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 September 30, 20222023
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) 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 October 26, 2022: 155,611,6302023: 156,057,991 shares.
TABLE OF CONTENTS
2
GLOSSARY
The following terms and abbreviations appearing in the text of this report have the meanings indicated below.
2022 Form 10-K | Annual Report on Form 10-K for the year ended December 31, 2022 |
2023 Share Repurchase Program | Share repurchase program approved by our Board of Directors on April 27, 2023 that allows us to repurchase up to $50.0 million of outstanding common stock |
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 |
Archrock, our, we, us | Archrock, Inc., individually and together with its wholly-owned subsidiaries |
Amended and Restated Credit Agreement | Amended and Restated Credit Agreement, dated May 16, 2023, which amended and restated that Credit Agreement, dated as of March 30, 2017, which governs the Credit Facility |
ASU | Accounting Standards Update |
Credit Facility | $750.0 million asset-based revolving credit facility due May 2028, as governed by the Amended and Restated Credit Agreement, dated May 16, 2023, which amended and restated that Credit Agreement, dated as of March 30, 2017 |
ECOTEC | Ecotec International Holdings, LLC |
ESPP | Employee Stock Purchase Plan |
Exchange Act | Securities Exchange Act of 1934, as amended |
FASB | Financial Accounting Standards Board |
Financial Statements | Condensed consolidated financial statements included in Part I Item 1 of this Quarterly Report on Form 10-Q |
GAAP | U.S. generally accepted accounting principles |
Hilcorp | Hilcorp Energy Company |
LIBOR | London Interbank Offered Rate |
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 |
SEC | U.S. Securities and Exchange Commission |
SG&A | Selling, general and administrative |
SOFR | Secured Overnight Financing Rate |
U.S. | United States of America |
WACC | Weighted average cost of capital |
3
FORWARD–LOOKING STATEMENTS
This Quarterly Report on Form 10–Q (this “Form 10–Q”10-Q”) contains “forward–looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this Form 10–Q are forward–looking statements within the meaning of Section 21E of the Securities Exchange Act, of 1934, as amended (the “Exchange Act”), including, without limitation, our business growth strategy and projected costs; future financial position; the sufficiency of available cash flows to fund continuing operations and pay dividends; the expected amount of our capital expenditures; anticipated cost savings; future revenue, gross margin and other financial or operational measures related to our business; the future value of our equipment; and plans and objectives of our management for our future operations. You can identify many of these statements by words such as “believe,” “expect,” “intend,” “project,” “anticipate,” “estimate,” “will continue” or similar words or the negative thereof.
Such forward–looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this Form 10–Q. Although we believe that the expectations reflected in these forward–looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct. Known material factors that could cause our actual results to differ materially from the expectations reflected in these forward–looking statements include the risk factors described in our Annual Report on2022 Form 10–K for the year ended December 31, 2021 (the “Form 10–K) and those set forth from time to time in our filings with the United States Securities and Exchange Commission (the “SEC”),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 Form 10–Q are based on information available to us on the date of this Form 10–Q. Except as required by law, we undertake no obligation to publicly update or revise any forward–looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward–looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this Form 10–Q.
34
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Archrock, Inc.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except par value and share amounts)
(unaudited)
| | | | | | | | | | | | |
|
| September 30, 2022 |
| December 31, 2021 |
| September 30, 2023 |
| December 31, 2022 | ||||
Assets |
| |
|
| |
|
| |
|
| |
|
Current assets: |
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents | | $ | 2,042 | | $ | 1,569 | | $ | 482 | | $ | 1,566 |
Accounts receivable, net of allowance of $1,487 and $2,152, respectively | |
| 127,334 | |
| 104,931 | ||||||
Accounts receivable, net of allowance of $988 and $1,674, respectively | |
| 129,306 | |
| 137,544 | ||||||
Inventory | |
| 84,091 | |
| 72,869 | |
| 87,942 | |
| 84,622 |
Other current assets | |
| 6,817 | |
| 7,201 | |
| 7,147 | |
| 8,228 |
Total current assets | |
| 220,284 | |
| 186,570 | |
| 224,877 | |
| 231,960 |
Property, plant and equipment, net | |
| 2,214,666 | |
| 2,226,526 | |
| 2,302,417 | |
| 2,199,253 |
Operating lease right-of-use assets | |
| 16,089 | |
| 17,491 | |
| 14,866 | |
| 16,706 |
Intangible assets, net | |
| 39,019 | |
| 47,887 | |
| 31,681 | |
| 37,077 |
Contract costs, net | |
| 32,598 | |
| 25,418 | |
| 37,954 | |
| 34,736 |
Deferred tax assets | |
| 37,001 | |
| 47,879 | |
| 10,984 | |
| 33,353 |
Other assets | |
| 37,051 | |
| 28,384 | |
| 41,463 | |
| 37,079 |
Assets of discontinued operations | |
| 8,893 | |
| 9,811 | ||||||
Non-current assets of discontinued operations | |
| 7,868 | |
| 8,586 | ||||||
Total assets | | $ | 2,605,601 | | $ | 2,589,966 | | $ | 2,672,110 | | $ | 2,598,750 |
| | | | | | | | | | | | |
Liabilities and Stockholders' Equity | |
|
| |
|
| |
|
| |
|
|
Current liabilities: | |
|
| |
|
| |
|
| |
|
|
Accounts payable | | $ | 89,602 | | $ | 38,920 | ||||||
Accounts payable, trade | | $ | 52,000 | | $ | 64,324 | ||||||
Accrued liabilities | |
| 97,021 | |
| 82,517 | |
| 101,101 | |
| 76,915 |
Deferred revenue | |
| 7,707 | |
| 3,817 | |
| 6,274 | |
| 7,332 |
Total current liabilities | |
| 194,330 | |
| 125,254 | |
| 159,375 | |
| 148,571 |
Long-term debt | |
| 1,498,895 | |
| 1,530,825 | |
| 1,604,554 | |
| 1,548,334 |
Operating lease liabilities | |
| 14,286 | |
| 15,940 | |
| 12,928 | |
| 14,861 |
Deferred tax liabilities | |
| 1,076 | |
| 1,136 | |
| 1,418 | |
| 854 |
Other liabilities | |
| 19,330 | |
| 17,505 | |
| 24,874 | |
| 17,569 |
Liabilities of discontinued operations | |
| 7,868 | |
| 7,868 | ||||||
Non-current liabilities of discontinued operations | |
| 7,868 | |
| 7,868 | ||||||
Total liabilities | |
| 1,735,785 | |
| 1,698,528 | |
| 1,811,017 | |
| 1,738,057 |
| | | | | | | | | | | | |
Commitments and contingencies (Note 8) | |
|
| |
|
| ||||||
Commitments and contingencies (Note 7) | |
|
| |
|
| ||||||
| | | | | | | | | | | | |
Stockholders' equity: | |
|
| |
|
| ||||||
Equity: | |
|
| |
|
| ||||||
Preferred stock: $0.01 par value per share, 50,000,000 shares authorized, zero issued | |
| — | |
| — | |
| — | |
| — |
Common stock: $0.01 par value per share, 250,000,000 shares authorized, 163,412,780 and 161,482,852 shares issued, respectively | |
| 1,633 | |
| 1,615 | ||||||
Common stock: $0.01 par value per share, 250,000,000 shares authorized, 164,959,743 and 163,439,013 shares issued, respectively | |
| 1,649 | |
| 1,634 | ||||||
Additional paid-in capital | |
| 3,453,720 | |
| 3,440,059 | |
| 3,467,051 | |
| 3,456,777 |
Accumulated deficit | |
| (2,497,002) | |
| (2,463,114) | |
| (2,508,743) | |
| (2,509,133) |
Accumulated other comprehensive loss | |
| — | |
| (984) | ||||||
Treasury stock: 7,801,150 and 7,417,401 common shares, at cost, respectively | |
| (88,535) | |
| (86,138) | ||||||
Total stockholders' equity | |
| 869,816 | |
| 891,438 | ||||||
Total liabilities and stockholders' equity | | $ | 2,605,601 | | $ | 2,589,966 | ||||||
Treasury stock: 8,839,652 and 7,810,548 common shares, at cost, respectively | |
| (98,864) | |
| (88,585) | ||||||
Total equity | |
| 861,093 | |
| 860,693 | ||||||
Total liabilities and equity | | $ | 2,672,110 | | $ | 2,598,750 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
45
Archrock, Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Revenue: |
| |
|
| |
|
| |
|
| |
|
Contract operations | | $ | 170,497 | | $ | 158,911 | | $ | 500,451 | | $ | 488,810 |
Aftermarket services | |
| 43,171 | |
| 36,255 | |
| 126,246 | |
| 97,402 |
Total revenue | |
| 213,668 | |
| 195,166 | |
| 626,697 | |
| 586,212 |
| | | | | | | | | | | | |
Cost of sales (excluding depreciation and amortization): | |
| | | | | | | | | | |
Contract operations | |
| 71,694 | |
| 61,280 | |
| 204,550 | |
| 184,032 |
Aftermarket services | |
| 35,833 | |
| 30,652 | |
| 106,181 | |
| 83,925 |
Total cost of sales (excluding depreciation and | |
| 107,527 | |
| 91,932 | |
| 310,731 | |
| 267,957 |
| | | | | | | | | | | | |
Selling, general and administrative | |
| 30,500 | |
| 28,839 | |
| 85,964 | |
| 80,000 |
Depreciation and amortization | |
| 39,953 | |
| 45,280 | |
| 124,348 | |
| 135,185 |
Long-lived and other asset impairment | |
| 4,154 | |
| 5,121 | |
| 16,217 | |
| 15,154 |
Restructuring charges | | | — | | | 313 | | | — | | | 1,953 |
Interest expense | |
| 25,177 | |
| 25,508 | |
| 74,879 | |
| 82,711 |
Gain on sale of assets, net | | | (12,695) | | | (15,393) | | | (33,755) | | | (29,549) |
Other (income) expense, net | |
| (585) | |
| 337 | |
| (52) | |
| (1,634) |
Income before income taxes | |
| 19,637 | |
| 13,229 | |
| 48,365 | |
| 34,435 |
Provision for income taxes | |
| 4,266 | |
| 3,925 | |
| 14,527 | |
| 12,210 |
Net income | | $ | 15,371 | | $ | 9,304 | | $ | 33,838 | | $ | 22,225 |
| | | | | | | | | | | | |
Basic and diluted earnings per common share | | $ | 0.10 | | $ | 0.06 | | $ | 0.21 | | $ | 0.14 |
| | | | | | | | | | | | |
Weighted average common shares outstanding: | |
|
| |
|
| |
|
| |
|
|
Basic | |
| 153,550 | |
| 152,158 | |
| 153,168 | |
| 151,615 |
Diluted | |
| 153,687 | |
| 152,297 | |
| 153,297 | |
| 151,769 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Archrock, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Income
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
Revenue: |
| |
|
| |
|
| |
|
| |
| ||||||||||||
Contract operations | | $ | 207,552 | | $ | 170,497 | | $ | 596,417 | | $ | 500,451 | ||||||||||||
Aftermarket services | |
| 45,815 | |
| 43,171 | |
| 134,327 | |
| 126,246 | ||||||||||||
Total revenue | |
| 253,367 | |
| 213,668 | |
| 730,744 | |
| 626,697 | ||||||||||||
Cost of sales (excluding depreciation and amortization): | |
| | | | | | | | | | | ||||||||||||
Contract operations | |
| 75,273 | |
| 71,694 | |
| 230,788 | |
| 204,550 | ||||||||||||
Aftermarket services | |
| 36,688 | |
| 35,833 | |
| 105,939 | |
| 106,181 | ||||||||||||
Total cost of sales (excluding depreciation and amortization) | |
| 111,961 | |
| 107,527 | |
| 336,727 | |
| 310,731 | ||||||||||||
Selling, general and administrative | |
| 28,558 | |
| 30,500 | |
| 83,632 | |
| 85,964 | ||||||||||||
Depreciation and amortization | |
| 42,155 | |
| 39,953 | |
| 123,546 | |
| 124,348 | ||||||||||||
Long-lived and other asset impairment | |
| 2,922 | |
| 4,154 | |
| 8,383 | |
| 16,217 | ||||||||||||
Restructuring charges | | | 592 | | | — | | | 1,554 | | | — | ||||||||||||
Interest expense | |
| 28,339 | |
| 25,177 | |
| 83,550 | |
| 74,879 | ||||||||||||
Gain on sale of assets, net | | | (3,237) | | | (12,695) | | | (8,018) | | | (33,755) | ||||||||||||
Other expense (income), net | |
| (235) | |
| (585) | |
| 1,831 | |
| (52) | ||||||||||||
Income before income taxes | |
| 42,312 | |
| 19,637 | |
| 99,539 | |
| 48,365 | ||||||||||||
Provision for income taxes | |
| 11,454 | |
| 4,266 | |
| 27,543 | |
| 14,527 | ||||||||||||
Net income | | $ | 15,371 |
| $ | 9,304 |
| $ | 33,838 |
| $ | 22,225 | | $ | 30,858 | | $ | 15,371 | | $ | 71,996 | | $ | 33,838 |
Other comprehensive income, net of tax: | |
|
| |
|
| |
|
| |
|
| ||||||||||||
Interest rate swap gain, net of reclassifications to | |
| — | |
| 585 | |
| 574 | |
| 2,547 | ||||||||||||
Amortization of dedesignated interest rate swap | |
| — | |
| 431 | |
| 410 | |
| 431 | ||||||||||||
Total other comprehensive income, net of tax | |
| — | |
| 1,016 | |
| 984 | |
| 2,978 | ||||||||||||
Comprehensive income | | $ | 15,371 | | $ | 10,320 | | $ | 34,822 | | $ | 25,203 | ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Basic and diluted earnings per common share | | $ | 0.20 | | $ | 0.10 | | $ | 0.46 | | $ | 0.21 | ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Weighted average common shares outstanding: | |
|
| |
|
| |
|
| |
|
| ||||||||||||
Basic | |
| 154,163 | |
| 153,550 | |
| 154,210 | |
| 153,168 | ||||||||||||
Diluted | |
| 154,401 | |
| 153,687 | |
| 154,398 | |
| 153,297 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
Archrock, Inc.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Net income | | $ | 30,858 |
| $ | 15,371 |
| $ | 71,996 |
| $ | 33,838 |
Other comprehensive income, net of tax: | |
|
| |
|
| |
|
| |
|
|
Interest rate swap gain, net of reclassifications to earnings | |
| — | |
| — | |
| — | |
| 574 |
Amortization of dedesignated interest rate swap | |
| — | |
| — | |
| — | |
| 410 |
Total other comprehensive income, net of tax | |
| — | |
| — | |
| — | |
| 984 |
Comprehensive income | | $ | 30,858 | | $ | 15,371 | | $ | 71,996 | | $ | 34,822 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
Archrock, Inc.
