Archrock, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone quarterly filing; selected unaudited fourth-quarter results are also reported. Archrock provides U.S. natural-gas compression contract operations and aftermarket services.
Business context and material developments
On April 26, 2018, Archrock acquired the Partnership units it did not already own, making the Partnership wholly owned. Archrock issued 57.6 million shares for 41.2 million units at a 1.40 exchange ratio; the filing gives total implied consideration of $625.3 million. The transaction was accounted for as an equity transaction, with no merger gain or loss recognized. The Partnership credit facility was expanded and Archrock’s separate credit facility was terminated.
- Contract operations accounted for 74% of FY2018 revenue and 91% of gross margin; aftermarket services accounted for 26% of revenue and 9% of gross margin.
- At year-end, the compression fleet comprised 6,891 units and approximately 3.96 million horsepower. Average horsepower utilization rose to 87% from 82% in 2017; average operating horsepower increased 7%.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $904.4 million | $794.7 million |
| Gross margin (non-GAAP) | $440.1 million | $375.7 million |
| Income from continuing operations | $29.2 million | $18.5 million |
| Net income attributable to Archrock stockholders | $21.1 million | $19.0 million |
| Diluted EPS attributable to common stockholders | $0.19 | $0.26 |
| Cash from operating activities | $225.9 million | $201.7 million |
| Capital expenditures | $319.1 million | $221.7 million |
Revenue rose 14%, with contract operations revenue up 10% and aftermarket services up 26%. Gross margin increased 17%; contract operations gross margin percentage was 59% versus 57%, and aftermarket services was 17% versus 15%. The company reported $28.1 million of long-lived asset impairment, mostly for idle compressors retired from the active fleet. Interest expense was $93.3 million, up from $88.8 million. The 2018 income tax provision was $6.2 million, compared with a $61.1 million benefit in 2017, which included a $53.4 million provisional benefit from the Tax Cuts and Jobs Act.
Fourth-quarter 2018 revenue was $233.2 million and net income attributable to Archrock stockholders was $13.0 million, or $0.10 per diluted share. Fourth-quarter impairment was $9.8 million.
Liquidity, debt and shareholder returns
- Year-end cash was $5.6 million; working capital was $105.5 million. Long-term debt was $1.530 billion net of discounts and financing costs; face-value debt was $1.540 billion.
- The $1.25 billion Partnership revolving facility had $391.6 million available for additional borrowing at year-end. The Partnership was in compliance with its debt covenants.
- Operating cash flow less reported capital expenditures was negative $93.2 million. Dividends declared and paid totaled $0.504 per share for 2018; the fourth-quarter rate was $0.132 per share. A $0.132 quarterly dividend was declared in January 2019, but future dividends remain discretionary and subject to debt restrictions and cash availability.
- Of $1.5395 billion in face-value debt, $350 million of senior notes mature in April 2021 and $350 million in October 2022. The credit facility generally matures in March 2022, but could mature in December 2020 if the April 2021 notes remain outstanding then. Purchase commitments totaled $303.4 million.
Outlook, risks and unusual items
Management expected higher average operating horsepower and increased revenue in both businesses in 2019, citing production growth, customer orders and expected demand for compression. It planned approximately $350–$410 million of 2019 capital expenditures, including $250–$300 million for growth and $57–$63 million for maintenance, and anticipated borrowing to fund a significant portion. Management also warned of rising parts and labor costs and expected higher SG&A and technology capital spending in 2019–2020 for a two-year ERP, supply-chain and remote-monitoring transformation. It stated that operating cash flow and facility borrowings were expected to meet liquidity needs through at least December 31, 2019.
- Results are not fully comparable: Archrock adopted the new revenue standard in 2018 using the modified retrospective method, without restating comparative periods. The filing estimates the standard increased 2018 reported revenue by $9.2 million and net income attributable to Archrock stockholders by $11.0 million.
- A fourth-quarter settlement of sales and use tax audits generated an $11.3 million net benefit, reflected across several income-statement lines, and a $15.3 million tax refund receivable offset by $4.0 million of accrued liabilities.
- The SEC investigation into previously disclosed errors and irregularities at a former international operation remained ongoing. The filing says its duration, scope and outcome could not be predicted; related costs and potential regulatory or shareholder actions remain risks.
- Other key exposures include substantial leverage and variable-rate debt, customer concentration (Williams Partners was 11% of 2018 revenue), customer financial health, contract renewals and pricing, competition, labor availability, environmental regulation, and possible impairment of idle equipment. A 1% increase in rates on debt effectively subject to variable rates was estimated to increase annual interest expense by $3.4 million.
- The company reported effective disclosure controls and internal control over financial reporting at year-end; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of revenue and earnings growth reflects underlying activity versus the accounting effects of the 2018 revenue-standard adoption and the tax-audit settlement.
- Whether 2019 capex, operating cash generation and borrowing needs meet management’s outlook, and how leverage and covenant headroom evolve.
- The timing and refinancing implications of the April 2021 notes and the credit facility’s conditional December 2020 maturity.
- Whether utilization, pricing and margins continue to improve, and whether the planned technology transformation delivers expected cost savings without material disruption.
- Developments in the SEC investigation and any related costs, claims or proceedings, as well as the sustainability of dividends and the valuation of deferred tax assets.