Archrock(AROC) - 2022 Q4 - Annual Report

Glossary This section provides definitions of key terms used throughout the report Forward-Looking Statements The 2022 Form 10-K contains forward-looking statements, which are not historical facts and are subject to various risks and uncertainties that could cause actual results to differ materially from expectations[16][17] - The company does not undertake any obligation to publicly update or revise these forward-looking statements, except as required by law[18] Part I Item 1. Business Archrock, Inc. is a leading U.S. energy infrastructure company focused on midstream natural gas compression services and aftermarket support - Archrock is the leading provider of natural gas compression services and a leading supplier of aftermarket services in the U.S. energy industry[20] - The company operates in two business segments: Contract Operations and Aftermarket Services[21] Company Overview Archrock, Inc. is a pure-play U.S. natural gas compression services provider, supporting safe and responsible natural gas production and transportation - Archrock, Inc. was renamed in November 2015 after spinning off its international contract operations, international aftermarket services, and global fabrication businesses into Exterran Corporation[20] - The company is an energy infrastructure company primarily focused on midstream natural gas compression, committed to safe and environmentally responsible natural gas production, compression, and transportation[20] Business Segments Archrock operates in Contract Operations, owning and operating compression equipment, and Aftermarket Services, providing maintenance and parts for customer-owned equipment - Contract Operations: Comprises Archrock's owned fleet of natural gas compression equipment used to provide operations services to customers[21] - Aftermarket Services: Provides a full range of services, including operations, maintenance, overhaul, reconfiguration, and sales of parts and components, to customers owning compression equipment[21] Natural Gas Compression Industry Overview Natural gas compression is critical for production and transportation, with industry growth driven by U.S. natural gas production, aging fields, and rising demand - Natural gas compression is essential for the production and transportation of natural gas, increasing pressure for movement and minimizing flaring[22] - Archrock's service offerings primarily focus on midstream applications, with 79% of its operating fleet used in gathering and processing, and 21% in gas lift applications[22] - The U.S. natural gas compression services industry has growth potential due to increased natural gas production from unconventional sources, aging fields requiring more compression, and expected increased demand for natural gas in power generation, industrial uses, and exports[26] Contract Operations Overview Contract operations provide turn-key compression services, generating 80% of 2022 revenue with a large, remotely monitored fleet and high availability - Contract operations generated 80%, 83%, and 84% of total revenue in 2022, 2021, and 2020, respectively[27] - The compression fleet is predominantly large horsepower (greater than 1,000 HP per unit), primarily reciprocating compressors driven by natural gas-powered engines, with a growing number of electric motor-driven compressors[28] Horsepower Distribution by Unit Size | Metric | Number of Units | Aggregate Horsepower (in thousands) | % of Horsepower | |:---|:---|:---|:---| | 0 — 1,000 horsepower per unit | 1,494 | 585 | 16 % | | 1,001 — 1,500 horsepower per unit | 1,361 | 1,840 | 49 % | | Over 1,500 horsepower per unit | 638 | 1,301 | 35 % | | Total | 3,493 | 3,726 | 100 % | Aftermarket Services Overview Aftermarket services offer parts sales and comprehensive maintenance for customer-owned equipment, with revenue increasing to 20% of total in 2022 - Aftermarket services include sales of parts and components, and operations, maintenance, overhaul, and reconfiguration services for customer-owned compression equipment[37] - Revenue from aftermarket services increased from 16% of total revenue in 2020 to 20% in 2022[37] Competitive Strengths Archrock's strengths include a large high-horsepower fleet, excellent customer service, superior safety, stable customer base, and technology-driven efficiencies - 84% of Archrock's fleet, by operating horsepower, consists of units exceeding 1,000 horsepower as of December 31, 2022[38] - The company achieved 99.1% availability in its contract operations service agreements during 2022, exceeding its 98% guarantee[39] - Archrock reported an industry-leading total recordable incident rate of 0.32 in 2022, reflecting its strong safety culture[40] - Investments in a process and technology transformation project (2019-2021) have enhanced operational efficiencies, including automation, digital tools, and expanded remote monitoring capabilities[44] Business Strategies Strategies focus on capitalizing on natural gas fundamentals, improving profitability through technology and large horsepower units, and optimizing returns via growth - Strategies include capitalizing on favorable long-term fundamentals for the U.S. natural gas compression industry, driven by significant natural gas resources and increased demand[45] - The company aims to improve profitability by increasing productivity and optimizing processes through its technology transformation project, which is expected to lower internal costs and enhance asset uptime[46] - Archrock is focused on increasing the percentage of large horsepower equipment in its fleet, having increased it from 77% in 2020 to 84% in 2022 through strategic sales of non-core horsepower[49] - The company plans to optimize its business for attractive returns through organic growth and third-party acquisitions, particularly in contract operations and aftermarket services[50] Oil and Natural Gas Industry Cyclicality and Volatility Contract operations are less impacted by commodity price volatility due to fee-based contracts, essential midstream role, and long average contract durations - Contract operations business is less impacted by commodity price fluctuations due to fee-based contracts and customer-supplied fuel gas[51] - Compression services are a necessary part of midstream energy infrastructure, facilitating natural gas transportation[51] - Compression