UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020March 31, 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-33666
Archrock, Inc.
(Exact name of registrant as specified in its charter)
| |
Delaware | 74-3204509 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
9807 Katy Freeway, Suite 100, Houston, Texas 77024
(Address of principal executive offices, zip code)
(281) 836-8000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | |
Title of each class |
| Trading Symbol |
| Name of exchange on which registered |
Common stock, $0.01 par value per share | | AROC | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | |
Large accelerated filer | ☒ | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of the common stock of the registrant outstanding as of July 24, 2020: 152,949,352April 23, 2021: 154,054,006 shares.
TABLE OF CONTENTS
2
GLOSSARY
The following terms and abbreviations appearing in the text of this report have the meanings indicated below.
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2020 |
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2027 Notes | $500.0 million of 6.875% senior notes due April 2027, issued in March 2019 |
2028 Notes | $ |
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Archrock, our, we, us | Archrock, Inc., individually and together with its wholly-owned subsidiaries |
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ASU 2016-13 | Accounting Standards Update No. 2016-13—Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments |
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ASU 2020-04 | Accounting Standards Update No. 2020-04—Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting |
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COVID-19 | Coronavirus disease 2019 |
Credit Facility | $ |
EBITDA | Earnings before interest, taxes, depreciation and amortization |
Elite Acquisition | Transaction completed on August 1, 2019 |
| whereby we acquired from Elite Compression Services, LLC substantially all of its assets and certain liabilities |
ERP | Enterprise Resource Planning |
ESPP | Employee Stock Purchase Plan |
Exchange Act | Securities Exchange Act of 1934, as amended |
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Financial Statements | Condensed consolidated financial statements included in Part I Item 1 of this Quarterly Report on Form 10-Q |
GAAP | U.S. generally accepted accounting principles |
Hilcorp | Hilcorp Energy Company |
JDH Capital | JDH Capital Holdings, L.P. |
July 2020 Disposition | Sale completed in July 2020 of the turbocharger business included within our aftermarket services segment |
LIBOR | London Interbank Offered Rate |
March 2020 Disposition | Sale completed in March 2020 of certain contract operations customer service agreements, compressors and other assets |
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OTC | Over-the-counter, as related to aftermarket services parts and components |
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ROU | Right-of-use, as related to the lease model under |
SEC | U.S. Securities and Exchange Commission |
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SG&A | Selling, general and administrative |
Spin-off | Spin-off completed in November 2015 of our international contract operations, international aftermarket services and global fabrication businesses into a standalone public company operating as Exterran Corporation |
U.S. | United States of America |
3
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 21E of the Exchange Act, including, without limitation, statements regarding the effects of the COVID-19 pandemic on our business, operations, customers and financial condition; our business growth strategy and projected costs; future financial position; the sufficiency of available cash flows to fund continuing operations and pay dividends; the expected amount of our capital expenditures; anticipated cost savings; future revenue, gross margin and other financial or operational measures related to our business; the future value of our equipment; and plans and objectives of our management for our future operations. You can identify many of these statements by words such as “believe,” “expect,” “intend,” “project,” “anticipate,” “estimate,” “will continue” or similar words or the negative thereof.
Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this Quarterly Report on Form 10-Q. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct. Known material factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include the risk factors described in our 20192020 Form 10-K and in Part II Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q, and those set forth from time to time in our filings with the SEC, which are available through our website at www.archrock.com and through the SEC’s website at www.sec.gov.
All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us on the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this Quarterly Report on Form 10-Q.
4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARCHROCK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share amounts)
(unaudited)
| | | | | | | | | | | | |
|
| June 30, 2020 |
| December 31, 2019 |
| March 31, 2021 |
| December 31, 2020 | ||||
Assets |
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Current assets: |
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Cash and cash equivalents | | $ | 2,205 | | $ | 3,685 | | $ | 1,933 | | $ | 1,097 |
Accounts receivable, trade, net of allowance of $3,630 and $2,210, respectively | |
| 124,587 | |
| 144,865 | ||||||
Accounts receivable, trade, net of allowance of $3,294 and $3,370, respectively | |
| 107,535 | |
| 104,425 | ||||||
Inventory | |
| 70,991 | |
| 74,467 | |
| 66,024 | |
| 63,670 |
Other current assets | |
| 11,106 | |
| 9,186 | |
| 12,818 | |
| 12,819 |
Total current assets | |
| 208,889 | |
| 232,203 | |
| 188,310 | |
| 182,011 |
Property, plant and equipment, net | |
| 2,486,074 | |
| 2,559,398 | |
| 2,342,076 | |
| 2,389,674 |
Operating lease ROU assets | |
| 20,203 | |
| 17,901 | |
| 19,073 | |
| 19,236 |
Goodwill, net | |
| — | |
| 100,598 | ||||||
Intangible assets, net | |
| 69,603 | |
| 77,471 | |
| 57,369 | |
| 61,531 |
Contract costs, net | |
| 37,055 | |
| 42,927 | |
| 25,638 | |
| 29,216 |
Deferred tax assets | |
| 63,975 | |
| 36,642 | |
| 53,602 | |
| 56,934 |
Other assets | |
| 30,285 | |
| 29,934 | |
| 25,733 | |
| 30,084 |
Noncurrent assets associated with discontinued operations | |
| 12,309 | |
| 12,901 | |
| 10,730 | |
| 11,036 |
Total assets | | $ | 2,928,393 | | $ | 3,109,975 | | $ | 2,722,531 | | $ | 2,779,722 |
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Liabilities and Equity | |
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Current liabilities: | |
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Accounts payable, trade | | $ | 35,545 | | $ | 60,215 | | $ | 35,190 | | $ | 30,819 |
Accrued liabilities | |
| 78,936 | |
| 67,845 | |
| 96,444 | |
| 76,993 |
Deferred revenue | |
| 5,598 | |
| 10,683 | |
| 3,099 | |
| 3,880 |
Total current liabilities | |
| 120,079 | |
| 138,743 | |
| 134,733 | |
| 111,692 |
Long-term debt | |
| 1,807,937 | |
| 1,842,549 | |
| 1,619,238 | |
| 1,688,867 |
Operating lease liabilities | |
| 17,993 | |
| 16,094 | |
| 16,941 | |
| 16,925 |
Deferred tax liabilities | |
| 1,017 | |
| 1,289 | |
| 696 | |
| 725 |
Other liabilities | |
| 21,965 | |
| 16,829 | |
| 19,931 | |
| 18,088 |
Noncurrent liabilities associated with discontinued operations | |
| 8,529 | |
| 8,508 | |
| 7,868 | |
| 7,868 |
Total liabilities | |
| 1,977,520 | |
| 2,024,012 | |
| 1,799,407 | |
| 1,844,165 |
Commitments and contingencies (Note 20) | |
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Equity: | |
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Preferred stock: $0.01 par value per share, 50,000,000 shares authorized, 0 issued | |
| — | |
| — | |
| — | |
| — |
Common stock: $0.01 par value per share, 250,000,000 shares authorized, 159,810,336 and 158,636,918 shares issued, respectively | |
| 1,598 | |
| 1,587 | ||||||
Common stock: $0.01 par value per share, 250,000,000 shares authorized, 161,323,492 and 160,014,960 shares issued, respectively | |
| 1,613 | |
| 1,600 | ||||||
Additional paid-in capital | |
| 3,419,512 | |
| 3,412,509 | |
| 3,430,910 | |
| 3,424,624 |
Accumulated other comprehensive loss | |
| (6,908) | |
| (1,387) | |
| (4,010) | |
| (5,006) |
Accumulated deficit | |
| (2,380,626) | |
| (2,244,877) | |
| (2,419,974) | |
| (2,401,988) |
Treasury stock: 6,860,984 and 6,702,602 common shares, at cost, respectively | |
| (82,703) | |
| (81,869) | ||||||
Treasury stock: 7,263,173 and 7,052,769 common shares, at cost, respectively | |
| (85,415) | |
| (83,673) | ||||||
Total equity | |
| 950,873 | |
| 1,085,963 | |
| 923,124 | |
| 935,557 |
Total liabilities and equity | | $ | 2,928,393 | | $ | 3,109,975 | | $ | 2,722,531 | | $ | 2,779,722 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
ARCHROCK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | ||||||||||||
| | June 30, | | June 30, | | March 31, | ||||||||||||
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| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||||
Revenue: |
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Contract operations | | $ | 187,949 | | $ | 186,258 | | $ | 394,923 | | $ | 368,765 | | $ | 166,034 | | $ | 206,974 |
Aftermarket services | |
| 32,367 | |
| 52,132 | |
| 75,090 | |
| 105,784 | |
| 29,397 | |
| 42,723 |
Total revenue | |
| 220,316 | |
| 238,390 | |
| 470,013 | |
| 474,549 | |
| 195,431 | |
| 249,697 |
Cost of sales (excluding depreciation and amortization): | |
| | | | | | | | | | | | | | | | |
Contract operations | |
| 63,390 | |
| 70,521 | |
| 142,041 | |
| 145,256 | |
| 61,365 | |
| 78,651 |
Aftermarket services | |
| 28,686 | |
| 42,215 | |
| 63,677 | |
| 86,117 | |
| 25,783 | |
| 34,991 |
Total cost of sales (excluding depreciation and amortization) | |
| 92,076 | |
| 112,736 | |
| 205,718 | |
| 231,373 | |
| 87,148 | |
| 113,642 |
Selling, general and administrative | |
| 28,745 | |
| 28,618 | |
| 59,371 | |
| 57,607 | |
| 25,084 | |
| 30,626 |
Depreciation and amortization | |
| 48,849 | |
| 45,482 | |
| 98,671 | |
| 89,588 | |
| 45,712 | |
| 49,822 |
Long-lived asset impairment | |
| 55,210 | |
| 8,632 | |
| 61,405 | |
| 11,724 | ||||||
Long-lived and other asset impairment | |
| 7,073 | |
| 6,195 | ||||||||||||
Goodwill impairment | | | — | | | — | | | 99,830 | | | — | | | — | | | 99,830 |
Restatement and other charges | |
| — | |
| 24 | |
| — | |
| 445 | ||||||
Restructuring charges | | | 2,408 | | | — | | | 4,136 | | | — | | | 897 | | | 1,728 |
Interest expense | |
| 25,778 | |
| 25,954 | |
| 55,443 | |
| 49,571 | |
| 31,245 | |
| 29,665 |
Debt extinguishment loss | |
| 3,971 | |
| 3,653 | |
| 3,971 | |
| 3,653 | ||||||
Transaction-related costs | |
| — | |
| 2,687 | |
| — | |
| 2,867 | ||||||
(Gain) loss on sale of assets, net | | | 2,189 | | | (1,801) | | | (1,927) | | | (1,785) | ||||||
Gain on sale of assets, net | | | (11,032) | | | (4,116) | ||||||||||||
Other income, net | |
| (438) | |
| (209) | |
| (993) | |
| (430) | |
| (1,889) | |
| (555) |
Income (loss) before income taxes | |
| (38,472) | |
| 12,614 | |
| (115,612) | |
| 29,936 | |
| 11,193 | |
| (77,140) |
Provision for (benefit from) income taxes | |
| (8,091) | |
| 1,191 | |
| (24,044) | |
| (1,216) | |
| 7,024 | |
| (15,953) |
Income (loss) from continuing operations | |
| (30,381) | |
| 11,423 | | | (91,568) | | | 31,152 | ||||||
Loss from discontinued operations, net of tax | |
| — | |
| — | |
| — | |
| (273) | ||||||
Net income (loss) | | $ | (30,381) | | $ | 11,423 | | $ | (91,568) | | $ | 30,879 | | $ | 4,169 | | $ | (61,187) |
| | | | | | | | | | | | | | | | | | |
Basic and diluted net income (loss) per common share | | $ | (0.20) | | $ | 0.09 | | $ | (0.61) | | $ | 0.24 | | $ | 0.03 | | $ | (0.41) |
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Weighted average common shares outstanding: | |
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Basic | |
| 150,743 | |
| 128,328 | |
| 150,628 | |
| 128,261 | |
| 151,425 | |
| 150,550 |
Diluted | |
| 150,743 | |
| 128,354 | |
| 150,628 | |
| 128,297 | |
| 151,578 | |
| 150,550 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
ARCHROCK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | ||||||||||||
| | June 30, | | June 30, | | March 31, | ||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||||
Net income (loss) | | $ | (30,381) |
| $ | 11,423 |
| $ | (91,568) |
| $ | 30,879 |
| $ | 4,169 |
| $ | (61,187) |
Other comprehensive income (loss), net of tax: | |
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Interest rate swap gain (loss), net of reclassifications to earnings | |
