Archrock, Inc. — Q1 2024 Form 10-Q
Business and period. Archrock provides U.S. midstream natural gas compression and related aftermarket services. This unaudited filing covers the three months ended March 31, 2024; comparisons are with Q1 2023 unless otherwise stated.
Financial and operating performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $268.5 million | $229.8 million |
| Gross margin (revenue less cost of sales, excluding D&A) | $155.7 million; 58.0% of revenue | $116.4 million; 50.7% |
| Operating income | Filing does not present this subtotal | Filing does not present this subtotal |
| Income before tax | $53.6 million | $22.6 million |
| Net income / diluted EPS | $40.5 million / $0.26 | $16.5 million / $0.10 |
| Cash from operations | $137.7 million | $87.9 million |
| Capital expenditures | $99.8 million | $84.4 million |
| Cash from operations less capital expenditures | $37.9 million | $3.5 million |
Contract operations revenue rose 19% to $223.1 million and gross margin rose 34% to $145.3 million; its gross margin percentage increased to 65% from 58%. Aftermarket services revenue increased 8% to $45.4 million and gross margin increased 28% to $10.4 million; its margin percentage rose to 23% from 19%.
Average operating horsepower was 3.606 million versus 3.475 million; average utilization was 96% versus 93%. Period-end operating horsepower was 3.593 million, with 95% spot utilization.
Balance sheet and liquidity at March 31, 2024: cash was $1.2 million; total assets were $2.663 billion; long-term debt was $1.567 billion, versus $1.585 billion at year-end 2023. Current assets were $193.7 million and current liabilities $153.2 million. The $750 million revolving credit facility had $268.5 million drawn and $3.8 million of letters of credit; all undrawn capacity was available, and the company reported covenant compliance. The weighted-average rate on facility borrowings was 7.8%. Senior notes comprise $500 million at 6.875% due 2027 and $800 million at 6.25% due 2028.
Interest expense was $27.3 million, up from $26.6 million. A 1 percentage-point increase in the effective rate on the facility balance outstanding at quarter-end would increase annual interest expense by an estimated $2.7 million. The company paid $26.0 million of dividends in the quarter, or $0.165 per share.
Changes, outlook, and management commentary
- Revenue increased 17% and net income more than doubled. Management attributed improvement mainly to higher contract-operations rates and average horsepower, lower startup costs and fewer unit stops, and stronger aftermarket service activity. Higher gross margin drove earnings growth, partly offset by higher SG&A, depreciation and interest expense and lower gains on asset sales.
- SG&A rose to $31.7 million from $26.4 million, including higher long-term incentive compensation. Depreciation and amortization increased to $42.8 million from $40.2 million. Impairment charges were approximately $2.6 million in both periods; no restructuring charge was recorded in Q1 2024, compared with $1.0 million in Q1 2023.
- Management expects 2024 capital expenditures of approximately $290–$300 million, including approximately $190 million for growth and $80–$85 million for maintenance. It expects lower total capital spending than in 2023 and says this supports free cash flow after dividends. The stated growth and maintenance ranges total $270–$275 million, leaving a difference from the total estimate that the filing does not explain.
- Remaining contract-operations performance obligations were $569.7 million, scheduled for recognition through 2029. Management said operating cash flows and credit-facility borrowings should be sufficient for future liquidity needs and noted no near-term debt maturities.
- The board extended the $50 million share repurchase authorization for 24 months and replenished available capacity to $50 million. A quarterly dividend of $0.165 per share was declared for payment in May 2024.
Risks, contingencies, and unusual items
The filing identifies risks including substantial debt and interest-rate exposure, customer financial health and concentration, contract renewals, access to capital, equipment and supplier constraints, operational and safety hazards, cybersecurity, and legal, tax, environmental and regulatory matters. Management reported no material changes to the risk factors in its 2023 Form 10-K.
Archrock is involved in ordinary-course legal matters; it believes resulting liabilities are not expected to have a material adverse effect, but cannot assure outcomes. It is substantially self-insured for workers’ compensation and employee health claims and self-insured for offshore property damage. Accrued non-income-based tax audit matters were $4.1 million; management did not expect resolution to materially differ from accruals, while noting future audit outcomes could affect results or cash flows. The company also reported $3.3 million of unrecognized tax benefits that could be reduced within 12 months, though ultimate resolution may differ materially.
Other notable items include $2.6 million of impairment on 25 idle compressors (14,000 horsepower) and a 24% effective tax rate, compared with 27% in Q1 2023. Management said deferred tax asset realizability could be affected if sustained profitability weakens. It reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification points
- Reconcile the 2024 capital-expenditure total guidance of $290–$300 million with the disclosed growth and maintenance ranges, which do not sum to that total.
- Confirm current revolver availability, borrowing terms, covenant headroom and sensitivity to variable rates; the company has only $1.2 million of cash.
- Assess whether record-high utilization and contracted horsepower can be sustained, and whether the increased capital program will generate returns above the cost of capital.
- Track dividend and repurchase spending against cash generation, debt reduction and planned capital expenditures.
- Monitor tax-audit and litigation developments, self-insured exposures, and valuation assumptions for investments and impaired idle compressors.