) | |
| (123,536) |
Net increase in cash and cash equivalents | | $ | 381 | | $ | 2,215 |
Operating Activities
The decrease in net cash provided by operating activities was primarily due to increased cash outflow for cost of sales, contract costs, SG&A and inventory, as well as decreased cash inflow from accounts receivable. Partially offsetting these decreases in operating cash were increased cash inflow from revenue and deferred revenue and decreased cash outflow for accounts payable and other liabilities, restructuring charges and interest paid on long-term debt.
Investing Activities
The increase in net cash used in investing activities was primarily due to a $67.3 million increase in capital expenditures and the $8.0 million investment made in unconsolidated entities during the six months ended June 30, 2022. These cash outflows were partially offset by a $28.3 million increase in proceeds from the sales of property, plant and equipment.
Financing Activities
The decrease in net cash used in financing activities was primarily due to $76.5 million of net repayments of long-term debt during 2021, compared to $1.2 million in net borrowings in 2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures aboutWe are exposed to market risk see Item 7A “Quantitative and Qualitative Disclosures About Market Risk”associated with changes in the variable interest rate of our 2020 Form 10-K. Our exposures asCredit Facility. We have previously used derivative instruments to manage our exposure to fluctuations in this variable interest rate, however, our interest rate swaps expired in the first quarter of 2022, and all borrowings under the Credit Facility are now subject to variable interest rates.
A 1% increase in the effective interest rate on our Credit Facility’s outstanding balance at June 30, 20212022 would have not changed materially since December 31, 2020.resulted in an annual increase in our interest expense of $2.4 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 Quarterly Report as Exhibits 31.1 and 31.2.
33
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 June 30, 20212022 our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to management, and made known to our principal executive officer and principal financial officer, on a timely basis to ensure that it is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
During the first quarter of 2022, we implemented a new ERP system, which replaced our existing core financial systems, resulting in changes to our financial close processes and procedures. As a result of the implementation, certain internal controls over financial reporting were automated, modified or implemented. While we believe the new ERP system will enhance our internal controls, there are inherent risks in implementing any new system, and we will continue to evaluate these control changes as part of our assessment of control design and effectiveness throughout 2022.
There were no other changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, we are involved in various pending or threatened legal actions. While we are unable to predict the ultimate outcome of these actions, we believe that any ultimate liability arising from any of these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends.
Item 1A. Risk Factors
There have been no material changes or updates to the risk factors previously disclosed in our 20202021 Form 10-K.
Item 2. Purchases of Equity Securities by Issuer and Affiliated Purchasers
The following table summarizes our purchases of equity securities during the three months ended June 30, 2021:2022:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | Maximum | | | | | | | | | Maximum |
| | | | | | | | | Number of Shares | | | | | | | | | Number of Shares |
| | | | | | | Total Number of | | That May Yet be | | | | | | | Total Number of | | That May Yet be |
| | | | Average | | Shares Purchased | | Purchased Under | | | | Average | | Shares Purchased | | Purchased Under | ||
| | Total Number | | Price | | as Part of Publicly | | the Publicly | | Total Number | | Price | | as Part of Publicly | | the Publicly | ||
| | of Shares | | Paid per | | Announced Plans | | Announced Plans | | of Shares | | Paid per | | Announced Plans | | Announced Plans | ||
|
| Purchased (1) |
| Share |
| or Programs |
| or Programs |
| Purchased (1) |
| Share |
| or Programs |
| or Programs | ||
April 1, 2021 — April 30, 2021 | | 383 | | $ | 9.75 | | N/A | | N/A | |||||||||
May 1, 2021 — May 31, 2021 |
| — | |
| — |
| N/A |
| N/A | |||||||||
June 1, 2021 — June 30, 2021 |
| — | |
| — |
| N/A |
| N/A | |||||||||
April 1, 2022 — April 30, 2022 | | 303 | | $ | 9.16 | | N/A | | N/A | |||||||||
May 1, 2022 — May 31, 2022 |
| — | |
| — |
| N/A |
| N/A | |||||||||
June 1, 2022 — June 30, 2022 |
| — | |
| — |
| N/A |
| N/A | |||||||||
Total |
| 383 | | | 9.75 |
| N/A |
| N/A |
| 303 | | | 9.16 |
| N/A |
| N/A |
(1) | Represents shares withheld to satisfy employees’ tax |
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
| | |
| | |
Exhibit No. |
| Description |
|
| |
|
| |
3.1 | | |
3.2 | | |
3.3 | | |
|
| |
|
| |
|
| |
31.1* | | |
31.2* | | |
32.1** | | |
32.2** | | |
101.1* | | Interactive data files (formatted in Inline XBRL) pursuant to Rule 405 of Regulation S-T |
104.1* | | Cover page interactive data |
* 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) |
| | |
| |
|
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