| 265 | |
| (5,320) | |
| (5,521) | |
| (8,545) | |
| 996 | |
| (5,786) |
Total other comprehensive income (loss) | |
| 265 | |
| (5,320) | |
| (5,521) | |
| (8,545) | ||||||
Total other comprehensive income (loss), net of tax | |
| 996 | |
| (5,786) | ||||||||||||
Comprehensive income (loss) | | $ | (30,116) | | $ | 6,103 | | $ | (97,089) | | $ | 22,334 | | $ | 5,165 | | $ | (66,973) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
ARCHROCK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share and per share amounts)
(unaudited)
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| | | | | | | | | | Accumulated | | | | | | | | | | | | |
| | Common | | Additional | | Other | | | | | Treasury | | | | ||||||||
| | Stock | | Paid-in | | Comprehensive | | Accumulated | | Stock | | | | |||||||||
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| Amount |
| Shares |
| Capital |
| Income (Loss) |
| Deficit |
| Amount |
| Shares |
| Total | ||||||
Balance at March 31, 2019 | | $ | 1,369 | | 136,876,352 | | $ | 3,180,546 | | $ | 2,548 | | $ | (2,261,452) | | $ | (80,719) | | (6,484,075) | | $ | 842,292 |
Cash dividends ($0.132 per common share) | |
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| (17,206) | |
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|
| |
| (17,206) |
Shares issued in employee stock purchase plan | |
| |
| 19,073 | |
| 189 | |
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| 189 |
Stock-based compensation, net of forfeitures | |
| |
| 3,872 | |
| 1,512 | |
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|
| (93,483) | |
| 1,512 |
Comprehensive income | |
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Net income | |
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|
| |
| 11,423 | |
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|
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| 11,423 |
Interest rate swap loss, net of reclassifications to earnings | |
|
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|
| |
|
| |
| (5,320) | |
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|
|
|
| |
| (5,320) |
Balance at June 30, 2019 | | $ | 1,369 |
| 136,899,297 | | $ | 3,182,247 | | $ | (2,772) | | $ | (2,267,235) | | $ | (80,719) |
| (6,577,558) | | $ | 832,890 |
| | | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2020 | | $ | 1,598 |
| 159,756,498 | | $ | 3,415,784 | | $ | (7,173) | | $ | (2,328,069) | | $ | (82,668) |
| (6,830,407) | | $ | 999,472 |
Treasury stock purchased | |
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|
| |
|
| |
| (35) |
| (5,563) | |
| (35) |
Cash dividends ($0.145 per common share) | |
|
|
|
| |
|
| |
|
| |
| (22,176) | |
|
|
|
| |
| (22,176) |
Shares issued in employee stock purchase plan | |
| |
| 53,838 | |
| 165 | |
|
| |
|
| |
|
|
|
| |
| 165 |
Stock-based compensation, net of forfeitures | |
| |
| | |
| 2,885 | |
|
| |
|
| |
|
|
| (25,014) | |
| 2,885 |
Contribution from Exterran Corporation | | | | | | | | 678 | | | | | | | | | | | | | | 678 |
Comprehensive loss | |
|
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|
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|
| |
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| |
|
| |
|
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|
| |
| |
Net loss | |
|
|
|
| |
|
| |
|
| |
| (30,381) | |
|
|
|
| |
| (30,381) |
Interest rate swap gain, net of reclassifications to earnings | |
|
|
|
| |
|
| |
| 265 | |
|
| |
|
|
|
| |
| 265 |
Balance at June 30, 2020 | | $ | 1,598 |
| 159,810,336 | | $ | 3,419,512 | | $ | (6,908) | | $ | (2,380,626) | | $ | (82,703) |
| (6,860,984) | | $ | 950,873 |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | | | | | | | | | | |
| | Common | | Additional | | Other | | | | | Treasury | | | | ||||||||
| | Stock | | Paid-in | | Comprehensive | | Accumulated | | Stock | | | | |||||||||
|
| Amount |
| Shares |
| Capital |
| Loss |
| Deficit |
| Amount |
| Shares |
| Total | ||||||
Balance at December 31, 2019 | | $ | 1,587 | | 158,636,918 | | $ | 3,412,509 | | $ | (1,387) | | $ | (2,244,877) | | $ | (81,869) | | (6,702,602) | | $ | 1,085,963 |
Treasury stock purchased | |
|
|
|
| |
|
| |
|
| |
|
| |
| (799) |
| (90,594) | |
| (799) |
Cash dividends ($0.145 per common share) | |
|
|
|
| |
|
| |
|
| |
| (22,171) | |
|
|
|
| |
| (22,171) |
Shares issued in ESPP | |
| 1 |
| 56,417 | |
| 201 | |
|
| |
|
| |
|
|
|
| |
| 202 |
Stock-based compensation, net of forfeitures | |
| 10 |
| 1,063,163 | |
| 3,074 | |
|
| |
|
| |
|
|
| (37,211) | |
| 3,084 |
Impact of ASU 2016-13 adoption | | | | | | | | | | | | | | 166 | | | | | | | | 166 |
Comprehensive loss | |
|
|
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
| |
Net loss | |
|
|
|
| |
|
| |
|
| |
| (61,187) | |
|
|
|
| |
| (61,187) |
Interest rate swap loss, net of reclassifications to earnings | |
|
|
|
| |
|
| |
| (5,786) | |
|
| |
|
|
|
| |
| (5,786) |
Balance at March 31, 2020 | | $ | 1,598 |
| 159,756,498 | | $ | 3,415,784 | | $ | (7,173) | | $ | (2,328,069) | | $ | (82,668) |
| (6,830,407) | | $ | 999,472 |
| | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2020 | | $ | 1,600 |
| 160,014,960 | | $ | 3,424,624 | | $ | (5,006) | | $ | (2,401,988) | | $ | (83,673) |
| (7,052,769) | | $ | 935,557 |
Treasury stock purchased | |
|
|
|
| |
|
| |
|
| |
|
| |
| (1,742) |
| (184,393) | |
| (1,742) |
Cash dividends ($0.145 per common share) | |
|
|
|
| |
|
| |
|
| |
| (22,155) | |
|
|
|
| |
| (22,155) |
Shares issued in ESPP | |
| — |
| 28,054 | |
| 235 | |
|
| |
|
| |
|
|
|
| |
| 235 |
Stock-based compensation, net of forfeitures | |
| 9 |
| 923,330 | |
| 2,654 | |
|
| |
|
| |
|
|
| (26,011) | |
| 2,663 |
Net proceeds from issuance of common stock | | | 4 | | 357,148 | | | 3,397 | | | | | | | | | | | | | | 3,401 |
Comprehensive income | |
|
|
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
| |
Net income | |
|
|
|
| |
|
| |
|
| |
| 4,169 | |
|
|
|
| |
| 4,169 |
Interest rate swap gain, net of reclassifications to earnings | |
|
|
|
| |
|
| |
| 996 | |
|
| |
|
|
|
| |
| 996 |
Balance at March 31, 2021 | | $ | 1,613 |
| 161,323,492 | | $ | 3,430,910 | | $ | (4,010) | | $ | (2,419,974) | | $ | (85,415) |
| (7,263,173) | | $ | 923,124 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | | | | | | | | | | |
| | Common | | Additional | | Other | | | | | Treasury | | | | ||||||||
| | Stock | | Paid-in | | Comprehensive | | Accumulated | | Stock | | | | |||||||||
|
| Amount |
| Shares |
| Capital |
| Income (Loss) |
| Deficit |
| Amount |
| Shares |
| Total | ||||||
Balance at December 31, 2018 | | $ | 1,358 | | 135,787,509 | | $ | 3,177,982 | | $ | 5,773 | | $ | (2,263,677) | | $ | (79,862) | | (6,381,605) | | $ | 841,574 |
Treasury stock purchased | |
|
|
|
| |
|
| |
|
| |
|
| |
| (857) |
| (87,036) | |
| (857) |
Cash dividends ($0.264 per common share) | |
|
|
|
| |
|
| |
|
| |
| (34,437) | |
|
|
|
| |
| (34,437) |
Shares issued in employee stock purchase plan | |
| |
| 48,801 | |
| 407 | |
|
| |
|
| |
|
|
|
| |
| 407 |
Stock-based compensation, net of forfeitures | |
| 11 |
| 1,062,987 | |
| 3,858 | |
|
| |
|
| |
|
|
| (108,917) | |
| 3,869 |
Comprehensive income | |
|
|
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
| |
Net income | |
|
|
|
| |
|
| |
|
| |
| 30,879 | |
|
|
|
| |
| 30,879 |
Interest rate swap loss, net of reclassifications to earnings | |
|
|
|
| |
|
| |
| (8,545) | |
|
| |
|
|
|
| |
| (8,545) |
Balance at June 30, 2019 | | $ | 1,369 |
| 136,899,297 | | $ | 3,182,247 | | $ | (2,772) | | $ | (2,267,235) | | $ | (80,719) |
| (6,577,558) | | $ | 832,890 |
| | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2019 | | $ | 1,587 |
| 158,636,918 | | $ | 3,412,509 | | $ | (1,387) | | $ | (2,244,877) | | $ | (81,869) |
| (6,702,602) | | $ | 1,085,963 |
Treasury stock purchased | |
|
|
|
| |
|
| |
|
| |
|
| |
| (834) |
| (96,157) | |
| (834) |
Cash dividends ($0.290 per common share) | |
|
|
|
| |
|
| |
|
| |
| (44,347) | |
|
|
|
| |
| (44,347) |
Shares issued in employee stock purchase plan | |
| 1 |
| 110,255 | |
| 366 | |
|
| |
|
| |
|
|
|
| |
| 367 |
Stock-based compensation, net of forfeitures | |
| 10 |
| 1,063,163 | |
| 5,959 | |
|
| |
|
| |
|
|
| (62,225) | |
| 5,969 |
Contribution from Exterran Corporation | | | | | | | | 678 | | | | | | | | | | | | | | 678 |
Impact of ASU 2016-13 adoption | |
| |
| | |
| | |
|
| |
| 166 | |
|
|
|
| |
| 166 |
Comprehensive loss | |
|
|
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
| |
Net loss | |
|
|
|
| |
|
| |
|
| |
| (91,568) | |
|
|
|
| |
| (91,568) |
Interest rate swap loss, net of reclassifications to earnings | |
|
|
|
| |
|
| |
| (5,521) | |
|
| |
|
|
|
| |
| (5,521) |
Balance at June 30, 2020 | | $ | 1,598 |
| 159,810,336 | | $ | 3,419,512 | | $ | (6,908) | | $ | (2,380,626) | | $ | (82,703) |
| (6,860,984) | | $ | 950,873 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
98
ARCHROCK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| | | | | | | | | | | | |
| | Six Months Ended | | Three Months Ended | ||||||||
| | June 30, | | March 31, | ||||||||
|
| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||
Cash flows from operating activities: | | |
| | |
| | |
| | |
|
Net income (loss) | | $ | (91,568) | | $ | 30,879 | | $ | 4,169 | | $ | (61,187) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
|
| |
|
| |
|
| |
|
|
Loss from discontinued operations, net of tax | |
| — | |
| 273 | ||||||
Depreciation and amortization | |
| 98,671 | |
| 89,588 | |
| 45,712 | |
| 49,822 |
Long-lived asset impairment | |
| 61,405 | |
| 11,724 | ||||||
Long-lived and other asset impairment | |
| 7,073 | |
| 6,195 | ||||||
Goodwill impairment | | | 99,830 | | | — | | | — | | | 99,830 |
Inventory write-downs | |
| 695 | |
| 492 | |
| 218 | |
| 282 |
Amortization of operating lease ROU assets | |
| 1,627 | |
| 1,425 | |
| 950 | |
| 781 |
Amortization of deferred financing costs | |
| 2,856 | |
| 3,041 | |
| 6,264 | |
| 1,533 |
Amortization of debt discount | |
| 187 | |
| 545 | |
| — | |
| 187 |
Debt extinguishment loss | |
| 3,971 | |
| 3,653 | ||||||
Amortization of debt premium | | | (501) | | | 0 | ||||||
Interest rate swaps | |
| 928 | |
| (802) | |
| 1,071 | |
| 196 |
Stock-based compensation expense | |
| 5,778 | |
| 3,869 | |
| 2,663 | |
| 3,006 |
Non-cash restructuring charges | | | 162 | | | — | | | — | | | 61 |
Provision for credit losses | |
| 2,282 | |
| 335 | |
| 224 | |
| 752 |
(Gain) loss on sale of assets, net | |
| 1,245 | |
| (1,785) | ||||||
Gain on March 2020 Disposition | | | (3,172) | | | — | ||||||
Deferred income tax benefit | |
| (24,117) | |
| (1,819) | ||||||
Gain on sale of assets, net | |
| (5,037) | |
| (944) | ||||||
Gain on sale of business | | | (5,995) | | | (3,172) | ||||||
Deferred income tax provision (benefit) | |
| 6,592 | |
| (15,966) | ||||||
Amortization of contract costs | |
| 13,656 | |
| 10,724 | |
| 5,591 | |
| 6,805 |
Deferred revenue recognized in earnings | |
| (12,762) | |
| (25,227) | |
| (2,328) | |
| (7,735) |
Changes in assets and liabilities: | |
|
| |
|
| ||||||
Change in assets and liabilities: | |
|
| |
|
| ||||||
Accounts receivable, trade | |
| 17,569 | |
| (5,015) | |
| (4,108) | |
| 4,803 |
Inventory | |
| 2,615 | |
| 2,160 | |
| (3,330) | |
| 1,068 |
Other assets | |
| (4,268) | |
| 12,817 | |
| 270 | |
| (439) |
Contract costs, net | |
| (8,129) | |
| (14,128) | |
| (2,283) | |
| (5,537) |
Accounts payable and other liabilities | |
| (10,829) | |
| 6,102 | |
| 18,881 | |
| 12,936 |
Deferred revenue | |
| 8,253 | |
| 19,747 | |
| 1,397 | |
| 5,783 |
Other | |
| 189 | |
| 65 | |
| 62 | |
| 69 |
Net cash provided by operating activities | |
| 167,074 | |
| 148,663 | |
| 77,555 | |
| 99,129 |
Cash flows from investing activities: | |
|
| |
|
| |
|
| |
|
|
Capital expenditures | |
| (113,289) | |
| (234,972) | |
| (11,539) | |
| (71,946) |
Proceeds from March 2020 Disposition | |
| 24,179 | |
| — | ||||||
Proceeds from sale of business | |
| 18,168 | |
| 24,179 | ||||||
Proceeds from sale of property, plant and equipment and other assets | |
| 5,071 | |
| 21,954 | |
| 9,114 | |
| 2,543 |
Proceeds from insurance and other settlements | | | 1,351 | | | 676 | | | 775 | | | 1,083 |
Net cash used in investing activities | |
| (82,688) | |
| (212,342) | ||||||
Net cash provided by (used in) investing activities | |
| 16,518 | |
| (44,141) | ||||||
Cash flows from financing activities: | |
|
| |
|
| |
|
| |
|
|
Borrowings of long-term debt | |
| 722,500 | |
| 1,254,000 | |
| 159,751 | |
| 227,500 |
Repayments of long-term debt | |
| (762,500) | |
| (1,151,000) | |
| (229,251) | |
| (259,500) |
Payments for debt issuance costs | |
| (943) | |
| (8,829) | |
| (2,401) | |
| (596) |
Proceeds from (payments for) settlement of interest rate swaps that include financing elements | |
| (787) | |
| 800 | ||||||
