Archrock, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Archrock provides U.S. natural-gas compression through contract operations and aftermarket services. Financial statements are unaudited.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $205.6 million | $244.9 million | $675.6 million | $719.5 million |
| Gross margin | $119.5 million (58.1%) | $131.4 million (53.6%) | $383.8 million (56.8%) | $374.6 million (52.1%) |
| Net income (loss) | $18.3 million | $20.4 million | $(73.2) million | $51.3 million |
| Diluted EPS | $0.12 | $0.14 | $(0.49) | $0.38 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $266.8 million | $223.6 million |
| Capital expenditures | Not separately provided for quarter | Not separately provided for quarter | $130.3 million | $303.5 million |
- Q3 segments: Contract operations revenue was $175.2 million, down 12%; gross margin was $114.8 million, down 6%, while margin percentage rose to 66% from 62%. Aftermarket services revenue was $30.4 million, down 35%; gross margin fell 48% to $4.7 million, with margin percentage declining to 15% from 19%.
- Balance sheet and liquidity: At September 30, cash was $1.5 million, total assets $2.87 billion, and long-term debt $1.73 billion. Credit Facility borrowings were $746 million; $491.6 million of additional borrowing capacity was available, and the company reported compliance with all covenants. Current assets were $211.7 million versus current liabilities of $136.3 million.
- Debt and interest: Archrock redeemed $350 million of 2022 Notes in April using Credit Facility borrowings and recorded a $4.0 million extinguishment loss. Nine-month interest expense was $80.7 million, up from $77.0 million. The company had $300 million of interest-rate swaps outstanding; a 1% rate increase on debt effectively exposed to variable rates would add an estimated $4.5 million annual interest expense.
Changes, unusual items, and management commentary
- Q3 revenue fell 16% year over year, reflecting weaker activity in both segments. Contract operations was affected by returned horsepower, lower rates and customer shifts to standby status; aftermarket services faced lower service and parts activity and deferred customer maintenance. Average horsepower utilization was 85%, compared with 88% a year earlier; period-end utilization was 83%, compared with 88%.
- Nine-month revenue declined 6%. Contract operations revenue edged up 1%, including the contribution from the 2019 Elite acquisition, while aftermarket services revenue declined 31%. Nine-month net loss included $99.8 million of goodwill impairment and $72.1 million of long-lived and other asset impairments; 235,000 horsepower of idle compressors were retired from the active fleet.
- Q3 results included a $12.4 million net benefit from settling a sales-and-use-tax audit, recorded primarily as reductions to cost of sales and SG&A; a $9.3 million gain on the turbocharger-business sale; and $2.9 million of restructuring charges. The nine-month period also included a $3.2 million gain on the March disposition and $7.0 million of restructuring charges.
- Management cited COVID-19, oil oversupply, customer spending cuts and lower production as significant pressures. It targeted $75–$85 million of annual operating, corporate and capital cost reductions. It expected horsepower, utilization and revenue to remain below 2019 levels through year-end 2020 and into 2021; the timing and extent of recovery remained uncertain.
- 2020 capital spending was planned at approximately $128–$140 million, including $75–$80 million for growth and $30–$33 million for maintenance. The filing states that operating cash flows and Credit Facility availability were expected to meet liquidity needs, but results depend on demand, customer spending and market conditions.
- The board declared a $0.145-per-share quarterly dividend on October 30, 2020. Future dividends remain subject to board discretion, financial condition and credit-agreement requirements.
Risks and contingencies
- The pandemic and volatile oil and gas markets may further reduce demand, revenues and cash flows, and may disrupt customers, operations, employees or supply chains. Management said the duration and magnitude of these effects could not be estimated reliably.
- Archrock warned that an ownership change under Section 382 could further limit use of tax NOLs, potentially increasing future cash taxes. It also identified uncertainty around deferred-tax-asset realizability and tax matters.
- The company reported ordinary-course litigation and tax audits. It accrued $5.7 million for non-income-based tax audit outcomes and said resolution could affect future results or cash flows. It reported no assurance that litigation or arbitration outcomes could not be material.
Important facts for investors to verify
- Whether customer activity, contract rates, horsepower utilization and aftermarket demand stabilize or deteriorate further.
- Progress and realized savings against the $75–$85 million cost-reduction target, and actual 2020 capital spending.
- Credit Facility capacity, covenant headroom, refinancing needs and the ability to sustain dividends amid low cash balances and market uncertainty.
- Assumptions underlying compressor and asset valuations, impairment charges, tax benefits and NOL availability.
- How much of Q3 profitability reflects recurring operations versus the tax settlement and asset-sale gains.