Archrock, Inc. quarterly report, Q1 FY2016

Archrock, Inc. — Form 10-Q Summary

Reporting period: Three months ended March 31, 2016. Filed February 9, 2017 after a delay related to review and restatement matters. Archrock’s continuing business is U.S. natural-gas compression contract operations and aftermarket services; international operations and fabrication were spun off to Exterran Corporation in November 2015. Prior-period comparisons are restated and reclassified, and 2015 net income included discontinued operations.

Financial results and liquidity

• Revenue fell 16% year over year, reflecting weaker customer demand in both segments. Contract operations revenue declined 13%; average operating horsepower fell 8% to 3.408 million. Aftermarket services revenue declined 27%.
• Contract operations gross margin was $108.1 million (61% margin, versus 59%); aftermarket services gross margin was $6.7 million (18%, versus 19%). Lower operating horsepower and rates weighed on results, while lower expenses and cost initiatives supported contract margin.
• SG&A rose 6% to $34.7 million; impairment was $9.9 million, and restructuring and other charges were $8.1 million. Interest expense decreased 24% to $20.3 million.
• At March 31, working capital was $142.5 million. Long-term debt was $1.600 billion, up from $1.577 billion at year-end. Archrock had $168.5 million of availability under its revolver after letters of credit; the Partnership had $302 million available under its revolver.
• Archrock and the Partnership reported compliance with their financial covenants at March 31. The Partnership’s leverage ratio was 4.7x against a maximum of 5.95x through Q4 2017; its interest coverage was 4.2x against a 2.75x minimum.

Changes, outlook, and significant matters

• Management attributed weaker activity to depressed oil and gas prices, reduced customer capital spending, operating horsepower declines, and pricing pressure. Period-end horsepower utilization was 82%, versus 87% a year earlier.
• Management expected 2016 net capital expenditures of $110–$130 million, including $45–$65 million for growth and $55–$60 million for maintenance. It expected operating cash flow and borrowing capacity to meet liquidity needs through December 31, 2016, while noting external financing might be needed if they did not.
• The board declared a quarterly common dividend of $0.095 per share in May 2016, down from the $0.1875 paid for Q1. Future dividends depend on results, liquidity, and debt restrictions. The Partnership also approved a Q1 distribution of $0.285 per unit.
• A cost-reduction program included workforce reductions and make-ready shop closures. Management expected another $6.3 million of program charges through 2016, plus spin-off-related retention costs of $2.1 million in 2016 and $1.5 million in 2017.
• The Partnership acquired customer agreements and 19 compressor units for $18.8 million in March 2016. The purchase was funded with borrowings, an equipment exchange, and Partnership units.
• Archrock recorded a $4.3 million Q1 benefit from its Texas compressor property-tax position; $38.1 million of cumulative benefits remained disputed in litigation. An adverse outcome could require repayment, penalties, and interest and could increase future taxes.
• The 2015 comparison was restated after errors at spun-off Exterran Corporation relating to EPC project estimates and tax receivables; Archrock says these issues did not relate to ongoing operations. The errors overstated Archrock’s Q1 2015 net income by $1.1 million. Exterran disclosed an SEC investigation involving the restatement and FCPA compliance, with information also provided to the DOJ; Archrock assisted with the inquiry.
• Following the accounting issues, lenders amended Archrock’s credit facility after quarter-end, waiving potential defaults tied to prior-period information and extending delivery deadlines for certain quarterly reports to March 31, 2017. The amendments also imposed a $35 million cash-balance threshold with related borrowing and repayment provisions.
• Interest-rate swaps covered $500 million of notional debt. After swaps, $419.5 million of debt was effectively floating-rate; a 1 percentage-point rate increase was estimated to add about $4.2 million in annual interest expense.

Key investor checks

1. Review the restated 2015 statements and the filing’s delayed submission, including its cover-page “No” responses on required-report and interactive-data filing questions.
2. Track customer demand, operating horsepower, utilization, pricing, and whether cost reductions offset continuing revenue pressure.
3. Assess debt covenant headroom, refinancing and liquidity needs, and the effect of post-period credit amendments.
4. Monitor the Texas property-tax litigation and potential repayment, penalties, interest, and future tax expense.
5. Verify the status and possible costs of the Exterran-related investigations, restatement matters, and any related claims.
6. Confirm capital-spending execution and the sustainability of Archrock’s reduced dividend and Partnership distributions.