packages operate at customer locations for an average of four years, with fixed or reduced monthly fees, providing stable cash flows[51] Seasonal Fluctuations Archrock's operations have not historically shown material seasonal tendencies, with no significant impact anticipated - The company's results of operations have not historically reflected any material seasonal tendencies and no material impact is expected in the foreseeable future[52] Sales and Marketing Sales and marketing efforts involve field personnel analyzing applications, ensuring satisfaction, and identifying future service requirements through communication - Sales and client service functions are coordinated by sales and field service personnel who qualify, analyze, and scope new compression applications[53] - Ongoing communication with customers ensures satisfaction, addresses current service needs, and ascertains future compression service requirements[53] Customers Archrock serves diverse oil and gas customers, with the top five accounting for 32% of 2022 revenue and no single customer exceeding 10% - Customer base consists primarily of companies engaged in all aspects of the oil and gas industry, including large integrated and independent producers, processors, gatherers, and transporters[54] - The five most significant customers collectively accounted for 32% of contract operations and aftermarket services revenue in 2022 (31% in 2021, 28% in 2020)[54] - No single customer accounted for 10% or more of total revenue in 2022, 2021, or 2020[54] Suppliers Archrock has pricing agreements with key suppliers like Ariel, Waukesha, and Caterpillar, collaborating on value engineering, with alternative sources generally available - Archrock has pricing agreements with primary suppliers of compression equipment, parts, and services, including Ariel Corporation, Waukesha Pearce Industries, and Caterpillar, Inc[55] - The company works closely with key suppliers on value engineering to lower total lifecycle cost and improve equipment reliability[55] - Despite reliance on these suppliers, alternative sources for compression equipment, parts, and services are generally available[55] Competition The natural gas compression services market is highly competitive, with Archrock competing on price, equipment availability, customer service, and technical expertise - The natural gas compression services business is highly competitive with low barriers to entry[56] - Archrock competes effectively on price, equipment availability, customer service, flexibility in meeting customer needs, technical expertise, and quality and reliability of its compression packages and services[56] Governmental Regulation Archrock's operations are subject to stringent U.S. federal, state, and local environmental, health, and safety regulations, with compliance incurring significant costs - Archrock's operations are subject to U.S. federal environmental laws including the Clean Air Act (CAA), Clean Water Act (CWA), Resource Conservation and Recovery Act (RCRA), and CERCLA[58] - Compliance with these laws may result in significant costs and liabilities, and failure to comply can lead to administrative, civil, and criminal penalties[57] Environmental Regulation Environmental regulations impacting Archrock include the Clean Air Act, Clean Water Act, RCRA, and CERCLA, governing air emissions, water discharges, and waste management Air Emissions Air emissions from compressors are regulated by the CAA and state laws, with increasing stringency from EPA rules and potential stricter permitting from NAAQS ozone standards - The CAA and state laws regulate air pollutant emissions from natural gas compressors, requiring permits and compliance with emission and operational limitations[59] - The EPA proposed more stringent methane rules in November 2021, applicable to newer and existing sources, with broader applicability to compression equipment and increased inspection requirements[61] - The EPA's 2015 NAAQS ozone standard (70 ppb) could lead to stricter permitting and increased pollution control expenditures, with a reconsideration decision expected in 2023[63] Climate Change Climate change legislation and initiatives aim to restrict greenhouse gas emissions, potentially increasing compliance costs, imposing operating restrictions, or reducing demand - Climate change legislation and regulatory initiatives, including the Inflation Reduction Act (August 2022), aim to restrict greenhouse gas emissions and promote low-carbon energy[67][68] - The U.S. re-entered the Paris Agreement in April 2021, committing to at least 50% GHG emissions reductions relative to 2005 levels by 2030, which may lead to new regulatory requirements[73] - Any regulation of greenhouse gas emissions could result in increased compliance costs, additional operating restrictions, or reduced demand for services, potentially having a material adverse effect on the business[74] Water Discharges The CWA and state laws regulate pollutant discharges into U.S. waters, requiring permits for industrial wastewater and storm water, with recent rule clarifying jurisdiction - The CWA and state laws impose restrictions on pollutant discharges into state waters or waters of the U.S., requiring permits for industrial wastewater and storm water[75] - A final rule, effective March 20, 2023, clarifies the definition of 'waters of the United States' and restores certain water protections under the CWA[75] Waste Management and Disposal Archrock is subject to RCRA and CERCLA, regulating waste management and imposing strict liability for contamination, potentially requiring remediation costs - RCRA and state laws govern the generation, transportation, treatment, storage, and disposal of hazardous and non-hazardous solid wastes[76] - CERCLA imposes strict, joint, and several liability for hazardous substance releases, potentially requiring remediation costs, damages to natural resources, and health studies[76] - The company could be required to remediate historical property contamination or prevent future contamination, even if caused by prior owners or third parties[77] Occupational Safety and Health Archrock complies with OSHA and state statutes protecting employee safety and health, monitoring conditions for potential re-implementation of COVID-19 procedures - Archrock is subject to OSHA and comparable state statutes that strictly govern employee