Archrock, Inc. — 2022 Form 10-K Summary
Business context and reporting period
Archrock provides U.S. natural gas compression services and aftermarket parts and services. Its fiscal year ended December 31, 2022; this is an annual filing, not a standalone fourth-quarter report. Contract operations generated 80% of 2022 revenue and aftermarket services 20%.
Financial and operating performance
| Metric | 2022 | 2021 |
|---|---|---|
| Revenue | $845.6 million | $781.5 million |
| Net income | $44.3 million | $28.2 million |
| Diluted earnings per share | $0.28 | $0.18 |
| Gross margin (non-GAAP) | $426.1 million; 50.4% of revenue | $422.5 million; 54.1% of revenue |
| Cash from operating activities | $203.5 million | $237.4 million |
| Capital expenditures | $239.9 million | $97.9 million |
| Cash and cash equivalents at year-end | $1.6 million | $1.6 million |
| Long-term debt, carrying value | $1.548 billion | $1.531 billion |
Revenue increased 8.2% and net income increased 57%. Operating cash flow declined; after capital expenditures, cash flow was approximately negative $36.4 million, compared with positive $139.5 million in 2021. The 2022 balance sheet reported current assets of $232.0 million and current liabilities of $148.6 million.
Contract operations revenue rose 5% to $677.8 million, but segment gross margin declined 1% to $398.9 million and margin rate fell to 59% from 62%, reflecting higher operating, maintenance, start-up and lube-oil costs. Aftermarket services revenue grew 26% to $167.8 million; gross margin increased 45% to $27.2 million and margin rate improved to 16% from 14%.
Operating horsepower at year-end was 3.448 million, up from 3.247 million; spot utilization increased to 93% from 84%. Reported service availability was 99.1%.
Material changes and unusual items
- Archrock recorded $40.5 million of net gains on asset sales, including $28.1 million from sales of customer service agreements, about 770 compressors and related assets.
- It recorded $21.4 million of long-lived and other asset impairments, primarily for 145 idle compressors retired from the active fleet. No goodwill impairment was recorded in 2022; 2020 included a $99.8 million goodwill impairment.
- Growth capital expenditures rose to $146.3 million from $37.2 million; maintenance capital expenditures rose to $84.2 million from $47.3 million.
- In 2022, Archrock acquired a 22.7% interest in methane-monitoring company ECOTEC, valued at $12.8 million at year-end, and recorded a $1.9 million unrealized loss. It acquired the remaining 2.3% interest in January 2023.
Liquidity, debt, outlook and risks
Debt consisted principally of $800 million of 6.25% notes due 2028, $500 million of 6.875% notes due 2027, and $251.3 million drawn under a $750 million revolving credit facility due November 2024. Of $493.0 million in undrawn facility capacity, $487.6 million was available at year-end after covenant limitations; Archrock reported compliance with its covenants. The credit facility’s weighted-average rate was 6.9% at year-end, versus 2.6% in 2021. A 1 percentage-point increase in its effective rate would add about $2.5 million in annual interest expense.
Management said operating cash flows and facility borrowings were expected to meet future liquidity needs and noted no near-term debt maturities. For 2023, Archrock planned capital expenditures of $270 million to $295 million, including $180 million to $200 million for growth and $75 million to $80 million for maintenance. The company cited expected U.S. production growth and continuing need for compression, while cautioning that impacts would vary by region, customer and contract.
Key risks include high debt and variable-rate borrowing costs; inflation, labor and supply-chain costs; customer concentration and contracts that may be terminable on 30 days’ notice after initial terms; competition; and uncertainty around future demand for natural gas. Proposed or evolving methane, emissions and other environmental regulations could increase costs or restrict operations. The company also noted potential exposure to severe weather, litigation, customer credit deterioration and limits on future dividends. Quarterly dividends were $0.145 per share in 2022; a $0.15 quarterly dividend was declared in January 2023.
Management and the auditor concluded that internal control over financial reporting was effective as of year-end. The auditor issued an unqualified opinion on the financial statements and identified compressor retirement and impairment estimates as a critical audit matter. Archrock said ordinary-course legal matters were not expected to have a material adverse effect, while acknowledging litigation outcomes are uncertain.
Important facts for investors to verify
- Whether operating cash flow can support the planned 2023 capital spending, debt service and dividends, given 2022 capital expenditures exceeded operating cash flow.
- Available revolver capacity, covenant headroom and plans for the November 2024 facility maturity; also monitor floating-rate exposure.
- Whether higher customer demand and utilization translate into improved contract-operations margins as labor, maintenance and supply costs evolve.
- The assumptions and valuation methods behind compressor impairments and the ECOTEC investment, and whether further fleet retirements or impairments occur.
- Renewals, pricing and concentration of customer contracts, plus the eventual costs of methane and other environmental rules.