Archrock(AROC) - 2024 Q2 - Quarterly Report

Glossary The glossary provides definitions for key terms and abbreviations used throughout the report, including financial instruments, company entities, accounting standards, and strategic transactions - The glossary provides definitions for key terms and abbreviations used throughout the report, including financial instruments (e.g., 2027 Notes, 2028 Notes, Credit Facility), company entities (Archrock, Archrock ELT), accounting standards (ASU, GAAP), and strategic transactions (TOPS Acquisition)[9] Forward-Looking Statements This section outlines forward-looking statements regarding business strategy and financial position, subject to various risks and uncertainties - This Form 10-Q contains forward-looking statements regarding business growth strategy, future financial position, cash flow sufficiency, capital expenditures, cost savings, future revenue, adjusted gross margin, equipment value, and management plans and objectives[10] - Such statements are subject to various risks and uncertainties that could cause actual results to differ materially, including risks related to the TOPS Acquisition (inability to consummate or integrate), inflation, international conflicts, competitive pressures, debt, and regulatory changes[11] - The company undertakes no obligation to publicly update or revise any forward-looking statement, except as required by law[12] Part I. Financial Information This part presents Archrock, Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements (unaudited) This section presents Archrock, Inc.'s unaudited condensed consolidated financial statements for the periods ended June 30, 2024, and December 31, 2023 (balance sheets), and June 30, 2024, and 2023 (statements of operations, equity, and cash flows) Condensed Consolidated Balance Sheets Key financial positions including assets, liabilities, and equity are presented for the periods ended June 30, 2024, and December 31, 2023 Condensed Consolidated Balance Sheets Summary | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | Change (vs Dec 31, 2023) | | :-------------------------- | :--------------------------- | :------------------------------- | :----------------------- | | Total Assets | $2,710,647 | $2,655,950 | +$54,697 | | Total Current Assets | $204,174 | $213,157 | -$8,983 | | Property, Plant & Equipment, net | $2,372,069 | $2,301,982 | +$70,087 | | Total Liabilities | $1,816,151 | $1,784,929 | +$31,222 | | Total Current Liabilities | $133,192 | $152,143 | -$18,951 | | Long-term Debt | $1,608,956 | $1,584,869 | +$24,087 | | Total Equity | $894,496 | $871,021 | +$23,475 | Condensed Consolidated Statements of Operations Detailed income statement data, including revenue, net income, and earnings per share, is provided for the three and six months ended June 30, 2024 and 2023 Condensed Consolidated Statements of Operations Summary | Metric (in thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | YoY Change | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | YoY Change | | :-------------------------- | :------------------------------- | :------------------------------- | :--------- | :----------------------------- | :----------------------------- | :--------- | | Total Revenue | $270,526 | $247,543 | +9.3% | $539,014 | $477,377 | +12.9% | | Net Income | $34,425 | $24,653 | +39.6% | $74,957 | $41,138 | +82.2% | | Basic EPS | $0.22 | $0.16 | +37.5% | $0.48 | $0.26 | +84.6% | | Diluted EPS | $0.22 | $0.16 | +37.5% | $0.48 | $0.26 | +84.6% | Condensed Consolidated Statements of Equity Changes in stockholders' equity, including common stock, additional paid-in capital, and accumulated deficit, are presented for the periods ended June 30, 2024 and 2023 Condensed Consolidated Statements of Equity Summary | Metric (in thousands) | Balance at June 30, 2024 | Balance at June 30, 2023 | Change | | :----------------------- | :----------------------- | :----------------------- | :----- | | Common Stock Amount | $1,658 | $1,649 | +$9 | | Common Stock Shares | 165,793,798 | 164,940,249 | +853,549 | | Additional Paid-in Capital | $3,478,597 | $3,463,668 | +$14,929 | | Accumulated Deficit | $(2,476,793) | $(2,515,351) | +$38,558 | | Treasury Stock Amount | $(108,966) | $(94,433) | -$(14,533) | | Total Equity | $894,496 | $855,533 | +$38,963 | - Cash dividends declared for Q2 2024 were $0.165 per common share, totaling $25.8 million, an increase from $0.150 per common share ($23.5 million) in Q2 2023[21][64] Condensed Consolidated Statements of Cash Flows Cash flow activities from operations, investing, and financing are detailed for the six months ended June 30, 2024 and 2023 Condensed Consolidated Statements of Cash Flows Summary | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | YoY Change | | :-------------------------------- | :----------------------------- | :----------------------------- | :--------- | | Net cash from Operating Activities | $208,353 | $118,398 | +$89,955 | | Net cash