safety and health protection[78] - COVID-19 specific requirements were relaxed in late 2022, but the company will consider re-implementing procedures if conditions change[79] Human Capital Archrock values its 1,100 employees, emphasizing diversity, competitive compensation, comprehensive benefits, and paid volunteer time, guided by core values - As of December 31, 2022, Archrock employed approximately 1,100 employees across 15 states[80] - The company emphasizes diversity and inclusion, with diverse Board representation and 29% ethnically diverse total workforce[81] - Archrock offers competitive compensation and comprehensive benefits packages, including paid time off for volunteering[82] Learning and Talent Development Archrock invests in talent development, offering specialized training for field service technicians and non-technical employees to build skills and leadership - Field service technicians completed over 40,500 hours of operational and technical training in 2022, supported by a dedicated training team[84] - New field employees are assigned an experienced mentor for an average of six months to apply classroom learning in real-world settings[84] - Non-technical, skills-based, and career-enhancing training programs are also offered, including supervisor coaching and performance management[85] Safety, Health and Wellness Safety is a core value, integrated into incentives and the 'TARGET ZERO' program, achieving an industry-leading 0.32 TRIR in 2022, alongside health and wellness programs - Safety is a core company value, with performance included in the short-term incentive program for over 16 years[87] - The 'TARGET ZERO' program, comprising over 90 safety and environmental procedures, contributed to an excellent safety performance with a total recordable incident rate of 0.32 in 2022[87] - Employees and their families have access to flexible health and wellness programs, including the employee-led RockFIT program[88] Building Employee and Community Connections Archrock fosters employee and community connections through initiatives like 'Archrock Cares' and offering paid volunteer time, promoting shared interests and giving - Employees receive 16 hours of paid time off per year for volunteering[89] - The employee-led 'Archrock Cares' program builds connections through shared interests and volunteering opportunities[89] Available Information Archrock's SEC filings and corporate governance documents are available free of charge on its website and in paper copies upon request - Annual, quarterly, and current reports filed with the SEC are available free of charge on Archrock's website (www.archrock.com)[90](index=90&type=chunk) - Corporate governance documents, including the Code of Business Conduct and committee charters, are also available on the website[90] Item 1A. Risk Factors This section outlines various risks that could materially impact Archrock's business, financial condition, results of operations, and cash flows Industry and General Economic Risks Archrock faces risks from pandemics, rising inflation increasing costs, and the Ukraine conflict adding market uncertainty, potentially impacting demand and profitability - Pandemics and public health crises, such as COVID-19, may negatively affect demand for services and have a material adverse impact on financial condition, operations, and cash flows[93][95] - Continued inflation could increase labor, parts, lube oil, and financing costs, negatively affecting profitability and cash flows, and potentially impacting customers' financial health[96] - The conflict in Ukraine could intensify natural gas price volatility and geopolitical instability, potentially having a substantial negative impact on the global economy and Archrock's business[97] Business and Operational Risks Operational risks include inherent hazards, competitive market pressures, integration risks from acquisitions, and potential conflicts of interest from a significant shareholder - Operations entail inherent risks (e.g., equipment defects, natural disasters) that could result in substantial liability for personal injury, property damage, or environmental damage, which may not be fully covered by insurance[99] - The business faces significant competitive pressures due to low barriers to entry, potentially leading to market share loss and adverse effects on contract renewals and pricing[100] - Future growth is partly dependent on accretive acquisitions, which carry risks such as integration difficulties, unknown liabilities, and diversion of management attention[102] - An affiliate of Hilcorp, Old Ocean Reserves, owns 10.8% of Archrock's common stock and has board representation, potentially leading to conflicts of interest with other shareholders[104] Financial Risks Substantial debt, variable interest rates, LIBOR phase-out uncertainty, and limited capital access pose financial risks, potentially restricting growth and operations - As of December 31, 2022, Archrock had $1.5 billion in outstanding debt obligations, which could limit its ability to fund future growth and operations and increase exposure to risk during adverse economic conditions[107] - Covenants in Debt Agreements, including financial ratios (e.g., EBITDA to Interest Expense, Total Debt to EBITDA), may impair business operations and could lead to default if breached[108][109] - Borrowings under the Credit Facility are subject to variable interest rates, making the company vulnerable to interest rate increases, which could negatively impact results and cash flows[115] - Uncertainty regarding the phasing out of LIBOR and its replacement with alternative benchmarks like SOFR may adversely affect debt service obligations and financing costs[116][117] Customer and Contract Risks Archrock is vulnerable to customer financial health, loss of significant customers, and non-renewal of short-term contracts, impacting revenue and profitability - The erosion of customers' financial condition, due to market weakening or financing issues, could reduce demand for Archrock's services, leading to contract cancellations or delays[120] - The top five customers accounted for 32% of revenues in 2022, and the loss of any significant customer could materially adversely affect the business[121] - Many contract operations service agreements have short initial terms (12-48 months) and are cancelable on short notice, posing a risk if