Unaudited Condensed Consolidated Statements of Equity
(in thousands, except shares and per share amounts)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Accumulated | | | | | | | | | |
| | | | Additional | | | | | Other | | | | | | | | | ||||||
| | Common Stock | | Paid-in | | Accumulated | | Comprehensive | | Treasury Stock | | | | ||||||||||
|
| | Shares |
| | Amount |
| Capital |
| Deficit |
| Loss |
| Shares |
| Amount |
| Total | |||||
Balance at June 30, 2022 | | | 163,385,390 | | $ | 1,633 | | $ | 3,450,603 | | $ | (2,489,814) | | $ | — | | (7,740,919) | | $ | (88,504) | | $ | 873,918 |
Treasury stock purchased | |
| — | | | — | |
| — | |
| — | |
| — | | (3,636) | |
| (31) | |
| (31) |
Cash dividends ($0.145 per common share | |
| — | | | — | |
| — | |
| (22,559) | |
| — | | — | |
| — | |
| (22,559) |
Shares issued under employee stock | |
| 27,390 | | | — | |
| 167 | |
| — | |
| — | | — | |
| — | |
| 167 |
Stock-based compensation, net of forfeitures | |
| — | | | — | |
| 2,998 | |
| — | |
| — | | (56,595) | |
| — | |
| 2,998 |
Net proceeds from issuance of common stock | | | — | | | — | | | (48) | | | — | | | — | | — | | | — | | | (48) |
Net income | |
| — | | | — | |
| — | |
| 15,371 | |
| — | | — | |
| — | |
| 15,371 |
Balance at September 30, 2022 | | | 163,412,780 | | $ | 1,633 | | $ | 3,453,720 | | $ | (2,497,002) | | $ | — | | (7,801,150) | | $ | (88,535) | | $ | 869,816 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2021 | | | 161,339,554 | | $ | 1,613 | | $ | 3,434,224 | | $ | (2,433,553) | | $ | (3,044) | | (7,278,449) | | $ | (85,419) | | $ | 913,821 |
Treasury stock purchased | | | — | | | — | | | — | | | — | | | — | | (92,540) | | | (663) | | | (663) |
Cash dividends ($0.145 per common share | | | — | |
| — | |
| — | |
| (22,506) | |
| — | | — | |
| — | |
| (22,506) |
Shares issued under ESPP | | | 22,425 | |
| — | |
| 175 | |
| — | |
| — | | — | |
| — | |
| 175 |
Stock-based compensation, net of forfeitures | | | 97,426 | |
| 1 | |
| 2,899 | |
| — | |
| — | | (31,199) | |
| — | |
| 2,900 |
Comprehensive income: | | | | |
| | | | | | | | | | | | | | | | | | |
Net income | | | — | |
| — | |
| — | |
| 9,304 | |
| — | | — | |
| — | |
| 9,304 |
Other comprehensive income | | | — | | | — | | | — | | | — | | | 1,016 | | — | | | — | | | 1,016 |
Balance at September 30, 2021 | | | 161,459,405 | | $ | 1,614 | | $ | 3,437,298 | | $ | (2,446,755) | | $ | (2,028) | | (7,402,188) | | $ | (86,082) | | $ | 904,047 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | | | | | | |
| | | | Additional | | | | | Other | | | | | | | | | |||||
| | Common Stock | | Paid-in | | Accumulated | | Comprehensive | | Treasury Stock | | | | |||||||||
|
| | Amount | | Shares |
| Capital |
| Deficit | | Loss | | | Amount | | Shares | | Total | ||||
Balance at June 30, 2022 | | $ | 1,633 | | 163,385,390 | | $ | 3,450,603 | | $ | (2,489,814) | | $ | — | | $ | (88,504) | | (7,740,919) | | $ | 873,918 |
Shares withheld related to net settlement of equity awards | | | — | | — | |
| — | |
| — | |
| — | |
| (31) | | (3,636) | |
| (31) |
Cash dividends ($0.145 per common share) | | | — | | — | |
| — | |
| (22,559) | |
| — | |
| — | | — | |
| (22,559) |
Shares issued under ESPP | | | — | | 27,390 | |
| 167 | |
| — | |
| — | |
| — | | — | |
| 167 |
Stock-based compensation, net of forfeitures | | | — | | — | |
| 2,998 | |
| — | |
| — | |
| — | | (56,595) | |
| 2,998 |
Net proceeds from issuance of common stock | | | — | | — | | | (48) | | | — | | | — | | | — | | — | | | (48) |
Net income | | | — | | — | |
| — | |
| 15,371 | |
| — | |
| — | | — | |
| 15,371 |
Balance at September 30, 2022 | | $ | 1,633 | | 163,412,780 | | $ | 3,453,720 | | $ | (2,497,002) | | $ | — | | $ | (88,535) | | (7,801,150) | | $ | 869,816 |
| | | | | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2023 | | $ | 1,649 | | 164,940,249 | | $ | 3,463,668 | | $ | (2,515,351) | | $ | — | | $ | (94,433) | | (8,440,673) | | $ | 855,533 |
Shares repurchased | | | — | | — | |
| — | |
| — | |
| — | | | (4,422) | | (354,012) | | | (4,422) |
Shares withheld related to net settlement of equity awards | | | — | | — | |
| — | |
| — | |
| — | |
| (9) | | (717) | |
| (9) |
Cash dividends ($0.155 per common share) | | | — | | — | |
| — | |
| (24,250) | |
| — | |
| — | | — | |
| (24,250) |
Shares issued under ESPP | | | — | | 19,494 | |
| 192 | |
| — | |
| — | |
| — | | — | |
| 192 |
Stock-based compensation, net of forfeitures | | | — | | — | |
| 3,191 | |
| — | |
| — | |
| — | | (44,250) | |
| 3,191 |
Net income | | | — | | — | |
| — | |
| 30,858 | |
| — | |
| — | | — | |
| 30,858 |
Balance at September 30, 2023 | | $ | 1,649 | | 164,959,743 | | $ | 3,467,051 | | $ | (2,508,743) | | $ | — | | $ | (98,864) | | (8,839,652) | | $ | 861,093 |
| | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
78
Archrock, Inc.
Unaudited Condensed Consolidated Statements of Equity (continued)
(in thousands, except shareshares and per share amounts)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||
| | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | |||||||
| | | | Additional | | | | | Other | | | | | | | | | | | Additional | | | | | Other | | | | | | | | | ||||||||||||
| | Common Stock | | Paid-in | | Accumulated | | Comprehensive | | Treasury Stock | | | | | Common Stock | | Paid-in | | Accumulated | | Comprehensive | | Treasury Stock | | | | |||||||||||||||||||
|
| | Shares | | | Amount |
| Capital |
| Deficit | | Loss | | Shares | | Amount | | Total |
| | Amount | | Shares |
| Capital |
| Deficit | | Loss | | | Amount | | Shares | | Total | |||||||||
Balance at December 31, 2021 | | 161,482,852 | | $ | 1,615 | | $ | 3,440,059 | | $ | (2,463,114) | | $ | (984) | | (7,417,401) | | $ | (86,138) | | $ | 891,438 | | $ | 1,615 | | 161,482,852 | | $ | 3,440,059 | | $ | (2,463,114) | | $ | (984) | | $ | (86,138) | | (7,417,401) | | $ | 891,438 | |
Treasury stock purchased | |
| — | | — | |
| — | |
| — | |
| — | | (276,342) | |
| (2,397) | |
| (2,397) | |||||||||||||||||||||||
Shares withheld related to net settlement of equity awards | | | — | | — | |
| — | |
| — | |
| — | |
| (2,397) | | (276,342) | |
| (2,397) | |||||||||||||||||||||||
Cash dividends ($0.435 per common share) | |
| — | | — | |
| — | |
| (67,726) | |
| — | | — | |
| — | |
| (67,726) | | | — | | — | |
| — | |
| (67,726) | |
| — | |
| — | | — | |
| (67,726) | |
Shares issued under ESPP | |
| 66,236 | | | |
| 462 | |
| — | |
| — | | — | |
| — | |
| 462 | | | — | | 66,236 | |
| 462 | |
| — | |
| — | |
| — | | — | |
| 462 | |
Stock-based compensation, net of forfeitures | |
| 1,416,672 | | 14 | |
| 9,021 | |
| — | |
| — | | (107,407) | |
| — | |
| 9,035 | | | 14 | | 1,416,672 | |
| 9,021 | |
| — | |
| — | |
| — | | (107,407) | |
| 9,035 | |
Net proceeds from issuance of common stock | | 447,020 | | 4 | | 4,178 | | | — | | | — | | — | | — | | 4,182 | | | 4 | | 447,020 | | | 4,178 | | | — | | | — | | | — | | — | | | 4,182 | |||||
Comprehensive income: | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| — | |||
Net income | |
| — | | — | |
| — | |
| 33,838 | |
| — | | — | |
| — | |
| 33,838 | | | — | | — | |
| — | |
| 33,838 | |
| — | |
| — | | — | |
| 33,838 | |
Other comprehensive income | | | — | | | — | | | — | | | — | | | 984 | | — | | | — | | | 984 | | | — | | — | | | — | | | — | | | 984 | | | — | | — | | | 984 |
Balance at September 30, 2022 | | | 163,412,780 | | $ | 1,633 | | $ | 3,453,720 | | $ | (2,497,002) | | $ | — | | (7,801,150) | | $ | (88,535) | | $ | 869,816 | | $ | 1,633 | | 163,412,780 | | $ | 3,453,720 | | $ | (2,497,002) | | $ | — | | $ | (88,535) | | (7,801,150) | | $ | 869,816 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Balance at December 31, 2020 | | 160,014,960 | | $ | 1,600 | | $ | 3,424,624 | | $ | (2,401,988) | | $ | (5,006) | | (7,052,769) | | $ | (83,673) | | $ | 935,557 | |||||||||||||||||||||||
Treasury stock purchased | |
| — | | — | |
| — | |
| — | |
| — | | (277,316) | |
| (2,409) | |
| (2,409) | |||||||||||||||||||||||
Cash dividends ($0.435 per common share) | |
| — | | — | |
| — | |
| (66,992) | |
| — | | — | |
| — | |
| (66,992) | |||||||||||||||||||||||
Balance at December 31, 2022 | | $ | 1,634 | | 163,439,013 | | $ | 3,456,777 | | $ | (2,509,133) | | $ | — | | $ | (88,585) | | (7,810,548) | | $ | 860,693 | |||||||||||||||||||||||
Shares repurchased | | | — | | — | |
| — | |
| — | |
| — | | | (6,495) | | (576,262) | | | (6,495) | |||||||||||||||||||||||
Shares withheld related to net settlement of equity awards | | | — | | — | |
| — | |
| — | |
| — | |
| (3,784) | | (384,684) | |
| (3,784) | |||||||||||||||||||||||
Cash dividends ($0.455 per common share) | | | — | | — | |
| — | |
| (71,606) | |
| — | |
| — | | — | |
| (71,606) | |||||||||||||||||||||||
Shares issued under ESPP | |
| 66,541 | | — | |
| 546 | |
| — | |
| — | | — | |
| — | |
| 546 | | | 1 | | 61,494 | |
| 573 | |
| — | |
| — | |
| — | | — | |
| 574 | |
Stock-based compensation, net of forfeitures | |
| 1,020,756 | | 10 | |
| 8,731 | |
| — | |
| — | | (72,103) | |
| — | |
| 8,741 | | | 14 | | 1,459,236 | |
| 9,701 | |
| — | |
| — | |
| — | | (68,158) | |
| 9,715 | |
Net proceeds from issuance of common stock | | 357,148 | | 4 | | 3,397 | | | — | | | — | | — | | — | | 3,401 | |||||||||||||||||||||||||||
Comprehensive income: | |
| | | | | | | | | | | | | | | | |
| | |||||||||||||||||||||||||
Net income | |
| — | | — | |
| — | |
| 22,225 | |
| — | | — | |
| — | |
| 22,225 | | | — | | — | |
| — | |
| 71,996 | |
| — | |
| — | | — | |
| 71,996 | |
Other comprehensive income | | | — | | | — | | | — | | | — | | | 2,978 | | — | | | — | | 2,978 | |||||||||||||||||||||||
Balance at September 30, 2021 | | | 161,459,405 | | $ | 1,614 | | $ | 3,437,298 | | $ | (2,446,755) | | $ | (2,028) | | (7,402,188) | | $ | (86,082) | | $ | 904,047 | ||||||||||||||||||||||
Balance at September 30, 2023 | | $ | 1,649 | | 164,959,743 | | $ | 3,467,051 | | $ | (2,508,743) | | $ | — | | $ | (98,864) | | (8,839,652) | | $ | 861,093 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
89
Archrock, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| | | | | | |
| | Nine Months Ended | ||||
| | September 30, | ||||
|
| 2022 |
| 2021 | ||
Cash flows from operating activities: | | |
| | |
|
Net income | | $ | 33,838 | | $ | 22,225 |
Adjustments to reconcile net income to net cash provided by operating activities: | |
|
| |
|
|
Depreciation and amortization | |
| 124,348 | |
| 135,185 |
Long-lived and other asset impairment | |
| 16,217 | |
| 15,154 |
Inventory write-downs | |
| 1,040 | |
| 621 |
Amortization of operating lease right-of-use assets | | | 2,407 | | | 2,922 |
Amortization of debt issuance costs | |
| 3,864 | |
| 8,839 |
Amortization of debt premium | | | (1,504) | | | (1,504) |
Amortization of dedesignated interest rate swap | | | 410 | | | 431 |
Interest rate swaps | |
| 631 | |
| 2,866 |
Stock-based compensation expense | |
| 9,035 | |
| 8,741 |
Provision for credit losses | |
| (28) | |
| 151 |
Gain on sale of assets, net | |
| (5,535) | |
| (10,604) |
Gain on sale of business | | | (28,220) | | | (18,945) |
Deferred income tax provision | |
| 13,624 | |
| 11,778 |
Amortization of contract costs | | | 14,211 | | | 15,523 |
Deferred revenue recognized in earnings | | | (15,709) | | | (8,081) |
Changes in operating assets and liabilities: | |
| | |
| |
Accounts receivable, net | | | (29,130) | | | (2,133) |
Inventory | | | (8,339) | | | (5,994) |
Other assets | | | 697 | | | 1,326 |
Contract costs | | | (22,486) | | | (11,481) |
Accounts payable and other liabilities | | | 37,251 | | | 33,626 |
Deferred revenue | | | 19,614 | | | 8,167 |
Other | | | 96 | | | (88) |
Net cash provided by operating activities | |
| 166,332 | |
| 208,725 |
| | | | | | |
Cash flows from investing activities: | |
|
| |
|
|
Capital expenditures | |
| (171,032) | |
| (70,881) |
Proceeds from sale of property, equipment and other assets | | | 13,348 | | | 24,683 |
Proceeds from sale of business | |
| 99,785 | |
| 83,075 |
Proceeds from insurance and other settlements | | | 3,353 | | | 977 |
Investments in unconsolidated entities | | | (12,000) | | | — |
Net cash (used in) provided by investing activities | |
| (66,546) | |
| 37,854 |
| | | | | | |
Cash flows from financing activities: | |
|
| |
|
|
Borrowings of long-term debt | |
| 579,483 | |
| 522,751 |
Repayments of long-term debt | |
| (611,983) | |
| (695,751) |
Payments of debt issuance costs | |
| — | |
| (2,451) |
Payments for settlement of interest rate swaps that include financing elements | |
| (1,334) | |
| (3,283) |
Dividends paid to stockholders | |
| (67,726) | |
| (66,992) |
Net proceeds from issuance of common stock | | | 4,182 | | | 3,401 |
Proceeds from stock issued under ESPP | |
| 462 | |
| 546 |
Purchases of treasury stock | |
| (2,397) | |
| (2,409) |
Net cash used in financing activities | |
| (99,313) | |
| (244,188) |
Net increase in cash and cash equivalents | |
| 473 | |
| 2,391 |
Cash and cash equivalents, beginning of period | |
| 1,569 | |
| 1,097 |
Cash and cash equivalents, end of period | | $ | 2,042 | | $ | 3,488 |
| | | | | | |
| | Nine Months Ended | ||||
| | September 30, | ||||
|
| 2023 |
| 2022 | ||
Cash flows from operating activities: | | |
