Archrock(AROC) - 2023 Q4 - Annual Report

Glossary Forward-Looking Statements The report includes forward-looking statements on strategy and financial performance, which are subject to significant risks and uncertainties - The 2023 Form 10-K contains forward-looking statements regarding business growth strategy, projected costs, future financial position, sufficiency of cash flows for operations and dividends, capital expenditures, cost savings, future revenue, gross margin, equipment value, and management plans[14][15] Part I Item 1. Business Archrock is a leading U.S. energy infrastructure company specializing in midstream natural gas compression and aftermarket services - Archrock, Inc. is a leading provider of natural gas compression services and aftermarket services in the U.S., focusing on midstream applications (75% of operating fleet in gathering and processing)[18][20] - The company operates in two business segments: Contract Operations (owned fleet providing services) and Aftermarket Services (parts sales, maintenance, overhaul, reconfiguration for customer-owned equipment)[19] - Key competitive strengths include superior safety performance (0.05 total recordable incident rate in 2023), the largest fleet of large horsepower equipment (85% over 1,000 HP), excellent customer service, a large and stable customer base (290+ customers), fee-based cash flows, and a diversified geographic footprint[36][37][38][39][41] - Business strategies include capitalizing on long-term U.S. natural gas compression fundamentals, improving profitability through technology transformation (ERP, supply chain, remote monitoring), and optimizing the business for attractive returns via organic growth and acquisitions[44][45][47] Company Overview - Archrock, Inc. was incorporated in February 2007, underwent a spin-off in November 2015, and was renamed 'Archrock, Inc.' It is an energy infrastructure company focused on midstream natural gas compression in the U.S[18] Business Segments Contract Operations - Contract operations generated 82% of total revenue in 2023, 80% in 2022, and 83% in 2021[25] - The compression fleet is predominantly large horsepower (>1,000 HP), primarily reciprocating compressors driven by natural gas-powered engines, with a growing number of electric motor-driven compressors[26] Natural Gas Compression Fleet Size (as of Dec 31, 2023) | Horsepower per unit | Number of Units | Aggregate Horsepower (in thousands) | % of Horsepower | | :--- | :--- | :--- | :--- | | 0 — 1,000 horsepower | 1,356 | 555 | 15 % | | 1,001 — 1,500 horsepower | 1,304 | 1,765 | 47 % | | Over 1,500 horsepower | 688 | 1,439 | 38 % | | Total | 3,348 | 3,759 | 100 % | - Contract operations service agreements typically have initial terms of 12-48 months, continuing month-to-month thereafter with 30 days' notice for termination[29][30][33] Aftermarket Services - Aftermarket services generated 18% of total revenue in 2023, 20% in 2022, and 17% in 2021[35] - The business provides parts and components sales, operations, major and routine maintenance, overhaul, and reconfiguration services to customers owning compression equipment[35] Competitive Strengths - Archrock maintains a strong safety culture with a 2023 total recordable incident rate of 0.05, consistently achieving industry-leading safety performance[36] - The company possesses the largest fleet of large horsepower equipment among U.S. outsourced compression service providers, with 85% of its operating horsepower exceeding 1,000 HP, driven by trends like associated gas production and pad drilling[37] - Archrock benefits from a large and stable customer base of approximately 290 midstream and E&P companies, with a diversified geographic footprint across major U.S. producing regions, including a two-thirds presence in Permian and Eagle Ford shales[39][41] - The company's fee-based contracts for compression services, with an average package operation of four years at customer locations, contribute to reduced volatility and enhanced stability of cash flows[39][48] - Archrock is focused on technology deployment, including automation, digital tools, expanded remote monitoring, and emissions solutions, to drive operational efficiencies, increase asset uptime, and reduce emissions[43] Business Strategies - Archrock aims to capitalize on favorable long-term fundamentals for the U.S. natural gas compression industry, driven by significant natural gas resources, increased unconventional production, decreasing reservoir pressures, and growing demand for LNG exports, pipeline exports to Mexico, power generation, and industrial uses[44] - The company is focused on improving profitability by leveraging a 2019-2021 technology transformation project (ERP, supply chain, remote monitoring) to lower internal costs, increase technician efficiency, and predict failures, thereby increasing asset uptime and reducing emissions[45] - As part of its strategy, Archrock sold approximately 199,000 and 341,000 horsepower in 2023 and 2022, respectively, increasing its large operating horsepower from 81% (2021) to 85% (2023) of its fleet[46] - Archrock plans to optimize its business for attractive returns through organic growth and third-party acquisitions, including reactivating idle units and adding new horsepower in key growth areas, and expanding aftermarket services for customer-owned equipment[47] Industry Cyclicality and Seasonal Fluctuations - Demand for Archrock's services correlates with natural gas and crude oil production, but its contract operations business is less impacted by commodity price volatility due to fee-based contracts, customer-supplied fuel gas, and the essential nature of compression in midstream infrastructure[48] - The company's results of operations have not historically shown material seasonal tendencies, and no material impact from seasonal fluctuations is anticipated[49] Sales and Marketing - Sales and marketing functions are managed by sales and field service personnel who analyze new compression applications, ensure customer satisfaction, and identify future service requirements[50] Customers and Suppliers Revenue from Five Most Significant Customers | Year | % of Contract Operations and Aftermarket Services Revenue | | :--- | :--- | | 2023 | 33% | | 2022 | 32% | | 2021 | 31% | - No single customer accounted for 10% or more of total revenue in 2021, 2022, or 2023[52] - Archrock has pricing agreements with primary suppliers of compression equipment, parts, and services, and believes alternative sources are generally available[53] Governmental Regulation - Operations are subject to stringent U.S. federal, state, and local environmental and occupational safety and health laws, including the Clean Air Act (CAA), Clean Water Act (CWA), Resource Conservation and Recovery Act (RCRA), Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), and Occupational Safety and Health Act (OSHA)[55][56] - New EPA rules (NSPS OOOOb and OOOOc) adopted in December 2023 will impose more stringent methane and VOC requirements for new and existing sources, with potential material impact on operations, though current rules are not believed to have a material adverse effect[59][60] - Climate change legislation and regulatory initiatives, including the Inflation Reduction Act and international pledges like the Global Methane Pledge, could increase compliance costs, operating restrictions, or reduce demand for services, particularly methane regulations[64][68][69] - The company is subject to strict liability for environmental contamination under CERCLA and RCRA, potentially incurring remediation costs for historical or third-party contamination, though currently not under any cleanup orders[72][73] Human Capital - As of December 31, 2023, Archrock employed approximately 1,100 employees across 14 states, with no collective bargaining agreements[75] - The company emphasizes diversity and inclusion, with three independent directors being female or from underrepresented racial/ethnic groups, one-third of the executive leadership team being female, and 28% of the total workforce being ethnically diverse[75] - Archrock offers competitive compensation and benefits, including bonuses, an ESPP, 401(k) with employer contribution, healthcare, paid time off (including 16 hours for volunteering), and tuition assistance[76] - The company invests in talent development, with field service technicians completing over 37,000 hours of operational and technical training in 2023, supported by a dedicated training team and mentorship programs[79] - Safety is a core value, integrated into the short-term incentive program for over 17 years, with the 'TARGET ZERO' program achieving a total recordable incident rate of 0.05 in 2023[82] Available Information - Archrock's SEC filings (10-K, 10-Q, 8-K) and corporate governance documents (Code of Business Conduct, Corporate Governance Principles, committee charters) are available free of charge on its website (www.archrock.com) and the SEC's website (www.sec.gov)[85](index=85&type=chunk)[86] Item 1A. Risk Factors The company faces significant risks related to market conditions, operations, finance, cybersecurity, and climate change regulations - Pandemics, public health crises, and ongoing international conflicts (e.g., Ukraine, Israel-Hamas) could negatively impact demand for services, cause price volatility, and disrupt the global economy, potentially having a material adverse effect on Archrock's financial condition[88][89][92] - Increased inflation could raise labor, parts, lube oil, and financing costs, negatively affecting profitability and cash flows, as the company may be unable to pass all higher costs to customers[90] - Archrock's operations entail inherent risks (equipment defects, natural disasters) that could lead to substantial liabilities, which may not be fully covered by insurance, potentially harming financial condition[93][94] - The business is highly competitive with low barriers to entry, risking market share loss due to competitors' adaptability, aggressive pricing, or customers opting to operate their own compression fleets[95][96] - Archrock has substantial debt ($1.6 billion as of Dec 31, 2023) and restrictive covenants in its Debt Agreements, which could limit future growth, increase vulnerability to adverse economic conditions, and impair operational flexibility[101][102][104] - The company's ability to fund future growth and operations depends on access to capital and credit markets, which could be limited during periods of instability, impacting its ability to purchase additional compression equipment[108][109] - The erosion of customers' financial condition, particularly in weak oil and natural gas markets, could reduce demand for Archrock's services, leading to contract cancellations or delays, and potential losses on receivables[114] - Dependence on a limited group of suppliers for equipment, parts, and services exposes Archrock to product shortages, price increases, and long lead times, potentially affecting customer retention and financial results[119][120][121] - Cybersecurity threats, including attacks on IT systems and third-party providers, could disrupt critical operations, compromise data, and lead to material adverse impacts on business, results of operations, and financial condition[124][125] - New environmental regulations (e.g., CAA, methane rules), climate change legislation, and stakeholder pressures for sustainable energy practices could increase compliance costs, reduce demand for fossil fuels, and negatively affect Archrock's business and financial condition[133][147][153][154][160][161] Item 1B. Unresolved Staff Comments Archrock, Inc. reported no unresolved staff comments from the SEC - There are no unresolved staff comments[162] Item 1C. Cybersecurity The company maintains a cybersecurity risk management program and has not experienced any material cybersecurity incidents - Archrock utilizes technology for operational efficiencies and customer value, including cloud-based solutions, workflow automation, digital tools for field technicians, and remote monitoring of compressor fleets[163] - The company has not experienced a material cybersecurity incident and has not identified risks from known cybersecurity threats that have materially affected its operations, business strategy, or financial condition[164] - Archrock's cybersecurity risk management program is designed to monitor, detect, prevent, and respond to threats, integrating with its overall enterprise risk management program and utilizing CIS CSC best practices[165][166] - The Board of Directors, through its Audit Committee, actively oversees cybersecurity risk management[170][171] Item 2. Properties The company's material facilities include a corporate office in Houston and various leased and owned facilities across key operating states Material Facilities (as of Dec 31, 2023) | Location | Status | Square Feet | Use by Segment | | :--- | :--- | :--- | :--- | | Houston, Texas | Leased | 75,000 | Corporate office — Contract Operations and Aftermarket Services | | Greeley, Colorado | Leased | 10,000 | Contract Operations and Aftermarket Services | | Houma, Louisiana | Owned | 60,000 | Contract Operations and Aftermarket Services | | Carlsbad, New Mexico | Leased | 11,200 | Contract Operations and Aftermarket Services | | Yukon, Oklahoma West | Owned | 85,000 | Contract Operations and Aftermarket Services | | Alexander, Pennsylvania| Leased | 15,000 | Contract Operations and Aftermarket Services | | Asherton, Texas | Leased | 9,000 | Contract Operations and Aftermarket Services | | Kenedy, Texas | Leased | 11,000 | Contract Operations and Aftermarket Services | | Midland, Texas | Owned | 51,000 | Contract Operations and Aftermarket Services | | Pecos, Texas | Leased | 10,000 | Contract Operations and Aftermarket Services | | Victoria, Texas | Owned | 23,000 | Contract Operations and Aftermarket Services | | Victoria, Texas | Owned | 66,000 | Contract Operations and Aftermarket Services | Item 3. Legal Proceedings The company is involved in ordinary course legal actions but does not expect a material adverse effect on its financial position - Archrock is involved in various pending or threatened legal actions in the ordinary course of business[175] - 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, including its ability to pay dividends[175] Item 4. Mine Safety Disclosures This item is not applicable to Archrock, Inc - Item 4. Mine Safety Disclosures is not applicable[176] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE, with details on dividends, share count, and a recent share repurchase program - Archrock's common stock (AROC) is traded on the New York Stock Exchange[5] - As of February 14, 2024, there were approximately 1,550 holders of record of common stock[178] Dividends Declared and Paid (2021-2023) | Year | Quarter | Dividends per Share | Dividends Paid (in thousands) | | :--- | :--- | :--- | :--- | | 2023 | Q4 | $0.155 | $24,190 | | | Q3 | $0.155 | $24,250 | | | Q2 | $0.150 | $23,504 | | | Q1 | $0.150 | $23,852 | | 2022 | Q4 | $0.145 | $22,589 | | | Q3 | $0.145 | $22,559 | | | Q2 | $0.145 | $22,494 | | | Q1 | $0.145 | $22,673 | | 2021 | Q4 | $0.145 | $22,351 | | | Q3 | $0.145 | $22,506 | | | Q2 | $0.145 | $22,331 | | | Q1 | $0.145 | $22,155 | - On January 25, 2024, the Board declared a quarterly dividend of $0.165 per share, totaling approximately $25.9 million, paid on February 13, 2024[179][406] Shares Repurchased Under 2023 Share Repurchase Program (Year Ended Dec 31, 2023) | Metric | Amount (in thousands, except per share) | | :--- | :--- | | Total cost of shares repurchased | $8,860 | | Average price per share | $11.81 | | Total number of shares repurchased | 750,374 | Item 6. [Reserved] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue and net income grew significantly in 2023 due to strong demand, with a focus on capital investment and liquidity management Summary of Financial Results (2023 vs. 2022) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $990,337 | $845,568 | 17.1% | | Net Income | $104,998 | $44,296 | 137.0% | - The increase in net income was primarily due to higher gross margin from both contract operations and aftermarket services, and decreases in long-lived asset impairment expense and SG&A, partially offset by a decrease in gain on sale of assets and increases in income taxes, interest expense, depreciation, and restructuring charges[207] - Archrock invested in Ionada, a global carbon capture technology company, as the lead investor in a Series A financing round in November 2023, reflecting a commitment to reducing GHG emissions[187] Average U.S. Oil and Dry Natural Gas Production (2021-2023) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Average dry natural gas production (Bcf/d) | 103.8 | 98.0 | 93.6 | | Average oil production (MMb/d) | 12.9 | 11.9 | 11.2 | - U.S. natural gas and oil production reached record levels in 2023, driving strong demand for compression services, resulting in a 19% increase in contract operations revenue and an 8% increase in aftermarket services revenue[191] EIA Outlook: Year-over-Year Changes (2024-2025) | Metric | 2024 | 2025 | | :--- | :--- | :--- | | U.S. dry natural gas production | 1 % | 2 % | | U.S. oil production | 1 % | 3 % | | U.S. natural gas domestic consumption | 2 % | (1)% | | Liquefied natural gas exports | 2 % | 19 % | - Key challenges include capital requirements and access to external capital, cost management (e.g., increased labor and supply chain costs), retaining qualified personnel, and potential reduced demand for natural gas-powered compression due to renewable energy adoption or emissions reduction focus[195][196][197][198][199] Operating Highlights (Horsepower in thousands) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total available horsepower (at period end) | 3,759 | 3,726 | 3,878 | | Total operating horsepower (at period end) | 3,607 | 3,448 | 3,247 | | Average operating horsepower | 3,554 | 3,328 | 3,282 | | Horsepower utilization: | | | | | Spot (at period end) | 96 % | 93 % | 84 % | | Average | 95 % | 87 % | 82 % | Reconciliation of Net Income to Gross Margin (in thousands) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net income | $104,998 | $44,296 | $28,217 | | Selling, general and administrative | 116,639 | 117,184 | 107,167 | | Depreciation and amortization | 166,241 | 164,259 | 178,946 | | Long-lived and other asset impairment | 12,041 | 21,442 | 21,397 | | Restructuring charges | 1,775 | — | 2,903 | | Interest expense | 111,488 | 101,259 | 108,135 | | Gain on sale of assets, net | (10,199) | (40,494) | (30,258) | | Other expense (income), net | 1,086 | 1,845 | (4,707) | | Provision for income taxes | 37,249 | 16,293 | 10,744 | | Gross margin | $541,318| $426,084| $422,544| - Archrock's primary sources of liquidity are operating cash flows and its $750.0 million Credit Facility, which matures in May 2028[224][237] Capital Expenditures (in thousands) | Type of Expenditure | 2023 | 2022 | | :--- | :--- | :--- | | Growth Capital | $190,300 | $146,300 | | Maintenance Capital | $92,200 | $84,200 | | Total | $282,500| $230,500| - Projected capital expenditures for 2024 are $275.0 million to $290.0 million, including $175.0 million to $180.0 million for growth and $80.0 million to $85.0 million for maintenance, aiming to support free cash flow generation after dividends[231] Cash Flows (in thousands) | Activity Type | 2023 | 2022 | | :--- | :--- | :--- | | Operating activities | $310,187 | $203,450 | | Investing activities | $(232,491) | $(130,916) | | Financing activities | $(77,924) | $(72,537) | | Net decrease in cash and cash equivalents | $(228) | $(3) | - Operating cash flows increased primarily due to higher gross margin and changes in deferred revenue, partially offset by changes in contract costs, accounts payable, and accounts receivable[243] - Investing activities used more cash due to increased capital expenditures and decreased proceeds from business sales, partially offset by higher proceeds from property sales and lower investments in unconsolidated affiliates[244] - Financing activities used more cash due to common stock repurchases, debt issuance costs, increased dividends, and decreased proceeds from ATM sales, partially offset by increased net borrowings of long-term debt[245] Overview - Archrock is an energy infrastructure company focused on midstream natural gas compression, serving the U.S. oil and natural gas industry as a leading provider of compression services and aftermarket support[184] - The company's business segments are Contract Operations (providing compression services with owned equipment) and Aftermarket Services (supporting customer-owned compression equipment)[186] Significant 2023 Transactions - In November 2023, Archrock became the lead investor in Ionada, a carbon capture technology company, through a Series A financing round, aiming to reduce GHG emissions[187] Trends and Outlook - The key driver of Archrock's business is U.S. oil and natural gas production, with 75% of its operating fleet in midstream natural gas gathering and the remainder in gas lift applications[188] - U.S. natural gas and oil production reached record levels in 2023, leading to strong demand for compression services and increased investment in new fleet units[191] EIA Outlook: U.S. Production and Consumption Forecast (YoY Change) | Metric | 2024 | 2025 | | :--- | :--- | :--- | | U.S. dry natural gas production | 1 % | 2 % | | U.S. oil production | 1 % | 3 % | | U.S. natural gas domestic consumption | 2 % | (1)% | | Liquefied natural gas exports | 2 % | 19 % | - The outlook for the energy industry in the U.S. is positive, with natural gas production expected to continue increasing to all-time highs in 2024 and 2025, sustaining long-term demand for compression services[193][194] Key Challenges and Uncertainties - Archrock faces challenges in capital requirements and access to external capital, as significant capital expenditures and debt could limit future funding for growth[195] - Cost management remains challenging due to investments in technology transformation, potential increases in operating expenses from market demand rebound, and volatility in supplier prices for materials, parts, and lube oil[196][197] - Retaining qualified labor is an ongoing challenge, with increasing labor costs and potential impacts on service levels and growth if personnel needs are not met[198] - Demand for natural gas-powered compression could be adversely affected by technological advances, accelerated adoption of renewable energy, or increased customer focus on reducing emissions, potentially shifting demand towards electric motor-driven compressors[199] Operating Highlights Operating Highlights (Horsepower in thousands) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total available horsepower (at period end) | 3,759 | 3,726 | 3,878 | | Total operating horsepower (at period end) | 3,607 | 3,448 | 3,247 | | Average operating horsepower | 3,554 | 3,328 | 3,282 | | Horsepower utilization: | | | | | Spot (at period end) | 96 % | 93 % | 84 % | | Average | 95 % | 87 % | 82 % | Non-GAAP Financial Measures - Management uses gross margin, a non-GAAP financial measure defined as total revenue less cost of sales (excluding depreciation and amortization), to evaluate operating performance by focusing on current operations and excluding historical asset costs, SG&A, financing, and taxes[201][202] - Gross margin has limitations due to the exclusion of SG&A, depreciation, interest expense, and other items, but is used as a supplemental measure for a more complete understanding of performance[203] Reconciliation of Net Income to Gross Margin (in thousands) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net income | $104,998 | $44,296 | $28,217 | | Selling, general and administrative | 116,639 | 117,184 | 107,167 | | Depreciation and amortization | 166,241 | 164,259 | 178,946 | | Long-lived and other asset impairment | 12,041 | 21,442 | 21,397 | | Restructuring charges | 1,775 | — | 2,903 | | Interest expense | 111,488 | 101,259 | 108,135 | | Gain on sale of assets, net | (10,199) | (40,494) | (30,258) | | Other expense (income), net | 1,086 | 1,845 | (4,707) | | Provision for income taxes | 37,249 | 16,293 | 10,744 | | Gross margin | $541,318| $426,084| $422,544| Results of Operations Revenue and Net Income (2023 vs. 2022) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $990,337 | $845,568 | 17.1% | | Net Income | $104,998 | $44,296 | 137.0% | - Contract operations revenue increased by 19% from $677.8 million in 2022 to $809.4 million in 2023, primarily due to higher rates and increased average operating horsepower[209][210] - Contract operations gross margin increased by 26% from $398.9 million in 2022 to $502.7 million in 2023, with the gross margin percentage rising from 59% to 62%[209][212] - Aftermarket services revenue increased by 8% from $167.8 million in 2022 to $180.9 million in 2023, driven by higher service activities and parts sales due to market recovery[213][214] - Aftermarket services gross margin increased by 42% from $27.2 million in 2022 to $38.6 million in 2023, with the gross margin percentage rising from 16% to 21%[213][214] - Selling, general and administrative (SG&A) expenses decreased by $0.5 million, primarily due to a reclassification of sales tax to contract operations cost of sales, partially offset by increases in incentive compensation and software expenses[215] - Depreciation and amortization increased by $2.0 million, mainly due to fixed asset additions and accelerated depreciation, partially offset by assets reaching the end of their depreciable lives and asset sales[216] - Long-lived and other asset impairment charges decreased from $21.4 million in 2022 to $12.0 million in 2023, reflecting increased customer demand and higher equipment utilization[218] - Interest expense increased by $10.2 million, driven by higher interest rates, a larger average outstanding debt balance, and a $1.0 million write-off of deferred financing costs, partially offset by increased capitalized interest[220] - Gain on sale of assets, net, decreased significantly from $40.5 million in 2022 to $10.2 million in 2023, primarily due to lower gains from compression asset sales[220] Provision for Income Taxes (in thousands) | Metric | 2023 | 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Provision for income taxes | $37,249 | $16,293 | 129% | | Effective tax rate | 26 % | 27 % | (1)% | Liquidity and Capital Resources - Archrock's liquidity relies on operating cash flows and its $750.0 million Credit Facility, with no near-term debt maturities, deemed sufficient for future needs[224][237] - Capital requirements include operating expenses, growth and maintenance capital expenditures, interest on debt, and dividend payments[226] Capital Expenditures (in thousands) | Type of Expenditure | 2023 | 2022 | | :--- | :--- | :--- | | Growth Capital | $190,300 | $146,300 | | Maintenance Capital | $92,200 | $84,200 | | Total | $282,500| $230,500| - Growth capital expenditures increased in 2023 due to higher investment in new compression equipment driven by customer demand, while maintenance capital increased due to scheduled activities and make-ready investments[228][229] - Projected capital expenditures for 2024 are $275.0 million to $290.0 million, including $175.0 million to $180.0 million for growth and $80.0 million to $85.0 million for maintenance[231] - The Board declared a quarterly dividend of $0.165 per share on January 25, 2024, paid on February 13, 2024[232] - A $50.0 million share repurchase program was authorized in April 2023, under which $8.86 million of common stock was repurchased in 2023[233][235] - Material contractual obligations as of December 31, 2023, include $1.6 billion in long-term debt (due 2027-2028), $428.8 million in estimated interest, $192.7 million in purchase commitments (primarily fleet assets), and $18.0 million in operating lease payments[234] - The Credit Facility was amended in May 2023, extending its maturity to May 2028, changing the reference rate from LIBOR to SOFR, and increasing swing line loan availability[236][384] - Outstanding senior notes total $1.3 billion, comprising $800.0 million of 6.25% notes due April 2028 and $500.0 million of 6.875% notes due April 2027[239] Cash Flows (in thousands) | Activity Type | 2023 | 2022 | | :--- | :--- | :--- | | Operating activities | $310,187 | $203,450 | | Investing activities | $(232,491) | $(130,916) | | Financing activities | $(77,924) | $(72,537) | | Net decrease in cash and cash equivalents | $(228) | $(3) | Critical Accounting Estimates - Critical accounting estimates include depreciation of property, plant, and equipment, which relies on assumptions about useful lives and salvage values, and impairment assessments of long-lived assets based on future cash flow forecasts[247][249][251] - Income tax estimates involve significant judgments in determining deferred tax assets and liabilities, evaluating the realizability of deferred tax assets, and assessing uncertain tax positions[253][254][256] Recent Accounting Developments - Archrock is evaluating the impact of ASU 2023-09 (Income Tax Disclosures), effective for fiscal years beginning after December 15, 2024, which requires additional disclosures on income taxes paid and rate reconciliation[346] - The company is also evaluating ASU 2023-07 (Segment Reporting), effective for fiscal years beginning after December 15, 2023, which mandates disclosures of significant expenses for each reportable segment[347] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risk from variable interest rates on its Credit Facility, with all borrowings now subject to variable rates - Archrock is exposed to market risk from changes in the variable interest rate of its Credit Facility; all borrowings are now subject to variable rates after interest rate swaps matured in March 2022[257] - A 1% increase in the effective interest rate on the outstanding Credit Facility balance at December 31, 2023, would increase annual interest expense by $2.9 million[257] Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data are presented in Part IV, Item 15 of this 2023 Form 10-K - The information specified by this Item is presented in Part IV, Item 15 of this 2023 Form 10-K[257] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Archrock, Inc. reported no changes in or disagreements with accountants on accounting and financial disclosure - There were no changes in or disagreements with accountants on accounting and financial disclosure[258] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - As of December 31, 2023, Archrock's principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective[258] - Management assessed and concluded that Archrock's internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework[259] - Deloitte & Touche LLP, an independent registered public accounting firm, audited and expressed an unqualified opinion on the effectiveness of Archrock's internal control over financial reporting as of December 31, 2023[260][264] - There were no changes in internal control over financial reporting during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[261] Report of Independent Registered Public Accounting Firm - Deloitte & Touche LLP audited Archrock, Inc.'s internal control over financial reporting as of December 31, 2023, and expressed an unqualified opinion that the company maintained effective internal control[264] - The audit was conducted in accordance with PCAOB standards, aiming for reasonable assurance about the effectiveness of internal control over financial reporting[266] - Internal control over financial reporting is defined as a process providing reasonable assurance regarding financial reporting reliability and asset safeguarding, with inherent limitations that may prevent or detect misstatements[267][268] Item 9B. Other Information No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements in Q4 2023 - No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the three months ended December 31, 2023[270] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to Archrock, Inc - Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections is not applicable[270] Part III Item 10. Directors, Executive Officers and Corporate Governance Information is incorporated by reference from the 2024 Annual Meeting of Stockholders proxy statement - Information for this item is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[271] Item 11. Executive Compensation Information is incorporated by reference from the 2024 Annual Meeting of Stockholders proxy statement - Information for this item is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[272] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference, with details on securities authorized under equity compensation plans - Portions of the information for this item are incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[272] Securities Authorized for Issuance Under Equity Compensation Plans (as of Dec 31, 2023) | Category | Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders (1) | 548,262 (2) | $ — (3) | 4,841,098 | | Equity compensation plans not approved by security holders (4) | — | — | 37,771 | | Total | 548,262 | — | 4,878,869 | Item 13. Certain Relationships and Related Transactions and Director Independence Information is incorporated by reference from the 2024 Annual Meeting of Stockholders proxy statement - Information for this item is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[276] Item 14. Principal Accountant Fees and Services Information is incorporated by reference from the 2024 Annual Meeting of Stockholders proxy statement - Information for this item is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[277] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the 2023 Form 10-K - The section lists the financial statements filed as part of the 2023 Form 10-K, including the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations, Comprehensive Income, Equity, Cash Flows, and Notes to Consolidated Financial Statements[278][279] - 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[280] - A comprehensive list of exhibits, including separation agreements, indentures, compensation arrangements, and certifications, is provided[281][282][284][286][288] Signatures - The report is signed on behalf of Archrock, Inc. by D. Bradley Childers, President and Chief Executive Officer, and other directors and officers, including Douglas S. Aron (Senior Vice President and Chief Financial Officer) and Donna A. Henderson (Vice President and Chief Accounting Officer), on February 21, 2024[289][290][292][293] Report of Independent Registered Public Accounting Firm (Financial Statements) - Deloitte & Touche LLP audited Archrock, Inc.'s consolidated financial statements as of December 31, 2023, and 2022, and for the three years ended December 31, 2023, expressing an unqualified opinion that they present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with GAAP[294] - The audit identified long-lived asset impairment as a critical audit matter due to the materiality of property, plant, and equipment, the high degree of auditor judgment in evaluating compressor unit retirement decisions, and the need for fair value specialists[298][299][300] Consolidated Financial Statements Consolidated Balance Sheets Total assets and liabilities increased in 2023, driven by growth in property, plant, and equipment and long-term debt Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $2,655,950 | $2,598,750 | | Property, Plant and Equipment, net | $2,301,982 | $2,199,253 | | Total Liabilities | $1,784,929 | $1,738,057 | | Long-Term Debt | $1,584,869 | $1,548,334 | | Total Equity | $871,021 | $860,693 | Consolidated Statements of Operations Revenue and net income grew substantially in 2023, driven by strong performance across both business segments Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total Revenue | $990,337 | $845,568 | $781,461 | | Cost of sales (excluding depreciation and amortization) | 449,019 | 419,484 | 358,917 | | Selling, general and administrative | 116,639 | 117,184 | 107,167 | | Depreciation and amortization | 166,241 | 164,259 | 178,946 | | Long-lived and other asset impairment | 12,041 | 21,442 | 21,397 | | Restructuring charges | 1,775 | — | 2,903 | | Interest expense | 111,488 | 101,259 | 108,135 | | Gain on sale of assets, net | (10,199) | (40,494) | (30,258) | | Other expense (income), net | 1,086 | 1,845 | (4,707) | | Income before income taxes | 142,247 | 60,589 | 38,961 | | Provision for income taxes | 37,249 | 16,293 | 10,744 | | Net income | $104,998 | $44,296 | $28,217 | | Basic and diluted earnings per common share | $0.67 | $0.28 | $0.18 | Consolidated Statements of Comprehensive Income (Loss) Comprehensive income increased significantly to $105.0 million in 2023, driven primarily by higher net income Consolidated Statements of Comprehensive Income (in thousands) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net income | $104,998 | $44,296 | $28,217 | | Other comprehensive income, net of tax: | | | | | Interest rate swap gain, net of reclassifications to earnings | — | 574 | 3,159 | | Amortization of dedesignated interest rate swap | — | 410 | 863 | | Total other comprehensive income, net of tax | — | 984 | 4,022 | | Comprehensive income | $104,998| $45,280 | $32,239 | Consolidated Statements of Equity Total equity increased in 2023 due to net income, partially offset by cash dividends and common stock repurchases Consolidated Statements of Equity Highlights (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Equity | $871,021 | $860,693 | | Common Stock (shares issued) | 164,984,401 | 163,439,013 | | Additional Paid-in Capital | $3,470,576 | $3,456,777 | | Accumulated Deficit | $(2,499,931) | $(2,509,133) | | Treasury Stock (shares) | (9,020,454) | (7,810,548) | | Net Income | $104,998 | $44,296 | | Cash Dividends Paid | $(95,796) | $(90,315) | | Shares Repurchased | $(8,860) | — | | Stock-based compensation, net of forfeitures | $12,998 | $11,928 | Consolidated Statements of Cash Flows Operating cash flow increased significantly in 2023, while cash used in investing and financing activities also rose Consolidated Statements of Cash Flows (in thousands) | Activity Type | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $310,187 | $203,450 | $237,400 | | Net cash used in investing activities | $(232,491) | $(130,916) | $16,107 | | Net cash used in financing activities | $(77,924) | $(72,537) | $(253,035) | | Net increase (decrease) in cash and cash equivalents | $(228) | $(3) | $472 | | Cash and cash equivalents, end of period | $1,338 | $1,566 | $1,569 | - Operating activities saw an increase in cash primarily due to higher gross margin and changes in deferred revenue, partially offset by changes in contract costs and accounts payable[243] - Investing activities used more cash due to increased capital expenditures ($298.6 million in 2023 vs $239.9 million in 2022) and decreased proceeds from business sales[244][491] - Financing activities used more cash due to common stock repurchases ($8.9 million), debt issuance costs ($6.0 million), and increased dividends paid ($95.8 million in 2023 vs $90.3 million in 2022)[245][312] Notes to Consolidated Financial Statements The notes detail the company's business, accounting policies, financial statement components, and recent accounting developments 1. Description of Business - Archrock is an energy infrastructure company focused on midstream natural gas compression, operating in two segments: contract operations and aftermarket services[315] 2. Basis of Presentation and Significant Accounting Policies - Financial statements are prepared in accordance with GAAP and SEC rules, requiring management estimates and assumptions[317] - Key accounting policies cover cash equivalents, accounts receivable (with an allowance for credit losses determined by aging schedule and risk assessment), inventory (lower of cost and net realizable value using average cost), property, plant, and equipment (recorded at cost and depreciated straight-line), and leases (ROU assets and liabilities recognized for non-short-term leases)[318][319][320][323][324][326] - Revenue is recognized when control of goods/services transfers to customers[332][333][335] - Income taxes are accounted for under the asset and liability method, recognizing deferred tax assets and liabilities for temporary differences, with valuation allowances recorded when realization is not more likely than not[340][341] - No customers accounted for more than 10% of consolidated revenues in 2021, 2022, or 2023, limiting credit risk concentration[344] 3. Recent Accounting Developments - Archrock is evaluating the impact of ASU 2023-09 (Income Tax Disclosures), effective for fiscal years beginning after December 15, 2024, which requires additional disclosures on income taxes paid and rate reconciliation[346] - The company is also evaluating ASU 2023-07 (Segment Reporting), effective for fiscal years beginning after December 15, 2023, which mandates disclosures of significant expenses for each reportable segment[347] - ASU 2023-05 (Business Combinations—Joint Venture Formations), effective for formations on or after January 1, 2025, will require joint ventures to apply a new basis of accounting upon formation, recognizing assets and liabilities at fair value[348] 4. Dispositions - In 2022, Archrock sold certain contract operations customer service agreements and approximately 770 compressors (172,000 horsepower), recognizing an aggregate gain of $28.1 million[349] - In 2021, the company sold certain contract operations customer service agreements and approximately 875 compressors (140,000 horsepower), recognizing an aggregate gain of $19.0 million[350] 5. Accounts Receivable, net Accounts Receivable, net (in thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Third party | $116,475 | $110,636 | | Related parties | $3,839 | $2,998 | | Other | $4,342 | $25,584 | | Accounts receivable | $124,656 | $139,218 | | Allowance for credit losses | $(587) | $(1,674) | | Accounts receivable, net| $124,069 | $137,544 | Changes in Allowance for Credit Losses (in thousands) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Balance at beginning of period | $1,674 | $2,152 | $3,370 | | Provision for (benefit from) credit losses | 224 | 206 | (90) | | Write-offs charged against allowance | (1,311) | (684) | (1,128) | | Balance at end of period | $587 | $1,674| $2,152| 6. Inventory Inventory Composition (in thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Parts and supplies | $70,759 | $70,228 | | Work in progress | $11,002 | $14,394 | | Total Inventory | $81,761 | $84,622 | - Archrock recorded inventory write-downs of $0.5 million in 2023, $1.6 million in 2022, and $1.0 million in 2021 for excess, obsolete, or overvalued inventory[355] 7. Property, Plant and Equipment, net Property, Plant and Equipment, net (in thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Compression equipment, facilities and other fleet assets | $3,326,919 | $3,234,239 | | Land and buildings | $30,169 | $44,304 | | Transportation and shop equipment | $100,474 | $93,189 | | Computer hardware and software | $77,532 | $77,357 | | Other | $5,678 | $5,754 | | Property, plant and equipment | $3,540,772 | $3,454,843 | | Accumulated depreciation | $(1,238,790) | $(1,255,590) | | Property, plant and equipment, net | $2,301,982| $2,199,253| - Depreciation expense was $159.3 million in 2023, $155.4 million in 2022, and $167.6 million in 2021[357] - Assets under construction, primarily compression equipment, were $64.7 million at December 31, 2023, down from $92.5 million in 2022[357] 8. Leases - Archrock has operating leases for office space, temporary housing, storage, and shops, with remaining terms from less than one year to approximately nine years[358] Operating Lease Financial Information (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Operating lease ROU assets | $14,097 | $16,706 | | Total lease liabilities | $15,431 | $18,105 | | Total lease cost (2023) | $6,424 | $6,290 | | Cash paid for operating lease liabilities (2023) | $6,157 | $5,951 | Remaining Maturities of Lease Liabilities (as of Dec 31, 2023, in thousands) | Year | Amount | | :--- | :--- | | 2024 | $3,577 | | 2025 | $2,979 | | 2026 | $2,556 | | 2027 | $2,374 | | 2028 | $2,193 | | Thereafter | $4,295 | | Total lease payments | $17,974 | | Less: Interest | $(2,543) | | Total lease liabilities | $15,431| 9. Intangible Assets, net - Intangible assets, primarily customer relationships from acquisitions, are amortized on a straight-line basis over 15 to 25 years[363][366] Intangible Assets, net (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Gross carrying amount | $142,336 | $141,462 | | Accumulated amortization | $(112,154) | $(104,385) | | Intangible assets, net | $30,182 | $37,077 | - Amortization expense was $6.9 million in 2023, $8.9 million in 2022, and $11.3 million in 2021[366] Estimated Amortization Expense for Subsequent Five Fiscal Years (in thousands) | Year | Amount | | :--- | :--- | | 2024 | $5,721 | | 2025 | $3,595 | | 2026 | $3,032 | | 2027 | $2,157 | | 2028 | $1,803 | | Thereafter | $13,874 | | Total | $30,182| 10. Contract Costs - Archrock capitalizes incremental costs to obtain a contract (e.g., sales commissions) and costs to fulfill a contract (e.g., freight and mobilization) if recovery is expected[368][369] - Contract costs associated with sales commissions were $2.2 million in 2023 and $3.0 million in 2022[368] - Obtainment and fulfillment costs are amortized over an estimated average contract term of 38 months[370] 11. Hosting Arrangements - Archrock has hosting arrangements for cloud applications, including ERP, mobile workforce, telematics, and inventory management tools[371] Capitalized Implementation Costs for Hosting Arrangements, net (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Hosting arrangements | $17,832 | $15,675 | | Accumulated amortization | $(5,320) | $(2,637) | | Hosting arrangements, net| $12,512 | $13,038 | - Amortization expense for these costs, recorded in SG&A, was $2.6 million in 2023, $2.0 million in 2022, and $0.3 million in 2021[373] 12. Investments in Unconsolidated Affiliates - Archrock holds a 25% equity interest in ECOTEC, a methane emissions technology company, with a fair value of $14.9 million as of December 31, 2023[375] - In November 2023, Archrock made an initial investment of $3.8 million in Ionada, a carbon capture technology company, for a 10% fully diluted ownership interest[377] 13. Accrued Liabilities Accrued Liabilities (in thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Accrued salaries and other benefits | $37,425 | $22,288 | | Accrued income and other taxes | $7,160 | $10,108 | | Accrued interest | $22,464 | $22,380 | | Other accrued liabilities | $18,332 | $22,139 | | Total Accrued liabilities | $85,381 | $76,915 | 14. Contract Liabilities - Contract liabilities were $7.0 million as of December 31, 2023, down from $8.0 million in 2022, primarily related to freight billings and milestone billings on aftermarket services[380][381] - Archrock deferred $15.4 million in revenue and recognized $16.5 million as revenue in 2023, compared to $24.6 million deferred and $21.0 million recognized in 2022[381] 15. Long-Term Debt Long-Term Debt Composition (in thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Credit Facility | $287,025 | $251,250 | | 6.25% senior notes due April 2028 (net) | $801,443 | $801,786 | | 6.875% senior notes due April 2027 (net) | $496,401 | $495,298 | | Total Long-term debt | $1,584,869| $1,548,334| - As of December 31, 2023, the Credit Facility had $4.5 million in letters of credit outstanding, with a weighted average annual interest rate of 7.7% (up from 6.9% in 2022)[383] - In May 2023, the Credit Facility was amended, extending its maturity to May 16, 2028, changing the reference rate from LIBOR to SOFR, and increasing swing line loan availability[384][385] - The Credit Facility has an aggregate borrowing commitment of $750.0 million, with potential for an additional $250.0 million, and is secured by substantially all of Archrock's personal property assets[386][387] Credit Facility Financial Covenants (as of Dec 31, 2023) | Ratio | Requirement | | :--- | :--- | | EBITDA to Interest Expense | 2.5 to 1.0 | | Senior Secured Debt to EBITDA | 3.0 to 1.0 | | Total Debt to EBITDA (1) | 5.25 to 1.0 | - Archrock has $1.3 billion in outstanding senior notes: $800.0 million of 6.25% notes due April 2028 and $500.0 million of 6.875% notes due April 2027[239][390][391][393] Maturities of Long-Term Debt (as of Dec 31, 2023, in thousands) | Year | Amount | | :--- | :--- | | 2024 | $— | | 2025 | $— | | 2026 | $— | | 2027 | $496,401 | | 2028 | $1,088,466| 16. Commitments and Contingencies - Archrock carries insurance against business risks, but is substantially self-insured for workers' compensation, employee group health claims, and property damage to offshore assets[396][397] - The company accrues for probable state and local non-income-based tax liabilities, with $3.9 million accrued as of December 31, 2023 and 2022, and $0.6 million for sales and use tax audits[398][400] - Archrock is involved in various legal actions but believes any ultimate liability will not materially adversely affect its financial position, results of operations, or cash flows[401] 17. Stockholders' Equity - In April 2023, Archrock's Board authorized a $50.0 million share repurchase program, under which 750,374 shares totaling $8.86 million were repurchased in 2023[402][403] - Under the ATM Agreement, Archrock sold 447,020 shares for $4.2 million in 2022, but no shares were sold in 2023[404] Cash Dividends Declared and Paid (in thousands, except per share amounts) | Year | Quarter | Dividends per Share | Dividends Paid | | :--- | :--- | :--- | :--- | | 2023 | Q4 | $0.155 | $24,190 | | | Q3 | $0.155 | $24,250 | | | Q2 | $0.150 | $23,504 | | | Q1 | $0.150 | $23,852 | | 2022 | Q4 | $0.145 | $22,589 | | | Q3 | $0.145 | $22,559 | | | Q2 | $0.145 | $22,494 | | | Q1 | $0.145 | $22,673 | | 2021 | Q4 | $0.145 | $22,351 | | | Q3 | $0.145 | $22,506 | | | Q2 | $0.145 | $22,331 | | | Q1 | $0.145 | $22,155 | - On January 25, 2024, a quarterly dividend of $0.165 per share ($25.9 million) was declared[406] - Accumulated other comprehensive loss, which consists of changes in the fair value of interest rate swap derivative instruments, was $0 in 2023, compared to $(98