Archrock, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This annual filing includes fourth-quarter results but is not a standalone quarterly report. Archrock provides U.S. natural gas compression services through Contract Operations and Aftermarket Services.
Financial results and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $965.5 million | $904.4 million | +6.7% |
| Gross margin (non-GAAP) | $509.2 million | $440.1 million | +15.7% |
| Net income attributable to Archrock stockholders | $97.3 million | $21.1 million | Increased |
| Operating cash flow | $290.1 million | $225.9 million | Increased |
| Capital expenditures | $385.2 million | $319.1 million | Increased |
| Long-term debt, net | $1.843 billion | $1.530 billion | Increased |
| Working capital | $93.5 million | $105.5 million | Decreased |
Contract Operations revenue rose 15% to $771.5 million and gross margin increased 19% to $474.3 million; gross margin percentage improved to 61% from 59%. Aftermarket Services revenue fell 16% to $193.9 million as customers deferred maintenance, and gross margin declined 14% to $35.0 million. Total gross margin is a non-GAAP measure.
Net income included a $50.8 million one-time benefit from releasing a deferred-tax valuation allowance, $44.7 million of long-lived asset impairment charges, and $16.0 million of net gains on asset sales. The effective tax rate was negative 67%, principally reflecting the valuation-allowance release. Fourth-quarter net income was $46.0 million and included a $39.6 million tax benefit; fourth-quarter impairment was $25.8 million.
Operating cash flow less capital expenditures was approximately negative $95.1 million. Cash and cash equivalents were $3.7 million at year-end; the company reported $669.7 million of available borrowing capacity under its revolving credit facility. Debt is presented net of discounts and financing costs; face-value contractual debt totaled approximately $1.863 billion.
Material changes and transactions
- Completed the Elite Acquisition on August 1 for $214.0 million in cash and 21.7 million shares valued at $225.9 million, acquiring a fleet of approximately 430,000 horsepower. The acquired assets contributed $33.2 million of revenue from closing through year-end.
- Sold approximately 80,000 horsepower and related assets to Harvest for $30.0 million cash, recording a $6.6 million gain.
- Issued $500 million of 6.875% notes due 2027 and $500 million of 6.25% notes due 2028; proceeds were principally used to repay revolving-credit borrowings. Repaid the $350 million 2021 Notes in April and recorded a $3.7 million extinguishment loss.
- Amended the $1.25 billion revolving facility, extending its stated maturity to November 2024, subject to earlier maturity in June 2022 if 2022 Notes remain outstanding then. Year-end debt included $513 million under the facility and $350 million of 2022 Notes.
- Year-end fleet capacity was 4.395 million horsepower, with average utilization of 88%, compared with 87% in 2018. The acquisition and other fleet additions contributed to higher capacity.
Outlook, risks and contingencies
- Management expected 2020 Contract Operations revenue to increase versus 2019 and 2018, citing the Elite fleet and continued demand. It anticipated 2020 capital spending of approximately $165–$195 million, including $80–$100 million for growth and $57–$63 million for maintenance.
- Management believed operating cash flows and facility borrowings would meet liquidity needs through at least December 31, 2020. It expected lower growth capital spending in 2020, while noting that debt and capital-market access could constrain investment.
- Key risks include integration and returns from Elite; increased customer concentration in Hilcorp after the acquisition; customer concentration in Williams Partners, which represented 8% of 2019 revenue; contract renewal and pricing risk; industry cyclicality; rising labor and equipment costs; and substantial debt, covenants and variable-rate exposure.
- JDH Capital, a Hilcorp affiliate, received 14.3% of year-end common shares and may nominate one director while its ownership with Hilcorp affiliates remains at least 7.5%. Hilcorp and affiliates generated $31.4 million of 2019 revenue.
- The company paid quarterly dividends of $0.132 per share in the first half of 2019 and $0.145 in the second half. A $0.145 quarterly dividend was declared in January 2020; future dividends remain discretionary and subject to financial and debt restrictions.
- Additional uncertainties include environmental and emissions regulation, customer credit and demand, employee retention, technology-transformation execution, litigation, tax audits and self-insured exposures. Management reported covenant compliance at year-end. The auditor issued unqualified opinions on the financial statements and internal controls; no material control weakness was reported.
Investor facts to verify
- Assess how much of 2019 earnings growth was attributable to the $50.8 million tax benefit and asset-sale gains, versus recurring operating performance.
- Track Elite integration, utilization, customer retention and actual contribution to revenue and cash flow, particularly Hilcorp concentration.
- Review debt maturities, borrowing-base availability, leverage covenant headroom, interest costs and refinancing needs, including the 2022 Notes’ effect on facility maturity.
- Compare future capital spending and dividends with operating cash generation, maintenance requirements and the company’s stated liquidity outlook.
- Monitor Aftermarket Services recovery, customer maintenance deferrals, compressor impairments and the costs and benefits of the technology transformation project.