Payments for settlement of interest rate swaps that include financing elements | |
| (1,075) | |
| (88) | ||||||
Dividends paid to stockholders | |
| (44,347) | |
| (34,437) | |
| (22,155) | |
| (22,171) |
Proceeds from stock issued under employee stock purchase plan | |
| 367 | |
| 407 | ||||||
Net proceeds from issuance of common stock | | | 3,401 | | | 0 | ||||||
Proceeds from stock issued under ESPP | |
| 235 | |
| 202 | ||||||
Purchases of treasury stock | |
| (834) | |
| (857) | |
| (1,742) | |
| (799) |
Contribution from Exterran Corporation | |
| 678 | |
| — | ||||||
Net cash provided by (used in) financing activities | |
| (85,866) | |
| 60,084 | ||||||
Net decrease in cash and cash equivalents | |
| (1,480) | |
| (3,595) | ||||||
Net cash used in financing activities | |
| (93,237) | |
| (55,452) | ||||||
Net increase (decrease) in cash and cash equivalents | |
| 836 | |
| (464) | ||||||
Cash and cash equivalents, beginning of period | |
| 3,685 | |
| 5,610 | |
| 1,097 | |
| 3,685 |
Cash and cash equivalents, end of period | | $ | 2,205 | | $ | 2,015 | | $ | 1,933 | | $ | 3,221 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
109
ARCHROCK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Description of Business and Basis of Presentation
We are an energy infrastructure company with a pure-play focus on midstream natural gas compression. We are the leading provider of natural gas compression services to customers in the oil and natural gas industry throughout the U.S. and a leading supplier of aftermarket services to customers that own compression equipment in the U.S. We operate in 2 business segments: contract operations and aftermarket services. Our predominant segment, contract operations, primarily includes designing, sourcing, owning, installing, operating, servicing, repairing and maintaining our owned fleet of natural gas compression equipment to provide natural gas compression services to our customers. In our aftermarket services business, we sell parts and components and provide operations, maintenance, overhaul and reconfiguration services to customers who own compression equipment.
The accompanying unaudited condensed consolidated financial statements included herein have been prepared in accordance with GAAP and the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP are not required in these interim financial statements and have been condensed or omitted. Management believes that the information furnished includes all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly our consolidated financial position, results of operations and cash flows for the periods indicated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements presented in our 20192020 Form 10-K, which contains a more comprehensive summary of our accounting policies. The interim results reported herein are not necessarily indicative of results for a full year. Certain prior year amounts have been reclassified to conform to the current year presentation.
2. Recent Accounting Developments
Accounting Standards Updates Not Yet Implemented
Reference Rate Reform
In March 2020, the Financial Accounting Standards Board issued ASU 2020-04, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued as a result of reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. Entities may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. Modifications to our interest rate swap and Credit LossesFacility agreements during the effective period of this amendment will be assessed and if the modifications meet the criteria for the optional expedients and exceptions, we intend to adopt ASU 2020-04 and apply the amendments as applicable. We evaluated Amendment No. 3 to our Credit Facility and determined that ASU 2020-04 was not applicable.
10
3. Business Transactions
February 2021 Disposition
On February 10, 2021, we completed the sale of certain contract operations customer service agreements and approximately 300 compressors, comprising approximately 40,000 horsepower, used to provide compression services under those agreements as well as other assets used to support the operations. We allocated customer-related and contract-based intangible assets based on a ratio of the horsepower sold relative to the total horsepower of the asset group. We recorded a gain on the sale of $6.0 million in gain on sale of assets, net in our condensed consolidated statements of operations during the three months ended March 31, 2021.
July 2020 Disposition
In July 2020, we completed the sale of the turbocharger business included within our aftermarket services segment. In connection with the sale, we entered into a supply agreement to purchase a minimum amount of turbocharger goods and services over a two-year term. In addition to cash of $9.5 million received upon closing, an additional $3.0 million is due on the first anniversary of the closing date and $3.5 million will be received through the purchase of turbocharger goods and services under the supply agreement. We received cash proceeds of $0.9 million and $1.6 million under the supply agreement during the three and nine months ended March 31, 2021, respectively.
March 2020 Disposition
In June 2016,March 2020, we completed the FASB issued ASU 2016-13, which changessale of certain contract operations customer service agreements and approximately 200 compressors, comprising approximately 35,000 horsepower, used to provide compression services under those agreements as well as other assets used to support the impairment model for financialoperations. We allocated customer-related and contract-based intangible assets measured at amortized cost and certain other instruments, and requires entitiesgoodwill based on a ratio of the horsepower sold relative to usethe total horsepower of the asset group. We recognized a new current expected credit loss model that resultsgain on the sale of $3.2 million in recognitiongain on sale of expected losses over the contractual life of an asset. We adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. The adoption resulted in a $0.2 million decreaseassets, net in our allowance for credit lossescondensed consolidated statements of operations during the three months ended March 31, 2020.
4. Discontinued Operations
In 2015 we completed the Spin-off. In order to effect the Spin-off and govern our relationship with Exterran Corporation after the Spin-off, we entered into several agreements with Exterran Corporation, including a corresponding pre-tax cumulative effect adjustmenttax matters agreement, which governs the respective rights, responsibilities and obligations of Exterran Corporation and us with respect to retained earningscertain tax matters.
As of each of March 31, 2021 and December 31, 2020, we had $7.9 million of unrecognized tax benefits (including interest and penalties) related to Exterran Corporation operations prior to the Spin-off recorded to noncurrent liabilities associated with discontinued operations in our condensed consolidated balance sheetsheets. We had an offsetting indemnification asset of $7.9 million related to these unrecognized tax benefits recorded to noncurrent assets associated with discontinued operations as of each of March 31, 2021 and December 31, 2020.
The following table presents the balance sheets for our discontinued operations:
| | | | | | |
(in thousands) |
| March 31, 2021 |
| December 31, 2020 | ||
Other assets | | $ | 7,868 | | $ | 7,868 |
Deferred tax assets | | | 2,862 | | | 3,168 |
Total assets associated with discontinued operations | | $ | 10,730 | | $ | 11,036 |
| | | | | | |
Deferred tax liabilities | | $ | 7,868 | | $ | 7,868 |
Total liabilities associated with discontinued operations | | $ | 7,868 | | $ | 7,868 |
11
5. Inventory
| | | | | | |
(in thousands) |
| March 31, 2021 |
| December 31, 2020 | ||
Parts and supplies | | $ | 58,666 | | $ | 57,433 |
Work in progress | |
| 7,358 | |
| 6,237 |
Inventory | | $ | 66,024 | | $ | 63,670 |
6. Property, Plant and Equipment, net
| | | | | | |
(in thousands) |
| March 31, 2021 |
| December 31, 2020 | ||
Compression equipment, facilities and other fleet assets | | $ | 3,387,464 | | $ | 3,439,432 |
Land and buildings | |
| 44,644 | |
| 45,167 |
Transportation and shop equipment | |
| 104,155 | |
| 106,868 |
Computer hardware and software | |
| 84,680 | |
| 84,680 |
Other | |
| 17,707 | |
| 14,457 |
Property, plant and equipment | |
| 3,638,650 | |
| 3,690,604 |
Accumulated depreciation | |
| (1,296,574) | |
| (1,300,930) |
Property, plant and equipment, net | | $ | 2,342,076 | | $ | 2,389,674 |
7. Goodwill
Our goodwill was recognized in connection with the Elite Acquisition and represents the excess of consideration transferred over the fair value of the assets and liabilities acquired. All of the goodwill was allocated to our contract operations reporting unit. We review the carrying amount of our goodwill in the fourth quarter of every year, or whenever indicators of potential impairment exist, to determine if the carrying amount of our contract operations reporting unit exceeds its fair value, including the goodwill. Beginning in the first quarter of 2020, the COVID-19 pandemic caused a significant deterioration in global macroeconomic conditions, including a collapse in the demand for oil coupled with an oversupply of oil, which commenced substantial spending cuts by our customers and a decline in production. This global response to the pandemic significantly impacted our market capitalization and estimates of future revenues and cash flows, which triggered the need to perform a quantitative test of the fair value of our contract operations reporting unit as of March 31, 2020. The quantitative test determined that the carrying amount of our contract operations reporting unit exceeded its fair value and we recorded a goodwill impairment loss of $99.8 million during the three months ended March 31, 2020.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions, which have a significant impact on the fair value determined. We determined the fair value of our reporting unit using an equal weighting of both the expected present value of future cash flows and a market approach. The present value of future cash flows was estimated using our most recent forecast and the weighted average cost of capital. The market approach uses a market multiple on the earnings before interest expense, provision for income taxes and depreciation and amortization expense of comparable peer companies. Significant estimates for our reporting unit included in our impairment analysis were our cash flow forecasts, our estimate of the market’s weighted average cost of capital and market multiples.
8. Hosting Arrangements
In the fourth quarter of 2018 we began a process and technology transformation project that will, among other things, upgrade or replace our existing ERP, supply chain and inventory management systems and expand the remote monitoring capabilities of our compression fleet. Included in this project are hosting arrangements that are service contracts related to the cloud migration of our ERP system and cloud services for our new mobile workforce, telematics and inventory management tools.
12
As of March 31, 2021 and December 31, 2020, we had $8.4 million and $7.7 million, respectively, of capitalized implementation costs related to our hosting arrangements that are service contracts included in other assets in our condensed consolidated balance sheets. Accumulated amortization was $0.4 million and $0.3 million at January 1,March 31, 2021 and December 31, 2020, respectively. We recorded $0.1 million of amortization expense to SG&A in our condensed consolidated statements of operations during each of the three months ended March 31, 2021 and 2020. Comparative information has
9. Long-Term Debt
| | | | | | |
(in thousands) |
| March 31, 2021 |
| December 31, 2020 | ||
Credit Facility | | $ | 323,500 | | $ | 393,000 |
| | | | | | |
2028 Notes | | | | | | |
Principal | |
| 800,000 | |
| 800,000 |
Debt premium, net of amortization | | | 14,040 | |
| 14,541 |
Deferred financing costs, net of amortization | |
| (11,669) | |
| (11,766) |
| |
| 802,371 | |
| 802,775 |
| | | | | | |
2027 Notes | | | | | | |
Principal | | | 500,000 | |
| 500,000 |
Deferred financing costs, net of amortization | | | (6,633) | |
| (6,908) |
| | | 493,367 | |
| 493,092 |
| | | | | | |
Long-term debt | | $ | 1,619,238 | | $ | 1,688,867 |
Credit Facility
As of March 31, 2021, there were $12.4 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.4%. The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 2.6% and 2.7% at March 31, 2021 and December 31, 2020, respectively. We incurred $0.6 million and $0.7 million in commitment fees on the daily unused amount of the Credit Facility during the three months ended March 31, 2021 and 2020, respectively.
