Archrock, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Archrock provides U.S. natural-gas compression through contract operations and aftermarket services.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $236.2 million | $212.0 million | +11% |
| Gross margin | $117.5 million; 49.8% of revenue | $105.1 million; 49.6% | +12% |
| Income (loss) attributable to Archrock stockholders | $19.5 million | $(3.8) million | Improved |
| Diluted earnings (loss) per share | $0.15 | $(0.06) | Improved |
| Cash provided by operating activities | $81.4 million | $62.5 million | +30% |
| Capital expenditures | $132.7 million | $70.0 million | +90% |
| Long-term debt | $1.582 billion | $1.530 billion | +$52.7 million |
| Cash and cash equivalents | $1.7 million | $5.6 million at Dec. 31, 2018 | Down |
Operating cash flow less capital expenditures was approximately negative $51.3 million, compared with negative $7.5 million in Q1 2018. At March 31, 2019, current assets were $228.7 million and current liabilities were $164.8 million. The company reported $485.8 million available for additional borrowing under its credit facility, after covenant restrictions, and was in compliance with its covenants.
Contract operations revenue increased 13% to $182.5 million; segment gross margin rose 12% to $107.8 million. Aftermarket services revenue increased 6% to $53.7 million; segment gross margin rose 15% to $9.8 million. Management attributed growth to higher operating horsepower, improved contract rates, and increased customer demand.
Material changes and unusual items
- Average operating horsepower rose 8% year over year to 3.545 million; average utilization increased to 89% from 85%.
- Net income improved in part because gross margin increased, merger-related costs declined to $0.2 million from $4.1 million, and there was no longer income attributable to Partnership public unitholders following the April 2018 merger.
- The income tax line was a $2.4 million benefit, versus a $0.4 million provision in Q1 2018. The filing attributes the change primarily to a valuation-allowance reduction and release of an unrecognized tax benefit after an audit settlement.
- Archrock recorded $3.1 million of long-lived asset impairment, relating to 20 idle compressor units totaling 15,000 horsepower, versus $4.7 million in Q1 2018.
- Cash dividends paid were $17.2 million, or $0.132 per share, compared with $8.5 million, or $0.120 per share, in Q1 2018. The board declared another $0.132-per-share dividend for May 2019.
Debt, liquidity, outlook, and risks
- In March, the Partnership issued $500 million of 6.875% senior notes due 2027, receiving $490.9 million net of issuance costs; proceeds repaid credit-facility borrowings. In April, it borrowed under the facility to redeem $350 million of 6% notes due 2021 at par, plus accrued interest. A debt-extinguishment loss of approximately $3.7 million was expected in Q2 2019.
- Management expected operating cash flows and credit-facility borrowings to meet liquidity needs through at least March 31, 2020. It anticipated continued demand for compression services in 2019.
- 2019 capital expenditure guidance was approximately $350 million–$410 million, including $250 million–$300 million for growth and $57 million–$63 million for maintenance.
- Key risks cited include oil and gas industry conditions and customer finances, competition, equipment and operational hazards, access to components and capital markets, indebtedness, and the ability to realize merger synergies. Future dividends remain subject to board discretion, financial condition, and debt agreements.
- Other contingencies include ordinary-course litigation, tax audits, performance bonds with maximum potential payments of $2.3 million, and self-insured employee claims. Management did not expect ordinary-course claims or accrued tax audits to materially affect results, but noted litigation outcomes are uncertain.
- The SEC informed Archrock on April 8, 2019 that its investigation into previously disclosed errors and irregularities at a former international operation had concluded with no enforcement action. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether operating cash flow can support the planned capital spending and dividend, given the quarter’s negative cash flow after capital expenditures and low cash balance.
- Actual growth and maintenance capital spending, compressor utilization, customer demand, and realized contract rates through the remainder of 2019.
- Debt costs, facility availability, covenant headroom, and the effects of the April refinancing and expected $3.7 million extinguishment loss.
- How much of reported earnings benefited from the tax valuation-allowance reduction and audit settlement, and whether that benefit is recurring.
- Whether the quarterly dividend remains sustainable as investment needs and borrowing requirements evolve.