Archrock, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Archrock provides U.S. natural-gas compression services through contract operations and sells parts and maintenance services through its aftermarket business. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $213.7 | $195.2 | $626.7 | $586.2 |
| Gross margin (revenue less cost of sales, excluding D&A) | $106.1 | $103.2 | $316.0 | $318.3 |
| Net income | $15.4 | $9.3 | $33.8 | $22.2 |
| Diluted EPS | $0.10 | $0.06 | $0.21 | $0.14 |
| Operating cash flow | Not presented by quarter | $166.3 | $208.7 | |
| Capital expenditures | Not presented by quarter | $171.0 | $70.9 |
- Q3 revenue rose 9.5% year over year; nine-month revenue increased 6.9%. Aftermarket services grew faster than contract operations in both comparisons.
- Q3 gross margin increased 2.8% in dollars, but its share of revenue declined to about 49.7% from 52.9%. Nine-month gross margin fell about 0.7% despite higher revenue, reflecting cost pressure in contract operations.
- Q3 net income increased 65%; nine-month net income rose 52%. Lower depreciation and amortization and, year to date, lower interest expense contributed; asset-sale gains also supported results.
- Nine-month operating cash flow declined $42.4 million. Capital expenditures exceeded operating cash flow by approximately $4.7 million, before disposition proceeds and other investing activity.
Balance sheet, debt and liquidity
- At September 30, 2022, cash was $2.0 million, long-term debt was $1,498.9 million, and total stockholders’ equity was $869.8 million. Current assets were $220.3 million versus current liabilities of $194.3 million.
- The $750 million asset-based revolver matures in November 2024. Of $542.2 million undrawn capacity, $486.4 million was available for additional borrowing after financial-ratio requirements; $5.8 million of letters of credit was outstanding. The company reported compliance with covenants.
- Credit Facility borrowings carried a 5.5% weighted-average annual rate at quarter-end, excluding swaps. All swaps expired in Q1 2022; a 1 percentage-point increase in the facility rate would raise annual interest expense by approximately $2.0 million.
- Management said operating cash flow and revolver availability should be sufficient for future liquidity needs and noted no near-term debt maturities.
Material changes, outlook and risks
- Operating horsepower utilization improved: average utilization was 88% in Q3 versus 82% a year earlier; period-end spot utilization was 89% versus 82%. Period-end operating horsepower was 3.353 million, while available horsepower was 3.747 million.
- Higher rates, operating horsepower and customer demand supported contract operations revenue. Start-up, maintenance, lube-oil and other costs rose with supply-chain pricing and redeployment activity. Aftermarket revenue and gross margin benefited from stronger parts and service demand.
- Archrock sold contract-service agreements and associated assets in May and September, including approximately 170,000 horsepower in total, for $99.8 million cash consideration and $28.2 million of gains. The nine-month statements also report $33.8 million of net gains on asset sales, including other asset sales.
- 2022 capital-spending plan: approximately $230–$235 million, including about $150 million for growth and $70–$75 million for maintenance. The filing attributes higher planned spending, especially growth investment, to stronger customer demand.
- Archrock acquired a 19% interest in methane-monitoring company ECOTEC for $12 million by September 30; an October 3 subsequent purchase raised ownership to 23%.
- Risks include variable-rate debt exposure, cost inflation, capital-intensive operations, potential uninsured losses, tax audits and uncertain litigation outcomes. The company reported no material changes to previously disclosed risk factors. It also cautioned that forward-looking statements are subject to risks and actual results may differ.
- The board declared a $0.145-per-share quarterly dividend for payment in November 2022. Future dividends remain subject to board discretion and financial and credit-agreement considerations.
- Management concluded disclosure controls were effective. A new ERP system was implemented in Q1 2022; management said control changes would continue to be evaluated. No material quarterly change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether utilization gains and customer demand can offset inflation in operating costs and maintain contract-operations margins.
- Actual 2022 capital expenditures versus the $230–$235 million plan, and the resulting funding needs after operating cash flow and asset-sale proceeds.
- Revolver availability, covenant headroom and interest-rate exposure as debt carries variable rates without active swaps.
- The durability and recurring contribution of earnings excluding disposition gains and impairment charges.
- ECOTEC’s subsequent ownership increase, valuation and any future investment commitments; and the status of tax matters, litigation and insurance exposures.