| | |
|
Net income | | $ | 71,996 | | $ | 33,838 |
Adjustments to reconcile net income to net cash provided by operating activities: | |
|
| |
|
|
Depreciation and amortization | |
| 123,546 | |
| 124,348 |
Long-lived and other asset impairment | |
| 8,383 | |
| 16,217 |
Non-cash restructuring charges | | | 211 | | | — |
Unrealized change in fair value of investment in unconsolidated affiliate | | | 1,996 | | | — |
Inventory write-downs | |
| 381 | |
| 1,040 |
Amortization of operating lease right-of-use assets | | | 2,488 | | | 2,407 |
Amortization of deferred financing costs | | | 4,599 | | | 3,864 |
Amortization of debt premium | | | (1,504) | | | (1,504) |
Amortization of capitalized implementation costs | | | 1,841 | | | — |
Amortization of dedesignated interest rate swap | | | — | | | 410 |
Interest rate swaps | |
| — | |
| 631 |
Stock-based compensation expense | |
| 9,715 | |
| 9,035 |
Benefit from credit losses | |
| (234) | |
| (28) |
Gain on sale of assets, net | |
| (8,018) | |
| (5,535) |
Gain on sale of business | | | — | | | (28,220) |
Deferred income tax provision | |
| 26,411 | |
| 13,624 |
Amortization of contract costs | | | 15,636 | | | 14,211 |
Deferred revenue recognized in earnings | | | (11,043) | | | (15,709) |
Changes in operating assets and liabilities: | |
| | |
| |
Accounts receivable, net | | | (7,315) | | | (29,130) |
Inventory | | | (1,672) | | | (8,339) |
Other assets | | | (1,635) | | | 697 |
Contract costs | | | (18,854) | | | (22,486) |
Accounts payable and other liabilities | | | 10,745 | | | 37,251 |
Deferred revenue | | | 10,733 | | | 19,614 |
Other | | | 62 | | | 96 |
Net cash provided by operating activities | |
| 238,468 | |
| 166,332 |
| | | | | | |
Cash flows from investing activities: | |
|
| |
|
|
Capital expenditures | |
| (261,977) | |
| (171,032) |
Proceeds from sale of business | | | — | | | 99,785 |
Proceeds from sale of property, equipment and other assets | |
| 54,663 | |
| 13,348 |
Proceeds from insurance and other settlements | | | 1,157 | | | 3,353 |
Investments in unconsolidated entities | | | (2,000) | | | (12,000) |
Net cash used in investing activities | |
| (208,157) | |
| (66,546) |
| | | | | | |
Cash flows from financing activities: | |
|
| |
|
|
Borrowings of long-term debt | |
| 577,725 | |
| 579,483 |
Repayments of long-term debt | |
| (522,075) | |
| (611,983) |
Payments of debt issuance costs | |
| (5,734) | |
| — |
Payments for settlement of interest rate swaps that include financing elements | |
| — | |
| (1,334) |
Dividends paid to stockholders | |
| (71,606) | |
| (67,726) |
Net proceeds from issuance of common stock | | | — | | | 4,182 |
Repurchases of common stock | | | (6,495) | | | — |
Taxes paid related to net share settlement of equity awards | | | (3,784) | | | (2,397) |
Proceeds from stock issued under ESPP | |
| 574 | |
| 462 |
Net cash used in financing activities | |
| (31,395) | |
| (99,313) |
Net increase (decrease) in cash and cash equivalents | |
| (1,084) | |
| 473 |
Cash and cash equivalents, beginning of period | |
| 1,566 | |
| 1,569 |
Cash and cash equivalents, end of period | | $ | 482 | | $ | 2,042 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
910
NOTE 1. GENERALDescription of Business and Basis of Presentation
Description of Business
Archrock, Inc. (individually and together with its wholly owned subsidiaries, “we,” “our” or us”) isWe are an energy infrastructure company with a primarypure play focus on midstream natural gas compression. We are the leading provider of natural gas compression services, in terms of total compression fleet horsepower, to customers in the energy industry throughout the United States (the “U.S.”)U.S. and a leading supplier of aftermarket services to customers that own compression equipment in the U.S. We operate in two business segments: contract operations and aftermarket services. Our predominant segment, contract operations, primarily includes designing, sourcing, owning, installing, operating, servicing, repairing and maintaining our owned fleet of natural gas compression equipment to provide natural gas compression services to our customers. In our aftermarket services business, we sell parts and components and provide operations, maintenance, overhaul and reconfiguration services to customers who own compression equipment.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements included herein have been prepared in accordance with U.S. Generally Accepted Accounting Policies (“GAAP”)the instructions to Form 10-Q and the rules and regulations of the SEC. Certaindo not include all 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 theby GAAP. Therefore, this 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 theour consolidated financial statements presentedand notes contained in our 2022 Form 10–K, which contains10-K. The information furnished herein reflects all adjustments that are, in the opinion of management, of a more comprehensive summary of our accounting policies. The interim results reported herein are not necessarily indicative of resultsnormal recurring nature and considered necessary for a full year.
fair statement of the results of the interim periods reported. All intercompany accountsbalances and transactions have been eliminated in consolidation. InOperating results for the Notes to Unaudited Condensed Consolidated Financial Statements, all dollar and share amounts in tabulationsnine months ended September 30, 2023 are in thousandsnot necessarily indicative of dollars and shares, respectively, unless otherwise indicated. the results that may be expected for the year ending December 31, 2023.
2. Recent Accounting Developments
Accounting Standards Updates Not Yet Implemented
Business Combinations – Joint Venture Formations
In August 2023, the FASB issued ASU 2023-05, to reduce diversity in practice and provide decision-useful information to a joint venture’s investors by requiring that a joint venture apply a new basis of accounting upon formation. By applying a new basis of accounting, a joint venture will recognize and initially measure its assets and liabilities at fair value, with exceptions to fair value measurement that are consistent with the business combinations guidance, on the date of formation. ASU 2023-05 is effective prospectively for all joint venture formations with a formation date on or after January 1, 2025. Additionally, a joint venture that was formed before January 1, 2025, may elect to apply the amendments retrospectively if it has sufficient information to do so. Early adoption is permitted in any interim or annual period in which financial statements have not been issued or been made available for issuance, either prospectively or retrospectively. We expect that the adoption of ASU 2023-05 will have no impact on our consolidated financial statements.
NOTE 2. DISPOSITIONS3. Inventory
In September 2022, we completed the sale of certain contract operations customer service agreements and approximately 390 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 ratioInventory is comprised of the horsepower sold relative to the total horsepower of the asset group. We received cash consideration of $44.3 million for the sale and recorded a gain on the sale of $11.5 million during the three months and nine months ended September 30, 2022.following:
| | | | | | |
| | September 30, | | December 31, | ||
(in thousands) | | 2023 | | 2022 | ||
Parts and supplies | | $ | 72,933 | | $ | 70,228 |
Work in progress | |
| 15,009 | |
| 14,394 |
Inventory | | $ | 87,942 | | $ | 84,622 |
In 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 during the nine months ended September 30, 2022.
1011
Archrock, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
NOTE 3. INVENTORY
Inventory is comprised of the following:
| | | | | | |
|
| September 30, 2022 |
| December 31, 2021 | ||
Parts and supplies | | $ | 67,459 | | $ | 63,628 |
Work in progress | |
| 16,632 | |
| 9,241 |
Inventory | | $ | 84,091 | | $ | 72,869 |
NOTE 4. PROPERTY, PLANT AND EQUIPMENTProperty, Plant and Equipment
Property, plant and equipment is comprised of the following:
| | | | | | | | | | | | |
|
| September 30, 2022 |
| December 31, 2021 |
| September 30, |
| December 31, | ||||
(in thousands) | | 2023 | | 2022 | ||||||||
Compression equipment, facilities and other fleet assets | | $ | 3,243,488 | | $ | 3,273,770 | | $ | 3,300,366 | | $ | 3,234,239 |
Land and buildings | |
| 44,056 | |
| 43,540 | |
| 37,947 | |
| 44,304 |
Transportation and shop equipment | |
| 90,116 | |
| 92,490 | |
| 98,421 | |
| 93,189 |
Computer hardware and software | |
| 77,357 | |
| 76,908 | |
| 77,483 | |
| 77,357 |
Other | |
| 5,518 | |
| 6,229 | |
| 6,228 | |
| 5,754 |
Property, plant and equipment | |
| 3,460,535 | |
| 3,492,937 | |
| 3,520,445 | |
| 3,454,843 |
Accumulated depreciation | |
| (1,245,869) | |
| (1,266,411) | |
| (1,218,028) | |
| (1,255,590) |
Property, plant and equipment, net | | $ | 2,214,666 | | $ | 2,226,526 | | $ | 2,302,417 | | $ | 2,199,253 |
NOTE
5. EQUITY INVESTMENTSInvestment in Unconsolidated Affiliate
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% equityAs of September 30, 2023, our ownership interest in Ecotec International Holdings, LLC. (“ECOTEC”),ECOTEC, a company specializing in methane emissions detection, monitoring and management. We have elected the fair value option to account for this investment (see Note 16). As of September 30, 2022, our ownership interest in ECOTECmanagement, is 19%, which is25% and included in Otherother assets in our unaudited condensed consolidated balance sheets.
For greater transparency, we have elected the fair value option for this investment.
Changes in the fair value of this investment are recognized in Otherother expense (income) expense,, net in our unaudited condensed consolidated statements of operations. See Note 14 (“Fair Value Measurements”) for further details on fair value accounting.
6. Long-Term Debt
NOTE 6. HOSTING ARRANGEMENTSLong–term debt is comprised of the following:
We have hosting arrangements that are service contracts related to the cloud migration of our Enterprise Resource Planning (“ERP”) system and cloud services for our mobile workforce, telematics and inventory management tools.
As of September 30, 2022 and December 31, 2021, we had $15.1 million and $12.7 million, respectively, of capitalized implementation costs related to these hosting arrangements included in Other assets in our unaudited condensed consolidated balance sheets. Accumulated amortization was $2.1 million and $0.7 million as of September 30, 2022 and December 31, 2021, respectively.
Included in Selling, general and administrative in our unaudited condensed consolidated statements of operations is amortization of $0.6 million and $0.1 million during the three months ended September 30, 2022 and 2021, respectively, and $1.5 million and $0.3 million during the nine months ended September 30, 2022 and 2021, respectively.
| | | | | | |
| | September 30, | | December 31, | ||
(in thousands) |
| 2023 | | 2022 | ||
Credit Facility | | $ | 306,900 | | $ | 251,250 |
| | | | | | |
6.25% senior notes due April 2028: | | | | | | |
Principal outstanding | |
| 800,000 | |
| 800,000 |
Unamortized debt premium | | | 9,026 | |
| 10,530 |
Unamortized debt issuance costs | |
| (7,498) | |
| (8,744) |
| |
| 801,528 | |
| 801,786 |
| | | | | | |
6.875% senior notes due April 2027: | | | | | | |
Principal outstanding | | | 500,000 | |
| 500,000 |
Unamortized debt issuance costs | | | (3,874) | |
| (4,702) |
| | | 496,126 | |
| 495,298 |
| | | | | | |
Long-term debt | | $ | 1,604,554 | | $ | 1,548,334 |
1112
Archrock, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
NOTE 7. LONG–TERM DEBT
Long–term debt is comprised of the following:
| | | | | | |
|
| September 30, 2022 |
| December 31, 2021 | ||
Credit Facility | | $ | 202,000 | | $ | 234,500 |
| | | | | | |
6.25% senior notes due April 2028 | | | | | | |
Principal outstanding | |
| 800,000 | |
| 800,000 |
Unamortized debt premium | | | 11,031 | |
| 12,536 |
Unamortized debt issuance costs | |
| (9,158) | |
| (10,406) |
| |
| 801,873 | |
| 802,130 |
| | | | | | |
6.875% senior notes due April 2027 | | | | | | |
Principal outstanding | | | 500,000 | |
| 500,000 |
Unamortized debt issuance costs | | | (4,978) | |
| (5,805) |
| | | 495,022 | |
| 494,195 |
| | | | | | |
Long-term debt | | $ | 1,498,895 | | $ | 1,530,825 |
Our $750.0 million asset–based revolving Credit Facility, as amended (the “Credit Facility”), matures in November 2024. As of September 30, 2022,2023, there were $5.8$4.5 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.4%. The weighted average annual interest rate on the outstanding balance under ourthe Credit Facility, excluding the effect of interest rate swaps, was 5.5%7.9% and 2.6%6.9% at September 30, 20222023 and December 31, 2021,2022, respectively. We incurred $0.4 million and $0.5 million of commitment fees on the daily unused amount of the Credit Facility in each ofduring the three months ended September 30, 2023 and 2022, respectively, and 2021$1.3 million and $1.5 million in each ofduring the nine months ended September 30, 2023 and 2022, and 2021.respectively.