used in Investing Activities | $(173,488) | $(150,946) | -$(22,542) | | Net cash from (used in) Financing Activities | $(35,284) | $32,175 | -$(67,459) | | Net decrease in cash and cash equivalents | $(419) | $(373) | -$(46) | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the condensed consolidated financial statements, covering business description, recent accounting developments, and specific financial line items Note 1. Description of Business and Basis of Presentation This note outlines Archrock's business segments and the accounting principles used in preparing the financial statements - Archrock is an energy infrastructure company focused on midstream natural gas compression, operating in two business segments: contract operations and aftermarket services[30] - The unaudited condensed consolidated financial statements are prepared in accordance with Form 10-Q instructions and GAAP, reflecting normal recurring adjustments[31] Note 2. Recent Accounting Developments Recent FASB Accounting Standards Updates (ASUs) impacting income tax disclosures, segment reporting, and business combinations are discussed - The FASB issued ASU 2023-09 (Income Tax Disclosures), effective for fiscal years beginning after December 15, 2024, requiring significant additional disclosures on income taxes paid and rate reconciliation[33] - The FASB issued ASU 2023-07 (Segment Reporting), effective for fiscal years beginning after December 15, 2023, requiring disclosures of significant expenses for each reportable segment[34] - The FASB issued ASU 2023-05 (Business Combinations – Joint Venture Formations), effective for formations on or after January 1, 2025, requiring joint ventures to apply a new basis of accounting upon formation[36] Note 3. Inventory Details of inventory composition, including parts, supplies, and work in progress, are provided for the specified periods Inventory Breakdown | Inventory Type (in thousands) | June 30, 2024 | December 31, 2023 | Change | | :---------------------------- | :------------ | :---------------- | :----- | | Parts and supplies | $66,932 | $70,759 | -$3,827 | | Work in progress | $12,301 | $11,002 | +$1,299 | | Total Inventory | $79,233 | $81,761 | -$2,528 | Note 4. Property, Plant and Equipment, Net A breakdown of property, plant, and equipment, net of accumulated depreciation, is presented Property, Plant and Equipment, Net Summary | Asset Category (in thousands) | June 30, 2024 | December 31, 2023 | Change | | :---------------------------- | :------------ | :---------------- | :----- | | Compression equipment, facilities and other fleet assets | $3,431,348 | $3,326,919 | +$104,429 | | Land and buildings | $31,570 | $30,169 | +$1,401 | | Transportation and shop equipment | $101,887 | $100,474 | +$1,413 | | Computer hardware and software | $77,711 | $77,532 | +$179 | | Other | $6,079 | $5,678 | +$401 | | Total Property, Plant and Equipment | $3,648,595 | $3,540,772 | +$107,823 | | Accumulated depreciation | $(1,276,526) | $(1,238,790) | -$(37,736) | | Property, Plant and Equipment, net | $2,372,069 | $2,301,982 | +$70,087 | Note 5. Investments in Unconsolidated Affiliates Information on equity investments in ECOTEC and Ionada, including ownership interests and valuation methods, is disclosed - Archrock holds a 25% equity interest in ECOTEC, a methane emissions detection company, accounted for using the fair value option, with a fair value of $14.9 million as of June 30, 2024[42][92] - Archrock is the lead investor in Ionada, a global carbon capture technology company, with a 10% fully diluted ownership interest and a carrying value of $4.3 million as of June 30, 2024, accounted for using the fair value measurement alternative[45][96] - Subject to certain conditions, Archrock's ownership interest in Ionada is expected to increase to 24% over the next two years with additional investments[45][96] Note 6. Long-Term Debt Details of the company's long-term debt, including the Credit Facility and senior notes, are provided along with covenant compliance Long-Term Debt Summary | Debt Type (in thousands) | June 30, 2024 | December 31, 2023 | Change | | :---------------------------- | :------------ | :---------------- | :----- | | Credit Facility | $310,700 | $287,025 | +$23,675 | | 6.25% senior notes due April 2028 | $801,290 | $801,443 | -$153 | | 6.875% senior notes due April 2027 | $496,966 | $496,401 | +$565 | | Total Long-term Debt | $1,608,956 | $1,584,869 | +$24,087 | - The Credit Facility's maturity date was extended to May 16, 2028, and the referenced rate changed from LIBOR to SOFR in May 2023[50] - As of June 30, 2024, Archrock was in compliance with all covenants under its Amended and Restated Credit Agreement, with all undrawn capacity available for borrowings[48][164] Note 7. Commitments and Contingencies Information on self-insurance, tax audit accruals, and pending legal actions is disclosed - Archrock is substantially self-insured for workers' compensation, employee group health