contracts are not renewed or are renewed at reduced rates[123] Labor and Supply Chain Risks Challenges in hiring and retaining qualified personnel, increased labor costs, and dependence on limited suppliers for equipment and parts pose operational risks - The ability to hire, train, and retain qualified operational and field personnel is challenging, and increased labor costs could negatively impact results[124] - Reliance on a limited group of suppliers for equipment, materials, and services creates vulnerability to price increases, inferior quality, and supply shortages[126] - Supply chain bottlenecks or significant price increases for inputs could adversely affect the ability to obtain necessary materials or increase costs, impacting profitability[127] Information Technology and Cybersecurity Risks The technology transformation project may not yield expected benefits, and sophisticated IT systems are vulnerable to cyber-attacks, disrupting operations and harming reputation - The process and technology transformation project, intended to drive operational efficiencies, may not realize expected benefits despite significant capital and resource investment[128] - Sophisticated information technology systems are vulnerable to cyber-attacks, viruses, and terrorism, which could disrupt operations and materially adversely affect business and financial condition[129][131] Tax-related Risks Complex tax laws, potential legislative changes, and limitations on using Net Operating Losses (NOLs) or interest expense carryovers could increase tax liability - Archrock is subject to complex U.S. federal, state, and local tax laws and regulations, which are subject to varying interpretations and potential adverse legislative or administrative initiatives[133] - The ability to use Net Operating Losses (NOLs) and interest expense limitation carryovers may be substantially limited by an 'ownership change' as defined under Section 382 of the Code, potentially increasing tax liability[135] Legal and Regulatory Risks Archrock faces litigation, tax audits, and new environmental regulations, which could increase costs, impose restrictions, reduce demand, and affect access to capital - The company is subject to various claims, tax audits, and litigation, which, if resolved unfavorably, could require material future cash payments or charges and negatively impact financial condition or reputation[136] - New or modified regulations under the Clean Air Act (CAA), including methane rules and NAAQS ozone standards, could result in increased compliance costs, stricter permitting, and operational restrictions[138][142] - Failure to comply with a variety of U.S. federal, state, and local regulations (environmental, health, safety, labor, taxation) could lead to administrative, civil, and criminal enforcement measures and substantial remediation costs[145][146] - Climate change legislation, regulatory initiatives, and increasing ESG scrutiny could lead to increased compliance costs, reduced demand for services, and limited access to financial markets[151][155] Item 1B. Unresolved Staff Comments There are no unresolved staff comments - No unresolved staff comments were reported[165] Item 2. Properties Archrock operates various owned and leased facilities across the U.S., including its corporate office in Houston and multiple service locations Key Facilities | Location | Ownership | Size (sq ft) | Function | |:---|:---|:---|:---| | Houston, Texas | Leased | 75,000 | Corporate office — Contract Operations and Aftermarket Services | | Broussard, Louisiana | Owned | 89,000 | Aftermarket Services | | Midland, Texas | Owned | 51,000 | Contract Operations and Aftermarket Services | | Rock Springs, Wyoming | Leased | 9,000 | Contract Operations and Aftermarket Services | Item 3. Legal Proceedings Archrock is involved in various legal actions, but believes any resulting liability will not materially adversely affect its financial position or operations - Archrock is involved in various pending or threatened legal actions in the ordinary course of business[168] - The company believes that any ultimate liability from these actions will not have a material adverse effect on its consolidated financial position, results of operations, or cash flows[170] Item 4. Mine Safety Disclosures This item is not applicable to Archrock - This item is not applicable[171] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Archrock's common stock trades on the NYSE under "AROC," with approximately 1,700 record holders, and the company repurchased shares for tax withholding obligations Common Stock Archrock's common stock is listed on the New York Stock Exchange under the symbol "AROC," with a closing price of $9.64 per share as of February 15, 2023 - Archrock's common stock is traded on the New York Stock Exchange under the symbol "AROC"[171] - As of February 15, 2023, the closing price of common stock was $9.64 per share[171] Holders As of February 15, 2023, Archrock had approximately 1,700 holders of record for its common stock, with actual stockholders being higher due to beneficial ownership - As of February 15, 2023, there were approximately 1,700 holders of record of Archrock's common stock[173] Securities Authorized for Issuance under Equity Compensation Plans Disclosures regarding securities authorized for issuance under equity compensation plans are incorporated by reference from Part III, Item 12 of this 2022 Form 10-K - Disclosures for securities authorized under equity compensation plans are incorporated by reference to Part III, Item 12[174] Unregistered Sales of Equity Securities and Use of Proceeds This section indicates no unregistered sales of equity securities or use of proceeds - No unregistered sales of equity securities or use of proceeds were reported[175] Purchases of Equity Securities by Issuer and Affiliated Purchasers Archrock repurchased 6,682 shares of common stock in November 2022 at an average price of $7.60 per share, primarily to satisfy employee tax withholding obligations Equity Security Purchases | Period | Total Number of Shares Purchased | Average Price Paid per Share | |:---|:---|:---|\ | November 1, 2022 — November 30, 2022 | 6,682 | $7.60 | | Total | 6,682 | $7.60 | - The shares purchased represent shares withheld to satisfy employees' tax withholding obligations in connection with the vesting of restricted stock awards[175] Item 6. [Reserved] This item is reserved and contains no information - This item is reserved[176] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of Archrock's financial condition, results of operations, and key trends for 2022 compared to 2021, including outlook and critical accounting estimates Overview Archrock is a leading U.S. energy infrastructure company specializing in midstream natural gas compression and aftermarket services, crucial for natural gas production and transportation - Archrock is a pure-play energy infrastructure company focused on midstream natural gas compression, serving as a leading provider of compression services and aftermarket support in the U.S.