Archrock(US:AROC)2023-07-31 16:00markdown [Glossary](index=4&type=section&id=Glossary) The glossary defines key terms and abbreviations used throughout the report - The glossary defines key terms and abbreviations used throughout the report, such as '**2023 Share Repurchase Program**', '**2027 Notes**', '**2028 Notes**', '**Amended and Restated Credit Agreement**', '**Credit Facility**', '**ECOTEC**', '**ESPP**', '**Exchange Act**', '**Financial Statements**', '**GAAP**', '**Hilcorp**', '**LIBOR**', '**Old Ocean Reserves**', '**OTC**', '**SEC**', '**SG&A**', '**SOFR**', '**U.S.**', and '**WACC**'[8](index=8&type=chunk)[9](index=9&type=chunk)[10](index=10&type=chunk) [Forward-Looking Statements](index=5&type=section&id=FORWARD%E2%80%93LOOKING%20STATEMENTS) This section outlines the inherent risks and uncertainties associated with forward-looking statements, disclaiming future updates except as legally required - This section contains forward-looking statements, as defined by the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The company does not undertake to publicly update or revise any forward-looking statement, except as required by law[12](index=12&type=chunk)[13](index=13&type=chunk)[14](index=14&type=chunk) [Part I. Financial Information](index=6&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial performance and liquidity [Item 1. Financial Statements (unaudited)](index=6&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income, equity, and cash flows, along with detailed notes providing context and breakdowns of key accounts and transactions [Condensed Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section presents the company's condensed consolidated balance sheets as of June 30, 2023, and December 31, 2022 Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :------------------------------------------ | :------------ | :------------------ | | **Assets** | | | | Total current assets | $223,568 | $231,960 | | Property, plant and equipment, net | $2,300,589 | $2,199,253 | | Total assets | $2,680,020 | $2,598,750 | | **Liabilities and Stockholders' Equity** | | | | Total current liabilities | $142,097 | $148,571 | | Long-term debt | $1,639,239 | $1,548,334 | | Total liabilities | $1,824,487 | $1,738,057 | | Total equity | $855,533 | $860,693 | | Total liabilities and equity | $2,680,020 | $2,598,750 | [Condensed Consolidated Statements of Operations](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This section presents the company's condensed consolidated statements of operations for the three and six months ended June 30, 2023 and 2022 Condensed Consolidated Statements of Operations (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenue | $247,543 | $215,828 | $477,377 | $413,029 | | Total cost of sales (excluding D&A) | $111,376 | $110,065 | $224,766 | $203,204 | | Selling, general and administrative | $28,649 | $27,691 | $55,074 | $55,464 | | Depreciation and amortization | $41,210 | $41,356 | $81,391 | $84,395 | | Interest expense | $28,630 | $24,456 | $55,211 | $49,702 | | Net income | $24,653 | $16,746 | $41,138 | $18,467 | | Basic and diluted earnings per common share | $0.16 | $0.11 | $0.26 | $0.12 | [Condensed Consolidated Statements of Comprehensive Income](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) This section presents the company's condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2023 and 2022 Condensed Consolidated Statements of Comprehensive Income (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $24,653 | $16,746 | $41,138 | $18,467 | | Total other comprehensive income, net of tax | $0 | $0 | $0 | $984 | | Comprehensive income | $24,653 | $16,746 | $41,138 | $19,451 | [Condensed Consolidated Statements of Equity](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Equity) This section presents the company's condensed consolidated statements of equity for the three months ended June 30, 2023 Condensed Consolidated Statements of Equity (in thousands, except shares and per share amounts) | Metric | Balance at March 31, 2023 | Shares Repurchased | Cash Dividends Paid | Stock-based Compensation | Net Income | Balance at June 30, 2023 | | :------------------------------------------ | :------------------------ | :----------------- | :------------------ | :----------------------- | :--------- | :----------------------- | | Common Stock (shares) | 164,903,900 | — | — | 14,600 | — | 164,940,249 | | Common Stock (amount) | $1,649 | — | — | — | — | $1,649 | | Additional Paid-in Capital | $3,460,259 | — | — | $3,197 | — | $3,463,668 | | Accumulated Deficit | $(2,516,500) | — | $(23,504) | — | $24,653 | $(2,515,351) | | Treasury Stock (amount) | $(92,358) | $(2,073) | — | — | — | $(94,433) | | Total Equity | $853,050 | $(2,073) | $(23,504) | $3,197 | $24,653 | $855,533 | - The company repurchased **222,250 common shares** for **$2,073 thousand** during the six months ended June 30, 2023[25](index=25&type=chunk)[27](index=27&type=chunk) - Cash dividends of **$0.15 per common share** were paid during the three months ended June 30, 2023, totaling **$23,504 thousand**[25](index=25&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=12&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section