Archrock, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. Archrock is a U.S. natural gas compression company operating in contract operations and aftermarket services. This unaudited filing covers the three months ended March 31, 2023; comparisons are with Q1 2022. Unless noted otherwise, amounts below are in U.S. dollars.
Financial results and key metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $229.8 million | $197.2 million | Up 16.5% |
| Gross margin (company-defined, non-GAAP) | $116.4 million | $104.1 million | Up 11.9% |
| Gross margin as a share of revenue | 50.7% | 52.8% | Down 2.1 percentage points |
| Operating income | Not separately presented | Not separately presented | The filing text does not provide a clear value |
| Net income | $16.5 million | $1.7 million | Up from prior-year quarter |
| Diluted EPS | $0.10 | $0.01 | Up |
| Operating cash flow | $87.9 million | $76.6 million | Up |
| Capital expenditures | $84.4 million | $44.9 million | Up $39.5 million |
| Long-term debt at period end | $1,547.3 million | $1,548.3 million at Dec. 31, 2022 | Down $1.1 million |
| Cash at period end | $3.1 million | $1.6 million at Dec. 31, 2022 | Up $1.5 million |
Contract operations revenue increased 15% to $187.7 million; segment gross margin rose 9% to $108.3 million, while its margin rate declined to 58% from 61%. Aftermarket services revenue rose 25% to $42.1 million; gross margin increased 67% to $8.2 million and its margin rate improved to 19% from 15%. Average operating horsepower increased to 3.475 million from 3.257 million, and average utilization was 93% versus 84%.
Current assets were $210.6 million and current liabilities were $177.1 million at March 31, 2023. The $750 million revolving Credit Facility had $250 million outstanding and $4.1 million of letters of credit; the company stated all undrawn capacity was available and it was in compliance with covenants. The facility matures in November 2024. Fixed-rate senior notes comprise $800 million due 2028 at 6.25% and $500 million due 2027 at 6.875%.
Cash flow from operations less reported capital expenditures was approximately $3.5 million, before asset-sale proceeds and other investing activity. Investing activities used $57.7 million; financing activities used $28.7 million. The quarterly dividend paid was $0.15 per share.
Material changes and management commentary
- Management attributed higher contract operations revenue to increased operating horsepower and improved contract compression rates amid recovering market conditions, partly offset by strategic horsepower dispositions in 2022. The filing reported higher maintenance, start-up, lube oil and other operating costs, reflecting supply-chain pricing and unit redeployments.
- Aftermarket revenue growth reflected stronger parts sales and service activity as customer demand recovered.
- Net income improved mainly due to higher gross margin, increased gains on asset sales, and lower depreciation and impairment charges. Interest expense rose to $26.6 million from $25.2 million, reflecting higher average debt and interest rates after interest-rate swaps expired in Q1 2022.
- Impairment charges on idle compressors were $2.6 million, down from $7.4 million. Archrock recorded $1.0 million of restructuring charges, primarily severance and consulting costs, and expects an additional $1.5 million related to the restructuring plan.
- The company recorded $3.6 million of net gains on asset sales, including $3.3 million of gains on compression asset sales. A $2.0 million sales-tax compliance change shifted contract-operations sales tax expense from SG&A to cost of sales, affecting year-over-year expense comparisons.
Outlook, risks and contingencies
- Management projected 2023 capital expenditures of approximately $270 million to $295 million, including $180 million to $200 million for growth and $75 million to $80 million for maintenance. Higher customer demand and investment in compression equipment were cited as drivers.
- Management stated operating cash flows and Credit Facility borrowings were expected to be sufficient for future liquidity needs. No specific revenue or earnings guidance was provided in the filing text.
- A 1 percentage-point increase in the effective Credit Facility interest rate would increase annual interest expense by approximately $2.5 million, based on the March 31 outstanding balance.
- The board declared a $0.15-per-share dividend payable May 16, 2023, and authorized a share repurchase program of up to $50 million through April 27, 2024. Repurchases are discretionary and the program does not obligate the company to buy shares.
- Archrock disclosed ordinary-course litigation and tax audits; management did not expect known matters to materially affect financial position, results or cash flows, but noted litigation outcomes are uncertain. The company is substantially self-insured for workers’ compensation and employee health claims and self-insured for offshore property damage.
- The company reported no material changes to risk factors from its 2022 Form 10-K. It noted that future taxable-income estimates affect the realizability of deferred tax assets and that resolution of tax matters could differ materially from estimates.
Important facts for investors to verify
- Whether operating cash flow can sustain the planned $270 million to $295 million of 2023 capital spending, dividends and any share repurchases.
- How unit redeployment, supply-chain costs and the sales-tax classification change affect contract operations margins in subsequent quarters.
- Credit Facility renewal or refinancing plans ahead of its November 2024 maturity, and exposure to variable interest rates.
- Whether higher utilization and customer demand persist, and how much growth capital spending translates into contracted operating horsepower and cash returns.
- Developments in tax audits, litigation, self-insured claims and the remaining restructuring costs.