Archrock, Inc. quarterly report, Q2 FY2023

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Archrock, Inc. — Q2 2023 Form 10-Q

Reporting period: Three and six months ended June 30, 2023. Archrock provides U.S. midstream natural-gas compression through contract operations and aftermarket services.

Financial and operating performance

  • Q2 revenue: $247.5 million, up 14.7% year over year. Contract operations revenue rose 21% to $201.1 million; aftermarket services revenue fell 6% to $46.4 million.
  • Q2 earnings: Net income was $24.7 million, versus $16.7 million; diluted EPS was $0.16, versus $0.11. Gross margin, a company-defined non-GAAP measure, was $136.2 million (55% of revenue), versus $105.8 million (49%).
  • First-half results: Revenue was $477.4 million, up 16%; net income was $41.1 million, versus $18.5 million. Gross margin was $252.6 million, versus $209.8 million.
  • Segment trends: Q2 contract operations gross margin increased 28% to $125.1 million, with margin percentage at 62% versus 59%. Aftermarket gross margin increased 42% to $11.1 million, with margin percentage at 24% versus 16%. For the first half, segment gross margin rose 18% in contract operations and 51% in aftermarket services.
  • Utilization: Period-end operating horsepower was 3.578 million, up from 3.322 million; average utilization was 95%, versus 86% in Q2 2022. Available horsepower was 3.770 million, versus 3.810 million.
  • Cash flow and investment: First-half operating cash flow was $118.4 million, versus $89.5 million. Capital expenditures were $187.5 million, versus $106.1 million. Cash ended at $1.2 million, down from $1.6 million at year-end 2022.
  • Debt and liquidity: Long-term debt was $1.639 billion, up from $1.548 billion at year-end. This included $341.8 million drawn on the $750 million asset-based revolving facility and $1.3 billion carrying value of senior notes. The facility matures May 2028, subject to earlier springing maturities tied to the 2027 and 2028 notes. All undrawn capacity was available and covenants were met at quarter-end; the filing does not state a specific available borrowing amount.
  • Other metrics: Q2 interest expense increased to $28.6 million from $24.5 million. The company paid $47.4 million of dividends in the first half and repurchased $2.1 million of stock under a new $50 million authorization.

Material changes and notable items

  • Revenue and earnings growth reflected higher compression rates and operating horsepower, along with stronger first-half aftermarket demand. Q2 aftermarket revenue declined against a prior-year period of strong market recovery.
  • Interest expense increased with higher rates, higher average debt and a $1.0 million write-off of deferred financing costs. The May 2023 credit agreement amendment extended facility maturity, replaced LIBOR with SOFR and increased swing-line capacity.
  • First-half asset impairment was $5.5 million, down from $12.1 million a year earlier. Gains on asset sales were also lower: $4.8 million in the first half versus $21.1 million.
  • Q2 results included a $1.7 million unrealized loss on the ECOTEC investment; first-half unrealized loss was $2.0 million. Restructuring charges were $1.0 million for the first half; management expected an additional $0.3 million.
  • The company changed sales-tax compliance accounting, moving costs associated with contract operations from SG&A to cost of sales. The reclassification affected reported segment costs and margins; management quantified the 2023 cost-of-sales impact at $2.2 million for Q2 and $4.2 million for the first half.

Outlook, risks and contingencies

  • Management projected approximately $295 million of 2023 capital expenditures, including about $200 million for growth and $79 million for maintenance. It anticipated approximately $160 million of growth capital expenditures in 2024, about 20% below 2023.
  • Management said operating cash flow and facility borrowings should be sufficient for future liquidity needs and noted no near-term debt maturities. It cautioned that results depend on customer demand, energy-sector spending, financial-market conditions and other factors.
  • A 1 percentage-point increase in the effective rate on the facility balance at June 30 would add approximately $3.4 million to annual interest expense. The weighted-average rate on facility borrowings, excluding swaps, was 7.7%.
  • Risks include uninsured or self-insured losses, tax audits and litigation. The company accrued $4.0 million for non-income-based tax audits and said litigation outcomes are uncertain, though it did not expect ultimate liability to be materially adverse. No material changes to previously disclosed risk factors were reported.
  • The board declared a post-quarter dividend of $0.155 per share, payable August 15, 2023. Future dividends remain at the board’s discretion.

Important facts for investors to verify

  • Whether high compression utilization and customer demand translate into continued growth in operating horsepower, rates and margins.
  • Whether projected 2023 and 2024 growth spending produces expected returns, and how capital expenditures affect debt and cash flow.
  • Facility borrowing availability under its asset-based borrowing limits, debt covenant headroom and exposure to higher variable rates.
  • The persistence of aftermarket demand and gross-margin improvement, considering Q2 revenue softness and period-to-period service and parts mix.
  • Potential changes in asset-sale proceeds, impairment assumptions, tax exposures and litigation outcomes; confirm the declared dividend and repurchase activity against subsequent disclosures.