Archrock, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2016. Filed February 9, 2017 after a delay related to review and restatement matters. Archrock’s continuing business is U.S. natural-gas compression contract operations and aftermarket services; international operations and fabrication were spun off to Exterran Corporation in November 2015. Prior-period comparisons are restated and reclassified, and 2015 net income included discontinued operations.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $213.3 million | $252.9 million |
| Gross margin | $114.8 million; 53.8% of revenue | $129.4 million; 51.2% of revenue |
| Loss from continuing operations | $6.7 million | $6.2 million income |
| Net income (loss) attributable to Archrock stockholders | ($1.8 million), or ($0.03) per share | $31.0 million, or $0.45 per share |
| Cash from operating activities | $71.2 million total; $71.4 million from continuing operations | $134.6 million total; $105.2 million from continuing operations |
| Capital expenditures | $50.6 million | $90.3 million |
| Cash and cash equivalents at period end | $4.8 million | — |
- Revenue fell 16% year over year, reflecting weaker customer demand in both segments. Contract operations revenue declined 13%; average operating horsepower fell 8% to 3.408 million. Aftermarket services revenue declined 27%.
- Contract operations gross margin was $108.1 million (61% margin, versus 59%); aftermarket services gross margin was $6.7 million (18%, versus 19%). Lower operating horsepower and rates weighed on results, while lower expenses and cost initiatives supported contract margin.
- SG&A rose 6% to $34.7 million; impairment was $9.9 million, and restructuring and other charges were $8.1 million. Interest expense decreased 24% to $20.3 million.
- At March 31, working capital was $142.5 million. Long-term debt was $1.600 billion, up from $1.577 billion at year-end. Archrock had $168.5 million of availability under its revolver after letters of credit; the Partnership had $302 million available under its revolver.
- Archrock and the Partnership reported compliance with their financial covenants at March 31. The Partnership’s leverage ratio was 4.7x against a maximum of 5.95x through Q4 2017; its interest coverage was 4.2x against a 2.75x minimum.
Changes, outlook, and significant matters
- Management attributed weaker activity to depressed oil and gas prices, reduced customer capital spending, operating horsepower declines, and pricing pressure. Period-end horsepower utilization was 82%, versus 87% a year earlier.
- Management expected 2016 net capital expenditures of $110–$130 million, including $45–$65 million for growth and $55–$60 million for maintenance. It expected operating cash flow and borrowing capacity to meet liquidity needs through December 31, 2016, while noting external financing might be needed if they did not.
- The board declared a quarterly common dividend of $0.095 per share in May 2016, down from the $0.1875 paid for Q1. Future dividends depend on results, liquidity, and debt restrictions. The Partnership also approved a Q1 distribution of $0.285 per unit.
- A cost-reduction program included workforce reductions and make-ready shop closures. Management expected another $6.3 million of program charges through 2016, plus spin-off-related retention costs of $2.1 million in 2016 and $1.5 million in 2017.
- The Partnership acquired customer agreements and 19 compressor units for $18.8 million in March 2016. The purchase was funded with borrowings, an equipment exchange, and Partnership units.
- Archrock recorded a $4.3 million Q1 benefit from its Texas compressor property-tax position; $38.1 million of cumulative benefits remained disputed in litigation. An adverse outcome could require repayment, penalties, and interest and could increase future taxes.
- The 2015 comparison was restated after errors at spun-off Exterran Corporation relating to EPC project estimates and tax receivables; Archrock says these issues did not relate to ongoing operations. The errors overstated Archrock’s Q1 2015 net income by $1.1 million. Exterran disclosed an SEC investigation involving the restatement and FCPA compliance, with information also provided to the DOJ; Archrock assisted with the inquiry.
- Following the accounting issues, lenders amended Archrock’s credit facility after quarter-end, waiving potential defaults tied to prior-period information and extending delivery deadlines for certain quarterly reports to March 31, 2017. The amendments also imposed a $35 million cash-balance threshold with related borrowing and repayment provisions.
- Interest-rate swaps covered $500 million of notional debt. After swaps, $419.5 million of debt was effectively floating-rate; a 1 percentage-point rate increase was estimated to add about $4.2 million in annual interest expense.
Key investor checks
- Review the restated 2015 statements and the filing’s delayed submission, including its cover-page “No” responses on required-report and interactive-data filing questions.
- Track customer demand, operating horsepower, utilization, pricing, and whether cost reductions offset continuing revenue pressure.
- Assess debt covenant headroom, refinancing and liquidity needs, and the effect of post-period credit amendments.
- Monitor the Texas property-tax litigation and potential repayment, penalties, interest, and future tax expense.
- Verify the status and possible costs of the Exterran-related investigations, restatement matters, and any related claims.
- Confirm capital-spending execution and the sustainability of Archrock’s reduced dividend and Partnership distributions.