[179] - The company's business supports essential services for natural gas production, processing, transportation, and storage, supplying critical industries and residential energy needs[179] - Archrock operates in two segments: Contract Operations (owned fleet) and Aftermarket Services (support for customer-owned equipment)[180] Significant 2022 Transactions In 2022, Archrock completed sales of contract operations agreements and compressors, generating a $28.1 million gain, and acquired a 22.7% equity interest in ECOTEC - Completed sales of contract operations customer service agreements and approximately 770 compressors (172,000 horsepower) in 2022, resulting in an aggregate gain of $28.1 million[181] - Acquired a 22.7% equity interest in ECOTEC, a methane emissions detection, monitoring, and management company, in April 2022, with the remaining 2.3% acquired in January 2023[181] Trends and Outlook Archrock's business is driven by U.S. oil and natural gas production, with strong demand in 2022 and a positive long-term outlook for compression services - The key driver of Archrock's business is U.S. oil and natural gas production, with 79% of its operating fleet deployed for midstream natural gas gathering[182] - Archrock's business is less impacted by commodity price volatility compared to shorter-cycle oil field service businesses[182] Current Trends In 2022, U.S. oil and natural gas production rebounded, leading to strong demand for Archrock's services, with contract operations revenue up 5% and aftermarket services up 26% U.S. Production Metrics | Metric | Year 2022 | Year 2021 | Year 2020 | |:---|:---|:---|:---|\ | Average dry natural gas production (Bcf/d) | 98.0 | 93.6 | 91.3 | | Average oil production (MMb/d) | 11.9 | 11.2 | 11.3 | - In 2022, increased oil and natural gas production led to strong demand for compression services, with contract operations revenue up 5% and total operating horsepower up 6%[185] - Aftermarket services revenue increased by 26% in 2022 due to similar increases in demand[185] Outlook EIA forecasts continued increases in U.S. dry natural gas and oil production for 2023-2024, supporting long-term demand for Archrock's compression and aftermarket services Forecasted Year-over-Year Change | Forecasted Year-over-Year Change | 2023 | 2024 | |:---|:---|:---|\ | U.S. dry natural gas production | 2 % | 2 % | | U.S. oil production | 5 % | 3 % | | U.S. natural gas domestic consumption | (2)% | (1)% | | Liquefied natural gas exports | 13 % | 4 % | - Natural gas production is expected to continue increasing, primarily in the Permian and Haynesville regions, supported by new pipeline infrastructure[186] - Long-term demand for compression services is expected to continue, and the growing base of owned compression in the U.S. will help sustain the aftermarket services business[187] Key Challenges and Uncertainties Archrock faces challenges including capital requirements, cost management, labor retention, modest natural gas production growth, and potential shifts to renewable energy - Challenges include significant capital requirements and potential limitations in accessing debt and equity markets for funding[188] - Cost management remains challenging due to potential increases in operating expenses from market demand rebound, and volatility in prices for materials, parts, and lube oil[189][190] - Hiring, training, and retaining qualified personnel is an ongoing challenge, with increasing labor costs expected[191] - Customer focus on free cash flow generation is expected to result in modest natural gas production growth, impacting demand for Archrock's services[192] - Demand for natural gas-powered compression could be reduced by technological advances and accelerated adoption of renewable energy sources[193] Operating Highlights Archrock's total available horsepower decreased from 2020 to 2022, while total operating horsepower increased, and horsepower utilization significantly improved to 93% in 2022 Horsepower Metrics | (horsepower in thousands) | Year 2022 | Year 2021 | Year 2020 | |:---|:---|:---|:---|\ | Total available horsepower (at period end) | 3,726 | 3,878 | 4,120 | | Total operating horsepower (at period end) | 3,448 | 3,247 | 3,388 | | Average operating horsepower | 3,328 | 3,282 | 3,657 | | Horsepower utilization: Spot (at period end) | 93 % | 84 % | 82 % | | Average | 87 % | 82 % | 86 % | Non-GAAP Financial Measures Management uses gross margin (total revenue less cost of sales, excluding depreciation and amortization) as a non-GAAP measure to evaluate current operating performance - Gross margin is a non-GAAP financial measure defined as total revenue less cost of sales (excluding depreciation and amortization)[196] - It is used by management to evaluate current operating performance, excluding the impact of historical asset costs, SG&A, financing methods, and income taxes[196] Net Income and Gross Margin | (in thousands) | Year 2022 | Year 2021 | Year 2020 | |:---|:---|:---|:---|\ | Net income (loss) | $44,296 | $28,217 | $(68,445) | | Gross margin | $426,084 | $422,544 | $497,777 | Results of Operations Archrock's total revenue increased by 8.2% to $845.6 million in 2022, with net income rising significantly to $44.3 million, driven by aftermarket services and lower expenses Summary of Results Total revenue increased to $845.6 million in 2022 from $781.5 million in 2021, with net income rising to $44.3 million, driven by aftermarket services and lower expenses Financial Summary | Metric | 2022 (in millions) | 2021 (in millions) | Change (%) | |:---|:---|:---|:---|\ | Total Revenue | $845.6 | $781.5 | 8.2% | | Net Income | $44.3 | $28.2 | 57.0% | - The increase in net income was primarily driven by