Archrock, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Archrock provides U.S. natural-gas compression services and aftermarket parts and services. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | First nine months 2023 | First nine months 2022 |
|---|---|---|---|---|
| Revenue | $253.4 | $213.7 | $730.7 | $626.7 |
| Gross margin | $141.4 | $106.1 | $394.0 | $316.0 |
| Gross margin percentage | 55.8% | 49.7% | 53.9% | 50.4% |
| Net income | $30.9 | $15.4 | $72.0 | $33.8 |
| Diluted EPS | $0.20 | $0.10 | $0.46 | $0.21 |
| Interest expense | $28.3 | $25.2 | $83.6 | $74.9 |
Gross margin is a non-GAAP measure defined by the company as revenue less cost of sales excluding depreciation and amortization. Q3 contract operations revenue was $207.6 million and aftermarket services revenue was $45.8 million. At quarter end, operating horsepower was 3.608 million and horsepower utilization was 96% (versus 3.353 million and 89% a year earlier).
For the first nine months, operating cash flow was $238.5 million; capital expenditures were $262.0 million, implying cash flow after capital expenditures of negative $23.5 million. Investing activities used $208.2 million and financing activities used $31.4 million. Cash decreased $1.1 million to $0.5 million.
At September 30, 2023, long-term debt was $1.605 billion, including $306.9 million drawn on the revolving credit facility and $1.3 billion of senior notes. Total assets were $2.672 billion and equity was $861.1 million. The $750 million facility had $4.5 million of letters of credit outstanding; the company reported all undrawn capacity available and compliance with covenants. The filing does not state a precise borrowing-availability figure.
Material changes versus the comparable period
- Q3 revenue rose 19% and net income roughly doubled year over year. Higher contract compression rates and operating horsepower, alongside increased aftermarket activity and improved pricing, lifted gross margin.
- Q3 contract operations gross margin increased 34% to $132.3 million; aftermarket gross margin increased 24% to $9.1 million. For the nine-month period, gross margin rose 25% to $394.0 million.
- Higher interest expense reflected increased rates and average debt balances. Nine-month gains on asset sales fell to $8.0 million from $33.8 million, partly offsetting operating improvement.
- Capital expenditures increased to $262.0 million from $171.0 million in the first nine months of 2022. Operating cash flow increased to $238.5 million from $166.3 million.
Outlook, risks and unusual items
- Management planned approximately $295 million of 2023 capital expenditures, including approximately $200 million for growth and $79 million for maintenance. It anticipated reducing growth capital expenditures to approximately $160 million in 2024, citing capital discipline and free-cash-flow generation after dividends.
- Management stated operating cash flows and Credit Facility borrowings should meet future liquidity needs and noted no near-term maturities. The outlook is subject to demand, market conditions and access to capital and credit markets.
- The Credit Facility was amended and restated in May 2023: maturity was extended to May 2028, subject to earlier dates in specified circumstances tied to the senior notes; the reference rate changed from LIBOR to SOFR. The company incurred $6.0 million in transaction costs and expensed $1.0 million of deferred financing costs.
- Q3 impairment charges were $2.9 million; nine-month charges were $8.4 million, primarily related to idle compression equipment. Nine-month restructuring charges were $1.6 million, chiefly severance and consulting; management said no additional charges were expected for these activities.
- A 1 percentage-point increase in the effective rate on Credit Facility borrowings would increase annual interest expense by approximately $3.1 million. The company is substantially self-insured for workers’ compensation and employee health claims and self-insures property damage to offshore assets.
- Ordinary-course litigation and tax matters remain contingencies. Management did not expect accrued non-income-tax audits to result in a material variance, but noted potential future audit resolutions could materially affect results or cash flows. No material changes to previously disclosed risk factors were reported.
- The board declared a $0.155-per-share quarterly dividend payable November 14, 2023. The $50 million repurchase authorization runs through April 27, 2024; $6.5 million had been repurchased through September 30.
Key facts for investors to verify
- Whether higher compression utilization, rates and aftermarket demand persist, and how input and maintenance costs affect margins.
- Whether planned 2023 and 2024 capital spending translates into adequate returns and cash flow after dividends.
- Debt levels, variable-rate exposure, facility availability and compliance with credit agreement terms.
- Potential cash needs from self-insured losses, litigation, tax matters and future equipment impairments.
- The sustainability of dividends and the pace of any further share repurchases.