Archrock, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also provides unaudited fourth-quarter results. Archrock completed the November 3, 2015 spin-off of its international contract operations, international aftermarket services and global fabrication businesses into Exterran Corporation; those businesses are presented as discontinued operations for all periods. The company retained its U.S. compression and aftermarket businesses and its controlling interest in Archrock Partners, L.P. (the Partnership).
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $998.1 million | $959.2 million |
| Gross margin (non-GAAP) | $503.1 million; 50.4% of revenue | $454.8 million; 47.4% of revenue |
| Continuing operations result | Net loss of $159.4 million | Net loss of $17.1 million |
| Net income (loss) attributable to Archrock stockholders, including discontinued operations | $(105.8) million; $(1.55) per share | $98.2 million; $1.47 per share |
| Adjusted EBITDA (non-GAAP) | $373.2 million | $330.1 million |
| Cash from continuing operating activities | $322.5 million | $216.0 million |
| Capital expenditures | $256.1 million | $383.8 million |
| Cash and working capital at year-end | $1.6 million; $150.2 million | $0.4 million; $575.7 million |
| Long-term debt at year-end | $1.588 billion carrying amount | $2.026 billion carrying amount |
Contract operations generated $781.2 million of revenue and $461.8 million of gross margin in 2015; aftermarket services generated $216.9 million and $41.3 million, respectively. Contract operations gross margin was 59% of segment revenue, versus 57% in 2014; aftermarket margin was 19%, versus 18%. Contract operations accounted for about 92% of total gross margin.
Average operating horsepower rose 8% to 3.62 million, reflecting the prior-year MidCon acquisitions; year-end operating horsepower nevertheless declined to 3.493 million from 3.700 million in 2014. Year-end utilization was 87%, versus 88%.
In Q4 2015, revenue was $241.3 million, gross profit as defined in the quarterly table was $(21.5) million, and net loss attributable to Archrock stockholders was $130.3 million, or $1.91 per share. The quarter included $87.4 million of long-lived asset impairments, $3.7 million of goodwill impairment and the effects of the year’s substantial tax charges.
Changes, unusual items and management commentary
- Revenue grew 4% year over year and adjusted EBITDA rose 13%, but the company reported a sharply larger continuing-operations loss. The loss reflected, among other items, $125.0 million of long-lived asset impairment, a $3.7 million goodwill impairment, $9.2 million of debt-extinguishment costs, higher depreciation and amortization, and higher income tax expense.
- Archrock impaired approximately 900 idle compressor units representing 371,000 horsepower, recording $111.7 million of impairment, plus $13.3 million related to previously culled units. It retired those units from the active fleet. The full remaining goodwill balance of $3.7 million was also impaired; the filing said the goodwill analysis was not yet finalized and anticipated completion in Q1 2016.
- The spin-off materially changed the company’s size, asset base, geographic reach and financial statements. Exterran transferred $532.6 million of net borrowing proceeds to Archrock at separation. Archrock replaced its former credit facility, established a $350 million revolver, and redeemed its $350 million 7.25% notes in December for $369.2 million, financed with revolver borrowings.
- FY2015 income tax provision was $53.2 million despite a pretax loss. The company wrote off $48.2 million of foreign tax credits and established a $37.8 million valuation allowance on other foreign credits allocated to Exterran, citing an $86.0 million tax-provision impact; MD&A also identifies tax expense related to state NOLs.
- Operating cash flow from continuing operations improved to $322.5 million. The company ended the year with $1.6 million cash and $173.5 million of available capacity under its own revolver after letters of credit. The Partnership separately had $319.5 million of revolver availability. Consolidated debt includes Partnership borrowings, for which Archrock states it has no direct obligation to pay interest or principal.
Outlook, risks and contingencies
- Management expected lower demand in 2016 than in 2015, continued operating-horsepower declines and potential pricing pressure, as customers reduced spending and shut in uneconomic wells. Archrock expected to invest less in new fleet units.
- 2016 net capital expenditure guidance was approximately $120 million–$130 million, net of used-fleet sales: $30 million–$50 million for growth and $70 million–$75 million for maintenance. The company said operating cash flow and revolver borrowings were expected to meet liquidity needs through December 31, 2016, but could seek external financing if needed.
- Archrock announced a cost-reduction program in January 2016. Management cautioned that savings were uncertain and might not offset revenue declines. The board declared and paid a $0.1875-per-share Q4 dividend in February 2016; future dividends were not assured and depend on cash generation, Partnership distributions, debt terms and other factors.
- Archrock depends heavily on distributions from the Partnership. At year-end, Archrock’s debt covenants were in compliance; its reported debt/EBITDA ratio was 1.3x against a 4.25x limit. The Partnership reported 4.5x debt/EBITDA against a temporary 5.5x limit through year-end; the limit reverted to 5.25x beginning Q1 2016.
- Williams Partners represented approximately 12% of 2015 revenue. The filing warned of renewal and customer-credit risk related to its service agreements, particularly in light of the announced Williams Parent merger.
- Texas ad valorem tax litigation challenges Archrock’s compressor appraisal methodology and tax situs. The company had recorded $44.0 million of cumulative tax benefits through 2015; $33.8 million was disputed. An adverse outcome could require repayment, penalties and interest, and could raise future tax expense.
- Exterran was due to receive approximately $79.3 million of remaining PDVSA Gas installments through Q3 2016, with corresponding amounts intended for Archrock under the separation agreement. PDVSA was in arrears as of the filing’s stated date. Archrock also had a right to a $25 million payment following a qualifying Exterran capital raise.
- Other material risks include commodity-price and customer-credit exposure, short and often cancellable service-contract terms, floating-rate debt, reliance on Exterran for newly fabricated compression equipment, environmental and emissions regulation, spin-off tax treatment, and contingent tax liabilities allocated between the companies.
Most important facts for investors to verify
- Whether 2016 horsepower, utilization, pricing and customer activity followed management’s expected declines, and whether the cost program delivered measurable savings.
- Cash generation, liquidity and covenant headroom at both Archrock and the Partnership, including the Partnership’s ability to sustain distributions that support Archrock’s dividend and debt service.
- Dividend declarations and payments after the February 2016 payment, and whether the $120 million–$130 million net capital expenditure plan was maintained.
- Developments in the $33.8 million disputed Texas tax benefits, including potential repayment exposure, penalties and future tax expense.
- Collection of remaining PDVSA proceeds, corresponding transfers from Exterran, and satisfaction of the conditions for the potential $25 million payment.
- Williams Partners contract renewals and payment performance, and the impact of its concentration in Archrock revenue.
- Completion of the goodwill impairment analysis and any resulting adjustment; also distinguish reported GAAP results from non-GAAP gross margin and adjusted EBITDA.