Archrock, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. Archrock provides U.S. natural-gas compression services and aftermarket parts and services. This unaudited quarterly report covers the three and six months ended June 30, 2022, compared with the same periods in 2021. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $215.8 | $195.6 | $413.0 | $391.0 |
| Gross margin | $105.8 | $106.7 | $209.8 | $215.0 |
| Net income | $16.7 | $8.8 | $18.5 | $12.9 |
| Diluted earnings per share | $0.11 | $0.06 | $0.12 | $0.08 |
| Operating cash flow | Not separately presented for quarter | $89.5 | $126.6 | |
| Capital expenditures | Not separately presented for quarter | $106.1 | $38.7 |
- Q2 revenue rose about 10%, led by aftermarket services revenue, up 56% to $49.5 million. Contract operations revenue increased 1% to $166.3 million.
- Q2 gross margin declined about 1% despite higher revenue. Contract operations gross margin fell 4% to $97.9 million, with margin percentage down to 59% from 63%; aftermarket gross margin increased 84% to $7.8 million, with margin percentage rising to 16% from 13%.
- Q2 net income nearly doubled. The increase was supported by a $16.7 million gain on the May asset disposition, stronger aftermarket gross margin, and lower depreciation and interest expense. Net income also reflects higher taxes, SG&A and impairment charges.
- For the first half, revenue increased about 6%, but gross margin decreased about 2.4%. Net income rose about 43%, reflecting asset-sale gains and lower interest and depreciation expense, partly offset by weaker contract operations margin and higher expenses and taxes.
Liquidity, debt and capital
- At June 30, 2022, cash was $2.0 million, current assets $217.0 million and current liabilities $151.5 million. Long-term debt was $1.532 billion; total liabilities were $1.727 billion.
- The $750 million revolving Credit Facility had $235.7 million drawn and $5.8 million of letters of credit outstanding. Of $508.5 million undrawn capacity, $476.6 million was available after financial-ratio requirements. Archrock reported compliance with all facility covenants.
- First-half operating cash flow was $89.5 million; investing cash outflow was $46.0 million and financing cash outflow was $43.1 million. Cash increased $0.4 million. Operating cash flow fell from $126.6 million a year earlier, while capital expenditures rose by $67.3 million.
- Archrock received $55.5 million from its May disposition, sold certain customer agreements and about 380 compressors totaling approximately 70,000 horsepower, and recorded a $16.7 million gain.
- Management projected 2022 capital expenditures of approximately $230–$235 million, including about $150 million for growth and $70–$75 million for maintenance. The filing anticipates increased spending, particularly for growth, in response to customer demand.
- The quarterly dividend was $0.145 per share; the board declared the same amount on July 28, 2022. First-half dividends paid totaled $45.2 million. Archrock also sold 447,020 shares through its at-the-market program for net proceeds of $4.2 million.
Management commentary, outlook and risks
- Management attributed contract operations cost pressure to higher supply-chain prices and increased start-up, maintenance and lube-oil costs as equipment returned to service. At quarter-end, operating horsepower utilization was 87%, versus 82% a year earlier.
- Interest-rate swaps expired in Q1 2022, leaving all Credit Facility borrowings subject to variable rates. The company estimated that a 1 percentage-point increase in the effective rate on the June 30 balance would add $2.4 million to annual interest expense.
- Archrock acquired a 14% interest in methane-monitoring company ECOTEC by June 30 for $8.0 million, and acquired another 5% on July 1, bringing ownership to 19%. The company had initially agreed to acquire a 25% interest.
- Management said operating cash flows and borrowing availability should meet future liquidity needs and reported no near-term debt maturities. Future dividends remain subject to board discretion and financial and contractual factors.
- Risks and contingencies include ordinary-course litigation, non-income-based tax audits, self-insured and uninsured losses, and the possibility that reduced future taxable income could require a valuation allowance against deferred tax assets. The filing reports no material change to previously disclosed risk factors.
- A remaining Hurricane Ida business-interruption insurance claim was still in process; any recovery will be recognized upon final settlement. The company also implemented a new ERP system in Q1 and said it would continue evaluating related control changes during 2022; management concluded disclosure controls were effective at quarter-end.
Important facts for investors to verify
- How much of Q2 earnings growth was attributable to the one-time disposition gain, and how recurring operating performance is trending.
- Whether contract operations margins recover as higher customer activity and pricing offset elevated operating costs; monitor utilization and equipment redeployment.
- Capital-spending execution against the $230–$235 million 2022 plan, and the resulting effect on operating cash flow, borrowing and dividend coverage.
- Exposure to variable interest rates after the swaps expired, available Credit Facility capacity and covenant headroom.
- Resolution and financial impact, if any, of the Hurricane Ida claim, tax matters and litigation, along with continued ERP-related control evaluation.