We must maintain certain consolidated financial ratios as defined in our Credit Facility agreement (see below). As of March 31, 2021, the ratio requirements did not been restatedconstrain our undrawn capacity and continuesas such, $414.1 million was available for additional borrowings. As of March 31, 2021, we were in compliance with all covenants under the Credit Facility agreement.
Amendment No. 3
On February 22, 2021, we amended our Credit Facility to, among other things:
● | reduce the aggregate revolving commitment from $1.25 billion to $750.0 million, and |
● | adjust the maximum Senior Secured Debt to EBITDA and Total Debt to EBITDA ratios, as defined in the Credit Facility agreement, to the following: |
| | |
Senior Secured Debt to EBITDA | 3.00 to 1.0 | |
Total Debt to EBITDA | ||
Through fiscal year 2022 | | 5.75 to 1.0 |
January 1, 2023 through September 30, 2023 | 5.50 to 1.0 | |
Thereafter (1) | 5.25 to 1.0 |
(1) | Subject to a temporary increase to 5.50 to 1.0 for any quarter during which an acquisition satisfying certain thresholds is completed and for the two quarters immediately following such quarter. |
13
We incurred $1.8 million in transaction costs related to Amendment No. 3, which were included in other assets in our condensed consolidated balance sheets and are being amortized over the remaining term of the Credit Facility. In addition, we wrote off $4.9 million of unamortized deferred financing costs as a result of the amendment, which was recorded to interest expense in our condensed consolidated statements of operations.
10. Accumulated Other Comprehensive Loss
Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with owners. Our accumulated other comprehensive income (loss) consists of changes in the fair value of our interest rate swap derivative instruments, net of tax, which are designated as cash flow hedges.
The following table presents the changes in accumulated other comprehensive loss of our derivative cash flow hedges, net of tax:
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
(in thousands) |
| 2021 |
| 2020 | ||
Beginning accumulated other comprehensive loss | | $ | (5,006) | | $ | (1,387) |
Loss recognized in other comprehensive income (loss), net of tax benefit of $2 and $1,590, respectively | |
| (8) | |
| (5,983) |
Loss reclassified from accumulated other comprehensive loss to interest expense, net of tax benefit of $267 and $51, respectively | |
| 1,004 | |
| 197 |
Other comprehensive income (loss) | |
| 996 | |
| (5,786) |
Ending accumulated other comprehensive loss | | $ | (4,010) | | $ | (7,173) |
See Note 17 (“Derivatives”) for further details on our interest rate swap derivative instruments.
11. Equity
At-the-Market Continuous Equity Offering Program
On February 23, 2021, we entered into the ATM Agreement, pursuant to which we may offer and sell shares of our common stock from time to time for an aggregate offering price of up to $50.0 million. We intend to use the net proceeds of these offerings, after deducting sales agent fees and offering expenses, for general corporate purposes. Offerings of common stock pursuant to the ATM Agreement will terminate upon the earlier of (i) the sale of all shares of common stock subject to the ATM Agreement or (ii) the termination of the ATM Agreement by us or by each of the sales agents. Any sales agent may also terminate the ATM Agreement but only with respect to itself.
During the three months ended March 31, 2021, we sold 357,148 shares of common stock for net proceeds of $3.4 million pursuant to the ATM Agreement.
14
Cash Dividends
The following table summarizes our dividends declared and paid in each of the quarterly periods of 2021 and 2020:
| | | | | | |
|
| Declared Dividends |
| Dividends Paid | ||
|
| per Common Share |
| (in thousands) | ||
2021 | |
|
| |
|
|
Q1 | | $ | 0.145 | | $ | 22,155 |
| | | | | | |
2020 |
| |
|
| |
|
Q4 | | $ | 0.145 | | $ | 22,177 |
Q3 | |
| 0.145 | |
| 22,308 |
Q2 | |
| 0.145 | |
| 22,176 |
Q1 | |
| 0.145 | |
| 22,171 |
On April 28, 2021, our Board of Directors declared a quarterly dividend of $0.145 per share of common stock to be reported underpaid on May 17, 2021 to stockholders of record at the accounting standards in effectclose of business on May 10, 2021.
12. Revenue from Contracts with Customers
The following table presents our revenue from contracts with customers by segment (see Note 22 (“Segments”)) and disaggregated by revenue source:
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
(in thousands) |
| 2021 |
| 2020 | ||
Contract operations: | | |
| | |
|
0 ― 1,000 horsepower per unit | | $ | 46,919 | | $ | 66,740 |
1,001 ― 1,500 horsepower per unit | |
| 68,464 | |
| 84,852 |
Over 1,500 horsepower per unit | |
| 50,403 | |
| 54,591 |
Other (1) | |
| 248 | |
| 791 |
Total contract operations (2) | |
| 166,034 | |
| 206,974 |
| | | | | | |
Aftermarket services: | |
|
| |
|
|
Services | |
| 16,892 | |
| 25,450 |
OTC parts and components sales | |
| 12,505 | |
| 17,273 |
Total aftermarket services (3) | |
| 29,397 | |
| 42,723 |
| | | | | | |
Total revenue | | $ | 195,431 | | $ | 249,697 |
(1) | Primarily relates to fees associated with owned non-compression equipment. |
(2) | Includes $1.0 million and $1.6 million for the three months ended March 31, 2021 and 2020, respectively, related to billable maintenance on owned compressors that was recognized at a point in time. All other contract operations revenue is recognized over time. |
(3) | All service revenue within aftermarket services is recognized over time. All OTC parts and components sales revenue is recognized at a point in time. |
15
Performance Obligations
As of March 31, 2021, we had $311.6 million of remaining performance obligations related to our contract operations segment, which will be recognized through 2025 as follows:
| | | | | | | | | | | | | | | | | | |
(in thousands) |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| Total | ||||||
Remaining performance obligations | | $ | 205,343 | | $ | 89,252 | | $ | 15,014 | | $ | 1,860 | | $ | 168 | | $ | 311,637 |
We do not disclose the aggregate transaction price for those periods.the remaining performance obligations for aftermarket services as there are no contracts with customers with an original contract term that is greater than one year.
Our financial assets measured at amortized cost consistContract Assets and Liabilities
Contract Assets
As of cash equivalentsMarch 31, 2021 and tradeDecember 31, 2020, our receivables from revenue transactions within the scopecontracts with customers, net of ASC 606 Revenue. We believe our temporary cash investments have a zero loss expectation because we maintain minimal balances in our cash investment accountsallowance for credit losses, were $99.4 million and have no history of loss. $95.6 million, respectively.
Allowance for Credit Losses
Trade accounts receivable are due from companies of varying size engaged principally in oil and natural gas activities throughout the U.S. We review the financial condition of customers prior to extending credit and generally do not obtain collateral for trade receivables. Payment terms are on a short-term basis and in accordance with industry practice. We consider this credit risk to be limited due to these companies’ financial resources, the nature of the products and services we provide and the terms of our customer agreements.
11
Due to the short-term nature of our trade receivables, we consider the amortized cost to be the same as the carrying amount of the receivable, excluding the allowance for credit losses. We recognize an allowance for credit losses when a receivable is recorded, even when the risk of loss is remote. We utilize an aging schedule to determine our allowance for credit losses and measure expected credit losses on a collective (pool) basis when similar risk characteristics exist. We rely primarily on ratings assigned by external rating agencies and credit monitoring services to assess credit risk and aggregate customers first by low, medium or high risk asset pools, and then by delinquency status. We also consider the internal risk associated with geographic location and the services we provide to the customer when determining asset pools. If a customer does not share similar risk characteristics with other customers, we evaluate the customer’s outstanding trade receivables for expected credit losses on an individual basis. Trade receivables evaluated individually are not included in our collective assessment. Each reporting period, we reassess our customers’ risk profiles and determine the appropriate asset pool classification, or perform individual assessments of expected credit losses, based on the customers’ risk characteristics at the reporting date.
The contractual life of our trade receivables is primarily 30 days based on the payment terms specified in the contract. Contract operations services are generally billed monthly at the beginning of the month in which service is being provided. Aftermarket services billings typically occur when parts are delivered or service is completed. Loss rates are separately determined for each asset pool based on the length of time a trade receivable has been outstanding. We analyze two years of internal historical loss data, including the effects of prepayments, write-offs and subsequent recoveries, to determine our historical loss experience. Our historical loss information is a relevant data point for estimating credit losses, as the data closely aligns with trade receivables due from our customers. Ratings assigned by external rating agencies and credit monitoring services consider past performance and forecasts of future economic conditions in assessing credit risk. We routinely update our historical loss data to reflect our customers’ current risk profile, to ensure the historical data and loss rates are relevant to the pool of assets for which we are estimating expected credit losses. Judgement is used to determine the expected credit loss for customers that do not share similar risk characteristics with other customers, based on customer specific items such as legal proceedings, past experience with the customer and/or ongoing customer negotiations.
The following table summarizes the changes in our allowance for credit losses balance during the six months ended June 30, 2020 (in thousands):
| | | |
Balance at December 31, 2019 |
| $ | 2,210 |
Impact of adoption of ASU 2016-13 on January 1, 2020 | | | (216) |
Provision for credit losses | | | 2,282 |
Write-offs charged against allowance | | | (646) |
Balance at June 30, 2020 | | $ | 3,630 |
Fair Value Measurements
On January 1, 2020, we adopted ASU 2018-13, which amends the required fair value measurements disclosures related to valuation techniques and inputs used, uncertainty in measurement and changes in measurements applied. These amendments resulted in new, prospective disclosures of the range and weighted average of the significant unobservable inputs used to develop our Level 3 fair value measurements related to our idle and previously-culled compressors. The adoption of ASU 2018-13 had no impact on our condensed consolidated financial statements.
Income Taxes
On January 1, 2020, we adopted ASU 2019-12, which simplifies the accounting for income taxes by, among other things, removing certain exceptions related to the incremental approach for intraperiod tax allocation, the year-to-date loss methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities on outside basis differences. ASU 2019-12 also clarifies other aspects of the accounting for income taxes in order to improve consistency of application. The adoption of ASU 2019-12 had no impact on our condensed consolidated financial statements.
12
Accounting Standards Updates Not Yet Implemented
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued as a result of reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. Entities may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. We are currently assessing the impact that ASU 2020-04 may have on our interest rate swap agreements, Credit Facility and other transactions that may be affected by reference rate reform.
3. Business Transactions
March 2020 Disposition
On March 1, 2020, we completed the sale of certain contract operations customer service agreements and approximately 200 compressors, comprising approximately 35,000 horsepower, used to provide compression services under those agreements as well as other assets used to support the operations. We allocated customer and contract-related intangible assets and goodwill based on a ratio of the horsepower sold relative to the total horsepower of the asset group. We recognized a gain on the sale of $3.2 million in gain (loss) on sale of assets, net in our condensed consolidated statements of operations during the six months ended June 30, 2020.
Elite Acquisition
On August 1, 2019, we completed the Elite Acquisition whereby we acquired from Elite Compression substantially all of its assets, including a fleet of predominantly large compressors comprising approximately 430,000 horsepower, vehicles, real property and inventory, and certain liabilities for aggregate consideration consisting of $214.0 million in cash and 21.7 million shares of common stock with an acquisition date fair value of $225.9 million. The cash portion of the acquisition was funded with borrowings on the Credit Facility.
The Elite Acquisition was accounted for using the acquisition method, which requires, among other things, assets acquired and liabilities assumed to be recorded at their fair value on the acquisition date. The excess of the consideration transferred over those fair values is recorded as goodwill. The following table summarizes the purchase price allocation based on the estimated fair values of the acquired assets and liabilities as of the acquisition date (in thousands):
| | | |
Accounts receivable |
| $ | 9,007 |
Inventory | |
| 7,987 |
Other current assets | |
| 608 |
Property, plant and equipment | |
| 286,158 |
Operating lease ROU assets | |
| 682 |
Goodwill | |
| 100,598 |
Intangible assets | |
| 40,237 |
Accounts payable, trade | |
| (2,079) |
Accrued liabilities | |
| (2,973) |
Operating lease liabilities | |
| (326) |
Purchase price | | $ | 439,899 |
Our valuation methodology and significant inputs for fair value measurements are detailed by asset class below. The fair value measurements for property, plant and equipment and intangible assets are based on significant inputs that are not observable in the market and therefore represent Level 3 measurements.
13
Goodwill
The goodwill resulting from the acquisition is attributable to the expansion of our services in various regions in which we currently operate and was allocated to our contract operations segment. All of the goodwill recorded for this acquisition is expected to be deductible for U.S. federal income tax purposes.
Property, Plant and Equipment
The property, plant and equipment is primarily comprised of compression equipment that will be depreciated on a straight-line basis over an estimated average remaining useful life of 15 years. The fair value of the property, plant and equipment was determined using the cost approach, whereby we estimated the replacement cost of the assets by evaluating recent purchases of similar assets or published data, and then adjusted replacement cost for physical deterioration and functional and economic obsolescence, as applicable.
Intangible Assets
The intangible assets consist of customer relationships that have an estimated useful life of 15 years. The amount of intangible assets and their associated useful life were determined based on the period over which the assets are expected to contribute directly or indirectly to our future cash flows. The fair value of the identifiable intangible assets was determined using the multi-period excess earnings method, which is a specific application of the discounted cash flow method, an income approach, whereby we estimated and then discounted the future cash flows of the intangible asset by adjusting overall business revenue for attrition, obsolescence, cost of sales, operating expenses, taxes and the required returns attributable to other contributory assets acquired. Significant estimates made in arriving at expected future cash flows included our expected customer attrition rate and the amount of earnings attributable to the assets. To discount the estimated future cash flows, we utilized a discount rate that was at a premium to our weighted average cost of capital to reflect the less liquid nature of the customer relationships relative to the tangible assets acquired.
Unaudited Pro Forma Financial Information
Unaudited pro forma financial information for the three and six months ended June 30, 2019 was derived by adjusting our historical financial statements in order to give effect to the assets and liabilities acquired in the Elite Acquisition. The Elite Acquisition is presented in this unaudited pro forma financial information as though the acquisition occurred as of January 1, 2019, and reflects the following:
The unaudited pro forma financial information below is presented (in thousands) for informational purposes only and is not necessarily indicative of our results of operations that would have occurred had the transaction been consummated at the beginning of the period presented, nor is it necessarily indicative of future results.
| | | | | | |
| | Three Months Ended | | Six Months Ended | ||
| | June 30, 2019 |
| June 30, 2019 | ||
Revenue | | $ | 257,706 | | $ | 512,271 |
Net income | |
| 15,250 | |
| 36,220 |
14
The results of operations attributable to the assets and liabilities acquired in the Elite Acquisition have been included in our condensed consolidated financial statements as part of our contract operations segment since the date of acquisition.
4. Discontinued Operations
In 2015 we completed the Spin-off. In order to effect the Spin-off and govern our relationship with Exterran Corporation after the Spin-off, we entered into several agreements with Exterran Corporation which include, but are not limited to, the separation and distribution agreement and the tax matters agreement.
The separation and distribution agreement specifies our right to promptly receive payments from Exterran Corporation based on a notional amount corresponding to payments received by Exterran Corporation from PDVSA in respect of the sale of Exterran Corporation’s previously-nationalized assets after such amounts are collected by Exterran Corporation. During the three months ended June 30, 2020, we received $0.7 million from Exterran Corporation pursuant to this term of the separation and distribution agreement. We also entered into an assignment from Exterran Corporation so that any future payments by PDVSA would be received directly by us.
The tax matters agreement governs the respective rights, responsibilities and obligations of Exterran Corporation and us with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and certain other matters regarding taxes. Subject to the provisions of this agreement, we and Exterran Corporation agreed to indemnify the primary obligor of any return for tax periods beginning before and ending before or after the Spin-off (including any ongoing or future amendments and audits for these returns) for the portion of the tax liability (including interest and penalties) that relates to their respective operations reported in the filing.
As of both June 30, 2020 and December 31, 2019, we had $8.5 million of unrecognized tax benefits (including interest and penalties) related to Exterran Corporation operations prior to the Spin-off recorded to noncurrent liabilities associated with discontinued operations in our condensed consolidated balance sheets. We had an offsetting indemnification asset of $8.5 million related to these unrecognized tax benefits recorded to noncurrent assets associated with discontinued operations as of both June 30, 2020 and December 31, 2019.
The following table presents the balance sheet for our discontinued operations (in thousands):
| | | | | | |
|
| June 30, 2020 |
| December 31, 2019 | ||
Other assets | | $ | 8,529 | | $ | 8,508 |
Deferred tax assets | | | 3,780 | | | 4,393 |
Total assets associated with discontinued operations | | $ | 12,309 | | $ | 12,901 |
| | | | | | |
Deferred tax liabilities | | $ | 8,529 | | $ | 8,508 |
Total liabilities associated with discontinued operations | | $ | 8,529 | | $ | 8,508 |
The following table presents the statements of operations for our discontinued operations (in thousands):
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Other income, net |
| $ | (10) |
| $ | — |
| $ | (20) |
| $ | (1,432) |
Provision for income taxes | | | 10 | |
| — | |
| 20 | |
| 1,705 |
Loss from discontinued operations, net of tax | | $ | — | | $ | — | | $ | — | | $ | (273) |
15
5. Inventory
Inventory consisted of the following (in thousands):
| | | | | | |
|
| June 30, 2020 |
| December 31, 2019 | ||
Parts and supplies | | $ | 64,774 | | $ | 66,121 |
Work in progress | |
| 6,217 | |
| 8,346 |
Inventory | | $ | 70,991 | | $ | 74,467 |
6. Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following (in thousands):
| | | | | | |
|
| June 30, 2020 |
| December 31, 2019 | ||
Compression equipment, facilities and other fleet assets | | $ | 3,505,096 | | $ | 3,653,930 |
Land and buildings | |
| 51,236 | |
| 50,743 |
Transportation and shop equipment | |
| 116,980 | |
| 116,057 |
Computer hardware and software | |
| 94,613 | |
| 93,695 |
Other | |
| 18,295 | |
| 15,308 |
Property, plant and equipment | |
| 3,786,220 | |
| 3,929,733 |
Accumulated depreciation | |
| (1,300,146) | |
| (1,370,335) |
Property, plant and equipment, net | | $ | 2,486,074 | | $ | 2,559,398 |
7. Goodwill
Our goodwill was recognized in connection with the Elite Acquisition and represents the excess of consideration transferred over the fair value of the assets and liabilities acquired. All of the goodwill was allocated to our contract operations reporting unit. We review the carrying amount of our goodwill in the fourth quarter of every year, or whenever indicators of potential impairment exist, to determine if the carrying amount of our contract operations reporting unit exceeds its fair value, including the goodwill. Beginning in the first quarter of 2020, the COVID-19 pandemic caused a significant deterioration in global macroeconomic conditions, including a collapse in the demand for oil coupled with an oversupply of oil, which commenced substantial spending cuts by our customers and a decline in production. This global response to the pandemic significantly impacted our market capitalization and estimates of future revenues and cash flows, which triggered the need to perform a quantitative test of the fair value of our contract operations reporting unit as of March 31, 2020. The quantitative test determined that the carrying amount of our contract operations reporting unit exceeded its fair value and we recorded a full impairment loss on goodwill in the first quarter as a result.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions, which have a significant impact on the fair value determined. We determine the fair value of our reporting unit using an equal weighting of both the expected present value of future cash flows and a market approach. The present value of future cash flows is estimated using our most recent forecast and the weighted average cost of capital. The market approach uses a market multiple on the earnings before interest expense, provision for income taxes and depreciation and amortization expense of comparable peer companies. Significant estimates for our reporting unit included in our impairment analysis are our cash flow forecasts, our estimate of the market’s weighted average cost of capital and market multiples.
16
The following table presents the change in the carrying amount of goodwill during the six months ended June 30, 2020 (in thousands):
| | | |
Balance at December 31, 2019 | | $ | 100,598 |
Dispositions | | | (768) |
Impairment loss | |
| (99,830) |
Balance at June 30, 2020 | | $ | — |
8. Hosting Arrangements
In the fourth quarter of 2018 we began a process and technology transformation project that will, among other things, upgrade or replace our existing ERP, supply chain and inventory management systems and expand the remote monitoring capabilities of our compression fleet. Included in this project are hosting arrangements that are service contracts related to the cloud migration of our ERP system and cloud servicesOur allowance for our new mobile workforce, telematics and inventory management tools.
Certain costs incurred for the implementation of our hosting arrangements that are service contracts are capitalized and amortized on a straight-line basis over the term of the respective contract. Amortization begins in the period in which an individual component becomes ready for its intended use. As of June 30, 2020 and December 31, 2019, we capitalized $7.7 million and $5.5 million, respectively, of implementation costs related to our hosting arrangements that are service contracts to other assets in our condensed consolidatedcredit losses balance sheets. Accumulated amortization was $0.1 million at June 30, 2020. We recorded $0.1 million of amortization expense to SG&A in our condensed consolidated statements of operations during each of the three and six months ended June 30, 2020.
9. Long-Term Debt
Long-term debt consisted of the following (in thousands):
| | | | | | |
|
| June 30, 2020 |
| December 31, 2019 | ||
Credit Facility | | $ | 823,000 | | $ | 513,000 |
| | | | | | |
2028 Notes | |
| 500,000 | |
| 500,000 |
Less: Deferred financing costs, net of amortization | |
| (7,603) | |
| (8,090) |
| |
| 492,397 | |
| 491,910 |
| | | | | | |
2027 Notes | | | 500,000 | |
| 500,000 |
Less: Deferred financing costs, net of amortization | | | (7,460) | |
| (7,999) |
| | | 492,540 | |
| 492,001 |
| | | | | | |
2022 Notes | |
| — | |
| 350,000 |
Less: Debt discount, net of amortization | |
| — | |
| (2,046) |
Less: Deferred financing costs, net of amortization | |
| — | |
| (2,316) |
| |
| — | |
| 345,638 |
| | | | | | |
Long-term debt | | $ | 1,807,937 | | $ | 1,842,549 |
17
Credit Facility
As of June 30, 2020, there were $12.4 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.5%. The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 2.7% and 4.3% at June 30, 2020 and December 31, 2019, respectively. We incurred $0.4 million and $0.6 million in commitment fees on the daily unused amount of the Credit Facilitychanged as follows during the three months ended June 30, 2020 and 2019, respectively, and $1.1 million during each of the six months ended June 30, 2020 and 2019.
We must maintain certain consolidated financial ratios as defined in our Credit Facility agreement. As of June 30, 2020, the ratio requirements did not constrain our undrawn capacity and as such, $414.6 million was available for additional borrowings. As of June 30, 2020, we were in compliance with all covenants under the Credit Facility agreement.
2022 Notes Redemption
On April 1, 2020, the 2022 Notes were redeemed at 100% of their $350.0 million aggregate principal amount plus accrued and unpaid interest of $10.5 million with borrowings from the Credit Facility. A debt extinguishment loss of $4.0 million related to the redemption was recognized during the three and six months ended June 30, 2020.
10. Accumulated Other Comprehensive Income (Loss)
Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with owners. Our accumulated other comprehensive income (loss) consists of changes in the fair value of our interest rate swap derivative instruments, net of tax, which are designated as cash flow hedges.
The following table presents the changes in accumulated other comprehensive income (loss) of our derivative cash flow hedges, net of tax, during the three and six months ended June 30, 2020 and 2019 (in thousands):
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Beginning accumulated other comprehensive income (loss) | | $ | (7,173) | | $ | 2,548 | | $ | (1,387) | | $ | 5,773 |
Loss recognized in other comprehensive income (loss), net of tax benefit of $155, $0, $1,745 and $0, respectively (1) | |
| (583) | |
| (4,529) | |
| (6,566) | |
| (6,828) |
(Gain) loss reclassified from accumulated other comprehensive income (loss) to interest expense, net of tax benefit of $225, $0, $277 and $0, respectively (1) | |
| 848 | |
| (791) | |
| 1,045 | |
| (1,717) |
Other comprehensive income (loss) | |
| 265 | |
| (5,320) | |
| (5,521) | |
| (8,545) |
Ending accumulated other comprehensive loss | | $ | (6,908) | | $ | (2,772) | | $ | (6,908) | | $ | (2,772) |
See Note 17 (“Derivatives”) for further details on our interest rate swap derivative instruments.
18
11. Equity
Cash Dividends
The following table summarizes our dividends declared and paid in each of the quarterly periods of 2020 and 2019:March 31, 2021:
| | | | | | |
|
| Declared Dividends |
| Dividends Paid | ||
|
| per Common Share |
| (in thousands) | ||
2020 | |
|
| |
|
|
Q1 | | $ | 0.145 | | $ | 22,171 |
Q2 | | | 0.145 | | | 22,176 |
| | | | | | |
2019 |
| |
|
| |
|
Q1 | | $ | 0.132 | | $ | 17,231 |
Q2 | |
| 0.132 | |
| 17,206 |
Q3 | |
| 0.145 | |
| 22,062 |
Q4 | |
| 0.145 | |
| 22,031 |
| | | |
(in thousands) | | | |
Balance at December 31, 2020 |
| $ | 3,370 |
Provision for credit losses | | | 224 |
Write-offs charged against allowance | | | (300) |
Balance at March 31, 2021 | | $ | 3,294 |
On July 29, 2020, our Board of Directors declared a quarterly dividend of $0.145 per share of common stock to be paid on August 14, 2020 to stockholders of record at the close of business on August 10, 2020.
12. Revenue from Contracts with Customers
The following table presents our revenue from contracts with customers disaggregated by revenue source (in thousands):
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Contract operations (1): | | |
| | |
| | |
| | |
|
0 - 1,000 horsepower per unit | | $ | 57,728 | | $ | 63,683 | | $ | 124,468 | | $ | 127,422 |
1,001 - 1,500 horsepower per unit | |
| 78,026 | |
| 75,598 | |
| 162,878 | |
| 149,938 |
Over 1,500 horsepower per unit | |
| 51,618 | |
| 45,969 | |
| 106,209 | |
| 89,394 |
Other (2) | |
| 577 | |
| 1,008 | |
| 1,368 | |
| 2,011 |
Total contract operations (3) | |
| 187,949 | |
| 186,258 | |
| 394,923 | |
| 368,765 |
| | | | | | | | | | | | |
Aftermarket services (1): | |
|
| |
|
| |
|
| |
|
|
Services | |
| 19,081 | |
| 33,281 | |
| 44,531 | |
| 66,802 |
OTC parts and components sales | |
| 13,286 | |
| 18,851 | |
| 30,559 | |
| 38,982 |
Total aftermarket services (4) | |
| 32,367 | |
| 52,132 | |
| 75,090 | |
| 105,784 |
| | | | | | | | | | | | |
Total revenue | | $ | 220,316 | | $ | 238,390 | | $ | 470,013 | | $ | 474,549 |
19
Performance Obligations
As of June 30, 2020, we had $416.8 million of remaining performance obligations related to our contract operations segment. We do not consider the effects of the time value of money, as the expected time between the transfer of services and payment for such services is less than one year. Our remaining performance obligations will be recognized through 2025 as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
|
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| Total | |||||||
Remaining performance obligations | | $ | 172,639 | | $ | 170,084 | | $ | 65,438 | | $ | 7,532 | | $ | 1,030 | | $ | 79 | | $ | 416,802 |
We do not disclose the aggregate transaction price for the remaining performance obligations for aftermarket services as there are no contracts with customers with an original contract term that is greater than one year.
Contract Assets and Liabilities
As of June 30, 2020 and December 31, 2019, our receivables from contracts with customers, net of allowance for credit losses, were $118.8 million and $139.4 million, respectively.
Freight billings to customers for the transport of compression assets, customer-specified modifications of compression assets and milestone billings on aftermarket services often result in a contract liability. As of June 30, 2020March 31, 2021 and December 31, 2019,2020, our contract liabilities were $6.9$3.6 million and $11.4$4.6 million, respectively, which were included in deferred revenue and other liabilities in our condensed consolidated balance sheets. The decrease in the contract liability balance during the sixthree months ended June 30, 2020March 31, 2021 was primarily due to $12.8$2.3 million recognized as revenue during the period, partially offset by revenue deferral of $8.3$1.4 million, each primarily related to freight billings and milestone billings on aftermarket services.
13. Long-Lived and Other Asset Impairment
We review long-lived assets, including property, plant and equipment and identifiable intangibles that are being amortized, for impairment whenever events or changes in circumstances, including the removal of compressors from our active fleet, indicate that the carrying amount of an asset may not be recoverable.
In the first quarter of 2020, we determined that the impairment of our contract operations reporting unit’s goodwill was an indicator of potential impairment of the carrying amount of our long-lived assets, including our compressor fleet and associated customer and contract-based intangible assets. Accordingly, we performed a quantitative impairment test of our long-lived assets, by which we determined that they were not also impaired. No similar impairment has been indicated subsequent to the first quarter of 2020.
Compression Fleet
We periodically review the future deployment of our idle compression assets for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. Based on these reviews, we determine that certain idle compressors should be retired from the active fleet. The retirement of these units from the active fleet triggers a review of these assets for impairment and as a result of our review, we may record an asset impairment to reduce the book value of each unit to its estimated fair value. The fair value of each unit is estimated based on the expected net sale proceeds compared to other fleet units we recently sold, a review of other units recently offered for sale by third parties or the estimated component value of the equipment we plan to use.
In connection with our review of our idle compression assets, we evaluate for impairment idle units that were culled from our fleet in prior years and are available for sale. Based on that review, we may reduce the expected proceeds from disposition and record additional impairment to reduce the book value of each unit to its estimated fair value.
In the first quarter of 2020, we determined that the impairment of our contract operations reporting unit’s goodwill was an indicator of potential impairment of the carrying amount of our long-lived assets, including our compressor fleet and associated customer and contract-based intangible assets. Accordingly, we performed a quantitative impairment test of our long-lived assets, by which we determined that they were not also impaired. No similar impairment has been indicated subsequent to the first quarter.
2017
The following table presents the results of our compression fleet impairment review as recorded to our contract operations segment (dollars in thousands):
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Idle compressors retired from the active fleet |
| | 450 |
| | 160 |
| | 535 |
| | 180 |
Horsepower of idle compressors retired from the active fleet |
| | 184,000 |
| | 41,000 |
| | 207,000 |
| | 56,000 |
Impairment recorded on idle compressors retired from the active fleet | | $ | 55,210 | | $ | 8,632 | | $ | 61,405 | | $ | 11,724 |
segment:
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
(dollars in thousands) |
| 2021 |
| 2020 | ||
Idle compressors retired from the active fleet |
| | 70 |
| | 85 |
Horsepower of idle compressors retired from the active fleet |
| | 24,000 |
| | 23,000 |
Impairment recorded on idle compressors retired from the active fleet | | $ | 7,012 | | $ | 6,195 |
14. Restructuring Charges
During the first quarter of 2020, we completed a series of restructuring activities to further streamline our organization and more fully align our teams to improve our customer service and profitability. We beganincurred severance costs of $1.7 million related to these activities during the three months ended March 31, 2020. NaN additional restructuring activities in the second quarter incosts will be incurred for this organizational restructuring.
In response to the decreased activity level of our customers that resulted from the COVID-19 pandemic. Wepandemic beginning in the second quarter of 2020, we have incurred severance costs of $2.4$6.1 million and $4.1 million during the three and six months ended June 30, 2020, respectively, which are reflected as restructuring charges into right-size our condensed consolidated statements of operations.
The following table presents the changes to our accrued liability balance related to restructuring charges during the six months ended June 30, 2020 (in thousands):
| | | |
Balance at December 31, 2019 | | $ | — |
Severance costs | |
| 3,974 |
Non-cash expense | | | 162 |
Payments | | | (2,885) |
Balance at June 30, 2020 | | $ | 1,251 |
The following table presents, by segment, the restructuring charges incurred during the three and six months ended June 30, 2020 (in thousands):
| | | | | | | | | | | | |
|
| Contract | | Aftermarket | | | | | ||||
| | Operations | | Services | | Other (1) | | Total | ||||
Three months ended June 30, 2020 | | $ | 1,386 | | $ | 286 | | $ | 736 | | $ | 2,408 |
Six months ended June 30, 2020 | | | 1,864 | | | 911 | | | 1,361 | | | 4,136 |
business. We are not currently able to estimate the total amount of totalrestructuring costs to be incurred related to the restructuring activities commenced as a result of the COVID-19 pandemic, as the magnitude and duration of the pandemic and its impact on our operations remain difficult to predict.
15. Income TaxesDuring the third quarter of 2020, a plan to dispose of certain non-core properties was approved by management. We have incurred $1.5 million of restructuring costs as a result of our property disposals and do not expect to incur additional material property disposal costs under this restructuring plan.
CARES Act
On March 27, 2020, President Trump signed into lawThe severance and property disposal costs incurred under the CARES Act, which includes, among other things, refundable payroll tax credits, deferment of employer side social security payments, NOL carryback periods, alternative minimum tax credit refunds, modificationsabove restructuring plans were recorded to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act provisions did not have a material impact onrestructuring charges in our condensed consolidated financial statements. Future regulatory guidance under the CARES Act or additional legislation enactedstatements of operations.
The following table presents restructuring charges incurred by Congress in connection with the COVID-19 pandemic could impact our tax provision in future periods.segment:
| | | | | | | | | | | | |
|
| Contract | | Aftermarket | | | | | | | ||
(in thousands) | | Operations | | Services | | Other (1) | | Total | ||||
Three months ended March 31, 2021 | | | | | | | | | | | | |
Pandemic restructuring | | $ | 279 | | $ | 24 | | $ | 585 | | $ | 888 |
Property restructuring | | | — | | | — | | | 9 | | | 9 |
Total restructuring charges | | $ | 279 | | $ | 24 | | $ | 594 | | $ | 897 |
| | | | | | | | | | | | |
Three months ended March 31, 2020 | | | | | | | | | | | | |
Organizational restructuring | | $ | 478 | | $ | 625 | | $ | 625 | | $ | 1,728 |
(1) | Represents expense incurred within our corporate function and not directly attributable to our segments. |
2118
The following table presents restructuring charges incurred by cost type:
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
(in thousands) | | 2021 | | 2020 | ||
Severance costs | | | | | | |
Organizational restructuring |
| $ | — |
| $ | 1,728 |
Pandemic restructuring |
| | 888 |
| | — |
Total severance costs | | | 888 | | | 1,728 |
Impairment - property restructuring |
| | 9 |
| | — |
Total restructuring charges | | $ | 897 | | $ | 1,728 |
15. Income Taxes
Valuation Allowance
The amount of our deferred tax assets considered realizable could be adjusted if projections of future taxable income are reduced or objective negative evidence in the form of a three-year cumulative loss is present or both. Should we no longer have a level of sustained profitability, excluding nonrecurring charges, we will have to rely more on our future projections of taxable income to determine if we have an adequate source of taxable income for the realization of our deferred tax assets, namely NOLnet operating loss carryforwards and tax credit carryforwards. This may result in the need to record a valuation allowance against all or a portion of our deferred tax assets.
Effective Tax Rate
We have historically calculated the provision for (benefit from) income taxes during interim reporting periods by applying a full year estimated AETR to income (loss) before income taxes, excluding infrequent or unusual discrete items, for the reporting period. For the six months ended June 30, 2020, we determined that using an AETR would not provide a reliable estimate of income taxes due to small changes in our projected income (loss) before income taxes resulting in significant changes in the estimated AETR. Thus, we concluded to use a discrete effective tax rate, which treats theThe year-to-date period as an annual period, to calculate income taxes for the six months ended June 30, 2020. The resulting year-to date effective tax rate for the sixthree months ended June 30, 2020 did notMarch 31, 2021 differed significantly differ from our statutory rate. We will continuerate primarily due to evaluate interim incomeunrecognized tax estimates using an estimated AETR in subsequent quartersbenefits and will only use a discrete effective tax rate if warranted.the limitation on executive compensation.
Unrecognized Tax Benefits
As of June 30, 2020,March 31, 2021, we believe it is reasonably possible that $2.7 million of our unrecognized tax benefits, including penalties, interest and discontinued operations, will be reduced prior to June 30, 2021March 31, 2022 due to the settlement of audits or the expiration of statutes of limitations or both. However, due to the uncertain and complex application of the tax regulations, it is possible that the ultimate resolution of these matters may result in liabilities that could materially differ from this estimate.
16. Earnings per Share
Basic net income (loss) per common share is computed using the two-class method, which is an earnings allocation formula that determines net income (loss) per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Under the two-class method, basic net income (loss) per common share is determined by dividing net income (loss), after deducting amounts allocated to participating securities, by the weighted average number of common shares outstanding for the period. Participating securities include unvested restricted stock and stock-settled restricted stock units that have nonforfeitable rights to receive dividends or dividend equivalents, whether paid or unpaid. During periods of net loss, no effect is givenonly distributed earnings (dividends) are allocated to participating securities, becauseas they do not have a contractual obligation to participate in our undistributed losses.
Diluted net income (loss) per common share is computed using the weighted average number of shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options, performance-based restricted stock units and stock to be issued pursuant to our employee stock purchase planESPP unless their effect would be anti-dilutive.
2219
The following table shows the calculation for net income (loss) attributable to common stockholders, which is used in the calculation of basic and diluted net income (loss) per common share (in thousands):share:
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Income (loss) from continuing operations | | $ | (30,381) | | $ | 11,423 | | $ | (91,568) | | $ | 31,152 |
Loss from discontinued operations, net of tax | |
| — | |
| — | |
| — | |
| (273) |
Net income (loss) | |
| (30,381) | |
| 11,423 | |
| (91,568) | |
| 30,879 |
Less: Net income attributable to participating securities | |
| (321) | |
| (261) | |
| (643) | |
| (574) |
Net income (loss) attributable to common stockholders | | $ | (30,702) | | $ | 11,162 | | $ | (92,211) | | $ | 30,305 |
| | | | | | | |
| | | Three Months Ended | ||||
| | | March 31, | ||||
(in thousands) |
|
| 2021 |
| 2020 | ||
Net income (loss) | | | $ | 4,169 | | $ | (61,187) |
Less: Earnings attributable to participating securities | | |
| (168) | |
| (322) |
Net income (loss) attributable to common stockholders | | | $ | 4,001 | | $ | (61,509) |
The following table shows the potential shares of common stock that were included in computing diluted net income (loss) per common share (in thousands):share:
| | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||
| | June 30, | | June 30, | ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
Weighted average common shares outstanding including participating securities | | 152,937 | | 130,330 | | 152,750 | | 130,276 |
Less: Weighted average participating securities outstanding |
| (2,194) |
| (2,002) |
| (2,122) |
| (2,015) |
Weighted average common shares outstanding used in basic net income (loss) per common share |
| 150,743 |
| 128,328 |
| 150,628 |
| 128,261 |
Net dilutive potential common shares issuable: |
| |
|
|
|
|
|
|
On exercise of options and vesting of performance-based restricted stock units |
| — | | 25 |
| — |
| 33 |
On settlement of employee stock purchase plan shares |
| — | | 1 |
| — |
| 3 |
Weighted average common shares outstanding used in diluted net income (loss) per common share |
| 150,743 |
| 128,354 |
| 150,628 |
| 128,297 |
| | | | |
| | Three Months Ended | ||
| | March 31, | ||
(in thousands) |
| 2021 |
| 2020 |
Weighted average common shares outstanding including participating securities | | 153,004 | | 152,601 |
Less: Weighted average participating securities outstanding |
| (1,579) |
| (2,051) |
Weighted average common shares outstanding used in basic net income (loss) per common share |
| 151,425 |
| 150,550 |
Net dilutive potential common shares issuable: |
|
|
|
|
On exercise of options and vesting of performance-based restricted stock units |
| 149 |
| — |
On settlement of ESPP shares |
| 4 |
| — |
Weighted average common shares outstanding used in diluted net income (loss) per common share |
| 151,578 |
| 150,550 |
The following table shows the potential shares of common stock issuable that were excluded from computing diluted net income (loss) per common share as their inclusion would have been anti-dilutive (in thousands):anti-dilutive:
| | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||
| | June 30, | | June 30, | ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
On exercise of options where exercise price is greater than average market value for the period | | 95 |
| 154 |
| 111 |
| 154 |
On exercise of options and vesting of performance-based restricted stock units | | 57 | | — | | 57 | | — |
On settlement of employee stock purchase plan shares | | 22 | | — | | 25 | | — |
Net dilutive potential common shares issuable | | 174 | | 154 | | 193 | | 154 |
| | | | |
| | Three Months Ended | ||
| | March 31, | ||
(in thousands) |
| 2021 |
| 2020 |
On exercise of options where exercise price is greater than average market value for the period |
| 44 |
| 126 |
On exercise of options and vesting of performance-based restricted stock units | | — | | 57 |
On settlement of ESPP shares | | — | | 29 |
Net dilutive potential common shares issuable | | 44 | | 212 |
17. Derivatives
We are exposed to market risks associated with changes in the variable interest rate of our Credit Facility. We use derivative instruments to manage our exposure to fluctuations in this variable interest rate and thereby minimize the risks and costs associated with financial activities. We do not use derivative instruments for trading or other speculative purposes.
23
As of June 30, 2020,March 31, 2021, we had $300.0 million notional value of interest rate swaps outstanding, which expire in March 2022 and were entered into to offset changes in expected cash flows due to fluctuations in the associated variable interest rates. The counterparties to ourthese derivative agreements are major financial institutions. We monitor the credit quality of these financial institutions and do not expect nonperformance by any counterparty, although such nonperformance could have a material adverse effect on us. We have no collateral posted for theour derivative instruments.
20
We have designated theseour interest rate swaps as cash flow hedging instruments. Changes in the fair value of the interest rate swapscash flow hedging instruments are recognized as a component of other comprehensive income (loss) until the hedged transaction affects earnings. At that time, amounts are reclassified into earnings to interest expense, the same statement of operations line item to which the earnings effect of the hedged item is recorded. Cash flows from derivatives designated as hedges are classified in our condensed consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions unless the derivative contract contains a significant financing element;element, in thiswhich case, the cash settlements for these derivatives are classified as cash flows from financing activities.
We expect the hedging relationship to be highly effective as the interest rate swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate. We perform quarterly qualitative prospective and retrospective hedge effectiveness assessments unless facts and circumstances related to the hedging relationships change such that we can no longer assert qualitatively that the cash flow hedge relationships were and continue to be highly effective. We estimate that $4.7$4.8 million of the deferred pre-tax loss attributable to interest rate swaps included in accumulated other comprehensive loss at June 30, 2020March 31, 2021 will be reclassified into earnings as interest expense at then-current values during the next 12 months as the underlying hedged transactions occur.
As of June 30, 2020,March 31, 2021, the weighted average effective fixed interest rate onof our interest rate swaps was 1.8%.
The following table presents the effect of our derivative instruments designated as cash flow hedging instruments on our condensed consolidated balance sheets (in thousands):sheets:
| | | | | | |
|
| June 30, 2020 |
| December 31, 2019 | ||
Other current assets | | $ | — | | $ | 12 |
Total derivative assets | | $ | — | | $ | 12 |
| | | | | | |
Accrued liabilities | | $ | 4,747 | | $ | 593 |
Other liabilities | |
| 3,999 | |
| 1,175 |
Total derivative liabilities | | $ | 8,746 | | $ | 1,768 |
| | | | | | |
(in thousands) |
| March 31, 2021 |
| December 31, 2020 | ||
Accrued liabilities | | $ | 4,771 | | $ | 4,810 |
Other liabilities | |
| 305 | |
| 1,527 |
Total derivative liabilities | | $ | 5,076 | | $ | 6,337 |
The following tables presenttable presents the effect of our derivative instruments designated as cash flow hedging instruments on our condensed consolidated statements of operations (in thousands):operations:
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Pre-tax loss recognized in other comprehensive income (loss) | | $ | (738) | | $ | (4,529) | | $ | (8,311) | | $ | (6,828) |
Pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense | |
| (1,073) | |
| 791 | |
| (1,322) | |
| 1,717 |
Total amount of interest expense in which the effects of cash flow hedges are recorded | | | 25,778 | | | 25,954 | | | 55,443 | | | 49,571 |
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
(in thousands) |
| 2021 |
| 2020 | ||
Pre-tax loss recognized in other comprehensive income (loss) | | $ | (10) | | $ | (7,573) |
Pre-tax loss reclassified from accumulated other comprehensive loss into interest expense | |
| (1,271) | |
| (248) |
Total amount of interest expense in which the effects of cash flow hedges are recorded | | | 31,245 | | | 29,665 |
See Note 10 (“Accumulated Other Comprehensive Income (Loss)”Loss”) and Note 18 (“Fair Value Measurements”) for further details on our derivative instruments.
24
18. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
On a quarterly basis, our interest rate swap derivative instruments are valued based on the income approach (discounted cash flow) using market observable inputs, including LIBOR forward curves. These fair value measurements are classified as Level 2. The following table presents our derivative asset and liabilityposition measured at fair value on a recurring basis, with pricing levels as of the date of valuation (in thousands):valuation:
| | | | | | | | | | | | |
|
| June 30, 2020 |
| December 31, 2019 | ||||||||
Derivative asset | | $ | — | | $ | 12 | ||||||
(in thousands) |
| March 31, 2021 |
| December 31, 2020 | ||||||||
Derivative liability | |
| 8,746 | |
| 1,768 | | $ | 5,076 | | $ | 6,337 |
21
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Goodwill
In the first quarter of 2020, we determined that the significant deterioration in global macroeconomic conditions caused by the COVID-19 pandemic was an indicator of potential impairment of our goodwill, and we performed a quantitative impairment test as of March 31, 2020 that resulted in a $99.8 million impairment of our goodwill. Significant estimates used in our impairment analysis included cash flow forecasts, our estimate of the market’s weighted average cost of capital and market multiples, which are Level 3 inputs. See Note 7 (“Goodwill”) for further details of the valuation methodology used in connection with the goodwill impairment.
Compressors
During the sixthree months ended June 30, 2020,March 31, 2021, we recorded nonrecurring fair value measurements related to our idle and previously-culled compressors. Our estimate of the compressors’ fair value was primarily based on the expected net sale proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use. We discounted the expected proceeds, net of selling and other carrying costs, using a weighted average disposal period of 4 years. These fair value measurements are classified as Level 3.
The following table presents the fair value of our compressors impaired compressors as of June 30, 2020during 2021 and December 31, 2019 was as follows:2020:
| | | | | | |
|
| June 30, 2020 |
| December 31, 2019 | ||
Impaired compressors | | $ | 2,324 | | $ | 5,859 |
| |
| | | | |
| | | | | | |
(in thousands) |
| March 31, 2021 |
| December 31, 2020 | ||
Impaired compressors | | $ | 3,318 | | $ | 19,046 |
The significant unobservable inputs used to develop the above fair value measurements were weighted by the relative fair value of the compressors being measured. Additional quantitative information related to our significant unobservable inputs as of June 30, 2020 follows:
| | | | |
|
| Range |
| Weighted Average(1) |
Estimated net sale | | | | |
As of March 31, 2021 | | $0 - | | $ |
As of December 31, 2020 | | $0 - $289 per horsepower | | $20 per horsepower |
(1) |
See Note 13 (“Long-Lived and Other Asset Impairment”) for further details.
25
Other Financial Instruments
The carrying amounts of our cash, receivables and payables approximate fair value due to the short-term nature of those instruments.
The carrying amount of borrowings outstanding under our Credit Facility approximates fair value due to its variable interest rate. The fair value of these outstanding borrowings is a Level 3 measurement.
The fair value of our fixed rate debt is estimated using yields observable in active markets, which are Level 2 inputs, and was as follows (in thousands):follows:
| | | | | | |
|
| June 30, 2020 |
| December 31, 2019 | ||
Carrying amount of fixed rate debt (1) | | $ | 984,937 | | $ | 1,329,549 |
Fair value of fixed rate debt | |
| 932,000 | |
| 1,400,000 |
| | | | | | |
(in thousands) |
| March 31, 2021 |
| December 31, 2020 | ||
Carrying amount of fixed rate debt (1) | | $ | 1,295,738 | | $ | 1,295,867 |
Fair value of fixed rate debt | |
| 1,337,000 | |
| 1,371,000 |
(1) | Carrying amounts are shown net of unamortized debt |
22
19. Stock-Based Compensation
Stock-based compensation expense consisted of the following during the three and six months ended June 30, 2020 and 2019 (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | ||||||||||||
| | June 30, | | June 30, | | March 31, | ||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||||
(in thousands) |
| 2021 |
| 2020 | ||||||||||||||
Equity awards | | $ | 2,772 | | $ | 1,512 | | $ | 5,778 | | $ | 3,869 | | $ | 2,663 | | $ | 3,006 |
Liability awards | |
| 842 | |
| 640 | |
| 294 | |
| 1,606 | |
| 586 | |
| (548) |
Total stock-based compensation expense | | $ | 3,614 | | $ | 2,152 | | $ | 6,072 | | $ | 5,475 | | $ | 3,249 | | $ | 2,458 |
The following table presents the activity of our stock-settled restricted stock awards, restricted stock unit,units and performance-based restricted stock unitunits and our cash-settled performance unit activityperformance-based restricted stock units during the sixthree months ended June 30, 2020 (shares in thousands):March 31, 2021:
| | | | | |
| | | | Weighted | |
| | | | Average | |
| | | | Grant Date | |
| | | | Fair Value | |
|
| Shares |
| Per Share | |
Non-vested awards, December 31, 2019 |
| 2,022 | | $ | 10.25 |
Granted |
| 1,412 | |
| 9.47 |
Vested |
| (358) | |
| 9.45 |
Canceled |
| (59) | |
| 10.18 |
Non-vested awards, June 30, 2020 (1) |
| 3,017 | |
| 9.98 |
| | | | | |
| | | | Weighted | |
| | | | Average | |
| | | | Grant Date | |
| | | | Fair Value | |
(shares in thousands) |
| Shares |
| Per Share | |
Non-vested awards, December 31, 2020 |
| 2,446 | | $ | 9.69 |
Granted |
| 1,279 | |
| 11.22 |
Vested |
| (594) | |
| 9.30 |
Canceled |
| (26) | |
| 9.80 |
Non-vested awards, March 31, 2021 (1) |
| 3,105 | |
| 10.39 |
(1) | Non-vested awards as of |
As of June 30, 2020,March 31, 2021, we expect $18.9$24.0 million of unrecognized compensation cost related to unvested restricted stock, stock-settled restricted stock units, performance units, cash-settled restricted stock unitsour non-vested awards and cash-settled performance units to be recognized over the weighted average period of 2.02.2 years.
26
2020 Plan
The 2020 Plan was adopted in April 2020 and provides for the granting of stock options, restricted stock, restricted stock units, stock appreciation rights, performance awards, other stock-based awards and dividend equivalent rights to employees, directors and consultants of Archrock. Under the 2020 Plan, the maximum number of shares of common stock available for issuance is 8,500,000. Each stock-settled award granted under the 2020 Plan reduces the number of shares available for issuance by 1 share. No additional grants may be made under the 2013 Plan following the adoption of the 2020 Plan. Previous grants made under the 2013 Plan continue to be governed by that plan and the applicable award agreements.