higher gross margin from aftermarket services, decreased depreciation and amortization, lower interest expense, and an increased gain on asset sales, partially offset by higher SG&A and lower contract operations gross margin[200] Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 This section details the year-over-year financial performance, highlighting changes in revenue, costs, and key expenses for both business segments Contract Operations Contract operations revenue increased by 5% to $677.8 million in 2022, but gross margin decreased by 1% due to higher cost of sales from supply chain pricing and unit redeployment Contract Operations Performance | (dollars in thousands) | Year Ended 2022 | December 31, 2021 | Increase (Decrease) % | |:---|:---|:---|:---|\ | Revenue | $677,801 | $648,311 | 5 % | | Cost of sales (excluding depreciation and amortization) | 278,898 | 244,486 | 14 % | | Gross margin | $398,903 | $403,825 | (1)% | | Gross margin percentage | 59 % | 62 % | (3)% | - Revenue increased due to higher rates and increased average operating horsepower, partially offset by strategic dispositions[203] - Gross margin decreased due to a larger increase in cost of sales, driven by higher supply chain pricing and increased volumes from unit redeployment[204] Aftermarket Services Aftermarket services revenue surged by 26% to $167.8 million in 2022, with gross margin increasing by 45% due to higher customer demand for services and parts Aftermarket Services Performance | (dollars in thousands) | Year Ended 2022 | December 31, 2021 | Increase (Decrease) % | |:---|:---|:---|:---|\ | Revenue | $167,767 | $133,150 | 26 % | | Cost of sales (excluding depreciation and amortization) | 140,586 | 114,431 | 23 % | | Gross margin | $27,181 | $18,719 | 45 % | | Gross margin percentage | 16 % | 14 % | 2 % | - Revenue increased due to higher customer demand for both service activities and sales of parts and components[205] - Gross margin increased due to higher revenue, partially offset by increased costs associated with parts and labor[206] Costs and Expenses In 2022, SG&A increased, depreciation and interest expense decreased, while gain on asset sales increased, and other expense shifted from income to expense Costs and Expenses Summary | (in thousands) | Year Ended 2022 | December 31, 2021 | |:---|:---|:---|\ | Selling, general and administrative | $117,184 | $107,167 | | Depreciation and amortization | 164,259 | 178,946 | | Long-lived and other asset impairment | 21,442 | 21,397 | | Restructuring charges | — | 2,903 | | Interest expense | 101,259 | 108,135 | | Gain on sale of assets, net | (40,494) | (30,258) | | Other expense (income), net | 1,845 | (4,707) | - SG&A increased by $10.0 million, primarily due to higher employee compensation, IT expenses, and sales and use tax settlements[207] - Depreciation and amortization decreased by $14.7 million, mainly due to assets reaching the end of their depreciable lives and asset sales[208] - Interest expense decreased by $6.9 million, primarily due to a lower average outstanding debt balance and a write-off of deferred financing costs in 2021[211] - Net gain on sale of assets increased by $10.2 million, driven by gains from contract operations customer service agreements and compressor sales[211] Provision for Income Taxes The provision for income taxes increased by 52% to $16.3 million in 2022 due to higher book income, with the effective tax rate slightly decreasing to 27% Income Tax Provision | (dollars in thousands) | Year Ended 2022 | December 31, 2021 | Increase (Decrease) % | |:---|:---|:---|:---|\ | Provision for income taxes | $16,293 | $10,744 | 52 % | | Effective tax rate | 27 % | 28 % | (1)% | - The increase in the provision for income taxes is primarily due to the tax effect of the increase in book income[213] Liquidity and Capital Resources Archrock's liquidity primarily stems from operating cash flows and its $750 million Credit Facility, deemed sufficient for future needs including capital expenditures and dividends Overview Archrock's liquidity is primarily derived from operating cash flows and its Credit Facility, expected to cover future needs, with potential debt retirement through market transactions - Primary sources of liquidity are cash flows from operations and borrowing availability under the Credit Facility[214] - The company believes operating cash flows and Credit Facility borrowings will be sufficient for future liquidity needs, with no near-term debt maturities[214] - Archrock may seek to retire or purchase outstanding debt through cash purchases or exchanges for equity securities[216] Cash Requirements Archrock's capital-intensive contract operations require significant investment, with key cash requirements including operating expenses, capital expenditures, interest, and dividends - The contract operations business is capital intensive, requiring significant investment for maintenance and upgrades[217] - Key capital requirements include operating expenses (employee compensation, inventory, lube oil), growth and maintenance capital expenditures, interest on debt, and dividend payments[217] Capital Expenditures Capital expenditures significantly increased in 2022, driven by higher customer demand for new compression equipment, with projected growth and maintenance capital for 2023 Capital Expenditure Summary | Capital Expenditure Type | 2022 (in millions) | 2021 (in millions) | |:---|:---|:---|\ | Growth Capital Expenditures | $146.3 | $37.2 | | Maintenance Capital Expenditures | $84.2 | $47.3 | - Growth capital expenditures increased significantly from 2021 to 2022 due to increased investment in new compression equipment driven by higher customer demand[219] - Projected capital expenditures for 2023 are $270.0 million to $295.0 million, with $180.0 million to $200.0 million for growth and $75.0 million to $80.0 million for maintenance[220] Dividends Archrock declared a quarterly dividend of $0.15 per share in January 2023, with future payments at the Board's discretion, dependent on financial condition and loan agreements - On January 26, 2023, the Board declared a quarterly dividend of $0.15 per share of common stock, totaling approximately $23.6 million, paid on February 14, 2023[221] - Future dividend payments are at the discretion of the Board of Directors and depend on financial condition, results of operations, and credit/loan