presents the company's condensed consolidated statements of cash flows for the six months ended June 30, 2023 and 2022 Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $118,398 | $89,524 | | Net cash used in investing activities | $(150,946) | $(46,034) | | Net cash provided by (used in) financing activities | $32,175 | $(43,109) | | Net increase (decrease) in cash and cash equivalents | $(373) | $381 | | Cash and cash equivalents, end of period | $1,193 | $1,950 | [Notes to Unaudited Condensed Consolidated Financial Statements](index=13&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed notes to the unaudited condensed consolidated financial statements, offering context and breakdowns of key accounts and transactions [1. Description of Business and Basis of Presentation](index=13&type=section&id=1.%20Description%20of%20Business%20and%20Basis%20of%20Presentation) This section describes Archrock, Inc.'s business as an energy infrastructure company focused on natural gas compression services - Archrock, Inc. is an energy infrastructure company focused on midstream natural gas compression, providing compression services and aftermarket services in the U.S[34](index=34&type=chunk) - The company operates in two business segments: contract operations (designing, owning, operating, and maintaining compression equipment) and aftermarket services (selling parts, providing maintenance, overhaul, and reconfiguration services)[34](index=34&type=chunk) [2. Inventory](index=13&type=section&id=2.%20Inventory) This section details the composition of the company's inventory, including parts, supplies, and work in progress Inventory Composition (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :---------------- | :------------ | :------------------ | | Parts and supplies | $78,953 | $70,228 | | Work in progress | $14,175 | $14,394 | | Total Inventory | $93,128 | $84,622 | [3. Property, Plant and Equipment](index=13&type=section&id=3.%20Property,%20Plant%20and%20Equipment) This section outlines the composition of the company's property, plant, and equipment, including compression equipment, land, buildings, and transportation assets Property, Plant and Equipment Composition (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :------------------------------------------ | :------------ | :------------------ | | Compression equipment, facilities and other fleet assets | $3,283,842 | $3,234,239 | | Land and buildings | $38,240 | $44,304 | | Transportation and shop equipment | $95,517 | $93,189 | | Computer hardware and software | $77,499 | $77,357 | | Other | $5,575 | $5,754 | | Property, plant and equipment (gross) | $3,500,674 | $3,454,843 | | Accumulated depreciation | $(1,200,085) | $(1,255,590) | | Property, plant and equipment, net | $2,300,589 | $2,199,253 | [4. Investment in Unconsolidated Affiliate](index=13&type=section&id=4.%20Investment%20in%20Unconsolidated%20Affiliate) This section details Archrock's investment in ECOTEC, an unconsolidated affiliate specializing in methane detection and management - As of **June 30, 2023**, Archrock holds a **25% ownership interest** in ECOTEC, a company specializing in methane detection, monitoring, and management[39](index=39&type=chunk) - The investment in ECOTEC is accounted for using the fair value option, with changes in fair value recognized in other expense (income), net[39](index=39&type=chunk)[41](index=41&type=chunk) - The fair value of the investment in ECOTEC was **$12.8 million** as of **June 30, 2023**[83](index=83&type=chunk) [5. Long-Term Debt](index=15&type=section&id=5.%20Long-Term%20Debt) This section provides an overview of the company's long-term debt, including the Credit Facility and senior notes, and recent amendments Long-Term Debt Composition (in thousands) | Debt Type | June 30, 2023 | December 31, 2022 | | :------------------------------------------ | :------------ | :------------------ | | Credit Facility | $341,775 | $251,250 | | 6.25% senior notes due April 2028 | $801,614 | $801,786 | | 6.875% senior notes due April 2027 | $495,850 | $495,298 | | Total Long-Term Debt | $1,639,239 | $1,548,334 | - The weighted average annual interest rate on the Credit Facility increased to **7.7%** at **June 30, 2023**, from **6.9%** at **December 31, 2022**[42](index=42&type=chunk) - On **May 16, 2023**, the Credit Facility was amended and restated to extend its maturity date to **May 16, 2028**, change the referenced rate from LIBOR to SOFR, and increase swing line loan availability from **$50.0 million** to **$75.0 million**[44](index=44&type=chunk) - The company incurred **$6.0 million in transaction costs** related to the Amended and Restated Credit Agreement and wrote off **$1.0 million of unamortized deferred financing costs**[45](index=45&type=chunk)[47](index=47&type=chunk) [6. Commitments and Contingencies](index=17&type=section&id=6.