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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
For the quarterly period ended
or
For the transition period from to
Commission File No.
(Exact name of registrant as specified in its charter)
(Address of principal executive offices, zip code)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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.
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).
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.
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
Number of shares of the common stock of the registrant outstanding as of July 27, 2022:
TABLE OF CONTENTS
2
GLOSSARY
The following terms and abbreviations appearing in the text of this report have the meanings indicated below.
2021 Form 10-K | Annual Report on Form 10-K for the year ended December 31, 2021 |
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 |
ATM Agreement | Equity Distribution Agreement, dated February 23, 2021, entered into with Wells Fargo Securities, LLC and BofA Securities, Inc., as sales agents, relating to the at-the-market offer and sale of shares of our common stock from time to time |
Credit Facility | $750.0 million asset-based revolving credit facility due November 2024, as governed by Amendment No. 3 to Credit Agreement, dated February 22, 2021, which amended that Credit Agreement, dated as of March 30, 2017 |
ECOTEC | Ecotec International Holdings, LLC |
ERP | Enterprise Resource Planning |
ESPP | Employee Stock Purchase Plan |
Exchange Act | Securities Exchange Act of 1934, as amended |
February 2021 Disposition | Sale completed in February 2021 of certain contract operations customer service agreements, compressors and other assets |
Financial Statements | Condensed consolidated financial statements included in Part I Item 1 of this Quarterly Report on Form 10-Q |
GAAP | U.S. generally accepted accounting principles |
Hilcorp | Hilcorp Energy Company |
LIBOR | London Interbank Offered Rate |
May 2022 Disposition | Sale completed in May 2022 of certain contract operations customer service agreements, compressors and other assets |
Old Ocean Reserves | Old Ocean Reserves, LP, formerly JDH Capital Holdings, L.P. |
OTC | Over-the-counter, as related to aftermarket services parts and components |
ROU | Right-of-use, as related to the lease model under Accounting Standards Codification Topic 842 Leases |
SEC | U.S. Securities and Exchange Commission |
SGA | Selling, general and administrative |
U.S. | United States of America |
3
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 21E of the Exchange Act, including, without limitation, our business growth strategy and projected costs; future financial position; the sufficiency of available cash flows to fund continuing operations and pay dividends; the expected amount of our capital expenditures; anticipated cost savings; future revenue, gross margin and other financial or operational measures related to our business; the future value of our equipment; and plans and objectives of our management for our future operations. You can identify many of these statements by words such as “believe,” “expect,” “intend,” “project,” “anticipate,” “estimate,” “will continue” or similar words or the negative thereof.
Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this Quarterly Report on Form 10-Q. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct. Known material factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include the risk factors described in our 2021 Form 10-K and those set forth from time to time in our filings with the SEC, which are available through our website at www.archrock.com and through the SEC’s website at www.sec.gov.
All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us on the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this Quarterly Report on Form 10-Q.
4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Archrock, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except par value and share amounts)
(unaudited)
| June 30, 2022 |
| December 31, 2021 | |||
Assets |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, trade, net of allowance of $ |
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Inventory |
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Other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Operating lease ROU assets |
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Intangible assets, net |
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Contract costs, net |
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Deferred tax assets |
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Other assets |
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Noncurrent assets associated with discontinued operations |
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Total assets | $ | | $ | | ||
Liabilities and Equity |
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Current liabilities: |
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Accounts payable, trade | $ | | $ | | ||
Accrued liabilities |
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Deferred revenue |
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Total current liabilities |
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Long-term debt |
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Operating lease liabilities |
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Deferred tax liabilities |
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Other liabilities |
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Noncurrent liabilities associated with discontinued operations |
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Total liabilities |
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Commitments and contingencies (Note 18) |
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Equity: |
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Preferred stock: $ |
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Common stock: $ |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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Accumulated deficit |
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Treasury stock: |
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Total equity |
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Total liabilities and equity | $ | | $ | | ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Archrock, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
| Three Months Ended | Six Months Ended | ||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Revenue: |
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Contract operations | $ | | $ | | $ | | $ | | ||||
Aftermarket services |
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Total revenue |
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Cost of sales (excluding depreciation and amortization): |
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Contract operations |
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Aftermarket services |
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Total cost of sales (excluding depreciation and amortization) |
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Selling, general and administrative |
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Depreciation and amortization |
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Long-lived and other asset impairment |
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Restructuring charges | — | | — | | ||||||||
Interest expense |
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Gain on sale of assets, net | ( | ( | ( | ( | ||||||||
Other (income) expense, net |
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Income before income taxes |
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Provision for income taxes |
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Net income | $ | | $ | | $ | | $ | | ||||
Basic and diluted net income per common share | $ | | $ | | $ | | $ | | ||||
Weighted average common shares outstanding: |
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Basic |
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Diluted |
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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 | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Net income | $ | |
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Other comprehensive income, net of tax: |
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Interest rate swap gain, net of reclassifications to earnings |
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Amortization of dedesignated interest rate swap |
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Total other comprehensive income, net of tax |
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Comprehensive income | $ | | $ | | $ | | $ | | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
Archrock, Inc.