As of September 30, 2022,2023, we were in compliance with all covenants under our Credit Facility agreement. As a result of the Credit Facility’s financial ratio requirements, $486.4 million of the $542.2 million ofAdditionally, all undrawn capacity on our Credit Facility was available for additional borrowings as of September 30, 2022.2023.
In February 2021,Amended and Restated Credit Agreement
On May 16, 2023, we amended and restated our Credit Facility to, among other things, reducethings:
● | extend the maturity date of the Credit Facility from November 8, 2024 to May 16, 2028 (or December 2, 2026 or December 3, 2027 if any portion of 2027 Senior Notes and 2028 Senior Notes, respectively, remain outstanding at such date); |
● | change the referenced rate from LIBOR to SOFR so that borrowings under the Credit Facility bear interest at, based on our election, either a base rate or SOFR, plus an applicable margin; |
● | increase the portion of the Credit Facility available for the issuance of swing line loans from $50.0 million to $75.0 million. |
We incurred $6.0 million in transaction costs related to the aggregate revolving commitment from $1.25 billion to $750.0 millionAmended and adjust certain financial ratios. WeRestated Credit Agreement, which were included in other assets in our condensed consolidated balance sheets and are being amortized over the remaining term of the Credit Facility. In addition, we wrote off $4.9$1.0 million of unamortized deferred financing costs as a result of the amendment,Amended and Restated Credit Agreement, which was recorded to interest expense in our unaudited condensed consolidated statements of operations during the nine months ended September 30, 2021.2023.
NOTE 8. COMMITMENTS AND CONTINGENCIES7. Commitments and Contingencies
Insurance Matters
Our business can be hazardous, involving unforeseen circumstances such as uncontrollable flows of natural gas or well fluids and fires or explosions. As is customary in our industry, we review our safety equipment and procedures and carry insurance against some, but not all, risks of our business. Our insurance coverage includes property damage, general liability and commercial automobile liability and other coverage we believe is appropriate. We believe that our insurance coverage is customary for the industry and adequate for our business, however, losses and liabilities not covered by insurance would increase our costs.
Additionally, we are substantially self–insured for workers’ compensation and employee group health claims in view of the relatively high per–incident deductibles we absorb under our insurance arrangements for these risks. Losses up to the deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages. We are also self–insured for property damage to our offshore assets.
1213
Archrock, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
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. 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 during the three months ended March 31, 2022. In September 2022, we received $0.4 million of business interruption insurance recovery proceeds, which resolved the remainder of our insurance claims related to Hurricane Ida.
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 September 30, 20222023 and December 31, 2021,2022, we had $3.9$4.1 million and $5.8$3.9 million, respectively, accrued for the outcomes of non–income–based tax audits. We do not expect that the ultimate resolutions of these audits will result in a material variance from the amounts accrued. We do not accrue for unasserted claims for tax audits unless we believe the assertion of a claim is probable, it is probable that it will be determined that the claim is owed and we can reasonably estimate the claim or range of the claim. We believe the likelihood is remote that the impact of potential unasserted claims from non–income–based tax audits could be material to our consolidated financial position, but it is possible that the resolution of future audits could be material to our consolidated results of operations or cash flows.
InDuring the years ended December 31, 2022 and 2021, onecertain of our sales and use tax audits advanced from the audit review phase to the contested hearing phase. As of both September 30, 20222023 and December 31, 2021,2022, we had $0.6$0.6 million accrued for this audit.
these audits.
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.
NOTE 9. STOCKHOLDERS’ EQUITY8. Stockholders’ Equity
Equity Distribution Agreement2023 Share Repurchase Program
DuringOn April 27, 2023, our Board of Directors authorized a share repurchase program that allows us to repurchase up to $50.0 million of outstanding common stock. Under the 2023 Share Repurchase Program, shares of our common stock may be repurchased periodically, including in the open market, privately negotiated transactions, or otherwise in accordance with applicable federal securities laws, at any time until April 27, 2024. The actual timing, manner, number, and value of shares repurchased under the program will be determined by us at our discretion.
The following table summarizes shares repurchased under the 2023 Share Repurchase Program during the three and nine months ended September 30, 2022, we sold 447,020 shares of common stock for net proceeds of $4.2 million pursuant to an 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 (the “Equity Distribution Agreement”). During the nine months ended September 30, 2021, we sold 357,148 shares of common stock under this program for net proceeds of $3.4 million.2023:
| | | | | | |
|
| Three Months Ended | | Nine Months Ended | ||
(dollars and shares in thousands, except per share amounts) | | September 30, 2023 | | September 30, 2023 | ||
Total cost of shares repurchased | | $ | 4,422 | | $ | 6,495 |
Average price per share | | $ | 12.49 | | $ | 11.27 |
Total number of shares repurchased | |
| 354 | |
| 576 |
1314
Archrock, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Cash Dividends
The following table summarizes our dividends declared and paid in each of the quarterly periods of 20222023 and 2021:2022:
| | | | | | | | | | | | |
|
| Dividends per |
| |
| Dividends per |
| Dividends Paid | ||||
|
| Common Share |
| Dividends Paid | ||||||||
2022 | |
|
| |
|
| ||||||
(dollars in thousands, except per share amounts) |
| Common Share |
| (in thousands) | ||||||||
2023 | |
|
| |
|
| ||||||
Q3 | | $ | 0.145 | | $ | 22,559 | | $ | 0.155 | | $ | 24,250 |
Q2 | | | 0.145 | | | 22,494 | | | 0.150 | | | 23,504 |
Q1 | | | 0.145 | | | 22,673 | | | 0.150 | | | 23,852 |
| | | | | | | | | | | | |
2021 |
| |
|
| |
| ||||||
2022 |
| |
|
| |
| ||||||
Q4 | | $ | 0.145 | | $ | 22,351 | | $ | 0.145 | | $ | 22,589 |
Q3 | |
| 0.145 | |
| 22,506 | |
| 0.145 | |
| 22,559 |
Q2 | |
| 0.145 | |
| 22,331 | |
| 0.145 | |
| 22,494 |
Q1 | |
| 0.145 | |
| 22,155 | |
| 0.145 | |
| 22,673 |
On October 27, 2022,26, 2023, our Board of Directors declared a quarterly dividend of $0.145$0.155 per share of common stock to be paid on November 15, 202214, 2023 to stockholders of record at the close of business on November 8, 2022.7, 2023.
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 loss consists of changes in the fair value of our interest rate swap derivative instruments, net of tax. See Note 15 for further details on our interest rate swap derivative instruments.
The following table presents the changes in accumulated other comprehensive loss, net of tax:
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | | ||||
Beginning accumulated other comprehensive loss | | $ | — | | $ | (3,044) | | $ | (984) | | $ | (5,006) | |
Other comprehensive income, net of tax: | | | | | | | | | | | | | |
Loss recognized in other comprehensive | |
| — | |
| (458) | |
| (405) | |
| (529) | |
Loss reclassified from accumulated other | |
| — | |
| 1,474 | |
| 1,389 | |
| 3,507 | |
Total other comprehensive income | |
| — | |
| 1,016 | |
| 984 | |
| 2,978 | |
Ending accumulated other comprehensive loss | | $ | — | | $ | (2,028) | | $ | — | | $ | (2,028) | |
14
Archrock, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
NOTE 10. REVENUE FROM CONTRACTS WITH CUSTOMERS9. Revenue from Contracts with Customers
The following table presents our revenue from contracts with customers by segment (see Note 18) and disaggregated by revenue source:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||||||||||
(in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||||||||||
Contract operations: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
0 ― 1,000 horsepower per unit | | $ | 38,967 | | $ | 41,576 | | $ | 121,298 | | $ | 134,413 | | $ | 43,142 | | $ | 38,967 | | $ | 126,272 | | $ | 121,298 |
1,001 ― 1,500 horsepower per unit | |
| 72,463 | |
| 66,138 | |
| 208,161 | |
| 201,454 | |
| 90,016 | |
| 72,463 | |
| 259,830 | |
| 208,161 |
Over 1,500 horsepower per unit | |
| 58,818 | |
| 51,018 | |
| 170,297 | |
| 152,360 | |
| 74,140 | |
| 58,818 | |
| 209,526 | |
| 170,297 |
Other (1) | |
| 249 | |
| 179 | |
| 695 | |
| 583 | |
| 254 | |
| 249 | |
| 789 | |
| 695 |
Total contract operations revenue (2) | |
| 170,497 | |
| 158,911 | |
| 500,451 | |
| 488,810 | |
| 207,552 | |
| 170,497 | |
| 596,417 | |
| 500,451 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Aftermarket services: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Services | |
| 23,528 | |
| 19,249 | |
| 66,666 | |
| 53,149 | |
| 24,860 | |
| 23,528 | |
| 70,676 | |
| 66,666 |
Over–the–counter (“OTC”) parts and components sales | |
| 19,643 | |
| 17,006 | |
| 59,580 | |
| 44,253 | ||||||||||||
OTC parts and components sales | |
| 20,955 | |
| 19,643 | |
| 63,651 | |
| 59,580 | ||||||||||||
Total aftermarket services revenue (3) | |
| 43,171 | |
| 36,255 | |
| 126,246 | |
| 97,402 | |
| 45,815 | |
| 43,171 | |
| 134,327 | |
| 126,246 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total revenue | | $ | 213,668 | | $ | 195,166 | | $ | 626,697 | | $ | 586,212 | | $ | 253,367 | | $ | 213,668 | | $ | 730,744 | | $ | 626,697 |
(1) | Primarily relates to fees associated with owned non-compression equipment. |
(2) | Includes |
(3) | Services revenue within aftermarket services is recognized over time. OTC parts and components sales revenue is recognized at a point in time. |
See Note 16 (“Segment Information”) for further information on segments.
15
Performance Obligations
As of September 30, 2022,2023, we had $282.3$431.7 million of remaining performance obligations related to our contract operations segment, which will be recognized through 20272028 as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| Total | ||||||||||||||||||||||||||||
(in thousands) |
| 2023 |
| 2024 | | 2025 |
| 2026 |
| 2027 |
| 2028 |
| Total | ||||||||||||||||||||||||||||
Remaining performance obligations | | $ | 99,377 | | $ | 122,031 | | $ | 46,882 | | $ | 12,870 | | $ | 919 | | $ | 192 | | $ | 282,271 | | $ | 117,864 | | $ | 176,902 | | $ | 90,951 | | $ | 31,648 | | $ | 9,672 | | $ | 4,620 | | $ | 431,657 |
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 September 30, 20222023 and December 31, 2021,2022, our receivables from contracts with customers, net of allowance for credit losses, were $118.9$124.8 million and $84.7$111.9 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.
15
Archrock, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
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.
Our allowance for credit losses balance changed as follows during the nine months ended September 30, 2022:2023:
| | | |
Balance at December 31, 2021 |
| $ | 2,152 |
Provision for credit losses | | | (28) |
Write-offs charged against allowance | | | (637) |
Balance at September 30, 2022 | | $ | 1,487 |
| | | |
(in thousands) |
| | |
Balance at beginning of period |
| $ | 1,674 |
Benefit from credit losses | | | (234) |
Write-offs charged against allowance | | | (452) |
Balance at end of period | | $ | 988 |
Contract Liabilities
Freight billings to customers for the transport of compression assets, customer–specified modifications of compression assets and milestone billings on aftermarket services often result in a contract liability. As of September 30, 20222023 and December 31, 2021,2022, our contract liabilities were $8.3$7.7 million and $4.4$8.0 million, respectively.
During the nine months ended September 30, 2022,2023, we deferred revenue of $19.6$10.7 million and recognized deferred revenue of $15.7 million. $11.0 million as revenue. The revenue recognized during the period primarily related to freight billings and milestone billings on aftermarket services.
NOTE 11. STOCK–BASED COMPENSATION
We grant various forms of stock–based compensation to our employees10. Long-Lived and non–employee directors. These stock–based awards can consist of stock options, stock appreciation rights, restricted stock awards, restricted stock units (“RSUs”), performance–based RSUs, other stock–based awards and dividend equivalent rights. We recognize stock–based compensation expense related to restricted stock awards, RSUs, performance–based RSUs and shares issued under our ESPP.
16
Archrock, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
The following table presents the stock–based compensation expense recognized in our unaudited condensed consolidated statements of operations:
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Equity award expense | | $ | 2,998 | | $ | 2,900 | | $ | 9,035 | | $ | 8,741 |
Liability award expense | |
| 24 | |
| 127 | |
| 904 | |
| 1,121 |
Total stock-based compensation expense | | $ | 3,022 | | $ | 3,027 | | $ | 9,939 | | $ | 9,862 |
The following table presents our restricted stock activity in the nine months ended September 30, 2022:
| | | | | |
| | | | Weighted | |
| | | | Average | |
| | | | Grant Date | |
| | Shares | | Fair Value | |
|
| (in thousands) |
| Per Share | |
Non-vested restricted stock, December 31, 2021 |
| 2,578 | | $ | 10.35 |
Granted |
| 1,861 | |
| 9.03 |
Vested |
| (1,152) | |
| 10.25 |
Canceled |
| (244) | |
| 9.28 |
Non-vested restricted stock, September 30, 2022 (1) |
| 3,043 | | $ | 9.67 |
As of September 30, 2022, there was $17.1 million of unrecognized stock–based compensation expense which is expected to be recognized over a weighted average period of 1.9 years.