%20Commitments%20and%20Contingencies) This section outlines the company's self-insurance programs, accrued tax liabilities, and assessment of legal actions - Archrock is substantially self-insured for workers' compensation and employee group health claims, as well as for property damage to offshore assets[49](index=49&type=chunk) - Accrued liabilities for non-income-based tax audits were **$4.0 million** as of **June 30, 2023**, up from **$3.9 million** at **December 31, 2022**[50](index=50&type=chunk) - The company believes that the ultimate liability from various pending or threatened legal actions will not have a material adverse effect on its consolidated financial position, results of operations, or cash flows[52](index=52&type=chunk) [7. Stockholders' Equity](index=17&type=section&id=7.%20Stockholders'%20Equity) This section details the company's share repurchase program and cash dividend declarations - On **April 27, 2023**, the Board of Directors authorized a share repurchase program for up to **$50.0 million** of outstanding common stock, valid until **April 27, 2024**[53](index=53&type=chunk)[55](index=55&type=chunk) Share Repurchase Program Activity (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | | :------------------------------------------ | :------------------------------- | :----------------------------- | | Total cost of shares repurchased | $2,073 | $2,073 | | Average price per share | $9.33 | $9.33 | | Total number of shares repurchased | 222 | 222 | Cash Dividends Declared and Paid (in thousands, except per share amounts) | Period | Dividends per Share | Dividends Paid | | :------------------------------------------ | :------------------ | :------------- | | Q2 2023 | $0.150 | $23,504 | | Q1 2023 | $0.150 | $23,852 | | Q4 2022 | $0.145 | $22,589 | | Q3 2022 | $0.145 | $22,559 | | Q2 2022 | $0.145 | $22,494 | | Q1 2022 | $0.145 | $22,673 | - On **July 27, 2023**, a quarterly dividend of **$0.155 per share** was declared, payable on **August 15, 2023**[58](index=58&type=chunk) [8. Revenue from Contracts with Customers](index=20&type=section&id=8.%20Revenue%20from%20Contracts%20with%20Customers) This section presents a breakdown of revenue from contracts with customers by segment and source, along with remaining performance obligations Revenue from Contracts with Customers by Segment and Source (in thousands) | Revenue Source | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | **Contract operations:** | | | | | | 0 – 1,000 horsepower per unit | $43,176 | $40,489 | $83,130 | $82,331 | | 1,001 – 1,500 horsepower per unit | $88,008 | $68,697 | $169,814 | $135,698 | | Over 1,500 horsepower per unit | $69,672 | $56,885 | $135,386 | $111,479 | | Total contract operations revenue | $201,120 | $166,298 | $388,865 | $329,954 | | **Aftermarket services:** | | | | | | Services | $24,567 | $26,001 | $45,816 | $43,138 | | OTC parts and components sales | $21,856 | $23,529 | $42,696 | $39,937 | | Total aftermarket services revenue | $46,423 | $49,530 | $88,512 | $83,075 | | **Total revenue** | $247,543 | $215,828 | $477,377 | $413,029 | Remaining Performance Obligations for Contract Operations (in thousands) | Year | Amount | | :---------------- | :------- | | 2023 | $179,142 | | 2024 | $142,684 | | 2025 | $66,507 | | 2026 | $20,055 | | 2027 | $4,246 | | 2028 | $795 | | Total | $413,429 | - Contract liabilities were **$6.4 million** as of **June 30, 2023**, down from **$8.0 million** at **December 31, 2022**. During the six months ended **June 30, 2023**, **$7.1 million in deferred revenue** was recognized as revenue[67](index=67&type=chunk) [9. Long-Lived and Other Asset Impairment](index=21&type=section&id=9.%20Long-Lived%20and%20Other%20Asset%20Impairment) This section describes the company's policy for reviewing long-lived assets for impairment and provides details on compression fleet impairment - The company reviews long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable, particularly for idle compression assets retired from the active fleet[68](index=68&type=chunk)[69](index=69&type=chunk) Compression Fleet Impairment Review (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Idle compressors retired from active fleet | 15 | 30 | 45 | 75 | | Horsepower of idle compressors retired | 9,000 | 26,000 | 23,000 | 57,000 | | Impairment recorded | $2,892 | $4,647 | $5,461 | $12,056 | [10. Restructuring Charges](index=22&type=section&id=10.%20Restructuring%20Charges) This section details restructuring charges incurred by the company related to organizational streamlining efforts - A plan to streamline the organization was approved in **Q1 2023**, with an expectation to incur an additional **$0.3 million** in restructuring charges[73](index=73&type=chunk) Restructuring Charges by Cost Type (in thousands) | Cost Type | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | | :---------------- | :------------------------------- | :----------------------------- | | Severance costs | $(85) | $705 | | Consulting costs | — | $257 | | Total restructuring charges | $(85) | $962 | [11. Income Taxes](index=23&type=section&id=11.%20Income%20Taxes) This section discusses the company's effective tax rate and potential reductions in unrecognized tax benefits - The year-to-date effective tax rate for the six months ended **June 30, 2023**, differed significantly from the statutory rate primarily due to state taxes, unrecognized tax benefits, and executive compensation limitations[79](index=79&type=chunk) - It is reasonably possible that **$2.8 million** of unrecognized tax benefits, including penalties, interest, and discontinued operations, will be reduced prior to **June 30, 2024**[80](index=80&type=chunk) [12. Earnings Per Common Share](index=23&type=section&id=12.