Condensed Consolidated Statements of Equity
(in thousands, except share and per share amounts)
(unaudited)
Accumulated | ||||||||||||||||||||||
Common | Additional | Other | Treasury | |||||||||||||||||||
Stock | Paid-in | Comprehensive | Accumulated | Stock | ||||||||||||||||||
| Amount |
| Shares |
| Capital |
| Loss |
| Deficit |
| Amount |
| Shares |
| Total | |||||||
Balance at March 31, 2021 | $ | |
| | $ | | $ | ( | $ | ( | $ | ( |
| ( | $ | | ||||||
Treasury stock purchased | ( | ( | ( | |||||||||||||||||||
Cash dividends ($ |
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Shares issued under ESPP |
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Stock-based compensation, net of forfeitures |
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Comprehensive income |
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Net income |
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Interest rate swap gain, net of reclassifications to earnings |
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Balance at June 30, 2021 | $ | |
| | $ | | $ | ( | $ | ( | $ | ( |
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Balance at March 31, 2022 | $ | |
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Treasury stock purchased |
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Cash dividends ($ |
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Shares issued under ESPP |
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Stock-based compensation, net of forfeitures |
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Net proceeds from issuance of common stock | | | | | ||||||||||||||||||
Comprehensive income |
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Net income |
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Balance at June 30, 2022 | $ | |
| | $ | | $ | — | $ | ( | $ | ( |
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8
Accumulated | ||||||||||||||||||||||
Common | Additional | Other | Treasury | |||||||||||||||||||
Stock | Paid-in | Comprehensive | Accumulated | Stock | ||||||||||||||||||
| Amount |
| Shares |
| Capital |
| Loss |
| Deficit |
| Amount |
| Shares |
| Total | |||||||
Balance at December 31, 2020 | $ | |
| | $ | | $ | ( | $ | ( | $ | ( |
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Treasury stock purchased |
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Cash dividends ($ |
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Shares issued under ESPP |
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Stock-based compensation, net of forfeitures |
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Net proceeds from issuance of common stock | | | | | ||||||||||||||||||
Comprehensive income |
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Net income |
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Interest rate swap gain, net of reclassifications to earnings |
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Balance at June 30, 2021 | $ | |
| | $ | | $ | ( | $ | ( | $ | ( |
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Balance at December 31, 2021 | $ | |
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Treasury stock purchased |
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Cash dividends ($ |
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Shares issued under ESPP |
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Stock-based compensation, net of forfeitures |
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Net proceeds from issuance of common stock | | | | | ||||||||||||||||||
Comprehensive income |
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Net income |
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Interest rate swap gain, net of reclassifications to earnings |
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Amortization of dedesignated interest rate swap | | | ||||||||||||||||||||
Balance at June 30, 2022 | $ | |
| | $ | | $ | — | $ | ( | $ | ( |
| ( | $ | | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
9
Archrock, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended | ||||||
June 30, | ||||||
| 2022 |
| 2021 | |||
Cash flows from operating activities: |
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Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Long-lived and other asset impairment |
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Inventory write-downs |
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Amortization of operating lease ROU assets |
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Amortization of deferred financing costs |
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Amortization of debt premium | ( | ( | ||||
Amortization of dedesignated interest rate swap | | — | ||||
Interest rate swaps |
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Stock-based compensation expense |
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Provision for credit losses |
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Gain on sale of assets, net |
| ( |
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Gain on sale of business | ( | ( | ||||
Deferred income tax provision |
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Amortization of contract costs |
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Deferred revenue recognized in earnings |
| ( |
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Change in assets and liabilities: |
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Accounts receivable, trade |
| ( |
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Inventory |
| ( |
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Other assets |
| ( |
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Contract costs, net |
| ( |
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Accounts payable and other liabilities |
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Deferred revenue |
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Other |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Capital expenditures |
| ( |
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Proceeds from sale of business |
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Proceeds from sale of property, plant and equipment and other assets |
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Proceeds from insurance and other settlements | | | ||||
Investments in unconsolidated entities | ( | — | ||||
Net cash used in investing activities |
| ( |
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Cash flows from financing activities: |
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Borrowings of long-term debt |
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Repayments of long-term debt |
| ( |
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Payments for debt issuance costs |
| — |
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Payments for settlement of interest rate swaps that include financing elements |
| ( |
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Dividends paid to stockholders |
| ( |
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Net proceeds from issuance of common stock | | | ||||
Proceeds from stock issued under ESPP |
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Purchases of treasury stock |
| ( |
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Net cash used in financing activities |
| ( |
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Net increase in cash and cash equivalents |
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Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period | $ | | $ | | ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
10
Archrock, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Description of Business and Basis of Presentation
We are an energy infrastructure company with a primary focus on midstream natural gas compression. We are the leading provider of natural gas compression services to customers in the energy industry throughout the U.S. and a leading supplier of aftermarket services to customers that own compression equipment in the U.S. We operate in
The accompanying unaudited condensed consolidated financial statements included herein have been prepared in accordance with GAAP and the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP are not required in these interim financial statements and have been condensed or omitted. Management believes that the information furnished reflects all normal recurring adjustments necessary to fairly present our consolidated financial position, results of operations and cash flows for the periods indicated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements presented in our 2021 Form 10-K, which contains a more comprehensive summary of our accounting policies. The interim results reported herein are not necessarily indicative of results for a full year.
2. Business Transactions
May 2022 Disposition
In May 2022, we completed the sale of certain contract operations customer service agreements and approximately
February 2021 Disposition
In February 2021, we completed the sale of certain contract operations customer service agreements and approximately
3. Inventory
(in thousands) |
| June 30, 2022 |
| December 31, 2021 | ||
Parts and supplies | $ | | $ | | ||
Work in progress |
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Inventory | $ | | $ | | ||
11
4. Property, Plant and Equipment, net
(in thousands) |
| June 30, 2022 |
| December 31, 2021 | ||
Compression equipment, facilities and other fleet assets | $ | | $ | | ||
Land and buildings |
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Transportation and shop equipment |
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Computer hardware and software |
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Other |
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Property, plant and equipment |
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Accumulated depreciation |
| ( |
| ( | ||
Property, plant and equipment, net | $ | | $ | | ||
5. Equity Investments
Investments in which we are deemed to exert significant influence, but not control, are accounted for using the equity method of accounting, except in cases where the fair value option is elected. For such investments where we have elected the fair value option, the election is irrevocable and is applied on an investment-by-investment basis at initial recognition. In April 2022, we agreed to acquire for cash a
6. Hosting Arrangements
We have hosting arrangements that are service contracts related to the cloud migration of our ERP system and cloud services for our mobile workforce, telematics and inventory management tools.
As of June 30, 2022 and December 31, 2021, we had $
7. Long-Term Debt
(in thousands) |
| June 30, 2022 |
| December 31, 2021 | ||
Credit Facility | $ | | $ | | ||
2028 Notes | ||||||
Principal |
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Premium, net of amortization | |
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Deferred financing costs, net of amortization |
| ( |
| ( | ||
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2027 Notes | ||||||
Principal | |
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Deferred financing costs, net of amortization | ( |
| ( | |||
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Long-term debt | $ | | $ | | ||
12
Credit Facility
As of June 30, 2022, there were $
As of June 30, 2022, we were in compliance with all covenants under our Credit Facility agreement. As a result of the facility’s financial ratio requirements, $
In February 2021, we amended our Credit Facility to, among other things, reduce the aggregate revolving commitment from $
8. Accumulated Other Comprehensive Loss
Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with owners. Our accumulated other comprehensive loss consists of changes in the fair value of our interest rate swap derivative instruments, net of tax.