claims (up to deductibles), and property damage to its offshore assets[53] - As of June 30, 2024, $4.3 million was accrued for the outcomes of non-income-based tax audits, including $0.6 million for sales and use tax audits[54][55] - The company is involved in various pending or threatened legal actions but believes any ultimate liability will not have a material adverse effect on its consolidated financial position, results of operations, or cash flows[58] Note 8. Stockholders' Equity Details on share repurchase programs, common stock activity, and dividends declared are presented - The Board of Directors extended the share repurchase program for an additional 24 months on April 25, 2024, and replenished the authorized amount to $50.0 million[58] - Through June 30, 2024, the company repurchased 833,346 common shares for an aggregate of $10.1 million at an average price of $12.11 per share under the program[58] Share Repurchase Activity | Share Repurchase Activity (in thousands, except per share) | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2024 | | :------------------------------------------------------- | :------------------------------- | :----------------------------- | | Shares withheld related to net settlement of equity awards | 597 shares, $11 cost, $17.72 avg price | 386,577 shares, $6,462 cost, $16.72 avg price | | Total shares repurchased | 597 shares, $11 cost, $17.72 avg price | 469,549 shares, $7,692 cost, $16.38 avg price | Dividends Declared | Dividends Declared (per common share) | Q2 2024 | Q1 2024 | Q4 2023 | Q3 2023 | Q2 2023 | Q1 2023 | | :------------------------------------ | :------ | :------ | :------ | :------ | :------ | :------ | | Dividend per share | $0.165 | $0.165 | $0.155 | $0.155 | $0.150 | $0.150 | | Total Dividends Paid (in thousands) | $25,819 | $26,000 | $24,190 | $24,250 | $23,504 | $23,852 | Note 9. Revenue from Contracts with Customers Revenue breakdown by contract operations and aftermarket services, along with remaining performance obligations, is provided Revenue by Source | Revenue Source (in thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | YoY Change | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | YoY Change | | :---------------------------- | :------------------------------- | :------------------------------- | :--------- | :----------------------------- | :----------------------------- | :--------- | | Contract operations | $225,468 | $201,120 | +12.1% | $448,519 | $388,865 | +15.3% | | Aftermarket services | $45,058 | $46,423 | -3.0% | $90,495 | $88,512 | +2.2% | | Total Revenue | $270,526 | $247,543 | +9.3% | $539,014 | $477,377 | +12.9% | - As of June 30, 2024, remaining performance obligations for the contract operations segment totaled $631.8 million, expected to be recognized through 2029[68] - Contract liabilities were $7.7 million as of June 30, 2024, up from $7.0 million at December 31, 2023, primarily from freight billings and milestone billings on aftermarket services[72] Note 10. Long-Lived and Other Asset Impairment Details on the impairment of idle compression assets, including units retired and impairment charges, are presented - The company periodically reviews idle compression assets for impairment, reducing their book value to estimated fair value when units are not cost-efficient to maintain or operate, based on expected net sale proceeds[74] Impairment of Idle Compressors | Impairment Metric (in thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | YoY Change | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | YoY Change | | :------------------------------- | :------------------------------- | :------------------------------- | :--------- | :----------------------------- | :----------------------------- | :--------- | | Idle compressors retired from active fleet (units) | 40 | 15 | +167% | 65 | 45 | +44% | | Horsepower of idle compressors retired (thousands) | 32,000 | 9,000 | +256% | 46,000 | 23,000 | +100% | | Impairment recorded | $4,401 | $2,892 | +52% | $6,969 | $5,461 | +28% | Note 11. Restructuring Charges Information on restructuring charges incurred, primarily from organizational streamlining efforts, is disclosed - No restructuring charges were incurred during the six months ended June 30, 2024[79] - In Q1 2023, a plan to streamline the organization was approved, leading to $0.962 million in restructuring charges for the six months ended June 30, 2023, primarily from severance and consulting costs[79][81] - The company expects to incur an additional $0.1 million in restructuring charges related to these activities[79] Note 12. Income Taxes Analysis of the effective tax rate and unrecognized tax benefits is provided - The year-to-date effective tax rate for the six months ended June 30, 2024, differed from the statutory rate primarily due to state taxes, unrecognized tax benefits, executive compensation limitations, and benefits from equity-settled long-term incentive compensation[83] - It is reasonably