Archrock, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statement amounts below are generally in millions. Archrock provides U.S. natural-gas compression contract operations and aftermarket services.
Business context and material developments
- On April 26, 2018, Archrock completed its merger with Archrock Partners, issuing 57.6 million shares for the public’s 41.2 million Partnership units; the Partnership became wholly owned. The transaction was accounted for as an equity transaction, with no gain or loss recorded. Partnership senior notes remained outstanding.
- The merger increased the share count and ended the public Partnership noncontrolling interest. Archrock also terminated its $350 million revolving facility and expanded the Partnership facility to $1.25 billion.
- Archrock adopted the new revenue-recognition standard in 2018. It changed timing for some aftermarket services and deferred certain freight and mobilization costs. Reported-period comparisons are not fully comparable because prior periods were not restated.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $226.9 | $198.0 | $438.9 | $387.9 |
| Gross margin | $108.3 | $96.1 | $213.4 | $188.2 |
| Net income (loss), consolidated | $4.1 | $(4.0) | $6.2 | $(18.0) |
| Net income (loss) attributable to Archrock stockholders | $1.9 | $(6.7) | $(1.9) | $(18.4) |
| EPS attributable to common stockholders | $0.02 | $(0.10) | $(0.02) | $(0.27) |
| Operating cash flow | Not separately stated | Not separately stated | $105.2 | $101.3 |
| Capital expenditures | Not separately stated | Not separately stated | $132.2 | $99.4 |
- Q2 revenue rose 15% year over year. Contract operations revenue increased 9%, with gross margin up 10% to $97.6 million and margin percentage steady at 59%. Aftermarket revenue grew 31%; gross margin rose 46% to $10.6 million and margin percentage improved to 17% from 15%.
- For the first half, contract operations revenue increased 8% and aftermarket services revenue increased 29%. Average operating horsepower rose 7%; period-end utilization was 86%, versus 81% a year earlier.
- Q2 improvement in attributable earnings reflected higher segment gross margin and lower depreciation and restatement charges, partly offset by merger and debt-extinguishment costs. First-half attributable loss narrowed, but higher interest expense and merger costs were offsets.
- First-half operating cash flow less capital expenditures was approximately negative $27.0 million (calculated from reported figures). Cash declined to $3.5 million from $10.5 million at year-end 2017.
- Gross margin is a company-defined non-GAAP measure, not net income. EBITDA was not stated in the supplied filing text.
Debt, liquidity and capital allocation
- Long-term debt was $1.459 billion at June 30, 2018, up from $1.417 billion at December 31, 2017. It included $770.5 million outstanding on the Partnership revolving facility and $700 million face value of 6% senior notes due 2021 and 2022.
- The company reported $464.1 million of undrawn facility capacity, of which $287.6 million was available for additional borrowing after covenant limits. It was in compliance with facility covenants.
- The Partnership facility’s weighted-average rate, excluding swaps, was 5.5%. After swaps, $270.5 million of debt was effectively floating-rate; a 1 percentage-point rate increase would add approximately $2.7 million in annual interest expense.
- First-half dividends paid were $24.0 million. The board declared a quarterly dividend of $0.132 per share for August 2018, up from $0.12 per share previously.
Outlook, risks and unusual items
- Management expected higher 2018 average operating horsepower and revenue in both segments, citing stronger orders, improved market conditions and anticipated customer spending. It forecast 2018 capital expenditures of $300–$320 million, including $230–$250 million for growth and $45–$50 million for maintenance.
- Management said operating cash flow and facility borrowings should meet liquidity needs through at least June 30, 2019. This outlook depends on operating performance and continued access to credit.
- Archrock recorded $9.8 million of merger costs for the first half and a $2.5 million debt-extinguishment loss. It also recorded $11.7 million of first-half compressor-asset impairments, retiring 50,000 horsepower from the active fleet.
- Texas heavy-equipment property-tax litigation is material: Archrock had recorded $87.7 million of aggregate tax benefits since 2012, of which $66.3 million was disputed. A $9.5 million benefit was recorded in the first half of 2018. An adverse outcome could require repayment, penalties and interest, and could raise future costs.
- The SEC had investigated previously disclosed errors and possible irregularities at a former international operation. The SEC did not intend to recommend enforcement regarding FCPA compliance, and the DOJ said it would not pursue further investigation or enforcement. Other litigation and tax-audit exposures remain; management said ordinary-course legal outcomes were not expected to be material but could not provide assurance.
- Management identified industry spending and commodity-market conditions, customer finances, competition, leverage, merger synergies, operational hazards and control effectiveness among the risks. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Investor facts to verify
- Whether the merger delivers expected operating benefits and how the increased share count affects per-share results.
- Whether operating cash generation can support the planned capital program, dividends and debt service, given first-half capital spending exceeded operating cash flow.
- Current covenant headroom and borrowing availability under the Partnership facility, including the notes-related maturity provision.
- Progress and potential financial exposure in the Texas property-tax litigation, including the disputed $66.3 million of recorded benefits.
- How much reported growth and earnings reflected the new revenue-recognition rules rather than underlying business activity.
- Whether the anticipated increase in horsepower utilization and revenue materializes amid energy-market and customer-spending uncertainty.