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Beginning accumulated other comprehensive loss | $ | — | $ | ( | $ | ( | $ | ( | ||||
Other comprehensive income, net of tax: | ||||||||||||
Loss recognized in other comprehensive income, net of tax benefit of $ |
| — |
| ( |
| ( |
| ( | ||||
Loss reclassified from accumulated other comprehensive loss to interest expense, net of tax benefit of $ |
| — |
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Total other comprehensive income |
| — |
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Ending accumulated other comprehensive loss | $ | — | $ | ( | $ | — | $ | ( | ||||
See Note 15 (“Derivatives”) for further details on our interest rate swap derivative instruments.
9. Equity
At-the-Market Continuous Equity Offering Program
During the three and six months ended June 30, 2022, we sold
During the six months ended June 30, 2021, we sold
13
Cash Dividends
The following table summarizes our dividends declared and paid in each of the quarterly periods of 2022 and 2021:
| Declared Dividends |
| Dividends Paid | |||
| per Common Share |
| (in thousands) | |||
2022 |
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Q2 | $ | | $ | | ||
Q1 | | | ||||
2021 |
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Q4 | $ | | $ | | ||
Q3 |
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Q2 |
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Q1 |
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On July 28, 2022, our Board of Directors declared a quarterly dividend of $
10. Revenue from Contracts with Customers
The following table presents our revenue from contracts with customers by segment (see Note 20 (“Segments”)) and disaggregated by revenue source:
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Contract operations: |
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$ | | $ | | $ | | $ | | |||||
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Over |
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| | ||||
Other (1) |
| |
| |
| |
| | ||||
Total contract operations revenue (2) |
| |
| |
| |
| | ||||
Aftermarket services: |
|
|
|
|
|
|
|
| ||||
Services |
| |
| |
| |
| | ||||
OTC parts and components sales |
| |
| |
| |
| | ||||
Total aftermarket services revenue (3) |
| |
| |
| |
| | ||||
Total revenue | $ | | $ | | $ | | $ | | ||||
| (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. |
14
Performance Obligations
As of June 30, 2022, we had $
(in thousands) |
|
|
|
|
|
|
| Total | |||||||||||||
Remaining performance obligations | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
We do not disclose the aggregate transaction price for the remaining performance obligations for aftermarket services as there are no contracts with customers with an original contract term that is greater than one year.
Contract Assets and Liabilities
Contract Assets
As of June 30, 2022 and December 31, 2021, our receivables from contracts with customers, net of allowance for credit losses, were $
Allowance for Credit Losses
Trade accounts receivable are due from companies of varying size engaged principally in oil and natural gas activities throughout the U.S. We review the financial condition of customers prior to extending credit and generally do not obtain collateral for trade receivables. Payment terms are on a short-term basis and in accordance with industry practice. We consider this credit risk to be limited due to these companies’ financial resources, the nature of the products and services we provide and the terms of our customer agreements.
Due to the short-term nature of our trade receivables, we consider the amortized cost to be the same as the carrying amount of the receivable, excluding the allowance for credit losses. We recognize an allowance for credit losses when a receivable is recorded, even when the risk of loss is remote. We utilize an aging schedule to determine our allowance for credit losses and measure expected credit losses on a collective (pool) basis when similar risk characteristics exist. We rely primarily on ratings assigned by external rating agencies and credit monitoring services to assess credit risk and aggregate customers first by low, medium or high risk asset pools, and then by delinquency status. We also consider the internal risk associated with geographic location and the services we provide to the customer when determining asset pools. If a customer does not share similar risk characteristics with other customers, we evaluate the customer’s outstanding trade receivables for expected credit losses on an individual basis. Trade receivables evaluated individually are not included in our collective assessment. Each reporting period, we reassess our customers’ risk profiles and determine the appropriate asset pool classification, or perform individual assessments of expected credit losses, based on the customers’ risk characteristics at the reporting date.
The contractual life of our trade receivables is primarily
15
Our allowance for credit losses balance changed as follows during the six months ended June 30, 2022:
(in thousands) | |||
Balance at December 31, 2021 |
| $ | |
Provision for credit losses | | ||
Write-offs charged against allowance | ( | ||
Balance at June 30, 2022 | $ | |
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. Our contract liabilities were $
11. Long-Lived and Other Asset Impairment
We review long-lived assets, including property, plant and equipment and identifiable intangibles that are being amortized, for impairment whenever events or changes in circumstances, including the removal of compressors from our active fleet, indicate that the carrying amount of an asset may not be recoverable.
Compression Fleet
We periodically review the future deployment of our idle compression assets for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. Based on these reviews, we determine that certain idle compressors should be retired from the active fleet. The retirement of these units from the active fleet triggers a review of these assets for impairment and as a result of our review, we may record an asset impairment to reduce the book value of each unit to its estimated fair value. The fair value of each unit is estimated based on the expected net sale proceeds compared to other fleet units we recently sold, a review of other units recently offered for sale by third parties or the estimated component value of the equipment we plan to use.
In connection with our review of our idle compression assets, we evaluate for impairment idle units that were culled from our fleet in prior years and are available for sale. Based on that review, we may reduce the expected proceeds from disposition and record additional impairment to reduce the book value of each unit to its estimated fair value.
The following table presents the results of our compression fleet impairment review as recorded to our contract operations segment:
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
(dollars in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Idle compressors retired from the active fleet |
| |
| |
| |
| | ||||
Horsepower of idle compressors retired from the active fleet |
| |
| |
| |
| | ||||
$ | | $ | | $ | | $ | | |||||
16
12. Restructuring Charges
In response to the decreased activity level of our customers that resulted from the coronavirus pandemic beginning in the second quarter of 2020, we incurred severance costs totaling $
During the third quarter of 2020, a plan to dispose of certain non-core properties was approved by management. We incurred $
The severance and property disposal costs incurred under the above restructuring plans were recorded to restructuring charges in our condensed consolidated statements of operations.