NOTE 12. LONG–LIVED AND OTHER ASSET IMPAIRMENTOther Asset Impairment
We review long–lived assets, including property, plant and equipment and identifiable intangibles that are being amortized, for impairment whenever events or changes in circumstances, including the removal of compressors from our active fleet, indicate that the carrying amount of an asset may not be recoverable.
Compression Fleet
We periodically review the future deployment of our idle compression assets for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. Based on these reviews, we determine that certain idle compressors should be retired from the active fleet. The retirement of these units from the active fleet triggers a review of these assets for impairment and as a result of our review, we may record an asset impairment to reduce the book value of each unit to its estimated fair value. The fair value of each unit is estimated based on the expected net sale proceeds compared to other fleet units we recently sold, a review of other units recently offered for sale by third parties or the estimated component value of the equipment we plan to use.
16
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.
17
Archrock, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
The following table presents the results of our compression fleet impairment review as recorded in our contract operations segment:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||||||||||
(dollars in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||||||||||
Idle compressors retired from the active fleet |
| | 25 |
| | 60 |
| | 100 |
| | 175 |
| | 30 |
| | 25 |
| | 75 |
| | 100 |
Horsepower of idle compressors retired from the active |
| | 23,000 |
| | 24,000 |
| | 80,000 |
| | 61,000 |
| | 16,000 |
| | 23,000 |
| | 39,000 |
| | 80,000 |
Impairment recorded on idle compressors retired from | | $ | 4,149 | | $ | 5,120 | | $ | 16,205 | | $ | 14,964 | | $ | 2,922 | | $ | 4,149 | | $ | 8,383 | | $ | 16,205 |
See Note 1614 (“Fair Value Measurements”) for additional information.further details on fair value accounting.
11. Restructuring Charges
NOTE 13. INCOME TAXESDuring the first quarter of 2023, a plan to further streamline our organization and more fully align our teams to improve our customer service and profitability was approved by management. We do not expect to incur additional restructuring charges related to these restructuring activities.
The following table presents the changes to our accrued liability balance related to restructuring charges during the nine months ended September 30, 2023:
| | | |
| | | |
| | | |
(in thousands) | | Total | |
Balance at December 31, 2022 |
| $ | — |
Charges incurred | |
| 1,554 |
Payments | | | (1,343) |
Balance at September 30, 2023 | | $ | 211 |
The following table presents restructuring charges incurred by segment:
| | | | | | | | | | | | |
|
| Contract | | Aftermarket | | | | | | | ||
(in thousands) | | Operations | | Services | | Other(1) | | Total | ||||
Three months ended September 30, 2023 | | | | | | | | | | | | |
Organizational restructuring | | $ | — | | $ | 387 | | $ | 205 | | $ | 592 |
Total restructuring charges | | $ | — | | $ | 387 | | $ | 205 | | $ | 592 |
| | | | | | | | | | | | |
Nine months ended September 30, 2023 | | | | | | | | | | | | |
Organizational restructuring | | $ | 101 | | $ | 387 | | $ | 1,066 | | $ | 1,554 |
Total restructuring charges | | $ | 101 | | $ | 387 | | $ | 1,066 | | $ | 1,554 |
(1) | Represents expense incurred within our corporate function and not directly attributable to our segments. |
17
The following table presents restructuring charges incurred by cost type:
| | | | | | |
| | Three Months Ended | | Nine Months Ended | ||
(in thousands) | | September 30, 2023 |
| September 30, 2023 | ||
Organizational restructuring | | | | | | |
Severance costs | | $ | 592 | | $ | 1,296 |
Consulting costs | | | — | | | 258 |
Total restructuring charges | | $ | 592 | | $ | 1,554 |
12. Income Taxes
Valuation Allowance
The amount of our deferred tax assets considered realizable could be adjusted if projections of future taxable income are reduced or objective negative evidence in the form of a three–year cumulative loss is present or both. Should we no longer have a level of sustained profitability, excluding nonrecurring charges, we will have to rely more on our future projections of taxable income to determine if we have an adequate source of taxable income for the realization of our deferred tax assets, namely net operating loss, interest limitation and tax credit carryforwards. This may result in the need to record a valuation allowance against all or a portion of our deferred tax assets.
Effective Tax Rate
The year-to-date effective tax rate for the nine months ended September 30, 20222023 differed significantly from our statutory rate primarily due to state taxes, unrecognized tax benefits and the limitation on executive compensation.
Unrecognized Tax Benefits
As of September 30, 2022,2023, we believe it is reasonably possible that $2.7$2.8 million of our unrecognized tax benefits, including penalties, interest and discontinued operations, will be reduced prior to September 30, 20232024 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.
Impact of New Legislation
On August 16, 2022, President Biden signed into law the Inflation Reduction Act (Public Law Number 117–169). This legislation is expected to have an immaterial impact to our unaudited condensed consolidated financial statements.
18
Archrock, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
NOTE14. EARNINGS PER COMMON SHARE13. Earnings Per Common Share
Basic net income (loss)earnings 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)earnings 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)earnings per common share is computed using the weighted average number of common shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options, performance–based RSUsrestricted stock units and stock to be issued pursuant to our ESPP unless their effect would have been anti–dilutive.
18
The following table shows the calculation of net income attributable to common stockholders, which is used in the calculation of basic and diluted earnings per common share, potential shares of common stock that were included in computing diluted earnings per common share and the potential shares of common stock issuable that were excluded from computing diluted earnings per common share as their inclusion would have been anti–dilutive:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||||||||||
(in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||||||||||
Net income | | $ | 15,371 | | $ | 9,304 | | $ | 33,838 | | $ | 22,225 | | $ | 30,858 | | $ | 15,371 | | $ | 71,996 | | $ | 33,838 |
Allocation of earnings to participating securities | |
| (294) | |
| (456) | |
| (1,114) | |
| (909) | ||||||||||||
Less: Allocation of earnings to participating securities | |
| (434) | |
| (294) | |
| (1,418) | |
| (1,114) | ||||||||||||
Net income attributable to common stockholders | | $ | 15,077 | | $ | 8,848 | | $ | 32,724 | | $ | 21,316 | | $ | 30,424 | | $ | 15,077 | | $ | 70,578 | | $ | 32,724 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding used in | | | 153,550 | | | 152,158 | | | 153,168 | | | 151,615 | | | 154,163 | | | 153,550 | | | 154,210 | | | 153,168 |
Effect of dilutive securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Restricted stock units | | | 131 | | | 138 | | | 125 | | | 152 | ||||||||||||
Performance-based restricted stock units | | | 235 | | | 131 | | | 181 | | | 125 | ||||||||||||
ESPP shares | | | 6 | | | 1 | | | 4 | | | 2 | | | 3 | | | 6 | | | 7 | | | 4 |
Weighted average common shares outstanding used in | | | 153,687 | | | 152,297 | | | 153,297 | | | 151,769 | | | 154,401 | | | 153,687 | | | 154,398 | | | 153,297 |
| | | | | | | | | | | | | ||||||||||||
On exercise of options where exercise price is greater than average market price for the period | | | — | | | 15 | | | — | | | 27 |
NOTE 15. DERIVATIVES AND HEDGING14. Fair Value Measurements
We are exposed to market risks associated with changes in the variable interest rate of our Credit Facility. We have used derivative instruments, in the form of interest rate swaps, to manage our exposure to fluctuations in this variable interest rateAssets and thereby minimize the risks and costs associated with financial activities. We do not use derivative instruments for trading or other speculative purposes.Liabilities Measured at Fair Value on a Recurring Basis
In March 2022, our $300.0 million notionalAs of September 30, 2023, we own a 25% equity interest in ECOTEC. The fair value is determined using an average of the income approach that includes the use of a discounted cash flow model, and the market approach that includes the financial metrics of comparable public companies under the guideline public company method. The determination of this investment primarily consisted of unobservable inputs, which creates uncertainty in the measurement of fair value as of the reporting date. Significant increases (decreases) in these inputs in isolation would result in a significantly higher (lower) fair value measurement. As of September 30, 2023, the fair value of interest rate swaps expired. We previously entered into these swaps to offset changesour investment in expected cash flows due to fluctuationsECOTEC was $12.8 million.
This fair value measurement is classified as Level 3. The significant unobservable inputs used in the associated variable interest ratesfair value measurement are the WACC and designated themthe revenue multiples. Additional quantitative information related to the significant unobservable inputs are as cash flow hedges. There was no nonperformance by any counterparty during the terms of the interest rate swaps and no collateral was posted for the instruments.follows:
| | | | | | | | | |
| | Significant Unobservable Inputs | | | Range | | | Median | |
Valuation technique: | | | | | | | | | |
Discounted cash flow | | WACC | | 0% - 17.4% | | | 10.0% | ||
Guideline public company | | Revenue multiple | | 1.6x - 10x | | | 4.0x |
19
Archrock, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Prior to expiration, during the third quarterThe reconciliation 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 amountchanges 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 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 unaudited 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 those derivatives are classified as cash flows from financing activities.
The following table presents the effect of our derivative instruments on our unaudited condensed consolidated statements of operations:
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Total amount of interest expense in which the effects of cash flow hedges and undesignated interest rate swaps are recorded | | $ | 25,177 | | $ | 25,508 | | $ | 74,879 | | $ | 82,711 |
| | | | | | | | | | | | |
Interest rate swaps designated as cash flow hedging | | | | | | | | | | | | |
Pre-tax loss recognized in other comprehensive | | $ | — | | $ | (581) | | $ | (512) | | $ | (670) |
Pre-tax loss reclassified from accumulated other | |
| — | |
| (1,867) | |
| (1,758) | |
| (4,440) |
| | | | | | | | | | | | |
Interest rate swaps not designated as hedging | | | | | | | | | | | | |
Gain recognized in interest expense | | $ | — | | $ | 532 | | $ | 523 | | $ | 532 |
20
Archrock, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
The following table presents the effect of our derivative instruments on our unaudited condensed consolidated balance sheets:
| | | | | | | |
|
| September 30, 2022 |
| December 31, 2021 | | ||
Interest rate swaps designated as cash flow hedging instruments | | | | | | | |
Accrued liabilities | | $ | — | | $ | 727 | |
| | | | | | | |
Interest rate swaps not designated as hedging instruments | | | | | | | |
Accrued liabilities | | | — | | | 523 | |
| | | | | | | |
Total derivative liabilities | | $ | — | | $ | 1,250 | |
Please see Note 9 and Note 16 for additional details on our derivative instruments.
16. FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Investment in ECOTEC
During the nine months ended September 30, 2022, we acquired a 19% equity interest in ECOTEC. We have elected the fair value option to account for this investment. The investment is valued at its transaction price, unless and until there is a significant change in the investment, such as an impairment or an additional investment. The investment’s fair value is reviewed periodically and is classified as a Level 3 measurement. As of September 30, 2022, the fair value of our investment in ECOTEC wasis as follows:
| | | | | | | | | | | | | | | |
|
| September 30, 2022 | | Three Months Ended | | Nine Months Ended | |||||||||
Investment in ECOTEC | | $ | 12,000 | ||||||||||||
| | September 30, | | September 30, | |||||||||||
(in thousands) | | | 2023 | | | 2022 | | | 2023 | | | 2022 | |||
Balance at beginning of period |
| $ | 12,807 |
| $ | 8,000 | | $ | 12,803 |
| $ | — | |||
Purchases of equity interests | | | — | | | 4,000 | | | 2,000 | | | 12,000 | |||
Unrealized loss (1) | | | — | | | — | | | (1,996) | | | — | |||
Balance at end of period | | $ | 12,807 | | $ | 12,000 | | $ | 12,807 | | $ | 12,000 |
(1) | Included in other expense (income), net in our unaudited condensed consolidated statement of operations. |
Interest Rate Swaps
Prior to their expirationSee Note 5 (“Investment in the first quarter of 2022, our interest rate swap derivative instruments were valued quarterly based on the income approach (discounted cash flows) using market observable inputs, including LIBOR forward curves. These fair value measurements were 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:
| | | | | | |
| | September 30, 2022 | | December 31, 2021 | ||
Derivative liabilities | | $ | — | | $ | 1,250 |
Unconsolidated Affiliate”) for further details.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
During the three months and nine months ended September 30, 2022,2023, we recorded nonrecurring fair value measurements of $4.1 million and $16.2 million, respectively, related to our idle compressors (see Note 12).compressors. Our estimate of the compressors’ fair value was primarily based on the expected net sale proceeds compared with other fleet units we recently sold and/or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use. We discounted the expected proceeds, net of selling and other carrying costs, using a weighted average disposal period of four years. The fair value of our compressors impaired in 20222023 and 20212022 was as follows:
| | | | | | |
|
| September 30, 2022 |
| December 31, 2021 | ||
Impaired compressors | | $ | 1,548 | | $ | 4,380 |
21
Archrock, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
| | | | | | | | |
(in thousands) |
| | | September 30, 2023 | | December 31, 2022 | ||
Impaired compressors | | | | $ | 1,036 | | $ | 1,961 |
These fair value measurements are classified as Level 3. 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 September 30, 2023 | | $0 - $310 per horsepower | | $51 per horsepower |
As of December 31, 2022 | | $0 - $621 per horsepower | | $ |
|
|
|
|
|
(1) | Calculated based on an estimated discount for market liquidity of |
See Note 10 (“Long-Lived and Other Asset Impairments”) for further details.
Other Financial Instruments
The carrying amounts of our cash, accounts receivable and accounts payable approximate fair value due to the short–term nature of these instruments.
The carrying amount of borrowings outstanding under our Credit Facility approximates fair value due to the variable interest rate. The measurement of the fair value of these outstanding borrowings is a Level 3 measurement.
