Archrock, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Archrock provides U.S. natural-gas compression services and aftermarket parts and services. Financial amounts below are in millions unless stated otherwise.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $220.3 | $238.4 | $470.0 | $474.5 |
| Gross margin | $128.2 | $125.7 | $264.3 | $243.2 |
| Net income (loss) | $(30.4) | $11.4 | $(91.6) | $30.9 |
| Net income (loss) per share | $(0.20) | $0.09 | $(0.61) | $0.24 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $167.1 | $148.7 |
- Q2 revenue fell 8% year over year, primarily due to aftermarket services. Contract operations revenue rose 1% to $187.9 million; aftermarket revenue declined 38% to $32.4 million.
- Q2 gross margin increased 2% to $128.2 million, but segment performance diverged: contract operations margin rose 8% to $124.6 million (66% margin), while aftermarket margin fell 63% to $3.7 million (11% margin).
- Six-month revenue was nearly flat. Contract operations revenue increased 7% to $394.9 million, offset by a 29% decline in aftermarket revenue to $75.1 million. Total gross margin increased 9%.
- Q2 net loss primarily reflected $55.2 million of long-lived asset impairment, higher depreciation and amortization, $2.4 million of restructuring charges, and weaker aftermarket margin. The six-month loss also included a $99.8 million goodwill impairment.
- Six-month operating cash flow was $167.1 million; investing cash outflow was $82.7 million and financing cash outflow was $85.9 million. Capital expenditures were $113.3 million, versus $235.0 million in the prior-year period. Cash declined by $1.5 million to $2.2 million.
- At June 30, total debt was $1.808 billion, versus $1.843 billion at year-end 2019. The $1.25 billion revolving Credit Facility had $823.0 million borrowed, $12.4 million of letters of credit outstanding, and $414.6 million available. Archrock reported compliance with all facility covenants.
- Current assets were $208.9 million and current liabilities were $120.1 million. Stockholders’ equity was $950.9 million.
Material changes and unusual items
- Compared with Q2 2019, operating horsepower at quarter-end was broadly stable at 3.613 million, but average utilization declined to 86% from 88%. Management cited customer returns of horsepower, standby status, and rate concessions amid the downturn.
- Archrock redeemed its $350 million 2022 Notes on April 1 using Credit Facility borrowings and recorded a $4.0 million extinguishment loss. The redemption shifted debt toward the revolving facility.
- In Q2, Archrock impaired 184,000 horsepower of idle compressors, recording $55.2 million of impairment. For the first half, impairments covered 207,000 horsepower and totaled $61.4 million. The separate first-quarter goodwill impairment was $99.8 million.
- The March 2020 disposition of customer service agreements, approximately 200 compressors representing about 35,000 horsepower, and related assets generated $24.2 million in proceeds and a $3.2 million gain.
- After quarter-end, Archrock sold its turbocharger business on July 9 and expected to recognize an approximately $9.0 million gain in Q3.
Outlook, risks and contingencies
- Management said COVID-19, oil oversupply, customer spending cuts, and lower production materially affected revenue, cash flows, and market capitalization. It expected horsepower, utilization, and revenue to remain below 2019 levels through 2020; the timing and strength of recovery remained uncertain.
- Archrock implemented a plan to reduce annual operating, corporate, and capital costs by $75 million to $85 million. Planned 2020 capital spending was approximately $130 million to $155 million, including $70 million to $85 million for growth and $37 million to $43 million for maintenance.
- Management believed operating cash flow and Credit Facility availability would be sufficient for near-term needs and reported no near-term debt maturities. It declared a $0.145-per-share quarterly dividend after quarter-end; future dividends remain at the board’s discretion.
- Remaining contract-operations performance obligations were $416.8 million, scheduled for recognition through 2025. This is contracted revenue, not a guarantee of collection or profitability.
- Risks include continued pandemic and commodity-market disruption, reduced customer demand, possible customer shutdowns and supply-chain or operational interruptions, and limits on use of net operating losses following a potential ownership change. Management also warned that reduced future taxable-income expectations could require a valuation allowance against deferred tax assets.
- Restructuring costs related to pandemic response were not yet estimable. Litigation was described as ordinary-course, with outcomes uncertain; the company stated it did not expect currently pending matters to materially affect its financial position, results, or cash flows. Performance bonds had maximum potential payments of $2.2 million.
Important facts for investors to verify
- Whether customer activity, utilization, rates, and aftermarket demand stabilized or deteriorated after June 30, and whether forecast cost reductions were achieved.
- How much of the $414.6 million facility availability remains accessible under the credit agreement as operating results evolve, and the implications of higher revolver borrowings after the notes redemption.
- Whether compressor impairments, idle fleet levels, and goodwill-related assumptions indicate further asset write-down risk.
- Whether planned capital spending and the $0.145 quarterly dividend remain sustainable given cash flow, debt, and customer conditions.
- The realized proceeds and gain from the July turbocharger-business sale, and any impact on continuing aftermarket revenue and margins.