The following table presents restructuring charges incurred by segment:
| Contract | Aftermarket | ||||||||||
(in thousands) | Operations | Services | Other (1) | Total | ||||||||
Three months ended June 30, 2021 | ||||||||||||
Pandemic restructuring | $ | | $ | | $ | | $ | | ||||
2020 property restructuring | — | — | | | ||||||||
Other restructuring | — | — | | | ||||||||
Total restructuring charges | $ | | $ | | $ | | $ | | ||||
Six months ended June 30, 2021 | ||||||||||||
Pandemic restructuring | $ | | $ | | $ | | $ | | ||||
2020 property restructuring | — | — | | | ||||||||
Other restructuring | — | — | | | ||||||||
Total restructuring charges | $ | | $ | | $ | | $ | | ||||
| (1) | Represents expense incurred within our corporate function and not directly attributable to our segments. |
The following table presents restructuring charges incurred by cost type:
Three Months Ended | Six Months Ended | |||||
(in thousands) | June 30, 2021 |
| June 30, 2021 | |||
Severance costs | $ | | $ | | ||
Property disposal costs | ||||||
Impairment | — | | ||||
Other exit costs | | | ||||
Total property disposal costs | | | ||||
Other restructuring costs | | | ||||
Total restructuring charges | $ | | $ | | ||
17
13. Income Taxes
Valuation Allowance
The amount of our deferred tax assets considered realizable could be adjusted if projections of future taxable income are reduced or objective negative evidence in the form of a three-year cumulative loss is present or both. Should we no longer have a level of sustained profitability, excluding nonrecurring charges, we will have to rely more on our future projections of taxable income to determine if we have an adequate source of taxable income for the realization of our deferred tax assets, namely net operating loss, 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 six months ended June 30, 2022 differed significantly from our statutory rate primarily due to unrecognized tax benefits and the limitation on executive compensation.
Unrecognized Tax Benefits
As of June 30, 2022, we believe it is reasonably possible that $
14. Earnings per Share
Basic net income (loss) per common share is computed using the two-class method, which is an earnings allocation formula that determines net income (loss) per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Under the two-class method, basic net income (loss) per common share is determined by dividing net income (loss), after deducting amounts allocated to participating securities, by the weighted average number of common shares outstanding for the period. Participating securities include unvested restricted stock and stock-settled restricted stock units that have nonforfeitable rights to receive dividends or dividend equivalents, whether paid or unpaid. During periods of net loss, only distributed earnings (dividends) are allocated to participating securities, as participating securities do not have a contractual obligation to participate in our undistributed losses.
Diluted net income (loss) per common share is computed using the weighted average number of shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options, performance-based restricted stock units and stock to be issued pursuant to our ESPP unless their effect would be anti-dilutive.
The following table shows the calculation for net income attributable to common stockholders, which is used in the calculation of basic and diluted net income per common share:
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net income | $ | | $ | | $ | | $ | | ||||
Less: Earnings attributable to participating securities |
| ( |
| ( |
| ( |
| ( | ||||
Net income attributable to common stockholders | | | | | ||||||||
18
The following table shows the potential shares of common stock that were included in computing diluted net income per common share:
Three Months Ended | Six Months Ended | |||||||
June 30, | June 30, | |||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
Weighted average common shares outstanding including participating securities | | | ||||||
Less: Weighted average participating securities outstanding |
| ( |
| ( |
| ( |
| ( |
Weighted average common shares outstanding used in basic net income per common share |
| |
| |
| |
| |
Net dilutive potential common shares issuable: |
|
|
|
|
|
|
| |
On vesting of restricted stock units |
| | |
| |
| | |
On settlement of ESPP shares |
| | |
| |
| | |
Weighted average common shares outstanding used in diluted net income per common share |
| |
| |
| |
| |
The following table shows the potential shares of common stock issuable that were excluded from computing diluted net income per common share as their inclusion would have been anti-dilutive:
Three Months Ended | Six Months Ended | |||||||
June 30, | June 30, | |||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
On exercise of options where exercise price is greater than average market value for the period | — |
|
| — |
| |||
15. Derivatives
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 rate and thereby minimize the risks and costs associated with financial activities. We do not use derivative instruments for trading or other speculative purposes.
In March 2022, our $
Prior to expiration, during the third quarter of 2021, we dedesignated $
The remaining $
19
The following table presents the effect of our derivative instruments on our condensed consolidated balance sheets:
(in thousands) |
| June 30, 2022 |
| December 31, 2021 | ||
Interest rate swaps designated as cash flow hedging instruments | ||||||
$ | — | $ | | |||
Interest rate swaps not designated as hedging instruments | ||||||
— | | |||||
$ | — | $ | | |||
The following table presents the effect of our derivative instruments on our condensed consolidated statements of operations:
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Total amount of interest expense in which the effects of cash flow hedges and undesignated interest rate swaps are recorded | $ | | $ | | $ | | $ | | ||||
Interest rate swaps designated as cash flow hedging instruments | ||||||||||||
Pre-tax loss recognized in other comprehensive income | $ | — | $ | ( | $ | ( | $ | ( | ||||
Pre-tax loss reclassified from accumulated other comprehensive loss into interest expense |
| — |
| ( |
| ( |
| ( | ||||
Interest rate swaps not designated as hedging instruments | ||||||||||||
$ | — | $ | — | $ | | $ | — | |||||
See Note 8 (“Accumulated Other Comprehensive Loss”) and Note 16 (“Fair Value Measurements”) for further 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 three months ended June 30, 2022, we acquired a
(in thousands) |
| June 30, 2022 | |
$ | | ||
20
Interest Rate Swaps
Prior to their expiration in the first quarter of 2022, our interest rate swap derivative instruments were valued quarterly based on the income approach (discounted cash flow) 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:
(in thousands) |
| June 30, 2022 |
| December 31, 2021 | ||
$ | | $ | | |||
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
During the six months ended June 30, 2022, we recorded nonrecurring fair value measurements related to our idle compressors. Our estimate of the compressors’ fair value was primarily based on the expected net sale proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use. We discounted the expected proceeds, net of selling and other carrying costs, using a weighted average disposal period of
(in thousands) |
| June 30, 2022 |
| December 31, 2021 | ||
Impaired compressors | $ | | $ | | ||
The significant unobservable inputs used to develop the above fair value measurements were weighted by the relative fair value of the compressors being measured. Additional quantitative information related to our significant unobservable inputs follows:
| Range |
| Weighted Average (1) | |
Estimated net sale proceeds: | ||||
As of June 30, 2022 | $ | $ | ||
As of December 31, 2021 | $ | $ |
| (1) | Calculated based on an estimated discount for market liquidity of |
See Note 11 (“Long-Lived and Other Asset Impairment”) for further details.
Other Financial Instruments
The carrying amounts of our cash, receivables and payables approximate fair value due to the short-term nature of those instruments.
The carrying amount of borrowings outstanding under our Credit Facility approximates fair value due to its variable interest rate. The fair value of these outstanding borrowings is a Level 3 measurement.
The fair value of our fixed rate debt is estimated using yields observable in active markets, which are Level 2 inputs, and was as follows:
(in thousands) |
| June 30, 2022 |
| December 31, 2021 | ||
Carrying amount of fixed rate debt (1) | $ | | $ | | ||
| |
| | |||
| (1) | Carrying amounts are shown net of unamortized premium and deferred financing costs. See Note 7 (“Long-Term Debt”). |
21
17. Stock-Based Compensation
We recognize stock-based compensation expense related to restricted stock awards, restricted stock units, performance-based restricted stock units and shares issued under our ESPP.
