Archrock, Inc. — 2020 Q1 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Archrock provides U.S. natural-gas compression through contract operations and aftermarket services.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $249.7 million | $236.2 million |
| Gross margin | $136.1 million (54.5% of revenue) | $117.5 million (49.8%) |
| Net income (loss) | $(61.2) million; $(0.41) per diluted share | $19.5 million; $0.15 per diluted share |
| Operating cash flow | $99.1 million | $81.4 million |
| Capital expenditures | $71.9 million | $132.7 million |
| Cash and cash equivalents at period end | $3.2 million | $1.7 million |
Contract operations revenue rose 13% to $207.0 million and gross margin increased 19% to $128.3 million, with margin percentage improving to 62% from 59%. Aftermarket services revenue fell 20% to $42.7 million; gross margin declined 21% to $7.7 million, while its margin percentage remained 18%.
Q1 operating cash flow less capital expenditures was approximately $27.2 million, compared with approximately $(51.3) million in Q1 2019. Financing cash flow was $(55.5) million, including $32.0 million of net debt repayments and $22.2 million of dividends.
At March 31, 2020, reported long-term debt was $1.811 billion (net of financing costs and discount). The Credit Facility balance was $481.0 million; $651.4 million of $755.3 million in undrawn capacity was available, after letters of credit and covenant limitations. Archrock reported compliance with all credit covenants. On April 1, it redeemed $350 million of 2022 Notes using Credit Facility borrowings; the company expects to record an approximately $4 million extinguishment loss in Q2.
Changes and material items
- Total revenue increased 6%, principally reflecting higher contract operations revenue, partly offset by weaker aftermarket activity.
- Net results swung to a loss primarily because of a $99.8 million non-cash goodwill impairment, alongside higher interest expense, depreciation and amortization, and long-lived asset impairment. The goodwill impairment exhausted the goodwill balance.
- Archrock recorded $6.2 million of long-lived asset impairment on idle compressors and $1.7 million of restructuring charges. It also recorded a $3.2 million gain on its March disposition of certain customer agreements, compressors and related assets, receiving $24.2 million in proceeds.
- Revenue from contract operations benefited in part from the 2019 Elite acquisition, including $20.1 million of acquired-asset revenue in Q1 2020. Aftermarket weakness reflected continued customer deferral of maintenance activities.
- Depreciation and amortization was $49.8 million versus $44.1 million; interest expense was $29.7 million versus $23.6 million. The income tax benefit was $16.0 million, including a discrete tax benefit related to the goodwill impairment.
Outlook, risks and contingencies
- Management said COVID-19, oil oversupply and lower commodity demand were driving customer spending cuts and declines in production. The company expects 2020 horsepower, utilization and revenue to decline in both segments versus 2019; the scale and duration of impacts remained uncertain.
- In Q2, Archrock implemented a plan to reduce 2020 operating, corporate and capital costs by $75 million to $85 million. It planned 2020 capital expenditures of approximately $140 million to $170 million, including $70 million to $90 million for growth and $47 million to $53 million for maintenance.
- Management believed operating cash flow and Credit Facility borrowings would be sufficient for future liquidity needs and noted no near-term maturities before the April redemption. These assessments depend on cash flows, market access, customer demand and covenant headroom.
- The board declared a $0.145-per-share dividend on April 24, payable May 18. Future dividends remain at the board’s discretion and depend on financial condition, results and lending agreements.
- Key risks include pandemic-related demand and operating disruption, customer spending cuts, possible further asset impairments, limitations on use of net operating losses after a potential ownership change, and uncertain tax and litigation outcomes. The filing describes ordinary-course legal matters and states their ultimate outcomes cannot be assured.
- Archrock reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the announced $75 million–$85 million cost reductions and lower capital spending were achieved, and how customer activity affected revenue, utilization and cash flow.
- Post-redemption Credit Facility borrowings, remaining availability, interest costs and covenant headroom.
- Whether the $99.8 million goodwill impairment and compressor valuations adequately reflect subsequent market and customer conditions.
- The sustainability of the dividend against future operating cash flow, debt needs and credit-agreement restrictions.
- Potential effects of ownership changes on NOL usage and the resolution of tax contingencies.