possible that $3.4 million of unrecognized tax benefits (including penalties, interest, and discontinued operations) will be reduced prior to June 30, 2025[85] Note 13. Earnings Per Common Share Methodology and calculations for basic and diluted earnings per common share are detailed - Basic earnings per common share is computed using the two-class method, allocating earnings to common stock and participating securities (unvested restricted stock and stock-settled restricted stock units)[86] - Diluted earnings per common share includes incremental common stock equivalents from performance-based restricted stock units and ESPP shares, unless their effect would be anti-dilutive[87] EPS Calculation | EPS Calculation (in thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income attributable to common stockholders | $33,990 | $24,299 | $73,777 | $40,066 | | Diluted net income attributable to common stockholders | $33,852 | $24,299 | $73,554 | $40,066 | | Weighted average common shares outstanding (Basic) | 154,496 | 154,358 | 154,342 | 154,234 | | Weighted average common shares outstanding (Diluted) | 154,785 | 154,412 | 154,648 | 154,326 | Note 14. Fair Value Measurements Fair value measurements for investments and impaired assets, including valuation methodologies and inputs, are disclosed - The fair value of the ECOTEC investment ($14.9 million as of June 30, 2024) is classified as Level 3, determined by an average of an income approach (discounted cash flow) and a market approach (guideline public company), using unobservable inputs like WACC and revenue multiples[92] - Nonrecurring fair value measurements for impaired idle compressors were $594 thousand as of June 30, 2024, based on expected net sale proceeds (weighted average $51 per horsepower)[98][99] Fixed Rate Debt Fair Value | Fixed Rate Debt (in thousands) | June 30, 2024 | December 31, 2023 | | :----------------------------- | :------------ | :---------------- | | Carrying amount | $1,298,256 | $1,297,844 | | Fair value | $1,295,000 | $1,289,000 | Note 15. Related Party Transactions Revenue and accounts receivable from related party Hilcorp are presented Revenue from Hilcorp | Metric (in millions) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue from Hilcorp | $9.9 | $8.7 | $20.4 | $17.8 | - Accounts receivable, net due from Hilcorp was $3.4 million as of June 30, 2024, a decrease from $3.8 million at December 31, 2023[102] Note 16. Segment Information Financial performance by business segment, including revenue and adjusted gross margin, is detailed - Archrock manages its business segments based on product or service type, operating in contract operations (natural gas compression services) and aftermarket services (parts sales, maintenance, overhaul)[104] Segment Performance (Three Months) | Segment (in thousands) | Three Months Ended June 30, 2024 Revenue | Three Months Ended June 30, 2024 Adjusted Gross Margin | Three Months Ended June 30, 2023 Revenue | Three Months Ended June 30, 2023 Adjusted Gross Margin | | :--------------------- | :--------------------------------------- | :------------------------------------- | :--------------------------------------- | :------------------------------------- | | Contract Operations | $225,468 | $146,190 | $201,120 | $125,087 | | Aftermarket Services | $45,058 | $9,900 | $46,423 | $11,080 | | Total | $270,526 | $156,090 | $247,543 | $136,167 | Segment Performance (Six Months) | Segment (in thousands) | Six Months Ended June 30, 2024 Revenue | Six Months Ended June 30, 2024 Adjusted Gross Margin | Six Months Ended June 30, 2023 Revenue | Six Months Ended June 30, 2023 Adjusted Gross Margin | | :--------------------- | :------------------------------------- | :----------------------------------- | :------------------------------------- | :----------------------------------- | | Contract Operations | $448,519 | $291,498 | $388,865 | $233,350 | | Aftermarket Services | $90,495 | $20,337 | $88,512 | $19,261 | | Total | $539,014 | $311,835 | $477,377 | $252,611 | Note 17. Subsequent Events Significant events occurring after the reporting period, including the TOPS Acquisition and common stock offering, are disclosed - On July 22, 2024, Archrock agreed to acquire TOPS for total consideration of $820 million cash, 6.87 million newly issued shares, and up to $6 million in deferred cash payments, with the transaction expected to close by the end of 2024[108][109] - The TOPS Acquisition is subject to customary closing conditions, including antitrust clearance, and includes termination fees of $30.0 million payable by Archrock ELT or $20.0 million by Sellers under certain circumstances[109][111] - On July 24, 2024, Archrock closed an underwritten offering of 12,650,000 shares of common stock, generating approximately $256.4 million in net proceeds to fund the TOPS Acquisition and for general corporate purposes[115][117] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Archrock's financial condition and