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Equity award expense | $ | | $ | | $ | | $ | | ||||
Liability award expense |
| |
| |
| |
| | ||||
Total stock-based compensation expense | $ | | $ | | $ | | $ | | ||||
The following table presents our restricted stock activity during the six months ended June 30, 2022:
Weighted | |||||
Average | |||||
Grant Date | |||||
Shares | Fair Value | ||||
| (in thousands) |
| Per Share | ||
Non-vested restricted stock, December 31, 2021 |
| | $ | | |
Granted |
| |
| | |
Vested |
| ( |
| | |
Canceled |
| ( |
| | |
Non-vested restricted stock, June 30, 2022 (1) |
| |
| | |
| (1) | Comprised of |
As of June 30, 2022, we expect $
18. 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.
22
Tax Matters
We are subject to a number of state and local taxes that are not income-based. As many of these taxes are subject to audit by the taxing authorities, it is possible that an audit could result in additional taxes due. We accrue for such additional taxes when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the liability. As of June 30, 2022 and December 31, 2021, we had $
In 2021, one of our sales and use tax audits advanced from the audit review phase to the contested hearing phase. We had $
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.
19. Related Party Transactions
Old Ocean Reserves, an affiliate of our customer Hilcorp, has the right to designate
Revenue from Hilcorp and affiliates was $
20. Segments
We manage our business segments primarily based on the type of product or service provided. We have
We evaluate the performance of our segments based on gross margin for each segment. Revenue includes only sales to external customers.
23
| Contract |
| Aftermarket |
| |||||
(in thousands) |
| Operations |
| Services |
| Total | |||
Three months ended June 30, 2022 |
|
|
|
|
|
| |||
Revenue | $ | | $ | | $ | | |||
Gross margin |
| |
| |
| | |||
Three months ended June 30, 2021 |
|
|
|
|
|
| |||
Revenue | $ | | $ | | $ | | |||
Gross margin |
| |
| |
| | |||
Six months ended June 30, 2022 |
|
|
|
|
|
| |||
Revenue | $ | | $ | | $ | | |||
Gross margin |
| |
| |
| | |||
Six months ended June 30, 2021 |
|
|
|
|
|
| |||
Revenue | $ | | $ | | $ | | |||
Gross margin |
| |
| |
| | |||
The following table reconciles total gross margin to income before income taxes:
Three Months Ended |
| Six Months Ended | ||||||||||
June 30, | June 30, | |||||||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Total gross margin | $ | | $ | | $ | | $ | | ||||
Less: |
|
|
|
|
|
|
|
| ||||
Selling, general and administrative |
| |
| |
| |
| | ||||
Depreciation and amortization |
| |
| |
| |
| | ||||
Long-lived and other asset impairment |
| |
| |
| |
| | ||||
Restructuring charges | — | | — | | ||||||||
Interest expense |
| |
| |
| |
| | ||||
Gain on sale of assets, net | ( | ( | ( | ( | ||||||||
Other (income) expense, net |
| |
| ( |
| |
| ( | ||||
Income before income taxes | $ | | $ | | $ | | $ | | ||||
21. Impact of Hurricane
In August 2021, Hurricane Ida caused operational disruptions, damage to compressors and a temporary shutdown of facilities in Louisiana that negatively impacted our financial performance in the quarter. At December 31, 2021, we had an insurance recovery receivable of $
22. Subsequent Event
On July 1, 2022, we acquired an additional
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q and in conjunction with our 2021 Form 10-K.
Overview
We are an energy infrastructure company with a primary focus on midstream natural gas compression. We are the leading provider of natural gas compression services to customers in the energy industry throughout the U.S. and a leading supplier of aftermarket services to customers that own compression equipment in the U.S. We operate in two business segments: contract operations and aftermarket services. Our 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
May 2022 Disposition
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 three and six months ended June 30, 2022. See Note 2 (“Business Transactions”) to our Financial Statements for further details of this transaction.
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 June 30, 2022, our ownership interest was 14%. See Note 5 (“Equity Investments”) to our Financial Statements for further details.
Operating Highlights
Three Months Ended | Six Months Ended |
| ||||||||
June 30, | June 30, |
| ||||||||
(horsepower in thousands) |
| 2022 |
| 2021 |
|
| 2022 |
| 2021 |
|
Total available horsepower (at period end)(1) |
| 3,810 |
| 4,041 |
|
| 3,810 |
| 4,041 | |
Total operating horsepower (at period end)(2) | 3,322 |
| 3,295 |
| 3,322 |
| 3,295 | |||
Average operating horsepower | 3,297 |
| 3,316 |
| 3,277 |
| 3,339 | |||
Horsepower utilization: |
|
|
|
|
|
|
| |||
Spot (at period end) | 87 | % | 82 | % | 87 | % | 82 | % | ||
Average | 86 | % | 82 | % | 85 | % | 82 | % | ||
| (1) | Defined as idle and operating horsepower. Includes new compressors completed by third party manufacturers that have been delivered to us. |
| (2) | Defined as horsepower that is operating under contract and horsepower that is idle but under contract and generating revenue such as standby revenue. |
Non-GAAP Financial Measures
Management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include the non-GAAP financial measure of gross margin.
25
We define gross margin as total revenue less cost of sales (excluding depreciation and amortization). Gross margin is included as a supplemental disclosure because it is a primary measure used by our management to evaluate the results of revenue and cost of sales (excluding depreciation and amortization), which are key components of our operations. We believe gross margin is important because it focuses on the current operating performance of our operations and excludes the impact of the prior historical costs of the assets acquired or constructed that are utilized in those operations, the indirect costs associated with our SGA activities, our financing methods and income taxes. In addition, depreciation and amortization may not accurately reflect the costs required to maintain and replenish the operational usage of our assets and therefore may not portray the costs of current operating activity. As an indicator of our operating performance, gross margin should not be considered an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP. Our gross margin may not be comparable to a similarly-titled measure of other entities because other entities may not calculate gross margin in the same manner.