20
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:
| | | | | | | | | | | | |
|
| September 30, 2022 |
| December 31, 2021 | ||||||||
(in thousands) |
| September 30, 2023 |
| December 31, 2022 | ||||||||
Carrying amount of fixed rate debt (1) | | $ | 1,296,895 | | $ | 1,296,325 | | $ | 1,297,654 | | $ | 1,297,084 |
Fair value of fixed rate debt | |
| 1,155,760 | |
| 1,361,000 | |
| 1,230,000 | |
| 1,214,000 |
NOTE 17. RELATED PARTY TRANSACTIONS15. Related Party Transactions
Old Ocean Reserves, LP (“Old Ocean Reserves”), formerly JDH Capital Holdings, L.P., an affiliate of our customer Hilcorp, Energy Company (“Hilcorp”), hashad the right to designate one director to serve on our boardBoard of directorsDirectors as long as Old Ocean Reserves or its successors (together with its affiliates) ownsowned at least 7.5% of our outstanding common stock. As ofThis right terminated in September 30, 2022,2023 when Old Ocean Reserves owned 10.8%ownership of our outstanding common stock. Jason C. Rebrook, Chief Executive Officer and Director of Harvest Midstream Company, a Hilcorp affiliate, has served as Old Ocean Reserves’ representative director since July 2020.stock fell below 7.5%.
Revenue from Hilcorp was $9.2$8.9 million and $9.5$9.2 million during the three months ended September 30, 2023 and 2022, respectively, and 2021, respectively, and $27.8$26.7 million and $28.6$27.8 million during the nine months ended September 30, 2023 and 2022, and 2021, respectively.respectively. Accounts receivable, net due from Hilcorp was $3.2 million and $3.7$3.0 million as of September 30, 20222023 and December 31, 2021,2022, respectively.
NOTE 18. SEGMENT INFORMATION16. Segment Information
We manage our business segments primarily based on the type of product or service provided. We have two segments: contract operations and aftermarket services. Our contract operations segment primarily provides natural gas compression services to meet specific customer requirements. Our aftermarket services segment provides a full range of services to support the compression needs of customers, from parts sales and normal maintenance services to full operation of a customer’s owned assets. All of our operations are located in the U.S.
22
Archrock, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
We evaluate the performance of our segments based on gross margin, defined as revenue less cost of sales (excluding depreciation and amortization) for each segment. Segment revenue includes only sales to external customers.
Summarized financial information for our reporting segments is shown below:
| | | | | | | | | | | | | | | | | | |
|
| Contract |
| Aftermarket |
| | |
| Contract |
| Aftermarket |
| | | ||||
(in thousands) |
| Operations |
| Services |
| Total | ||||||||||||
Three months ended September 30, 2023 |
| |
|
| |
|
| |
| |||||||||
Revenue | | $ | 207,552 | | $ | 45,815 | | $ | 253,367 | |||||||||
Gross margin | |
| 132,279 | |
| 9,127 | |
| 141,406 | |||||||||
|
| Operations |
| Services |
| Total | | | | | | | | | | |||
Three months ended September 30, 2022 |
| |
|
| |
|
| |
| |
|
| |
|
| |
|
|
Revenue | | $ | 170,497 | | $ | 43,171 | | $ | 213,668 | | $ | 170,497 | | $ | 43,171 | | $ | 213,668 |
Gross margin | |
| 98,803 | |
| 7,338 | |
| 106,141 | |
| 98,803 | |
| 7,338 | |
| 106,141 |
| | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2021 | |
|
| |
|
| |
|
| |||||||||
Nine months ended September 30, 2023 | |
|
| |
|
| |
|
| |||||||||
Revenue | | $ | 158,911 | | $ | 36,255 | | $ | 195,166 | | $ | 596,417 | | $ | 134,327 | | $ | 730,744 |
Gross margin | |
| 97,631 | |
| 5,603 | |
| 103,234 | |
| 365,629 | |
| 28,388 | |
| 394,017 |
| | | | | | | | | | | | | | | | | | |
Nine months ended September 30, 2022 | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Revenue | | $ | 500,451 | | $ | 126,246 | | $ | 626,697 | | $ | 500,451 | | $ | 126,246 | | $ | 626,697 |
Gross margin | |
| 295,901 | |
| 20,065 | |
| 315,966 | |
| 295,901 | |
| 20,065 | |
| 315,966 |
| | | | | | | | | | |||||||||
Nine months ended September 30, 2021 | |
|
| |
|
| |
|
| |||||||||
Revenue | | $ | 488,810 | | $ | 97,402 | | $ | 586,212 | |||||||||
Gross margin | |
| 304,778 | |
| 13,477 | |
| 318,255 |
21
The following table reconciles total gross margin to income before income taxes:
| | | | | | | | | | | | |
| | Three Months Ended |
| Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Total gross margin | | $ | 106,141 | | $ | 103,234 | | $ | 315,966 | | $ | 318,255 |
Less: | |
|
| |
|
| |
|
| |
|
|
Selling, general and administrative | |
| 30,500 | |
| 28,839 | |
| 85,964 | |
| 80,000 |
Depreciation and amortization | |
| 39,953 | |
| 45,280 | |
| 124,348 | |
| 135,185 |
Long-lived and other asset impairment | |
| 4,154 | |
| 5,121 | |
| 16,217 | |
| 15,154 |
Restructuring charges | | | — | | | 313 | | | — | | | 1,953 |
Interest expense | |
| 25,177 | |
| 25,508 | |
| 74,879 | |
| 82,711 |
Gain on sale of assets, net | | | (12,695) | | | (15,393) | | | (33,755) | | | (29,549) |
Other (income) expense, net | |
| (585) | |
| 337 | |
| (52) | |
| (1,634) |
Income before income taxes | | $ | 19,637 | | $ | 13,229 | | $ | 48,365 | | $ | 34,435 |
NOTE 19. SUBSEQUENT EVENTS
On October 3, 2022, we acquired an additional equity interest in ECOTEC, which increased our total ownership interest to 23%.
| | | | | | | | | | | | |
| | Three Months Ended |
| Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
(in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Total gross margin | | $ | 141,406 | | $ | 106,141 | | $ | 394,017 | | $ | 315,966 |
Less: | |
|
| |
|
| |
|
| |
|
|
Selling, general and administrative | |
| 28,558 | |
| 30,500 | |
| 83,632 | |
| 85,964 |
Depreciation and amortization | |
| 42,155 | |
| 39,953 | |
| 123,546 | |
| 124,348 |
Long-lived and other asset impairment | |
| 2,922 | |
| 4,154 | |
| 8,383 | |
| 16,217 |
Restructuring charges | | | 592 | | | — | | | 1,554 | | | — |
Interest expense | |
| 28,339 | |
| 25,177 | |
| 83,550 | |
| 74,879 |
Gain on sale of assets, net | | | (3,237) | | | (12,695) | | | (8,018) | | | (33,755) |
Other expense (income), net | |
| (235) | |
| (585) | |
| 1,831 | |
| (52) |
Income before income taxes | | $ | 42,312 | | $ | 19,637 | | $ | 99,539 | | $ | 48,365 |
2322
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s DiscussionThe following discussion and Analysisanalysis of Financial Conditionour financial condition and Resultsresults of Operationsoperations should be read in conjunction with our unaudited condensed consolidated financial statementsFinancial Statements and the related notes thereto included in this Form 10–Q, as well as10-Q and in conjunction with our 2022 Form 10–K.
10-K.
OVERVIEW
We are an energy infrastructure company with a primarypure–play focus on midstream natural gas compression. We are the leading provider of natural gas compression services, in terms of total compression fleet horsepower, to customers in the energy industry throughout the U.S., and a leading supplier of aftermarket services to customers that own compression equipment in the U.S. We operate in two business segments: contract operations and aftermarket services. Our contract operations services primarily include designing, sourcing, owning, installing, operating, servicing, repairing and maintaining our owned fleet of natural gas compression equipment to provide natural gas compression services to our customers. In our aftermarket services business, we sell parts and components and provide operations, maintenance, overhaul and reconfiguration services to customers who own compression equipment.
Recent Business Developments
Dispositions
In September 2022, we completed the sale of certain contract operations customer service agreements and approximately 390 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 received cash consideration of $44.3 million for the sale and recorded a gain on the sale of $11.5 million during the three months and nine months ended September 30, 2022.
In 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 received cash consideration of $55.5 million for the sale and recorded a gain on the sale of $16.7 million during the nine months ended September 30, 2022.
Investment in ECOTEC
In April 2022, we agreed to acquire for cash a 25% equity interest in ECOTEC, a company specializing in methane emissions monitoring and management. As of September 30, 2022, our equity interest was 19%. See Note 5 in our Notes to Unaudited Condensed Consolidated Financial Statements for additional information about this investment.
Operating Highlights
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended |
| | | Three Months Ended | | | Nine Months Ended |
| ||||||||
| | September 30, | | | September 30, |
| | | September 30, | | | September 30, |
| ||||||||
|
| 2022 |
| 2021 |
|
| 2022 |
| 2021 |
| | ||||||||||
(horsepower in thousands) |
| 2023 |
| 2022 |
|
| 2023 |
| 2022 |
| |||||||||||
Total available horsepower (at period end)(1) |
| 3,747 |
| 3,913 |
|
| 3,747 |
| 3,913 | | |
| 3,773 |
| 3,747 |
|
| 3,773 |
| 3,747 | |
Total operating horsepower (at period end)(2) | | 3,353 |
| 3,196 |
| | 3,353 |
| 3,196 | | | | 3,608 |
| 3,353 |
| | 3,608 |
| 3,353 | |
Average operating horsepower | | 3,355 |
| 3,225 |
| | 3,304 |
| 3,298 | | | | 3,593 |
| 3,355 |
| | 3,539 |
| 3,304 | |
Horsepower utilization: | |
|
|
|
| |
|
|
| | | |
|
|
|
| |
|
|
| |
Spot (at period end) | | 89 | % | 82 | % | | 89 | % | 82 | % | | | 96 | % | 89 | % | | 96 | % | 89 | % |
Average | | 88 | % | 82 | % | | 86 | % | 82 | % | | | 95 | % | 88 | % | | 94 | % | 86 | % |
(1) | Defined as idle and operating horsepower. Includes new compressors completed by third party manufacturers that have been delivered to us. |
(2) | Defined as horsepower that is operating under contract and horsepower that is idle but under contract and generating revenue such as standby revenue. |
24
Non–GAAP Financial Measures
Management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include the non–GAAP financial measure of gross margin.
We define gross margin as total revenue less cost of sales (excluding depreciation and amortization). Gross margin is included as a supplemental disclosure because it is a primary measure used by our management to evaluate the results of revenue and cost of sales (excluding depreciation and amortization), which are key components of our operations. We believe gross margin is important because it focuses on the current operating performance of our operations and excludes the impact of the prior historical costs of the assets acquired or constructed that are utilized in those operations, the indirect costs associated with our selling, general & administrative (“SG&A”)&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.
23
Gross margin has certain material limitations associated with its use as compared to net income (loss).income. These limitations are primarily due to the exclusion of SG&A, depreciation and amortization, impairments, restructuring charges, interest expense, gain on sale of assets, net, other expense (income) expense,, net and provision for income taxes. Because we intend to finance a portion of our operations through borrowings, interest expense is a necessary element of our costs and our ability to generate revenue. Additionally, because we use capital assets, depreciation expense is a necessary element of our costs and our ability to generate revenue and SG&A is necessary to support our operations and required corporate activities. To compensate for these limitations, management uses this non–GAAP measure as a supplemental measure to other GAAP results to provide a more complete understanding of our performance.
The following table reconciles net income to gross margin:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||||||||||
(in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||||||||||
Net income | | $ | 15,371 | | $ | 9,304 | | $ | 33,838 | | $ | 22,225 | | $ | 30,858 | | $ | 15,371 | | $ | 71,996 | | $ | 33,838 |
Selling, general and administrative | |
| 30,500 | |
| 28,839 | |
| 85,964 | |
| 80,000 | |
| 28,558 | |
| 30,500 | |
| 83,632 | |
| 85,964 |
Depreciation and amortization | |
| 39,953 | |
| 45,280 | |
| 124,348 | |
| 135,185 | |
| 42,155 | |
| 39,953 | |
| 123,546 | |
| 124,348 |
Long-lived and other asset impairment | |
| 4,154 | |
| 5,121 | |
| 16,217 | |
| 15,154 | |
| 2,922 | |
| 4,154 | |
| 8,383 | |
| 16,217 |
Restructuring charges | | | — | | | 313 | | | — | | | 1,953 | | | 592 | | | — | | | 1,554 | | | — |
Interest expense | |
| 25,177 | |
| 25,508 | |
| 74,879 | |
| 82,711 | |
| 28,339 | |
| 25,177 | |
| 83,550 | |
| 74,879 |
Gain on sale of assets, net | | | (12,695) | | | (15,393) | | | (33,755) | | | (29,549) | | | (3,237) | | | (12,695) | | | (8,018) | | | (33,755) |
Other (income) expense, net | |
| (585) | |
| 337 | |
| (52) | |
| (1,634) | ||||||||||||
Other expense (income), net | |
| (235) | |
| (585) | |
| 1,831 | |
| (52) | ||||||||||||
Provision for income taxes | |
| 4,266 | |
| 3,925 | |
| 14,527 | |
| 12,210 | |
| 11,454 | |
| 4,266 | |
| 27,543 | |
| 14,527 |
Gross margin | | $ | 106,141 | | $ | 103,234 | | $ | 315,966 | | $ | 318,255 | | $ | 141,406 | | $ | 106,141 | | $ | 394,017 | | $ | 315,966 |
RESULTS OF OPERATIONS
Summary of Results
Revenue was $213.7$253.4 million and $195.2$213.7 million during the three months ended September 30, 20222023 and 2021,2022, respectively, and $626.7$730.7 million and $586.2$626.7 million during the nine months ended September 30, 20222023 and 2021,2022, respectively. The increasesincrease in consolidated revenue during these periods werewas primarily due to increased revenue from both our contract operations business and aftermarket services business.business during the three and nine months ended September 30, 2023. See “Contract Operations” and “Aftermarket Services” below for further details.
Net income was $30.9 million and $15.4 million during the three months ended September 30, 2023 and 2022, respectively. The increase was primarily driven by higher gross margin from both our contract operations business and aftermarket services business and decreases in SG&A and long-lived and other asset impairment expense. These changes were partially offset by a decrease in the gain on sale of assets and increases in our provision for income taxes, interest expense and depreciation and amortization expense.