operational performance for the periods ended June 30, 2024, and 2023 OVERVIEW An overview of Archrock's business model and key operating metrics, including horsepower utilization, is provided - Archrock is an energy infrastructure company with a pure-play focus on midstream natural gas compression, providing services through its contract operations and aftermarket services segments across the U.S[120] Operating Metrics | Operating Metric (in thousands of horsepower) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total available horsepower (at period end) | 3,806 | 3,770 | 3,806 | 3,770 | | Total operating horsepower (at period end) | 3,601 | 3,578 | 3,601 | 3,578 | | Average operating horsepower | 3,605 | 3,549 | 3,607 | 3,513 | | Horsepower utilization (at period end) | 95% | 95% | 95% | 95% | | Average Horsepower utilization | 95% | 95% | 95% | 94% | Non-GAAP Financial Measures Explanation and reconciliation of non-GAAP financial measures, particularly adjusted gross margin, are presented - Management uses adjusted gross margin (total revenue less cost of sales, exclusive of depreciation and amortization) as a primary non-GAAP measure to evaluate operating performance, excluding historical asset costs, SG&A, financing, and income taxes[123] - Adjusted gross margin has limitations as it excludes significant costs like SG&A, depreciation, interest expense, and income taxes, and should be used as a supplemental measure to GAAP results[125] Non-GAAP Reconciliation | Reconciliation (in thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :---------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $34,425 | $24,653 | $74,957 | $41,138 | | Adjusted gross margin | $156,090 | $136,167 | $311,835 | $252,611 | | Gross margin | $112,237 | $94,957 | $225,147 | $171,220 | RESULTS OF OPERATIONS Detailed analysis of the company's financial performance, including revenue and net income trends, is provided Summary of Results A high-level summary of revenue and net income changes for the reported periods is presented - Total revenue increased to $270.5 million for the three months ended June 30, 2024 (from $247.5 million in 2023) and $539.0 million for the six months ended June 30, 2024 (from $477.4 million in 2023), primarily due to increased revenue from contract operations and aftermarket services[128] - Net income rose to $34.4 million for the three months ended June 30, 2024 (from $24.7 million in 2023) and $75.0 million for the six months ended June 30, 2024 (from $41.1 million in 2023), primarily driven by higher adjusted gross margin[129][132] - These increases were partially offset by higher selling, general and administrative (SG&A) expenses, depreciation and amortization, transaction-related costs, and long-lived and other asset impairment[129][132] Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023 Comparative analysis of financial performance for the second quarter of 2024 versus 2023 is provided Contract Operations (Q2 YoY) Performance of the contract operations segment, including revenue and adjusted gross margin, is compared year-over-year for Q2 Contract Operations Performance (Q2) | Metric (in thousands) | Q2 2024 | Q2 2023 | YoY Change | | :-------------------- | :---------- | :---------- | :--------- | | Revenue | $225,468 | $201,120 | +12% | | Cost of sales (excl. D&A) | $79,278 | $76,033 | +4% | | Adjusted gross margin | $146,190 | $125,087 | +17% | | Adjusted gross margin percentage | 65% | 62% | +3% pts | - The increase in contract operations revenue was primarily due to higher rates and an increase in average operating horsepower, reflecting higher utilization across the industry[135] - Cost of sales increased due to a $3.7 million rise in employee compensation and a $1.1 million increase in parts expense, partially offset by a $1.9 million decrease in startup expenses[135] Aftermarket Services (Q2 YoY) Performance of the aftermarket services segment, including revenue and adjusted gross margin, is compared year-over-year for Q2 Aftermarket Services Performance (Q2) | Metric (in thousands) | Q2 2024 | Q2 2023 | YoY Change | | :-------------------- | :---------- | :---------- | :--------- | | Revenue | $45,058 | $46,423 | -3% | | Cost of sales (excl. D&A) | $35,158 | $35,343 | -1% | | Adjusted gross margin | $9,900 | $11,080 | -11% | | Adjusted gross margin percentage | 22% | 24% | -2% pts | - Aftermarket services revenue decreased primarily due to lower part sales, partially offset by increased service activities driven by customer demand[137] - Adjusted gross margin decreased as the revenue decline exceeded the decrease in cost of sales, influenced by the mix of product sales[137] Costs and Expenses (Q2 YoY) Comparative analysis of operating expenses, including SG&A, depreciation, and impairment charges, for Q2 is presented Costs and Expenses Summary (Q2) | Expense (in thousands) | Q2 2024 | Q2 2023 | YoY Change | | :---------------------------- | :---------- | :---------- | :--------- | | SG&A | $31,163 | $28,649 | +$2,514 | | Depreciation and amortization | $43,853 | $41,210 | +$2,643 | | Long-lived asset impairment | $4,401 | $2,892 | +$1,509 | | Interest expense | $27,859 | $28,630 | -$771 | | Transaction-related costs | $1,782 | $0 | +$1,782 | | Gain on sale of assets, net | $(576) | $(1,176) | +$600 | | Other expense, net | $128 | $1,463 | -$1,335 | - SG&A increased due to a $1.9 million rise in long-term incentive compensation and a $0.2 million increase in employee compensation[138] - Long-lived and other asset impairment charges increased to $4.4 million in Q2 2024 from $2.9 million in Q2 2023, primarily due to idle compressor retirements[140][141] - Transaction-related costs of $1.8 million were incurred in Q2 2024, related to the TOPS Acquisition[142] Provision for Income Taxes (Q2 YoY) Comparative analysis of income tax provision and effective tax rate for Q2 is provided Provision for Income Taxes (Q2) | Metric (in thousands) | Q2 2024 | Q2 2023 | YoY Change | | :-------------------- | :---------- | :---------- | :--------- | | Provision for income taxes | $13,055 | $9,931 | +31% | | Effective tax rate | 27% | 28% | -1% pts | - The increase in provision for income taxes was primarily due to the tax effect of increased book income, partially offset by a reduction in valuation allowance[144] Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023 Comparative analysis of financial performance for the first half of 2024 versus 2023 is provided Contract Operations (H1 YoY) Performance of the contract operations segment, including revenue and adjusted gross margin, is compared year-over-year for H1 Contract Operations Performance (H1) | Metric (in thousands) | H1 2024 | H1 2023 | YoY Change | | :-------------------- | :---------- | :---------- | :--------- | | Revenue | $448,519 | $388,865 | +15% | | Cost of sales (excl. D&A) | $157,021 | $155,515 | +1% | | Adjusted gross margin | $291,498 | $233,350 | +25% | | Adjusted gross margin percentage | 65% | 60% | +5% pts | - The increase in contract operations revenue was primarily due to higher rates and an increase in average operating horsepower, reflecting strong utilization[147] - Cost of sales increased due to higher employee compensation ($5.2 million), parts expense ($1.8 million), and local taxes ($1.4 million), partially offset by a $6.9 million decrease in startup expenses[147] Aftermarket Services (H1 YoY) Performance of the aftermarket services segment, including revenue and adjusted gross margin, is compared year-over-year for H1 Aftermarket Services Performance (H1) | Metric (in thousands) | H1 2024 | H1 2023 | YoY Change | | :-------------------- | :---------- | :---------- | :--------- | | Revenue | $90,495 | $88,512 | +2% | | Cost of sales (excl. D&A) | $70,158 | $69,251 | +1% | | Adjusted gross margin | $20,337 | $19,261 | +6% | | Adjusted gross margin percentage | 22% | 22% | 0% pts | - Aftermarket services revenue increased due to higher service activities driven by customer demand, partially offset by a decrease in part sales[149] - Adjusted gross margin increased as revenue growth exceeded the increase in cost of sales, influenced by differences in the scope, timing, and type of services performed[149] Costs and Expenses (H1 YoY) Comparative analysis of operating expenses, including SG&A, depreciation, and impairment charges, for H1 is presented Costs and Expenses Summary (H1) | Expense (in thousands) | H1 2024 | H1 2023 | YoY Change | | :---------------------------- | :---------- | :---------- | :--------- | | SG&A | $62,828 | $55,074 | +$7,754 | | Depreciation and amortization | $86,688 | $81,391 | +$5,297 | | Long-lived asset impairment | $6,969 | $5,461 | +$1,508 | | Restructuring charges | $0 | $962 | -$962 | | Interest expense | $55,193 | $55,211 | -$18 | | Transaction-related costs | $1,782 | $0 | +$1,782 | | Gain on sale of assets, net | $(2,957) | $(4,781) | +$1,824 | | Other expense, net | $267 | $2,066 | -$1,799 | - SG&A increased primarily due to a $5.7 million rise in long-term incentive compensation, a $0.6 million increase in short-term incentive compensation, and a $0.5 million increase in network and computer-related costs[150] - Long-lived and other asset impairment charges increased to $7.0 million in H1 2024 from $5.5 million in H1 2023, due to idle compressor retirements[152][153] - Transaction-related costs of $1.8 million were incurred in H1 2024, related to the TOPS Acquisition[154] Provision for Income Taxes (H1 YoY) Comparative analysis of income tax provision and effective tax rate for H1 is provided Provision for Income Taxes (H1) | Metric (in thousands) | H1 2024 | H1 2023 | YoY Change | | :-------------------- | :---------- | :---------- | :--------- | | Provision for income taxes | $26,108 | $16,089 | +62% | | Effective tax rate | 26% | 28% | -2% pts | - The increase in provision for income taxes was primarily due to the tax effect of increased book income and the limitation on executive