Gross margin has certain material limitations associated with its use as compared to net income (loss). These limitations are primarily due to the exclusion of SGA, depreciation and amortization, impairments, restructuring charges, interest expense, (gain) loss on sale of assets, net, other (income) expense, net and provision for (benefit from) income taxes. Because we intend to finance a portion of our operations through borrowings, interest expense is a necessary element of our costs and our ability to generate revenue. Additionally, because we use capital assets, depreciation expense is a necessary element of our costs and our ability to generate revenue and SGA 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 | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net income | $ | 16,746 | $ | 8,752 | $ | 18,467 | $ | 12,921 | ||||
Selling, general and administrative |
| 27,691 |
| 26,077 |
| 55,464 |
| 51,161 | ||||
Depreciation and amortization |
| 41,356 |
| 44,193 |
| 84,395 |
| 89,905 | ||||
Long-lived and other asset impairment |
| 4,647 |
| 2,960 |
| 12,063 |
| 10,033 | ||||
Restructuring charges | — | 743 | — | 1,640 | ||||||||
Interest expense |
| 24,456 |
| 25,958 |
| 49,702 |
| 57,203 | ||||
Gain on sale of assets, net | (18,948) | (3,124) | (21,060) | (14,156) | ||||||||
Other (income) expense, net |
| 497 |
| (82) |
| 533 |
| (1,971) | ||||
Provision for income taxes |
| 9,318 |
| 1,261 |
| 10,261 |
| 8,285 | ||||
Gross margin | $ | 105,763 | $ | 106,738 | $ | 209,825 | $ | 215,021 | ||||
Results of Operations: Summary of Results
Revenue
Revenue was $215.8 million and $195.6 million during the three months ended June 30, 2022 and 2021, respectively, and $413.0 million and $391.0 million during the six months ended June 30, 2022 and 2021, respectively. The increases in consolidated revenue during these periods were primarily due to increased revenue from our aftermarket services business. See “Contract Operations” and “Aftermarket Services” below for further details.
Net Income
Net income was $16.7 million and $8.8 million during the three months ended June 30, 2022 and 2021, respectively. The increase was primarily driven by increases in gain on sale of assets, net and gross margin from our aftermarket services business, as well as decreases in depreciation and amortization and interest expense. These changes were partially offset by a decrease in gross margin from our contract operations business and increases in our provision for income taxes, SGA and long-lived and other asset impairment.
26
Net income was $18.5 million and $12.9 million during the six months ended June 30, 2022 and 2021, respectively. The increase was primarily driven by increases in gain on sale of assets, net and gross margin from our aftermarket services business, as well as decreases in interest expense, depreciation and amortization and restructuring charges. These changes were partially offset by a decrease in gross margin from our contract operations business, increases in SGA, long-lived and other asset impairment and provision for income taxes and a change from net other income to net other expense.
Results of Operations: Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
Contract Operations
| Three Months Ended | ||||||||
June 30, | Increase | ||||||||
(dollars in thousands) |
| 2022 |
| 2021 |
| (Decrease) | |||
Revenue | $ | 166,298 | $ | 163,865 | 1 | % | |||
Cost of sales (excluding depreciation and amortization) |
| 68,355 |
| 61,387 | 11 | % | |||
Gross margin | $ | 97,943 | $ | 102,478 | (4) | % | |||
Gross margin percentage (1) |
| 59 | % |
| 63 | % | (4) | % | |
| (1) | Defined as gross margin divided by revenue. |
Revenue increased primarily due to an increase in contract operations rates in response to improving market conditions and units returning to operating status from standby, which was partially offset by the impact of the strategic disposition of 147,000 horsepower in 2021. Adjusting for these dispositions, operating horsepower increased quarter over quarter.
Despite this increase in revenue, gross margin decreased due to a larger increase in cost of sales. Start-up, 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.
Aftermarket Services
| Three Months Ended |
| |||||||
June 30, | Increase | ||||||||
(dollars in thousands) |
| 2022 |
| 2021 |
| (Decrease) | |||
Revenue | $ | 49,530 | $ | 31,750 |
| 56 | % | ||
Cost of sales (excluding depreciation and amortization) |
| 41,710 |
| 27,490 |
| 52 | % | ||
Gross margin | $ | 7,820 | $ | 4,260 |
| 84 | % | ||
Gross margin percentage |
| 16 | % |
| 13 | % | 3 | % | |
Revenue increased primarily due to increases in parts sales and service activities, as the market recovery drove an increase in customer demand.
Gross margin increased due to the increase in revenue and despite an increase in cost of sales, which was primarily driven by the same increases in parts sales and service activities.
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Costs and Expenses
| Three Months Ended | |||||
June 30, | ||||||
(in thousands) |
| 2022 |
| 2021 | ||
Selling, general and administrative | $ | 27,691 | $ | 26,077 | ||
Depreciation and amortization |
| 41,356 |
| 44,193 | ||
Long-lived and other asset impairment |
| 4,647 |
| 2,960 | ||
Restructuring charges | — | 743 | ||||
Interest expense |
| 24,456 |
| 25,958 | ||
Gain on sale of assets, net | (18,948) | (3,124) | ||||
Other (income) expense, net |
| 497 |
| (82) | ||
Selling, general and administrative. The increase in SGA was primarily due to a $0.7 million increase in bad debt expense and a $0.7 million increase in information technology expense, which largely consisted of increased service agreement costs and amortization of capitalized implementation costs related to the substantial completion of our process and technology transformation project at the end of 2021.
Depreciation and amortization. The decrease in depreciation and amortization expense was primarily due to a decrease in depreciation expense resulting from assets reaching the end of their depreciable lives and the impact of compression and other asset sales. These decreases were partially offset by an increase in depreciation expense associated with fixed asset additions.
Long-lived and other asset impairment. We periodically review the future deployment of our idle compressors for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. In addition, we evaluate for impairment idle units that have been culled from our compression fleet in prior years and are available for sale. See Note 11 (“Long-Lived and Other Asset Impairment”) to our Financial Statements for further details. The following table presents the results of our compression fleet impairment review, as recorded in our contract operations segment:
| Three Months Ended | |||||
June 30, | ||||||
(dollars in thousands) |
| 2022 |
| 2021 | ||
Idle compressors retired from the active fleet |
| 30 |
| 45 | ||
Horsepower of idle compressors retired from the active fleet |
| 26,000 |
| 13,000 | ||
Impairment recorded on idle compressors retired from the active fleet | $ | 4,647 | $ | 2,832 | ||
Restructuring charges. Restructuring charges of $0.7 million during the three months ended June 30, 2021 primarily consisted of severance costs related to our pandemic restructuring activities. See Note 12 (“Restructuring Charges”) to our Financial Statements for further details.
Interest expense. The decrease in interest expense was primarily due to a decrease in the average outstanding balance of long-term debt.
Gain on sale of assets, net. The increase in gain on sale of assets, net was primarily due to the $16.7 million gain on the May 2022 Disposition and gains of $1.8 million recognized on other compression assets sold during the three months ended June 30, 2022, compared to gains of $2.1 million and $1.1 million recognized on sales of compression assets and transportation and shop assets, respectively, during the three months ended June 30, 2021.
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Provision for Income Taxes
| Three Months Ended |
| |||||||
June 30, | Increase | ||||||||
(dollars in thousands) |
| 2022 |
| 2021 |
| (Decrease) | |||
Provision for income taxes | $ | 9,318 | $ | 1,261 |
| 639 | % | ||
Effective tax rate |
| 36 | % |
| 13 | % | 23 | % | |
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 June 30, 2022 compared to the three months ended June 30, 2021.
Results of Operations: Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
Contract Operations
| Six Months Ended | ||||||||
June 30, | Increase | ||||||||
(dollars in thousands) |
| 2022 |
| 2021 |
| (Decrease) | |||
Revenue | $ | 329,954 | $ | 329,899 | — | % | |||
Cost of sales (excluding depreciation and amortization) |
| 132,856 |
| 122,752 | 8 | % | |||
Gross margin | $ | 197,098 | $ | 207,147 | (5) | % | |||
Gross margin percentage |
| 60 | % |
| 63 | % | (3) | % | |
Revenue was unchanged primarily due to an increase in contract operations rates in response to improving market conditions and units returning to operating status from standby, and the offsetting impact of the strategic disposition of 147,000 horsepower in 2021. Adjusting for these dispositions, operating horsepower increased year over year.
With revenue unchanged, gross margin decreased with the increase in cost of sales. Start-up, 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.
Aftermarket Services
| Six Months Ended |
| |||||||
June 30, | Increase | ||||||||
(dollars in thousands) |
| 2022 |
| 2021 |
| (Decrease) | |||
Revenue | $ | 83,075 | $ | 61,147 |
| 36 | % | ||
Cost of sales (excluding depreciation and amortization) |
| 70,348 |
| 53,273 |
| 32 | % | ||
Gross margin | $ | 12,727 | $ | 7,874 |
| 62 | % | ||
Gross margin percentage |
| 15 | % |
| 13 | % | 2 | % | |
Revenue increased primarily due to increases in parts sales and service activities, as the market recovery drove an increase in customer demand.
Gross margin increased due to the increase in revenue and despite an increase in cost of sales, which was primarily driven by the same increases in parts sales and service activities.
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Costs and Expenses
| Six Months Ended | |||||
June 30, | ||||||
(in thousands) |
| 2022 |
| 2021 | ||
Selling, general and administrative | $ | 55,464 | $ | 51,161 | ||
Depreciation and amortization |
| 84,395 | 89,905 | |||
Long-lived and other asset impairment |
| 12,063 | 10,033 | |||
Restructuring charges | — | 1,640 | ||||
Interest expense |
| 49,702 | 57,203 | |||
Gain on sale of assets, net | (21,060) | (14,156) | ||||
Other (income) expense, net |
| 533 | (1,971) | |||
Selling, general and administrative. The increase in SGA was primarily due to a $1.8 million increase in sales and use tax that was mainly driven by audit settlements in 2021 and no comparable settlements in 2022, a $0.7 million increase in information technology expense, which largely consisted of increased service agreement costs and amortization of capitalized implementation costs related to the substantial completion of our process and technology transformation project at the end of 2021, and $0.6 million increases in each of employee travel and meeting expense and bad debt expense.
Depreciation and amortization. The decrease in depreciation and amortization expense was primarily due to a decrease in depreciation expense resulting from assets reaching the end of their depreciable lives, the impact of compression and other asset sales and impairments and a decrease in amortization expense as certain intangible assets reached the end of their useful lives. These decreases were partially offset by an increase in depreciation expense associated with fixed asset additions.
Long-lived and other asset impairment. We periodically review the future deployment of our idle compressors for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. In addition, we evaluate for impairment idle units that have been culled from our compression fleet in prior years and are available for sale. See Note 11 (“Long-Lived and Other Asset Impairment”) to our Financial Statements for further details. The following table presents the results of our compression fleet impairment review, as recorded in our contract operations segment:
| Six Months Ended | |||||
June 30, | ||||||
(dollars in thousands) |
| 2022 |
| 2021 | ||
Idle compressors retired from the active fleet |
| 75 |
| 115 | ||
Horsepower of idle compressors retired from the active fleet |
| 57,000 |
| 37,000 | ||
Impairment recorded on idle compressors retired from the active fleet | $ | 12,056 | $ | 9,844 | ||
Restructuring charges. Restructuring charges of $1.6 million during the six months ended June 30, 2021 primarily consisted of severance costs related to our pandemic restructuring activities. See Note 12 (“Restructuring Charges”) to our Financial Statements for further details.
Interest expense. The decrease in interest expense was primarily due to the $4.9 million write-off of unamortized deferred financing costs related to the amendment of our Credit Facility in the first quarter of 2021 and a decrease in the average outstanding balance of long-term debt.
Gain on sale of assets, net. Our net gain on the sale of assets during the six months ended June 30, 2022 was primarily due to the $16.7 million gain on the May 2022 Disposition and gains of $3.2 million and $1.1 million recognized on sales of other compression assets and transportation and shop assets, respectively, during the period.
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Our net gain on the sale of assets during the six months ended June 30, 2021 was primarily due to the $6.0 million gain on the February 2021 Disposition and gains of $6.4 million and $2.1 million recognized on sales of other compression assets and transportation and shop assets, respectively, during the period.
Other (income) expense, net. The change from net other income to net other expense was primarily due to a $0.9 million reduction in indemnification expense in 2021 due to the settlement of an audit pursuant to our tax matters agreement with Exterran Corporation, as well as income in 2021 of $0.3 million and $0.3 million related to compressor parts recycling and equipment damaged at a customer site, respectively.
Provision for Income Taxes
| Six Months Ended |
| |||||||
June 30, | Increase | ||||||||
(dollars in thousands) |
| 2022 |
| 2021 |
| (Decrease) | |||
Provision for income taxes | $ | 10,261 | $ | 8,285 |
| 24 | % | ||
Effective tax rate |
| 36 | % |
| 39 | % | (3) | % | |
The increase in provision for income taxes was primarily due to the tax effect of the increase in book income during the six months ended June 30, 2022 compared to the six months ended June 30, 2021.
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. |
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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 million in capital expenditures during 2022, primarily consisting of approximately $150 million for growth capital expenditures and approximately $70 million to $75 million for maintenance capital expenditures. We anticipate increased 2022 capital expenditures, particularly growth capital expenditures, as compared to 2021 due to increased investment in new compression equipment as a result of higher customer demand.
Dividends
On July 28, 2022, our Board of Directors declared a quarterly dividend of $0.145 per share of common stock to be paid on August 16, 2022 to stockholders of record at the close of business on August 9, 2022. Any future determinations to pay cash dividends to our stockholders will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations and credit and loan agreements in effect at that time and other factors deemed relevant by our Board of Directors.
Sources of Cash
Revolving Credit Facility
During the six months ended June 30, 2022 and 2021, the Credit Facility had an average daily balance of $231.5 million and $345.3 million, respectively. The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 3.9% and 2.6% at June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022, there were $5.8 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.3%.
As of June 30, 2022, we were in compliance with all covenants under our Credit Facility. As a result of the facility’s financial ratio requirements, $476.6 million of the $508.5 million of undrawn capacity was available for additional borrowings as of June 30, 2022.
At-the-Market Continuous Equity Offering Program
During the six months ended June 30, 2022 and 2021, we sold 447,020 and 357,148 shares of common stock for net proceeds of $4.2 million and $3.4 million, respectively, pursuant to our ATM agreement. See Note 9 (“Equity”) to our Financial Statements for further details.
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Cash Flows
Our cash flows, as reflected in our condensed consolidated statements of cash flows, are summarized below:
| Six Months Ended | |||||
June 30, | ||||||
(in thousands) |
| 2022 |
| 2021 | ||
Net cash provided by (used in): |
|
|
|
| ||
Operating activities | $ | 89,524 | $ | 126,617 | ||
Investing activities |
| (46,034) |
| (866) | ||
Financing activities |
| (43,109) |
| (123,536) | ||
Net increase in cash and cash equivalents | $ | 381 | $ | 2,215 | ||
Operating Activities
The decrease in net cash provided by operating activities was primarily due to increased cash outflow for cost of sales, contract costs, SGA and inventory, as well as decreased cash inflow from accounts receivable. Partially offsetting these decreases in operating cash were increased cash inflow from revenue and deferred revenue and decreased cash outflow for accounts payable and other liabilities, restructuring charges and interest paid on long-term debt.
Investing Activities
The increase in net cash used in investing activities was primarily due to a $67.3 million increase in capital expenditures and the $8.0 million investment made in unconsolidated entities during the six months ended June 30, 2022. These cash outflows were partially offset by a $28.3 million increase in proceeds from the sales of property, plant and equipment.
Financing Activities
The decrease in net cash used in financing activities was primarily due to $76.5 million of net repayments of long-term debt during 2021, compared to $1.2 million in net borrowings in 2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk associated with changes in the variable interest rate of our Credit Facility. We have previously used derivative instruments to manage our exposure to fluctuations in this variable interest rate, however, our interest rate swaps expired in the first quarter of 2022, and all borrowings under the Credit Facility are now subject to variable interest rates.
A 1% increase in the effective interest rate on our Credit Facility’s outstanding balance at June 30, 2022 would have resulted in an annual increase in our interest expense of $2.4 million.
Item 4. Controls and Procedures
This Item 4 includes information concerning the controls and controls evaluation referred to in the certifications of our Chief Executive Officer and Chief Financial Officer required by Rule 13a-14 of the Exchange Act included in this Quarterly Report as Exhibits 31.1 and 31.2.
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Management’s Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act), which are designed to provide reasonable assurance that we are able to record, process, summarize and report the information required to be disclosed in our reports under the Exchange Act within the time periods specified in the rules and forms of the SEC. Based on the evaluation, as of June 30, 2022 our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to management, and made known to our principal executive officer and principal financial officer, on a timely basis to ensure that it is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
During the first quarter of 2022, we implemented a new ERP system, which replaced our existing core financial systems, resulting in changes to our financial close processes and procedures. As a result of the implementation, certain internal controls over financial reporting were automated, modified or implemented. While we believe the new ERP system will enhance our internal controls, there are inherent risks in implementing any new system, and we will continue to evaluate these control changes as part of our assessment of control design and effectiveness throughout 2022.
There were no other changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, we are involved in various pending or threatened legal actions. While we are unable to predict the ultimate outcome of these actions, we believe that any ultimate liability arising from any of these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends.
Item 1A. Risk Factors
There have been no material changes or updates to the risk factors previously disclosed in our 2021 Form 10-K.
Item 2. Purchases of Equity Securities by Issuer and Affiliated Purchasers
The following table summarizes our purchases of equity securities during the three months ended June 30, 2022:
Maximum | |||||||||
Number of Shares | |||||||||
Total Number of | That May Yet be | ||||||||
Average | Shares Purchased | Purchased Under | |||||||
Total Number | Price | as Part of Publicly | the Publicly | ||||||
of Shares | Paid per | Announced Plans | Announced Plans | ||||||
| Purchased (1) |
| Share |
| or Programs |
| or Programs | ||
April 1, 2022 — April 30, 2022 | 303 | $ | 9.16 | N/A | N/A | ||||
May 1, 2022 — May 31, 2022 |
| — |
| — |
| N/A |
| N/A | |
June 1, 2022 — June 30, 2022 |
| — |
| — |
| N/A |
| N/A | |
Total |
| 303 | 9.16 |
| N/A |
| N/A | ||
| (1) | Represents shares withheld to satisfy employees’ tax obligations in connection with the vesting of restricted stock awards during the period. |
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
Exhibit No. |
| Description |
3.1 | ||
3.2 | ||
3.3 | ||
31.1* | ||
31.2* | ||
32.1** | ||
32.2** | ||
101.1* | Interactive data files (formatted in Inline XBRL) pursuant to Rule 405 of Regulation S-T | |
104.1* | Cover page interactive data file (formatted in Inline XBRL) pursuant to Rule 406 of Regulation S-T |
* Filed herewith.
** Furnished, not filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Archrock, Inc. | ||
By: | /s/ Douglas S. Aron | |
Douglas S. Aron | ||
Senior Vice President and Chief Financial Officer | ||
(Principal Financial Officer) | ||
By: | /s/ Donna A. Henderson | |
Donna A. Henderson | ||
Vice President and Chief Accounting Officer | ||
(Principal Accounting Officer) | ||
August 3, 2022 | ||
37