Net income was $72.0 million and $33.8 million during the nine months ended September 30, 2023 and 2022, respectively. The increase was primarily driven by higher gross margin from both our contract operations business and aftermarket services business and decreases in long-lived and other asset impairment expense and SG&A. These changes were partially offset by a decrease in the gain on sale of assets and increases in our provision for income taxes, interest expense, unrealized change in fair value of our investment in an unconsolidated affiliate and restructuring charges.
2524
Net income was $15.4 million and $9.3 million during the three months ended September 30, 2022 and 2021, respectively. The increase was primarily driven by a higher gross margin from both our aftermarket services business and our contract operations business and decreased depreciation and amortization expense, partially offset by increased SG&A and lower gain on sale of assets, net.
Net income was $33.8 million and $22.2 million during the nine months ended September 30, 2022 and 2021, respectively. The increase was primarily driven by a higher gross margin from our aftermarket services business, decreased depreciation and amortization expense and interest expense and an increased gain on sale of assets, net, partially offset by a lower gross margin from our contract operations business and higher SG&A.
Three Months Ended September 30, 20222023 Compared to Three Months Ended September 30, 20212022
Contract Operations
| | | | | | | | | | | | | | | | | | |
|
| Three Months Ended | | | |
| Three Months Ended | | | | ||||||||
| | September 30, | | Increase | | | September 30, | | Increase | | ||||||||
|
| 2022 |
| 2021 |
| (Decrease) | | |||||||||||
(dollars in thousands) |
| 2023 |
| 2022 |
| (Decrease) | | |||||||||||
Revenue | | $ | 170,497 | | $ | 158,911 | | 7 | % | | $ | 207,552 | | $ | 170,497 | | 22 | % |
Cost of sales (excluding depreciation and amortization) | |
| 71,694 | |
| 61,280 | | 17 | % | |
| 75,273 | |
| 71,694 | | 5 | % |
Gross margin | | $ | 98,803 | | $ | 97,631 | | 1 | % | | $ | 132,279 | | $ | 98,803 | | 34 | % |
Gross margin percentage (1) | |
| 58 | % |
| 61 | % | (3) | % | |
| 64 | % |
| 58 | % | 6 | % |
(1) | Defined as gross margin divided by revenue. |
Revenue in our contract operations business increased primarily due to higher rates and an increase in average operating horsepower and higher ratesfor contract compression in response to improving market conditions, partially offset by the impact of the strategic dispositions of horsepower in 2021 and 2022. Average operating horsepower
Gross margin percentage increased primarily due to an increase in revenue which exceeded the increase in cost of sales. Cost of sales for the three months ended September 30, 2022 increased when compared2023 includes an increase of $2.4 million for sales tax as a result of a change in tax compliance for sales tax associated with the three months ended September 30, 2021 before adjusting for the dispositions.
Despite the increase in revenue, the increase in gross margin in our contract operations business was partially offset by our increase in cost of sales. Start–up,Prior to 2023, amounts were recognized in SG&A. Further, maintenance lube oil and other operating 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 and 2022.
Aftermarket Services
| | | | | | | | | | | | | | | | | | |
|
| Three Months Ended |
| | |
| Three Months Ended |
| | | ||||||||
| | September 30, | | Increase | | | September 30, | | Increase | | ||||||||
|
| 2022 |
| 2021 |
| (Decrease) | | |||||||||||
(dollars in thousands) |
| 2023 |
| 2022 |
| (Decrease) | | |||||||||||
Revenue | | $ | 43,171 | | $ | 36,255 |
| 19 | % | | $ | 45,815 | | $ | 43,171 |
| 6 | % |
Cost of sales (excluding depreciation and amortization) | |
| 35,833 | |
| 30,652 |
| 17 | % | |
| 36,688 | |
| 35,833 |
| 2 | % |
Gross margin | | $ | 7,338 | | $ | 5,603 |
| 31 | % | | $ | 9,127 | | $ | 7,338 |
| 24 | % |
Gross margin percentage | |
| 17 | % |
| 15 | % | 2 | % | |
| 20 | % |
| 17 | % | 3 | % |
Revenue in our aftermarket services business increased primarily due to higher service activities and parts sales and service activities, asfrom the continuation of the market recovery drovewhich began in the prior year and continues to drive an increase in customer demand.
Gross margin increased in our aftermarket services business as a result of increasedan increase in revenue partially offset bywhich exceeded the associated increaseincreases in cost of sales, which was primarily driven by the same increases incustomer demand and improved pricing for parts sales and serviceservices activities.
Costs and Expenses
| | | | | | |
|
| Three Months Ended | ||||
| | September 30, | ||||
(in thousands) |
| 2023 |
| 2022 | ||
Selling, general and administrative | | $ | 28,558 | | $ | 30,500 |
Depreciation and amortization | |
| 42,155 | |
| 39,953 |
Long-lived and other asset impairment | |
| 2,922 | |
| 4,154 |
Restructuring charges | | | 592 | | | — |
Interest expense | |
| 28,339 | |
| 25,177 |
Gain on sale of assets, net | | | (3,237) | | | (12,695) |
Other expense (income), net | | | (235) | | | (585) |
2625
Costs and Expenses
| | | | | | |
|
| Three Months Ended | ||||
| | September 30, | ||||
|
| 2022 |
| 2021 | ||
Selling, general and administrative | | $ | 30,500 | | $ | 28,839 |
Depreciation and amortization | |
| 39,953 | |
| 45,280 |
Long-lived and other asset impairment | |
| 4,154 | |
| 5,121 |
Restructuring charges | | | — | | | 313 |
Interest expense | |
| 25,177 | |
| 25,508 |
Gain on sale of assets, net | | | (12,695) | | | (15,393) |
Other (income) expense, net | | | (585) | | | 337 |
Provision for income taxes | | | 4,266 | | | 3,925 |
Effective tax rate | |
| 22% | |
| 30% |
Selling, general and administrative. The increasedecrease in SG&A was primarily due to a $1.1decrease of $2.2 million for sales tax as a result of a change in tax compliance for sales tax associated with contract operations cost of sales. Beginning in 2023, amounts are recognized in contract operations cost of sales. Further, SG&A for the three months ended September 30, 2023 includes a $0.7 million decrease in professional expense and a $0.4 million decrease in employee compensation expense, partially offset by a $1.9 million increase in employeelong-term performance-based incentive compensation costs and a $0.9 million increase in information technology expense related to increased amortization of capitalized implementation costs and increased service agreement costs related to the substantial completion of our process and technology transformation project at the end of 2021.expense.
Depreciation and amortization. The decreaseincrease in depreciation and amortization expense was primarily due to the impact offixed assets additions and accelerated depreciation associated with certain assets. These increases were partially offset by a decrease in depreciation expense associated with assets reaching the end of their depreciable lives, andthe impact of compression and other asset sales, partially offset by the impact of fixedand long-lived asset additions.
impairments.
Long-lived and other asset impairment. We periodically review the future deployment of our idle compressors for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. We also evaluate for impairment our idle units that have been culled from our compression fleet in prior years and are available for sale. During the three months ended September 30, 20222023 and 2021,2022, we recognized $4.2$2.9 million and $5.1$4.1 million, respectively, of impairment charges to write down these compressors to their fair value.See Note 12 in our Notes to Unaudited Condensed Consolidated Financial Statements10 (“Long-Lived Asset and Other Impairments”) for additional information aboutfurther details on these impairment charges. The following table presents the results of our compression fleet impairment review, as recorded in our contract operations segment:
| | | | | | | | | | | | |
|
| Three Months Ended |
| Three Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2022 |
| 2021 | ||||||||
(dollars in thousands) |
| 2023 |
| 2022 | ||||||||
Idle compressors retired from the active fleet |
| | 25 |
| | 60 |
| | 30 |
| | 25 |
Horsepower of idle compressors retired from the active fleet |
| | 23,000 |
| | 24,000 |
| | 16,000 |
| | 23,000 |
Impairment recorded on idle compressors retired from the active fleet | | $ | 4,149 | | $ | 5,120 | | $ | 2,922 | | $ | 4,149 |
Restructuring charges. Restructuring charges of $0.6 million during the three months ended September 30, 2023 consisted of severance costs related to our restructuring activities. See Note 11 (“Restructuring Charges”) for further details on these restructuring charges.
Interest expense. The decreaseincrease in interest expense was due to an increase in interest rates and a lowerhigher average outstanding balance of long–term debt, partially offset by a higher average interest rate as a result of the expiration of our interest rate swapsan increase in the first quarter of 2022.
capitalized interest.
Gain on sale of assets, net. The netdecrease in gain on sale of assets was primarily due to gains of $3.2 million on compression asset sales during the three months ended September 30, 2022 was primarily the result of the $11.5 million of gain recognized on the September 2022 disposition of assets and2023, compared to gains of $1.2$12.7 million recognized on sales of other compression transportation and shop assets during the period.
The net gain on sale of assetsasset sales during the three months ended September 30, 2021 was primarily the result of the $13.0 million of gain recognized on the July 2021 disposition of assets and gains of $2.2 million recognized in on other compression asset sales during the period.2022.
Provision for Income Taxes
27
Provision for income taxes. The increase in provision for income taxes was primarily due to the tax effect of the increase in book income during the three months ended September 30, 20222023 compared with the three months ended September 30, 2021.2022.
| | | | | | | | | |
|
| Three Months Ended |
| | | ||||
| | September 30, | | Increase | | ||||
(dollars in thousands) |
| 2023 |
| 2022 |
| (Decrease) | | ||
Provision for income taxes | | $ | 11,454 | | $ | 4,266 |
| 168 | % |
Effective tax rate | |
| 27 | % |
| 22 | % | 5 | % |
26
Nine Months Ended September 30, 20222023 Compared to Nine Months Ended September 30, 20212022
Contract Operations
| | | | | | | | | | | | | | | | | | |
|
| Nine Months Ended | | | |
| Nine Months Ended | | | | ||||||||
| | September 30, | | Increase | | | September 30, | | Increase | | ||||||||
|
| 2022 |
| 2021 |
| (Decrease) | | |||||||||||
(dollars in thousands) |
| 2023 |
| 2022 |
| (Decrease) | | |||||||||||
Revenue | | $ | 500,451 | | $ | 488,810 | | 2 | % | | $ | 596,417 | | $ | 500,451 | | 19 | % |
Cost of sales (excluding depreciation and amortization) | |
| 204,550 | |
| 184,032 | | 11 | % | |
| 230,788 | |
| 204,550 | | 13 | % |
Gross margin | | $ | 295,901 | | $ | 304,778 | | (3) | % | | $ | 365,629 | | $ | 295,901 | | 24 | % |
Gross margin percentage | |
| 59 | % |
| 62 | % | (3) | % | |
| 61 | % |
| 59 | % | 2 | % |
(1) | Defined as gross margin divided by revenue. |
Revenue in our contract operations business increased primarily due to higher rates and an increase in average operating horsepower and higher rates for contract compression in response to improving market conditions, partially offset by the impact of the strategic dispositions of horsepower in 2021 and 2022. Average operating horsepower for the nine months ended September 30, 2022 increased when compared with the nine months ended September 30, 2021 before adjusting for the dispositions.
Despite theGross margin percentage increased primarily due to an increase in revenue which exceeded the decrease in gross margin in our contract operations business reflects the impact of a larger increase in cost of sales. Start–up, maintenance,Maintenance, lube oil and other operating expenses increased, driven by higher pricing throughout our supply chain, as well as increased volumes associated with unit redeployment as customer activity accelerated. Further, cost of sales for the nine months ended September 30, 2023 includes an increase of $6.6 million for sales tax as a result of a change in tax compliance for sales tax associated with contract operations cost of sales. Prior to 2023, amounts were recognized in SG&A. Partially offsetting these cost increases was the decrease in expense attributable to the horsepower sold in 2021 and 2022.
Aftermarket Services
| | | | | | | | | | | | | | | | | | |
|
| Nine Months Ended |
| | |
| Nine Months Ended |
| | | ||||||||
| | September 30, | | Increase | | | September 30, | | Increase | | ||||||||
|
| 2022 |
| 2021 |
| (Decrease) | | |||||||||||
(dollars in thousands) |
| 2023 |
| 2022 |
| (Decrease) | | |||||||||||
Revenue | | $ | 126,246 | | $ | 97,402 |
| 30 | % | | $ | 134,327 | | $ | 126,246 |
| 6 | % |
Cost of sales (excluding depreciation and amortization) | |
| 106,181 | |
| 83,925 |
| 27 | % | |
| 105,939 | |
| 106,181 |
| (0) | % |
Gross margin | | $ | 20,065 | | $ | 13,477 |
| 49 | % | | $ | 28,388 | | $ | 20,065 |
| 41 | % |
Gross margin percentage | |
| 16 | % |
| 14 | % | 2 | % | |
| 21 | % |
| 16 | % | 5 | % |
Revenue in our aftermarket services business increased primarily due to higher parts sales and service activities asfrom the continuation of the market recovery drovewhich began in the prior year and continues to drive an increase in customer demand.
Gross margin increased in our aftermarket services business as a result of increased due to an increase in revenue from customer demand and despite an increaseimproved pricing for parts sales and service activities and a decrease in cost of sales which was primarily driven by differences in the same increasesscope, timing and type of service activities performed resulting in parts sales andlower costs associated with service activities.