agreements[221] Contractual Obligations As of December 31, 2022, Archrock's material contractual obligations included $1.5 billion in long-term debt, $444.0 million in estimated interest, $210.7 million in purchase commitments, and $21.4 million in operating lease payments - Long-term debt: $1.5 billion, with $1.3 billion due in 2027 and 2028, and the remainder in 2024[222] - Estimated interest on long-term debt: $444.0 million, with annual payments ranging from $84.4 million to $103.5 million through 2028[222] - Purchase commitments: $210.7 million, primarily for fleet assets and IT-related costs, with $178.0 million due in 2023[222] - Operating lease payments: $21.4 million, spread relatively evenly from 2023 through 2032[222] Sources of Cash Archrock's primary cash sources are its Credit Facility, Senior Notes, and At-the-Market equity offering program, supplemented by asset sales not relied upon for future capital Revolving Credit Facility The Credit Facility, maturing in November 2024, had $251.3 million outstanding at a 6.9% weighted average interest rate as of December 31, 2022, with $487.6 million undrawn capacity - The Credit Facility has a $750.0 million aggregate revolving commitment and matures in November 2024[225] - As of December 31, 2022, the weighted average annual interest rate on outstanding borrowings was 6.9% (compared to 2.6% in 2021)[224] - Archrock was in compliance with all Credit Facility covenants as of December 31, 2022, with $487.6 million of undrawn capacity available[226] Senior Notes Archrock has $1.3 billion in outstanding senior notes as of December 31, 2022, comprising 6.25% notes due April 2028 and 6.875% notes due April 2027, fully guaranteed by subsidiaries - Outstanding senior notes totaled $1.3 billion as of December 31, 2022, consisting of $800.0 million of 6.25% notes due April 2028 and $500.0 million of 6.875% notes due April 2027[227] - The notes are fully and unconditionally guaranteed, jointly and severally, by Archrock and its existing subsidiaries (excluding co-issuers) and rank equally with other senior indebtedness[380] At–the–Market Continuous Equity Offering Program Under its ATM Agreement, Archrock can sell up to $50.0 million of common stock, having sold 447,020 shares for $4.2 million in net proceeds in 2022 for general corporate purposes - Archrock may sell up to $50.0 million of common stock under its At-the-Market (ATM) Agreement[228] - In 2022, 447,020 shares were sold for net proceeds of $4.2 million, used for general corporate purposes[228] Other Sources of Cash Archrock generated $120.3 million from asset sales in 2022, typically used to repay Credit Facility borrowings, but not considered a reliable future capital source - Proceeds from business dispositions and other asset sales totaled $120.3 million in 2022 (vs. $112.9 million in 2021)[229] - These proceeds are typically used to repay Credit Facility borrowings but are not relied upon as a future source of capital due to unpredictable timing and amount[229] Cash Flows In 2022, operating cash flows decreased, investing activities shifted to cash usage due to higher capital expenditures, and financing activities used less cash due to net debt borrowings Cash Flow Summary | (in thousands) | 2022 | 2021 | |:---|:---|:---|\ | Net cash provided by (used in): Operating activities | $203,450 | $237,400 | | Investing activities | $(130,916) | $16,107 | | Financing activities | $(72,537) | $(253,035) | | Net (decrease) increase in cash and cash equivalents | $(3) | $472 | - Operating cash flows decreased primarily due to increased cash outflow for cost of sales, contract costs, and SG&A[232] - Investing activities shifted from providing cash to using cash, mainly due to a $142.0 million increase in capital expenditures and a $14.7 million increase in investments in unconsolidated affiliates[233] - Financing activities used less cash due to net borrowings of long-term debt in 2022, contrasting with net repayments in 2021[234] Critical Accounting Estimates Financial statement preparation requires significant estimates and judgments, particularly concerning depreciation, impairment of assets, and income taxes, which can materially affect reported amounts Depreciation Property, plant, and equipment are depreciated using the straight-line method over estimated useful lives, with changes in assumptions potentially altering net book values and results - Property, plant, and equipment are depreciated using the straight-line method over estimated useful lives, with $2.2 billion net as of December 31, 2022, and $155.4 million in depreciation expense for 2022[236] - Estimates of useful lives and salvage values are based on historical experience and future expectations, and different assumptions could significantly impact net book values and results of operations[236] Impairment of Assets Long-lived assets are reviewed for impairment when carrying amounts may not be recoverable, requiring significant judgment in forecasting future revenue and costs, with $21.4 million recorded in 2022 - Long-lived assets are reviewed for impairment when events or changes in circumstances, including removal of compressors from the active fleet, indicate the carrying amount may not be recoverable[238] - Impairment losses are recognized when estimated undiscounted cash flows are less than the carrying amount, requiring significant judgment in long-term forecasts of future revenue and costs[238] - In 2022, $21.4 million in long-lived and other asset impairments were recorded[238] Income Taxes Income tax expense, deferred tax assets/liabilities, and unrecognized tax benefits involve significant judgments and estimates, with changes in tax laws or challenges affecting liabilities - Income tax expense, deferred tax assets/liabilities, and unrecognized tax benefits require significant judgments and estimates[241] - Deferred income taxes arise from temporary differences, and their recovery depends on projected future taxable income and tax-planning strategies[242] - The calculation of tax liabilities involves uncertainties in applying complex tax laws, and ultimate resolution may differ materially from current estimates[243][244] Recent Accounting Developments Archrock adopted ASU No. 2022–06, deferring the sunset date of reference rate reform guidance to December 31, 2024, with no material impact expected on financial statements - Archrock adopted ASU No. 2022–06, deferring the sunset date of Topic 848 (Reference Rate Reform) from December 31, 2022, to December 31, 2024[336] - The adoption of ASU 2022–06 did not and is not currently expected to have a material impact on the consolidated financial statements[336] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Archrock is exposed to market risk from variable interest rates on its Credit Facility, with a 1% increase in rates raising annual interest expense by $2.5 million - Archrock is exposed to market risk from changes in the variable interest rate of its Credit Facility[244] - Following the maturity of interest rate swaps in March 2022, all Credit Facility borrowings are now subject to variable interest rates[244] - A 1% increase in the effective interest rate on the Credit Facility's outstanding balance as of December 31, 2022, would result in an annual increase of $2.5 million in interest expense[245] Item 8. Financial Statements and Supplementary Data This item refers to the consolidated financial statements and supplementary data presented in Part IV, Item 15 of the 2022 Form 10-K - The information for this item is presented in Part IV, Item 15 of the 2022 Form 10-K[246] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure were reported[246] Item 9A. Controls and Procedures Management concluded that Archrock's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2022 Management's Evaluation of Disclosure Controls and Procedures Archrock's principal executive and financial officers concluded that disclosure controls and procedures were effective as of December 31, 2022, ensuring timely and accurate reporting - As of December 31, 2022, Archrock's principal executive and financial officers concluded that disclosure controls and procedures were effective[247] - These controls provide reasonable assurance that information required by the Exchange Act is recorded, processed, summarized, and reported timely[247] Management's Annual Report on Internal Control Over Financial Reporting Management assessed and concluded that internal control over financial reporting was effective as of December 31, 2022, a conclusion independently audited by Deloitte & Touche LLP - Management concluded that internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[248] - The effectiveness of internal control over financial reporting was audited by Deloitte & Touche LLP, an independent registered public accounting firm[249] Changes in Internal Control over Financial Reporting No material changes in Archrock's internal control over financial reporting occurred during the last fiscal quarter - No material changes in internal control over financial reporting occurred during the last fiscal quarter[250] Item 9B. Other Information This item reports no other information - No other information was reported[259] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable - This item is not applicable[263] Part III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement sections 'Election of Directors,' 'Governance,' and 'Stock Ownership'[260] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the company's Proxy Statement - Information on executive compensation is incorporated by reference from the Proxy Statement sections 'Governance' and 'Compensation Discussion and Analysis'[261] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Portions of the information on security ownership are incorporated by reference from the Proxy Statement, with details on shares available for future issuance under equity compensation plans - Portions of the information required in Item 12 are incorporated by reference to the section entitled 'Stock Ownership' in the Proxy Statement[261] Securities Authorized for Issuance under Equity Compensation Plans As of December 31, 2022, Archrock had 508,753 outstanding options and 6,345,361 shares available for future issuance under approved equity compensation plans Equity Compensation Plan Information | | Outstanding Options, Warrants and Rights (a) | Number of Shares of Common Stock to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) | |:---|:---|:---|:---|\ | Equity compensation plans approved by security holders | 508,753 | $ — (3) | 6,345,361 | | Equity compensation plans not approved by security holders | — | — | 37,771 | | Total | 508,753 | — | 6,383,132 | Item 13. Certain Relationships and Related Transactions and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference to the 'Governance' section in the Proxy Statement[262] Item 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's Proxy Statement - Information on principal accountant fees and services is incorporated by reference to the 'Ratification of the Appointment of the Independent Registered Public Accounting Firm' section in the Proxy Statement[265] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the 2022 Form 10-K Financial Statements The consolidated financial statements, including the Report of Independent Registered Public Accounting Firm, Balance Sheets, Statements of Operations, Comprehensive Income, Equity, and Cash Flows, along with their notes, are included Consolidated Financial Statements | Document | Page | |:---|:---|\ | Report of Independent Registered Public Accounting Firm (PCAOB ID 34) | F–1 | | Consolidated Balance Sheets | F–3 | | Consolidated Statements of Operations | F–4 | | Consolidated Statements of Comprehensive Income | F–5 | | Consolidated Statements of Equity | F–6 | | Consolidated Statements of Cash Flows | F–7 | | Notes to Consolidated Financial Statements | F–9 | Financial Statement Schedules All financial statement schedules are omitted as they are either not applicable or the information is already presented within the consolidated financial statements or their notes - All financial statement schedules are omitted because they are not applicable or the information is set forth in the consolidated financial statements or notes thereto[267] Exhibits This section provides a comprehensive list of exhibits filed with the 2022 Form 10-K, including various agreements, corporate documents, indentures, compensation plans, and certifications - Exhibits include various agreements (e.g., Separation and Distribution, Merger, Purchase), corporate documents (Certificate of Incorporation, Bylaws), indentures for senior notes, compensation plans, and certifications[268][270][273][274][276][277]