%20Earnings%20Per%20Common%20Share) This section provides the calculation of basic and diluted earnings per common share for the periods presented Earnings Per Common Share Calculation (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income attributable to common stockholders | $24,299 | $16,441 | $40,066 | $17,648 | | Weighted average common shares outstanding (basic) | 154,358 | 153,033 | 154,234 | 152,857 | | Weighted average common shares outstanding (diluted) | 154,412 | 153,164 | 154,326 | 152,982 | [13. Fair Value Measurements](index=24&type=section&id=13.%20Fair%20Value%20Measurements) This section presents fair value measurements for the company's investment in ECOTEC, impaired compressors, and fixed rate debt Reconciliation of Changes in Fair Value of Investment in ECOTEC (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Balance at beginning of period | $14,549 | $0 | $12,803 | $0 | | Purchases of equity interests | $0 | $8,000 | $2,000 | $8,000 | | Unrealized loss | $(1,742) | $0 | $(1,996) | $0 | | Balance at end of period | $12,807 | $8,000 | $12,807 | $8,000 | Fair Value of Impaired Compressors (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :---------------- | :------------ | :------------------ | | Impaired compressors | $550 | $1,961 | Fair Value of Fixed Rate Debt (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :------------------------------------------ | :------------ | :------------------ | | Carrying amount of fixed rate debt | $1,297,464 | $1,297,084 | | Fair value of fixed rate debt | $1,231,000 | $1,214,000 | [14. Related Party Transactions](index=25&type=section&id=14.%20Related%20Party%20Transactions) This section discloses transactions with related parties, including Old Ocean Reserves and Hilcorp - Old Ocean Reserves, an affiliate of customer Hilcorp, owned **9.2% of Archrock's outstanding common stock** as of **June 30, 2023**, and has the right to designate **one director** to the board[92](index=92&type=chunk) - Revenue from Hilcorp was **$8.7 million** for the three months ended **June 30, 2023** (down from **$9.2 million** in **2022**) and **$17.8 million** for the six months ended **June 30, 2023** (down from **$18.6 million** in **2022**)[94](index=94&type=chunk) - Accounts receivable, net, due from Hilcorp remained stable at **$3.0 million** as of **June 30, 2023**, and **December 31, 2022**[94](index=94&type=chunk) [15. Segment Information](index=27&type=section&id=15.%20Segment%20Information) This section provides financial information by business segment, including revenue, gross margin, and a reconciliation to income before income taxes Segment Revenue and Gross Margin (in thousands) | Segment | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | **Revenue:** | | | | | | Contract Operations | $201,120 | $166,298 | $388,865 | $329,954 | | Aftermarket Services | $46,423 | $49,530 | $88,512 | $83,075 | | Total Revenue | $247,543 | $215,828 | $477,377 | $413,029 | | **Gross Margin:** | | | | | | Contract Operations | $125,087 | $97,943 | $233,350 | $197,098 | | Aftermarket Services | $11,080 | $7,820 | $19,261 | $12,727 | | Total Gross Margin | $136,167 | $105,763 | $252,611 | $209,825 | Reconciliation of Total Gross Margin to Income Before Income Taxes (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total gross margin | $136,167 | $105,763 | $252,611 | $209,825 | | Selling, general and administrative | $28,649 | $27,691 | $55,074 | $55,464 | | Depreciation and amortization | $41,210 | $41,356 | $81,391 | $84,395 | | Long-lived and other asset impairment | $2,892 | $4,647 | $5,461 | $12,063 | | Restructuring charges | $(85) | $0 | $962 | $0 | | Interest expense | $28,630 | $24,456 | $55,211 | $49,702 | | Gain on sale of assets, net | $(1,176) | $(18,948) | $(4,781) | $(21,060) | | Other expense (income), net | $1,463 | $497 | $2,066 | $533 | | Income before income taxes | $34,584 | $26,064 | $57,227 | $28,728 | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=29&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations, including an overview of the business, operating highlights, detailed analysis of revenue and expenses by segment, and discussion of liquidity and capital resources [Overview](index=29&type=section&id=OVERVIEW) This section provides an overview of Archrock's business as a leading provider of natural gas compression services and aftermarket services in the U.S - Archrock is a leading provider of natural gas compression services and aftermarket services in the U.S., operating in contract operations and aftermarket services segments[99](index=99&type=chunk) Operating Highlights (horsepower in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total available horsepower (at period end) | 3,770 | 3,810 | 3,770 | 3,810 | | Total operating horsepower (at period end) | 3,578 | 3,322 | 3,578 | 3,322 | | Average operating horsepower | 3,549 | 3,297 | 3,513 | 3,277 | | Horsepower utilization (Spot, at period end) | 95% | 87% | 95% | 