Costs and Expenses
| | | | | | |
|
| Nine Months Ended | ||||
| | September 30, | ||||
(in thousands) |
| 2023 |
| 2022 | ||
Selling, general and administrative | | $ | 83,632 | | $ | 85,964 |
Depreciation and amortization | |
| 123,546 | | | 124,348 |
Long-lived and other asset impairment | |
| 8,383 | | | 16,217 |
Restructuring charges | | | 1,554 | | | — |
Interest expense | |
| 83,550 | | | 74,879 |
Gain on sale of assets, net | | | (8,018) | | | (33,755) |
Other expense (income), net | | | 1,831 | | | (52) |
2827
Costs and Expenses
| | | | | | |
|
| Nine Months Ended | ||||
| | September 30, | ||||
|
| 2022 |
| 2021 | ||
Selling, general and administrative | | $ | 85,964 | | $ | 80,000 |
Depreciation and amortization | |
| 124,348 | | | 135,185 |
Long-lived and other asset impairment | |
| 16,217 | | | 15,154 |
Restructuring charges | | | — | | | 1,953 |
Interest expense | |
| 74,879 | | | 82,711 |
Gain on sale of assets, net | | | (33,755) | | | (29,549) |
Other (income), net | | | (52) | | | (1,634) |
Provision for income taxes | | | 14,527 | | | 12,210 |
Effective tax rate | |
| 30% | | | 35% |
Selling, general and administrative. The increasedecrease in SG&A was primarily due to a $2.0decrease of $6.4 million increasefor sales tax as a result of a change in tax compliance for sales and use tax resulting from audit settlements reached duringassociated with contract operations cost of sales. Beginning in 2023, amounts are recognized in contract operations cost of sales. Further, SG&A for the nine months ended September 30, 2021,2023 includes a $1.7$0.6 million decrease in professional expense and a $0.3 million decrease in allowance for credit losses, partially offset by a $3.3 million increase in information technologylong-term performance-based incentive compensation expense, related to increased amortization of capitalized implementation costs and increased service agreement costs related to the substantial completion of our process and technology transformation project at the end of 2021, a $0.9$1.4 million increase in employee compensation costsshort-term incentive expense and a $0.9$1.2 million increase in higher travelsoftware and meeting expenses.maintenance expense.
Depreciation and amortization. The decrease in depreciation and amortization expense was primarily due to the impact ofa decrease in depreciation expense resulting from assets reaching the end of their depreciable lives, the impact of compression and other asset sales, and impairments,long-lived asset impairments. These decreases were partially offset by the impact ofan increase in depreciation expense associated with fixed asset additions.
additions and accelerated depreciation associated with certain assets.
Long-lived and other asset impairment. We periodically review the future deployment of our idle compressors for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. We also evaluate for impairment our idle units that have been culled from our compression fleet in prior years and are available for sale. During the nine months ended September 30, 20222023 and 2021,2022, we recognized $16.2$8.4 million and $15.2$16.2 million, respectively, of impairment charges to write down these compressors to their fair value. See Note 12 in our Notes to Unaudited Condensed Consolidated Financial Statements10 (“Long-Lived Asset and Other Impairments”) for additional information aboutfurther details on these impairment charges. The following table presents the results of our compression fleet impairment review, as recorded in our contract operations segment:
| | | | | | | | | | | | |
|
| Nine Months Ended |
| Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2022 |
| 2021 | ||||||||
(dollars in thousands) |
| 2023 |
| 2022 | ||||||||
Idle compressors retired from the active fleet |
| | 100 |
| | 175 |
| | 75 |
| | 100 |
Horsepower of idle compressors retired from the active fleet |
| | 80,000 |
| | 61,000 |
| | 39,000 |
| | 80,000 |
Impairment recorded on idle compressors retired from the active fleet | | $ | 16,205 | | $ | 14,964 | | $ | 8,383 | | $ | 16,205 |
Restructuring charges. Restructuring charges of $1.6 million during the nine months ended September 30, 2023 consisted of severance and consulting costs related to our restructuring activities. See Note 11 (“Restructuring Charges”) for further details on these restructuring charges.
Interest expense. The decreaseincrease in interest expense was due to the $4.9 million write–off of unamortized deferred financing costs related to the amendment of our Credit Facilityan increase in the first quarter of 2021 andinterest rates, a lowerhigher average outstanding balance of long–term debt offset by a higher average interest rateand the write-off of $1.0 million of unamortized deferred financing costs as a result of the expiration of our interest rate swapsAmended and Restated Credit Agreement, partially offset by an increase in the first quarter of 2022.
capitalized interest.
Gain on sale of assets, net. The netdecrease in gain on sale of assets was primarily due to gains of $7.3 million on compression asset sales during the nine months ended September 30, 2022 was primarily the result of the $28.2 million of gains recognized on the May 2022 and September 2022 dispositions of assets and2023 compared to gains of $5.6$32.5 million recognized on sales of other compression transportation and shop assets during the period.
The net gain on sale of assetsasset sales during the nine months ended September 30, 20212022.
Other expense (income), net. The increase in other expense (income), net was primarily due to a $2.0 million unrealized change in the resultfair value of the $19.0 million of gains recognized on the February 2021 and July 2021 dispositions of assets and gains of $8.6 million recognized on other compression asset sales during the period.our investment in an unconsolidated affiliate.
Provision for Income Taxes
29
Provision for income taxes. The increase in provision for income taxes was primarily due to the tax effect of the increase in book income during the nine months ended September 30, 20222023 compared with the nine months ended September 30, 2021.2022.
| | | | | | | | | |
|
| Nine Months Ended |
| | | ||||
| | September 30, | | Increase | | ||||
(dollars in thousands) |
| 2023 |
| 2022 |
| (Decrease) | | ||
Provision for income taxes | | $ | 27,543 | | $ | 14,527 |
| 90 | % |
Effective tax rate | |
| 28 | % |
| 30 | % | (2) | % |
28
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our ability to fund operations, finance capital expenditures and pay dividends depends on the levels of our operating cash flows and access to the capital and credit markets. Our primary sources of liquidity are cash flows generated from our operations and our borrowing availability under our Credit Facility. Our cash flow is affected by numerous factors including prices and demand for our services, oil and natural gas exploration and production spending, conditions in the financial markets and other factors. We have no near-term maturities and believe that our operating cash flows and borrowings under the Credit Facility will be sufficient to meet our future liquidity needs.
We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or debt securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, may be material, will be upon terms and prices as we may determine and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
Cash Requirements
Our contract operations business is capital intensive, requiring significant investment to maintain and upgrade existing operations. Our capital spending is primarily dependent on the demand for our contract operations services and the availability of the type of compression equipment required for us to provide those contract operations services to our customers. Our capital requirements have consisted primarily of, and we anticipate will continue to consist of, the following:
• | operating expenses, namely employee compensation and benefits and inventory and lube oil purchases; |
• | growth capital expenditures; |
• | maintenance capital expenditures; |
• | interest on our outstanding debt obligations; and |
• | dividend payments to our stockholders. |
Capital Expenditures
Growth Capital Expenditures. The majority of our growth capital expenditures are related to the acquisition cost of new compressors when our idle equipment cannot be reconfigured to economically fulfill a project’s requirements and the new compressor is expected to generate economic returns that exceed our cost of capital over the compressor’s expected useful life. In addition to newly-acquired compressors, growth capital expenditures include the upgrading of major components on an existing compression package where the current configuration of the compression package is no longer in demand and the compressor is not likely to return to an operating status without the capital expenditures. These expenditures substantially modify the operating parameters of the compression package such that it can be used in applications for which it previously was not suited.
Maintenance Capital Expenditures. Maintenance capital expenditures are related to major overhauls of significant components of a compression package, such as the engine, compressor and cooler, which return the components to a like-new condition, but do not modify the application for which the compression package was designed.
Projected Capital Expenditures. We currently plan to spend approximately $230 million to $235$295 million in capital expenditures during 2022,2023, primarily consisting of approximately $150$200 million for growth capital expenditures and approximately $70 million to $75$79 million for maintenance capital expenditures. The increase in 2022 capital expenditures, particularlyWhile market activity continues to be strong, we currently anticipate reducing growth capital expenditures as compared to 2021 is dueapproximately $160 million in 2024 which reflects the capital discipline needed to increased investment in new compression equipment as a result of higher customer demand.
support free cash flow generation after dividends.
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Dividends
On October 27, 2022,26, 2023, our Board of Directors declared a quarterly dividend of $0.145$0.155 per share of common stock to be paid on November 15, 202214, 2023 to stockholders of record at the close of business on November 8, 2022.7, 2023. 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.
Share Repurchase Program
On April 27, 2023, our Board of Directors authorized a share repurchase program that allows us to repurchase up to $50.0 million of outstanding common stock. Under the 2023 Share Repurchase Program, shares of our common stock may be repurchased periodically, including in the open market, privately negotiated transactions, or otherwise in accordance with applicable federal securities laws, at any time until April 27, 2024. The actual timing, manner, number, and value of shares repurchased under the program will be determined by us at our discretion.
The following table summarizes shares repurchased under the 2023 Share Repurchase Program during the three and nine months ended September 30, 2023:
| | | | | | |
|
| Three Months Ended | | Nine Months Ended | ||
(dollars and shares in thousands, except per share amounts) | | September 30, 2023 | | September 30, 2023 | ||
Total cost of shares repurchased | | $ | 4,422 | | $ | 6,495 |
Average price per share | | $ | 12.49 | | $ | 11.27 |
Total number of shares repurchased | |
| 354 | |
| 576 |
Sources of Cash
Revolving Credit Facility
During the nine months ended September 30, 20222023 and 2021,2022, our Credit Facility had an average debt balance of $228.9$294.5 million and $310.9$228.9 million, respectively. The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 5.5%7.9% and 2.6%6.9% at September 30, 20222023 and December 31, 2021,2022, respectively. As of September 30, 2022,2023, there were $5.8$4.5 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.4%.
As of September 30, 2022,2023, we were in compliance with all covenants under our Credit Facility. As a result of the facility’s financial ratio requirements, $486.4 million of the $542.2 million ofAdditionally, all undrawn capacity on our Credit Facility was available for additional borrowings as of September 30, 2022.
Equity Distribution Agreement
During the nine months ended September 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 the Equity Distribution Agreement.
2023.
Cash Flows
Our cash flows, as reflected in our unaudited condensed consolidated statements of cash flows, are summarized below:
| | | | | | | | | | | | | |
|
| Nine Months Ended |
| Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
|
| 2022 |
| 2021 | |||||||||
(in thousands) |
| 2023 |
| 2022 | | ||||||||
Net cash provided by (used in): |
| |
|
| |
|
| |
|
| |
| |
Operating activities | | $ | 166,332 | | $ | 208,725 | | $ | 238,468 | | $ | 166,332 | |
Investing activities | |
| (66,546) | |
| 37,854 | |
| (208,157) | |
| (66,546) | |
Financing activities | |
| (99,313) | |
| (244,188) | | | (31,395) | |
| (99,313) | |
Net (decrease) increase in cash and cash equivalents | | $ | (1,084) | | $ | 473 | |
Operating Activities
The decreaseincrease in net cash provided by operating activities was primarily due to increased cash outflow for cost of sales, contract costs,inflows from gross margin and SG&A, as well as decreased cash inflow from accounts receivable. Partially offsetting these decreasesreceivable, partially offset by changes in operating cash were increased cash inflow from revenueaccounts payable and other liabilities and deferred revenue.
Investing Activities
The change in net cash used in (provided by) investing activities was primarily due to a $100.2 million increase in capital expenditures and the $12.0 million investment made in unconsolidated entities during the nine months ended September 30, 2022. These cash outflows were partially offset by an increase of $5.4 million in proceeds from business dispositions and other sales of property, plant and equipment and an increase of $2.4 million in insurance and other settlements.
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Investing Activities
The increase in net cash used in investing activities was primarily due to a $90.9 million increase in capital expenditures and a $99.8 million decrease in proceeds from the sale of business, partially offset by a $40.3 million increase in proceeds from sales of property, plant and equipment and a $10.0 million decrease in investments in non-consolidated affiliates.
Financing Activities
The decrease in net cash used in financing activities was primarily due to $32.5an $88.2 million increase in net borrowings of long-term debt, partially offset by $6.5 million of net repayments of long–termcommon stock purchased under the 2023 Share Repurchase Program, a $5.7 million payment for debt duringissuance costs related to the nine months ended September 30, 2022 compared with $173.0Amended and Restated Credit Agreement and a $3.9 million of net repayments of long–term debt during the nine months ended September 30, 2021.increase in dividends paid to stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks associated with changes in the variable interest rate of our Credit Facility. We have previously used derivative instruments to manage our exposure to fluctuation in this variable interest rate; however, our interest rate swaps expired in the first quarter of 2022, and all borrowings under our 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 September 30, 20222023 would have resulted in an annual increase in our interest expense of $2.0$3.1 million.
ITEM 4. CONTROLS AND PROCEDURES
This Item 4 includes information concerning the controls and controls evaluation referred to in the certifications of our Chief Executive Officer and Chief Financial Officer required by Rule 13a–14 of the Exchange Act included in this Form 10–Q as Exhibits 31.1 and 31.2.
Management’s Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act), which are designed to provide reasonable assurance that we are able to record, process, summarize and report the information required to be disclosed in our reports under the Exchange Act within the time periods specified in the rules and forms of the SEC. Based on the evaluation, as of September 30, 20222023 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
In 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 changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) that occurred 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 Form 10–K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES BY ISSUER AND USE OF PROCEEDS
Sales of Unregistered Securities
None
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
The following table summarizes our purchases of equity securities duringshare repurchase activity for the ninethree months ended September 30, 2022:2023:
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Maximum | | | | | | | | | Approximate Dollar | |
| | | | | | | | | Number of Shares | | | | | | | | | Value 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 | |||||||||||
July 1, 2022 — July 31, 2022 | | 2,919 | | $ | 8.39 | | N/A | | N/A | ||||||||||
August 1, 2022 — August 31, 2022 |
| 717 | |
| 8.25 |
| N/A |
| N/A | ||||||||||
September 1, 2022 — September 30, 2022 |
| — | |
| — |
| N/A |
| N/A | ||||||||||
(dollars in thousands, except per share amounts) |
| Purchased (1) |
| Share(2) |
| or Programs |
| or Programs | |||||||||||
July 1, 2023 — July 31, 2023 | | — | | $ | — | | — | | $ | 47,927 | |||||||||
August 1, 2023 — August 31, 2023 |
| 164,089 | |
| 12.66 |
| 163,372 |
|
| 45,858 | |||||||||
September 1, 2023 — September 30, 2023 |
| 190,640 | |
| 12.34 |
| 190,640 |
|
| 43,505 | |||||||||
Total |
| 3,636 | | | 8.36 |
| N/A |
| N/A |
| 354,729 | | $ | 12.49 |
| 354,012 |
| | |
(1) | Represents shares of common stock purchased from employees to satisfy tax withholding obligations in connection with the vesting of restricted stock awards and shares repurchased under the 2023 Share Repurchase Program during the period. See Note 8 (“Stockholders’ Equity”) for further details on the 2023 Share Repurchase Program. |
(2) | Average price paid per share includes costs associated with the repurchase, as applicable. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.Not applicable.
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ITEM 6. EXHIBITS
The exhibits listed below are filed or furnished as part of this report: