Archrock, Inc. — Q1 2022 Form 10-Q
Period: Three months ended March 31, 2022; unaudited. Archrock provides U.S. natural gas compression through contract operations and aftermarket services.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $197.2 million | $195.4 million | +0.9% |
| Gross margin | $104.1 million (52.8%) | $108.3 million (55.4%) | −3.9%; margin −2.6 percentage points |
| Net income | $1.7 million | $4.2 million | −58.7% |
| Diluted earnings per share | $0.01 | $0.03 | Down |
| Cash from operations | $76.6 million | $77.6 million | −1.3% |
| Capital expenditures | $44.9 million | $11.5 million | +$33.3 million |
| Cash and cash equivalents | $1.3 million | $1.6 million at Dec. 31, 2021 | Down $0.3 million |
| Long-term debt | $1,517.0 million | $1,530.8 million at Dec. 31, 2021 | Down $13.8 million |
Contract operations revenue declined 1% to $163.7 million and gross margin fell 5% to $99.2 million; segment margin was 61%, versus 63%. Aftermarket services revenue rose 14% to $33.5 million and gross margin increased 36% to $4.9 million; segment margin was 15%, versus 12%. Total operating horsepower was 3.275 million, compared with 3.329 million a year earlier; average horsepower utilization improved to 84% from 82%.
Liquidity, debt and cash flow
Operating cash flow was broadly stable. Cash used in investing was $36.7 million, compared with $16.5 million of cash provided in Q1 2021, mainly reflecting higher capital spending and lower asset-sale proceeds. Cash used in financing was $40.2 million, versus $93.2 million, including $22.7 million of dividends paid in Q1 2022. Cash declined by $0.3 million during the quarter.
Debt comprised $220.5 million outstanding under the $750 million revolving Credit Facility, $800 million principal of 2028 Notes and $500 million principal of 2027 Notes. Of $524.0 million of undrawn facility capacity, $435.2 million was available after financial-ratio requirements; $5.5 million of letters of credit was outstanding. Archrock reported compliance with all facility covenants. The filing says it has no near-term debt maturities and expects operating cash flow and facility borrowings to meet liquidity needs.
The $300 million notional interest-rate swaps expired in March 2022, leaving Credit Facility borrowings exposed to variable rates. A 1 percentage-point rate increase on the quarter-end facility balance would increase annual interest expense by an estimated $2.2 million. The quarterly dividend was $0.145 per share; the Board declared the same amount for payment in May 2022.
Changes, outlook and notable items
- Management attributed lower contract operations revenue primarily to the 2021 disposition of 147,000 horsepower, partly offset by higher rates and equipment returning to service. Higher lube-oil costs, commodity pricing and redeployment costs pressured contract operations margin.
- Aftermarket growth reflected stronger parts demand amid a market recovery. Consolidated net income declined mainly because of weaker contract operations gross margin, lower asset-sale gains and other income, and higher SG&A. Lower interest expense, depreciation and taxes partly offset those pressures.
- Archrock recorded $7.4 million of long-lived asset impairment, chiefly for 45 idle compressors totaling 31,000 horsepower. The comparable 2021 impairment was $7.1 million. Asset-sale gains were $2.1 million, versus $11.0 million in Q1 2021, which included a $6.0 million gain on the February 2021 disposition.
- Management projected 2022 capital expenditures of $213 million to $235 million, including approximately $150 million for growth and $55 million to $75 million for maintenance, citing increased customer demand for compression equipment.
- After quarter-end, Archrock completed a May 6 sale of customer agreements and approximately 70,000 horsepower of compressors for $55.5 million cash; it expects to recognize an approximately $17 million gain in Q2 2022. On April 21, it agreed to acquire a 25% equity interest in methane-monitoring company ECOTEC; the purchase price was not stated in the provided filing text.
- Hurricane Ida insurance proceeds of $2.8 million were received in Q1 2022; a separate business-interruption claim remained in process. The filing describes ordinary-course litigation and tax matters, without expecting material effects, while noting outcomes are uncertain. No material risk-factor changes from the 2021 Form 10-K were reported.
- A new ERP system was implemented during the quarter. Management said disclosure controls were effective, while noting it would continue evaluating control changes associated with the system during 2022.
Investor verification points
- Track whether growth in aftermarket demand and improved utilization offset contract operations margin pressure and higher operating costs.
- Verify capital spending against the $213 million–$235 million plan and assess resulting cash generation and facility usage.
- Monitor variable-rate exposure following swap expiration, debt reduction, and the amount of borrowing capacity actually available under facility covenants.
- Confirm completion accounting and proceeds from the May disposition, and obtain the ECOTEC investment price and terms when disclosed.
- Follow the remaining Hurricane Ida business-interruption claim, tax exposures, and ERP-related control assessments.