compensation, offset by benefits from equity-settled long-term incentive compensation and a reduction in valuation allowance[156] LIQUIDITY AND CAPITAL RESOURCES Discussion of the company's liquidity sources, capital requirements, and cash flow management strategies is provided Overview (Liquidity) An overview of Archrock's primary liquidity sources and sufficiency to meet future needs is presented - Archrock's primary sources of liquidity are cash flows generated from operations and borrowing availability under its Credit Facility[157] - The company believes its operating cash flows and Credit Facility borrowings will be sufficient to meet future liquidity needs, with no near-term debt maturities[157] Cash Requirements Details on capital requirements, including operating expenses, capital expenditures, and dividends, are provided - Capital requirements primarily consist of operating expenses (employee compensation, inventory, lube oil), growth and maintenance capital expenditures, interest on debt, dividend payments, and share repurchases[160] - Growth capital expenditures involve new compressors or major component upgrades that substantially modify operating parameters, while maintenance capital expenditures are for major overhauls that return components to like-new condition without modifying application[161][162] Capital Expenditures Projected capital expenditures for growth and maintenance are outlined for the current fiscal year - Projected capital expenditures for 2024 are approximately $290 million to $300 million, including about $190 million for growth capital and $80 million to $85 million for maintenance capital, supporting free cash flow generation after dividends[162] Dividends (Liquidity) Information on recent dividend declarations and factors influencing future dividend payments is presented - On July 25, 2024, the Board of Directors declared a quarterly dividend of $0.165 per share of common stock, payable on August 13, 2024[163] - Future dividend payments are at the discretion of the Board and depend on financial condition, results of operations, credit and loan agreements, and other relevant factors[163] Sources of Cash Details on the Credit Facility, including debt balance and available capacity, are provided - The Credit Facility had an average debt balance of $287.0 million during the six months ended June 30, 2024, with a weighted average annual interest rate of 7.6% at June 30, 2024[164] - As of June 30, 2024, $4.1 million in letters of credit were outstanding, and all undrawn capacity on the Credit Facility was available for borrowings[164] Cash Flows (Liquidity) Comparative analysis of cash flows from operating, investing, and financing activities is presented Cash Flow Activities | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | YoY Change | | :-------------------------------- | :----------------------------- | :----------------------------- | :--------- | | Net cash from Operating Activities | $208,353 | $118,398 | +$89,955 | | Net cash used in Investing Activities | $(173,488) | $(150,946) | -$(22,542) | | Net cash from (used in) Financing Activities | $(35,284) | $32,175 | -$(67,459) | | Net decrease in cash and cash equivalents | $(419) | $(373) | -$(46) | - Net cash provided by operating activities increased primarily due to higher adjusted gross margin, increased cash receipts from customers, reduced overall spend, and improved lead times for parts[168] - Net cash used in investing activities increased due to a $20.5 million decrease in proceeds from asset sales and a $3.6 million increase in capital expenditures, partially offset by a $1.9 million decrease in investments in non-consolidated affiliates[169] - Net cash from financing activities shifted to a net use, primarily due to a $66.9 million decrease in net borrowings of long-term debt, increased dividends, and higher taxes paid for equity awards[170] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses Archrock's exposure to market risks, specifically focusing on interest rate risk associated with its variable-rate Credit Facility - Archrock is exposed to market risks associated with changes in the variable interest rate of its Credit Facility[171] - A 1% increase in the effective interest rate on the Credit Facility's outstanding balance at June 30, 2024, would result in an annual increase of $3.1 million in interest expense[171] Item 4. Controls and Procedures This section details the company's disclosure controls and procedures, including management's evaluation of their effectiveness and any changes in internal control over financial reporting Management's Evaluation of Disclosure Controls and Procedures Management's assessment of the effectiveness of disclosure controls and procedures is presented - As of June 30, 2024, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective in providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[174] Changes in Internal Control over Financial Reporting Any material changes in internal control over financial reporting during the quarter are disclosed - There were no changes in internal control over financial reporting during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[175] Part II. Other Information This part provides additional disclosures, including legal proceedings, updated risk factors, equity sales, and other relevant information Item 1. Legal Proceedings This section addresses the company's involvement in various legal actions and its assessment of their potential financial impact - Archrock is involved in various pending or threatened legal actions in the ordinary course of business[177] - The company believes that any ultimate liability arising from these actions will not have a material adverse effect on its consolidated financial position, results of operations, or cash flows, including its ability to pay dividends[177] Item 1A. Risk Factors This section updates the risk factors previously disclosed in the 2023 Form 10-K, with a specific focus on risks related to the recently announced TOPS Acquisition Risks Related to the TOPS Acquisition Specific risks associated with the TOPS Acquisition, including closing conditions, integration challenges, and potential liabilities, are detailed - The TOPS Acquisition is subject to customary closing conditions, and there is no assurance it will be consummated as anticipated, which could lead to a decline in stock price or negative publicity if delayed or terminated[179][180] - Termination of the purchase agreement could require Archrock ELT to pay a $30.0 million termination fee, or Sellers to pay Archrock ELT a $20.0 million termination fee under certain circumstances[181] - The company may not achieve the expected benefits of the TOPS Acquisition and could encounter significant difficulties in integrating TOPS, potentially leading to increased costs, liabilities, or diversion of management's time and energy[183] - Any acquisitions, including the TOPS Acquisition, are subject to substantial risks such as unknown liabilities, inability to obtain satisfactory title, and significant changes like asset impairment, which could reduce the ability to make distributions to common stockholders[185] Item 2. Unregistered Sales of Equity Securities by Issuer and Use of Proceeds This section reports on any unregistered sales of equity securities and details the company's share repurchase activities during the quarter Sales of Unregistered Securities Information regarding any unregistered sales of equity securities by the issuer is provided - There were no unregistered sales of equity securities by the issuer during the period[186] Purchase of Equity Securities by the Issuer and Affiliated Purchasers Details on share repurchase activities, including shares purchased and remaining authorization, are presented Equity Securities Purchase Activity | Period | Total Number of Shares Purchased | Average Price Paid per Share | Value of Shares Yet to be Purchased Under Plans/Programs (in thousands) | | :---------------------- | :------------------------------- | :--------------------------- | :---------------------------------------------------------------------- | | April 1, 2024 – April 30, 2024 | — | — | $39,910 | | May 1, 2024 – May 31, 2024 | 597 | $17.72 | $50,000 | | June 1, 2024 – June 30, 2024 | — | — | $50,000 | | Total | 597 | $17.72 | | - The reported purchases represent shares of common stock bought from employees to satisfy tax withholding obligations in connection with the vesting of restricted stock awards[186] Item 3. Defaults Upon Senior Securities Confirmation regarding any defaults upon senior securities during the reporting period is provided - There were no defaults upon senior securities during the period[186] Item 4. Mine Safety Disclosures Statement on the applicability of mine safety disclosures to the company's operations is presented - Mine safety disclosures are not applicable to Archrock, Inc[186] Item 5. Other Information Disclosure of any Rule 10b5-1 trading arrangements adopted or terminated by directors or officers is provided - During the three months ended June 30, 2024, none of Archrock's directors or officers adopted or terminated a "Rule 10b5-1 trading arrangement" or a "non-Rule 10b5-1 trading arrangement"[187] Item 6. Exhibits A comprehensive list of all exhibits filed or furnished as part of the report is provided - Exhibits include the Composite Certificate of Incorporation, Fourth Amended and Restated Bylaws, certifications from the Principal Executive Officer and Principal Financial Officer (pursuant to Sections 302 and 906 of Sarbanes-Oxley Act), and interactive data files (Inline XBRL)[191] Signatures The report is formally signed by authorized financial officers, confirming its accuracy and completeness - The report is signed by Douglas S. Aron, Senior Vice President and Chief Financial Officer, and Donna A. Henderson, Vice President and Chief Accounting Officer, on July 31, 2024[194]