87% | | Horsepower utilization (Average) | 95% | 86% | 94% | 85% | - Gross margin, a non-GAAP financial measure, is defined as total revenue less cost of sales (excluding depreciation and amortization) and is used by management to evaluate operating performance[102](index=102&type=chunk) [Results of Operations](index=31&type=section&id=RESULTS%20OF%20OPERATIONS) This section provides a detailed analysis of the company's consolidated financial results, including revenue, net income, and segment performance [Summary of Results](index=31&type=section&id=Summary%20of%20Results) This section summarizes the company's consolidated financial results, highlighting key changes in revenue and net income Summary of Consolidated Financial Results (in millions) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $247.5 | $215.8 | $477.4 | $413.0 | | Net Income | $24.7 | $16.7 | $41.1 | $18.5 | - The increase in consolidated revenue was primarily driven by growth in contract operations for the three months ended **June 30, 2023**, and by both contract operations and aftermarket services for the six months ended **June 30, 2023**[106](index=106&type=chunk) - Net income increased for both periods, mainly due to higher gross margin from both business segments and a decrease in long-lived and other asset impairment expense[106](index=106&type=chunk)[107](index=107&type=chunk) [Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022](index=32&type=section&id=Three%20Months%20Ended%20June%2030,%202023%20Compared%20to%20Three%20Months%20Ended%20June%2030,%202022) This section provides a comparative analysis of the company's financial performance for the three months ended June 30, 2023, versus the same period in 2022 [Contract Operations](index=32&type=section&id=Contract%20Operations_3M) This section analyzes the performance of the contract operations segment for the three months ended June 30, 2023, compared to 2022 Contract Operations Performance (Three Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Increase (Decrease) | | :------------------------------------------ | :----- | :----- | :------------------ | | Revenue | $201,120 | $166,298 | 21% | | Cost of sales (excluding D&A) | $76,033 | $68,355 | 11% | | Gross margin | $125,087 | $97,943 | 28% | | Gross margin percentage | 62% | 59% | 3% | - Revenue increased due to higher rates and increased average operating horsepower, partially offset by strategic dispositions in **2022**[110](index=110&type=chunk) - Gross margin percentage improved as revenue growth outpaced the increase in cost of sales, despite higher maintenance, lube oil, and other operating expenses, and a **$2.2 million** reclassification of sales tax from SG&A to cost of sales[111](index=111&type=chunk) [Aftermarket Services](index=32&type=section&id=Aftermarket%20Services_3M) This section analyzes the performance of the aftermarket services segment for the three months ended June 30, 2023, compared to 2022 Aftermarket Services Performance (Three Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Increase (Decrease) | | :------------------------------------------ | :----- | :----- | :------------------ | | Revenue | $46,423 | $49,530 | (6)% | | Cost of sales (excluding D&A) | $35,343 | $41,710 | (15)% | | Gross margin | $11,080 | $7,820 | 42% | | Gross margin percentage | 24% | 16% | 8% | - Revenue decreased due to a decline in parts sales and service activities compared to the prior year's market recovery[112](index=112&type=chunk) - Gross margin increased significantly due to decreases in cost of sales for service activities and parts sales, which more than offset the revenue decline[113](index=113&type=chunk) [Costs and Expenses](index=32&type=section&id=Costs%20and%20Expenses_3M) This section details the changes in various cost and expense categories for the three months ended June 30, 2023, compared to 2022 Costs and Expenses (Three Months Ended June 30, in thousands) | Expense Category | 2023 | 2022 | | :------------------------------------------ | :----- | :----- | | Selling, general and administrative | $28,649 | $27,691 | | Depreciation and amortization | $41,210 | $41,356 | | Long-lived and other asset impairment | $2,892 | $4,647 | | Restructuring charges | $(85) | $0 | | Interest expense | $28,630 | $24,456 | | Gain on sale of assets, net | $(1,176) | $(18,948) | | Other expense (income), net | $1,463 | $497 | - SG&A increased primarily due to higher compensation and benefits, professional expenses, and software/maintenance, partially offset by a **$2.2 million** reclassification of sales tax to cost of sales[116](index=116&type=chunk) - Depreciation and amortization decreased due to assets reaching the end of their depreciable lives and asset sales, partially offset by fixed asset additions[116](index=116&type=chunk) - Interest expense increased due to higher interest rates, a larger average outstanding debt balance, and a **$1.0 million** write-off of deferred financing costs from the Credit Agreement amendment[118](index=118&type=chunk) - Gain on sale of assets, net, decreased significantly from **$19.2 million** in **2022** to **$0.6 million** in **2023**[119](index=119&type=chunk) [Provision for Income Taxes](index=34&type=section&id=Provision%20for%20Income%20Taxes_3M) This section analyzes the provision for income taxes and the effective tax rate for the three months ended June 30, 2023, compared to 2022 Provision for Income Taxes (Three Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Increase (Decrease) | | :---------------- | :----- | :----- | :------------------ | | Provision for income taxes | $9,931 | $9,318 | 7% | | Effective tax rate | 29% | 36% | (7)% | - The increase in provision for income taxes was primarily due to the tax effect of increased book income and valuation allowance[120](index=120&type=chunk) [Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022](index=36&type=section&id=Six%20Months%20Ended%20June%2030,%202023%20Compared%20to%20Six%20Months%20Ended%20June%2030,%202022) This section provides a comparative analysis of the company's financial performance for the six months ended June 30, 2023, versus the same period in 2022 [Contract Operations](index=36&type=section&id=Contract%20Operations_6M) This section analyzes the performance of the contract operations segment for the six months ended June 30, 2023, compared to 2022 Contract Operations Performance (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Increase (Decrease) | | :------------------------------------------ | :----- | :----- | :------------------ | | Revenue | $388,865 | $329,954 | 18% | | Cost of sales (excluding D&A) | $155,515 | $132,856 | 17% | | Gross margin | $233,350 | $197,098 | 18% | | Gross margin percentage | 60% | 60% | 0% | - Revenue increased due to higher rates and increased average operating horsepower, partially offset by strategic dispositions in **2022**[124](index=124&type=chunk) - Gross margin percentage remained unchanged despite increased revenue, as maintenance, start-up, lube oil, and other operating expenses rose due to higher pricing and increased unit redeployment volumes. A **$4.2 million** reclassification of sales tax from SG&A to cost of sales also impacted costs[124](index=124&type=chunk) [Aftermarket Services](index=36&type=section&id=Aftermarket%20Services_6M) This section analyzes the performance of the aftermarket services segment for the six months ended June 30, 2023, compared to 2022 Aftermarket Services Performance (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Increase (Decrease) | | :------------------------------------------ | :----- | :----- | :------------------ | | Revenue | $88,512 | $83,075 | 7% | | Cost of sales (excluding D&A) | $69,251 | $70,348 | (2)% | | Gross margin | $19,261 | $12,727 | 51% | | Gross margin percentage | 22% | 15% | 7% | - Revenue increased primarily due to higher parts sales and service activities, driven by continued market recovery and increased customer demand[125](index=125&type=chunk) - Gross margin increased significantly due to higher revenue and a decrease in cost of sales, mainly from differences in the scope, timing, and type of service activities performed[126](index=126&type=chunk) [Costs and Expenses](index=36&type=section&id=Costs%20and%20Expenses_6M) This section details the changes in various cost and expense categories for the six months ended June 30, 2023, compared to 2022 Costs and Expenses (Six Months Ended June 30, in thousands) | Expense Category | 2023 | 2022 | | :------------------------------------------ | :----- | :----- | | Selling, general and administrative | $55,074 | $55,464 | | Depreciation and amortization | $81,391 | $84,395 | | Long-lived and other asset impairment | $5,461 | $12,063 | | Restructuring charges | $962 | $0 | | Interest expense | $55,211 | $49,702 | | Gain on sale of assets, net | $(4,781) | $(21,060) | | Other expense (income), net | $2,066 | $533 | - SG&A decreased due to a **$0.7 million decrease in allowance for credit losses** and a **$4.2 million** reclassification of sales tax, partially offset by a **$3.5 million increase in employee compensation and benefits** and a **$1.1 million increase in software and maintenance expense**[129](index=129&type=chunk) - Depreciation and amortization decreased due to assets reaching the end of their depreciable lives, asset sales, and impairments, partially offset by fixed asset additions[129](index=129&type=chunk) - Restructuring charges of **$1.0 million** were incurred in **2023** for severance and consulting costs related to organizational streamlining[131](index=131&type=chunk) - Interest expense increased due to higher interest rates, a larger average outstanding debt balance, and a **$1.0 million** write-off of deferred financing costs[132](index=132&type=chunk) - Gain on sale of assets, net, decreased significantly from **$20.6 million** in **2022** to **$3.9 million** in **2023**[132](index=132&type=chunk) [Provision for Income Taxes](index=38&type=section&id=Provision%20for%20Income%20Taxes_6M) This section analyzes the provision for income taxes and the effective tax rate for the six months ended June 30, 2023, compared to 2022 Provision for Income Taxes (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Increase (Decrease) | | :---------------- | :----- | :----- | :------------------ | | Provision for income taxes | $16,089 | $10,261 | 57% | | Effective tax rate | 28% | 36% | (8)% | - The increase in provision for income taxes was primarily due to the tax effect of increased book income[133](index=133&type=chunk) [Liquidity and Capital Resources](index=40&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) This section discusses the company's sources of liquidity, cash requirements, capital expenditures, and dividend policies [Overview](index=40&type=section&id=Overview_Liquidity) This section provides an overview of Archrock's primary liquidity sources and its ability to meet future financial obligations - Archrock's primary liquidity sources are cash flows from operations and borrowing availability under its Credit Facility[136](index=136&type=chunk) - 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[136](index=136&type=chunk) [Cash Requirements](index=40&type=section&id=Cash%20Requirements) This section outlines the company's key cash requirements, including operating expenses, capital expenditures, interest on debt, and dividend payments - Key cash requirements include operating expenses (compensation, inventory, lube oil), growth capital expenditures, maintenance capital expenditures, interest on debt, and dividend payments[138](index=138&type=chunk) [Capital Expenditures](index=40&type=section&id=Capital%20Expenditures) This section defines and details the company's growth and maintenance capital expenditures, including projected amounts for 2023 and 2024 - Growth capital expenditures are primarily for new compressors or major component upgrades that substantially modify operating parameters, driven by demand and expected economic returns[139](index=139&type=chunk) - Maintenance capital expenditures relate to major overhauls of compression package components to return them to like-new condition without modifying their application[140](index=140&type=chunk) - Projected capital expenditures for **2023** are approximately **$295 million**, including **$200 million for growth** and **$79 million for maintenance**. Growth capital expenditures are anticipated to be around **$160 million in 2024**, a **20% decrease** from **2023**[140](index=140&type=chunk) [Dividends](index=42&type=section&id=Dividends_Liquidity) This section reports on recent dividend declarations and the factors influencing future dividend payments - On **July 27, 2023**, the Board declared a quarterly dividend of **$0.155 per share**, payable on **August 15, 2023**[142](index=142&type=chunk) - Future dividend payments are at the discretion of the Board of Directors, dependent on financial condition, results of operations, credit agreements, and other relevant factors[142](index=142&type=chunk) [Share Repurchase Program](index=42&type=section&id=Share%20Repurchase%20Program_Liquidity) This section provides details on the company's 2023 Share Repurchase Program, including authorized amounts and activity - The **2023 Share Repurchase Program**, authorized on **April 27, 2023**, allows for repurchases of up to **$50.0 million** of common stock until **April 27, 2024**[143](index=143&type=chunk) Share Repurchase Program Activity (Three and Six Months Ended June 30, 2023, in thousands) | Metric | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | | :------------------------------------------ | :------------------------------- | :----------------------------- | | Total cost of shares repurchased | $2,073 | $2,073 | | Average price per share | $9.33 | $9.33 | | Total number of shares repurchased | 222 | 222 | [Sources of Cash](index=42&type=section&id=Sources%20of%20Cash) This section details the company's sources of cash, including its revolving credit facility and cash flow activities [Revolving Credit Facility](index=42&type=section&id=Revolving%20Credit%20Facility) This section provides information on the company's Credit Facility, including debt balances, interest rates, and covenant compliance - The Credit Facility had an average debt balance of **$282.5 million** for the six months ended **June 30, 2023**, up from **$231.5 million** in the prior year[145](index=145&type=chunk) - The weighted average annual interest rate on the Credit Facility's outstanding balance increased to **7.7%** at **June 30, 2023**, from **6.9%** at **December 31, 2022**[145](index=145&type=chunk) - As of **June 30, 2023**, the company was in compliance with all Credit Facility covenants, and all undrawn capacity was available for borrowings[145](index=145&type=chunk) [Cash Flows](index=42&type=section&id=Cash%20Flows) This section summarizes the company's cash flow activities from operations, investing, and financing for the six months ended June 30, 2023 and 2022 Summary of Cash Flows (Six Months Ended June 30, in thousands) | Activity | 2023 | 2022 | | :------------------------------------------ | :------- | :------- | | Net cash provided by operating activities | $118,398 | $89,524 | | Net cash used in investing activities | $(150,946) | $(46,034) | | Net cash provided by (used in) financing activities | $32,175 | $(43,109) | | Net (decrease) increase in cash and cash equivalents | $(373) | $381 | - Net cash from operating activities increased primarily due to higher cash inflows from gross margin and accounts receivable, partially offset by changes in accounts payable and deferred revenue[148](index=148&type=chunk) - Net cash used in investing activities increased significantly due to an **$81.4 million increase in capital expenditures** and a **$55.5 million decrease in proceeds from business sales**, partially offset by a **$28.4 million increase in proceeds from property, plant, and equipment sales**[150](index=150&type=chunk) - Net cash provided by financing activities increased due to an **$89.3 million increase in net borrowings of long-term debt**, partially offset by debt issuance costs, increased dividends, and common stock repurchases[151](index=151&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=44&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section outlines the company's exposure to market risks, specifically related to changes in variable interest rates - A **1% increase** in the effective interest rate on the Credit Facility's outstanding balance at **June 30, 2023**, would result in an annual increase of **$3.4 million in interest expense**[152](index=152&type=chunk) [Item 4. Controls and Procedures](index=44&type=section&id=Item%204.%20Controls%20and%20Procedures) This section details management's evaluation of the effectiveness of the company's disclosure controls and procedures - As of **June 30, 2023**, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective to provide reasonable assurance that required information is recorded, processed, summarized, and reported within SEC specified time periods[155](index=155&type=chunk) [Part II. Other Information](index=45&type=section&id=PART%20II.%20OTHER%20INFORMATION) This part covers legal proceedings, risk factors, equity security sales, defaults, mine safety, and other miscellaneous information [Item 1. Legal Proceedings](index=45&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) This section addresses the company's involvement in legal actions and their potential financial impact - The company is involved in various pending or threatened legal actions but believes that any ultimate liability will not have a material adverse effect on its consolidated financial position, results of operations, or cash flows[157](index=157&type=chunk) [Item 1A. Risk Factors](index=45&type=section&id=ITEM%201A.%20RISK%20FACTORS) This section confirms whether there have been any material changes to the risk factors previously disclosed - There have been no material changes or updates to the risk factors previously disclosed in the company's Form 10-K[158](index=158&type=chunk) [Item 2. Unregistered Sales of Equity Securities by Issuer and Use of Proceeds](index=45&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20BY%20ISSUER%20AND%20USE%20OF%20PROCEEDS) This section provides details on the company's equity security repurchase activities during the quarter - There were no unregistered sales of equity securities by the issuer[158](index=158&type=chunk) Share Repurchase Activity (Three Months Ended June 30, 2023, in thousands, except per share amounts) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet be Purchased Under the Publicly Announced Plans or Programs | | :------------------------------------------ | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :---------------------------------------------------------------------------------------------------------- | | April 1, 2023 — April 30, 2023 | 201 | $9.36 | — | $50,000 | | May 1, 2023 — May 31, 2023 | 191,450 | $9.29 | 191,450 | $48,222 | | June 1, 2023 — June 30, 2023 | 30,800 | $9.57 | 30,800 | $47,927 | | Total | 222,451 | $9.33 | 222,250 | | [Item 3. Defaults Upon Senior Securities](index=45&type=section&id=ITEM%203.%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) This section reports on any defaults upon senior securities - There were no defaults upon senior securities[160](index=160&type=chunk) [Item 4. Mine Safety Disclosures](index=45&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) This section indicates the applicability of mine safety disclosures - Mine safety disclosures are not applicable to the company[160](index=160&type=chunk) [Item 5. Other Information](index=45&type=section&id=ITEM%205.%20OTHER%20INFORMATION) This section covers any other information not specifically addressed elsewhere - There is no other information to report in this section[160](index=160&type=chunk) [Item 6. Exhibits](index=47&type=section&id=ITEM%206.%20EXHIBITS) This section lists all exhibits filed or furnished as part of the report - Key exhibits include the Composite Certificate of Incorporation, Amended and Restated Bylaws, Certifications of the Principal Executive Officer and Principal Financial Officer (pursuant to Sections 302 and 906 of Sarbanes-Oxley Act), and Interactive Data Files (XBRL)[163](index=163&type=chunk) [Signatures](index=48&type=section&id=Signatures) This section confirms the official signing of the report by the principal executive and financial officers - The report is duly signed by Douglas S. Aron, Senior Vice President and Chief Financial Officer, and Donna A. Henderson, Vice President and Chief Accounting Officer, on **August 1, 2023**[164](index=164&type=chunk)[165](index=165&type=chunk)