20. Commitments and Contingencies
Performance Bonds
In the normal course of business we have issued performance bonds to various state authorities that ensure payment of certain obligations. We have also issued a bond to protect our 401(k) retirement plan against losses caused by acts of fraud or dishonesty. The bonds have expiration dates in 20202021 through the fourth quarter of 2022, and maximum potential future payments of $2.2 million. As of June 30, 2020,March 31, 2021, we were in compliance with all obligations to which the performance bonds pertain.
Tax Matters
We are subject to a number of state and local taxes that are not income-based. As many of these taxes are subject to audit by the taxing authorities, it is possible that an audit could result in additional taxes due. We accrue for such additional taxes when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the liability. As of June 30, 2020March 31, 2021 and December 31, 2019,2020, we accrued $2.6$5.4 million and $2.5$5.6 million, respectively, for the outcomes of non-income-based tax audits. We do not expect that the ultimate resolutions of these audits will result in a material variance from the amounts accrued. We do not accrue for unasserted claims for tax audits unless we believe the assertion of a claim is probable, it is probable that it will be determined that the claim is owed and we can reasonably estimate the claim or range of the claim. We believe the likelihood is remote that the impact of potential unasserted claims from non-income-based tax audits could be material to our consolidated financial position, but it is possible that the resolution of future audits could be material to our consolidated results of operations or cash flows.
23
Subject to the provisions of the tax matters agreement between Exterran Corporation and us, both parties agreed to indemnify the primary obligor of any return for tax periods beginning before and ending before or after the Spin-off (including any ongoing or future amendments and audits for these returns) for the portion of the tax liability (including interest and penalties) that relates to their respective operations reported in the filing. The tax contingencies mentioned above relate to tax matters for which we are responsible in managing the audit. As of June 30, 2020 and December 31, 2019,2020, we had an indemnification liability (including penalties and interest), in addition to the tax contingency above, of $1.6 million and $2.8 million, respectively, for our share of non-income-based tax contingencies related to audits being managed by Exterran Corporation. During the three months ended March 31, 2021, these audits were settled and our indemnification liability was reduced to 0.
Insurance Matters
Our business can be hazardous, involving unforeseen circumstances such as uncontrollable flows of natural gas or well fluids and fires or explosions. As is customary in our industry, we review our safety equipment and procedures and carry insurance against some, but not all, risks of our business. Our insurance coverage includes property damage, general liability and commercial automobile liability and other coverage we believe is appropriate. We believe that our insurance coverage is customary for the industry and adequate for our business; however, losses and liabilities not covered by insurance would increase our costs.
27
Additionally, we are substantially self-insured for workers’ compensation and employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses up to the deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages. We are also self-insured for property damage to our offshore assets.
Litigation and Claims
In the ordinary course of business, we are involved in various pending or threatened legal actions. While we are unable to predict the ultimate outcome of these actions, we believe that any ultimate liability arising from any of these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends.
21. Related Party Transactions
In connection with the closing of the Elite Acquisition, we issued 21.7 million shares of our common stock to JDH Capital, an affiliate of our customer Hilcorp. As long as JDH Capital, together with affiliates of Hilcorp, owns at least 7.5% of our outstanding common stock, it will have the right to designate 1 director to our Board of Directors. In August 2019, As of March 31, 2021, JDH Capital owned 11.4% of our outstanding common stock.
Jeffery D. Hildebrand, founder and executive chairman of Hilcorp, was electedappointed Director in August 2019 and served until his resignation on July 29, 2020, at which time Jason C. Rebrook, President of Hilcorp, was appointed Director to our Board of Directors.fill the resulting vacancy. Mr. Hildebrand receives 0did 0t receive compensation forin his role as a director. AsDirector and Mr. Rebrook received 0 compensation in his role as Director in 2020. In December 2020, the Board of June 30, 2020, JDH Capital owned 14.2%Directors voted to approve the payment of our outstanding common stock.Director cash and equity compensation to Mr. Rebrook beginning in 2021.
Revenue from Hilcorp and affiliates was $10.2$9.5 million and $4.9$10.7 million during the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and $20.8 million and $10.4 million during the six months ended June 30, 2020 and 2019, respectively. Accounts receivable, net due from Hilcorp and affiliates was $4.0$7.1 million and $5.1$3.9 million as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.
24
22. Segments
We manage our business segments primarily based on the type of product or service provided. We have 2 segments which we operate within the U.S.: contract operations and aftermarket services. The contract operations segment primarily provides natural gas compression services to meet specific customer requirements. The aftermarket services segment provides a full range of services to support the compression needs of customers, from parts sales and normal maintenance services to full operation of a customer’s owned assets.
We evaluate the performance of our segments based on gross margin for each segment. Revenue includes only sales to external customers.
28
The following table presents revenue and gross margin by segment during the three and six months ended June 30, 2020 and 2019 (in thousands):
| | | | | | | | | | | | | | | | | | |
|
| Contract |
| Aftermarket |
| | |
| Contract |
| Aftermarket |
| | | ||||
|
| Operations |
| Services |
| Total | ||||||||||||
Three months ended June 30, 2020 |
| |
|
| |
|
| |
| |||||||||
(in thousands) |
| Operations |
| Services |
| Total | ||||||||||||
Three months ended March 31, 2021 |
| |
|
| |
|
| |
| |||||||||
Revenue | | $ | 187,949 | | $ | 32,367 | | $ | 220,316 | | $ | 166,034 | | $ | 29,397 | | $ | 195,431 |
Gross margin | |
| 124,559 | |
| 3,681 | |
| 128,240 | |
| 104,669 | |
| 3,614 | |
| 108,283 |
| | | | | | | | | | | | | | | | | | |
Three months ended June 30, 2019 | |
|
| |
|
| |
|
| |||||||||
Three months ended March 31, 2020 | |
|
| |
|
| |
|
| |||||||||
Revenue | | $ | 186,258 | | $ | 52,132 | | $ | 238,390 | | $ | 206,974 | | $ | 42,723 | | $ | 249,697 |
Gross margin | |
| 115,737 | |
| 9,917 | |
| 125,654 | |
| 128,323 | |
| 7,732 | |
| 136,055 |
| | | | | | | | | | |||||||||
Six months ended June 30, 2020 | |
|
| |
|
| |
|
| |||||||||
Revenue | | $ | 394,923 | | $ | 75,090 | | $ | 470,013 | |||||||||
Gross margin | |
| 252,882 | |
| 11,413 | |
| 264,295 | |||||||||
| | | | | | | | | | |||||||||
Six months ended June 30, 2019 | |
|
| |
|
| |
|
| |||||||||
Revenue | | $ | 368,765 | | $ | 105,784 | | $ | 474,549 | |||||||||
Gross margin | |
| 223,509 | |
| 19,667 | |
| 243,176 |
The following table reconciles total gross margin to income (loss) before income taxes (in thousands):taxes:
| | | | | | | | | | | | |
| | Three Months Ended |
| Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Total gross margin | | $ | 128,240 | | $ | 125,654 | | $ | 264,295 | | $ | 243,176 |
Less: | |
|
| |
|
| |
|
| |
|
|
Selling, general and administrative | |
| 28,745 | |
| 28,618 | |
| 59,371 | |
| 57,607 |
Depreciation and amortization | |
| 48,849 | |
| 45,482 | |
| 98,671 | |
| 89,588 |
Long-lived asset impairment | |
| 55,210 | |
| 8,632 | |
| 61,405 | |
| 11,724 |
Goodwill impairment | | | — | | | — | | | 99,830 | | | — |
Restatement and other charges | |
| — | |
| 24 | |
| — | |
| 445 |
Restructuring charges | | | 2,408 | | | — | | | 4,136 | | | — |
Interest expense | |
| 25,778 | |
| 25,954 | |
| 55,443 | |
| 49,571 |
Debt extinguishment loss | |
| 3,971 | |
| 3,653 | |
| 3,971 | |
| 3,653 |
Transaction-related costs | |
| — | |
| 2,687 | |
| — | |
| 2,867 |
(Gain) loss on sale of assets, net | | | 2,189 | | | (1,801) | | | (1,927) | | | (1,785) |
Other income, net | |
| (438) | |
| (209) | |
| (993) | |
| (430) |
Income (loss) before income taxes | | $ | (38,472) | | $ | 12,614 | | $ | (115,612) | | $ | 29,936 |
| | | | | | |
|
| Three Months Ended | ||||
| | March 31, | ||||
(in thousands) |
| 2021 |
| 2020 | ||
Total gross margin | | $ | 108,283 | | $ | 136,055 |
Less: | |
|
| |
|
|
Selling, general and administrative | |
| 25,084 | |
| 30,626 |
Depreciation and amortization | |
| 45,712 | |
| 49,822 |
Long-lived and other asset impairment | |
| 7,073 | |
| 6,195 |
Goodwill impairment | | | — | | | 99,830 |
Restructuring charges | | | 897 | | | 1,728 |
Interest expense | |
| 31,245 | |
| 29,665 |
Gain on sale of assets, net | | | (11,032) | | | (4,116) |
Other income, net | |
| (1,889) | |
| (555) |
Income (loss) before income taxes | | $ | 11,193 | | $ | (77,140) |
23. Subsequent Events
July 2020 Disposition
On July 9, 2020, we completed the sale of the turbocharger business included within our aftermarket services segment. A gain on the sale of approximately $9.0 million will be recognized in the third quarter of 2020.
2925
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q and in conjunction with our 20192020 Form 10-K.
Overview
We are an energy infrastructure company with a pure-play focus on midstream natural gas compression. We are the leading provider of natural gas compression services to customers in the oil and natural gas industry throughout the U.S. and a leading supplier of aftermarket services to customers that own compression equipment in the U.S. We operate in two business segments: contract operations and aftermarket services. Our contract operations services primarily include designing, sourcing, owning, installing, operating, servicing, repairing and maintaining our owned fleet of natural gas compression equipment to provide natural gas compression services to our customers. In our aftermarket services business, we sell parts and components and provide operations, maintenance, overhaul and reconfiguration services to customers who own compression equipment.
Recent Business Developments
2022 Notes RedemptionFebruary 2021 Disposition
On April 1, 2020,February 10, 2021, we repaidcompleted the 2022 Notes with borrowings from our Credit Facility.sale of certain contract operations customer service agreements and approximately 300 compressors, comprising approximately 40,000 horsepower, used to provide compression services under those agreements as well as other assets used to support the operations. We recorded a gain on the sale of $6.0 million during the three months ended March 31, 2021. See Note 93 (“Long-Term Debt”Business Transactions”) to our Financial Statements for further details of this transaction.
COVID-19 Pandemic
DuringBeginning in the six months ended June 30,first quarter of 2020, the COVID-19 pandemic caused a deterioration in global macroeconomic conditions, including a collapse in the demand for natural gas and crude oil coupled with an oversupply of crude oil, in the first quarter, which commencedled to substantial spending cuts by our customers and a decline in production in the second quarter.natural gas and crude oil production. This global response to the pandemic has significantlyadversely impacted our market capitalization, revenue and cash flows. Though demand has shown modest improvement since the lows reached in the second quarter of 2020 as economies have started to reopen, muchreopened and vaccine rollout is underway globally, the potential for additional surges and variants of the disease remains and as such, uncertainty still exists surroundingaround the timing and magnitude of a full and sustainedeconomic recovery.
The key driver of our business is the production of U.S. crude oil and natural gas. Approximately 70% of our operating fleet is deployed for midstream natural gas gathering applications with the remaining fleet being used in wellhead and gas lift applications to enhance oil production.crude oil. Changes in oilnatural gas and natural gascrude oil production spending therefore typically result in changes in demand for our services. According to the EIA’s July 2020U.S. Energy Information Administration’s April 2021 Short-Term Energy Outlook, both crude oil andU.S. dry natural gas production are now expected to decline in 2020 and 2021 as the result of the decrease in demand and commodity prices. U.S. crude oil production is estimatedexpected to decrease 5% in 2020be flat and decline an additional 5%2%, respectively, in 2021.2021 as producers limit drilling and completion activity to achieve maintenance levels of production and cash flows in the course of the COVID-19 pandemic. U.S. production of both commodities is expected to increase in 2022 at a rate of 2% for dry natural gas production is estimated to decrease 3%and 7% for crude oil.
Our customers substantially cut spending and activity beginning in the second quarter of 2020 and decline an additional 6% in 2021.
Substantial spending cuts for 2020 have been announced by our customers as a result of the significant declines in oil and natural gas and crude oil prices and demand; however,demand. Our horsepower, utilization and revenue have experienced declines and are expected to remain at lower levels into 2021 as compared to the timingfirst quarter of 2020 and periods prior in both our contract operations and aftermarket services businesses. However, U.S. onshore activity is on the full impactrise, which we expect will provide prospects for growth in our businesses in the second half of 2021. During this uncertain time, we continue to execute on the spending cuts on production remains difficult to predict, as do the magnitude and duration of the pandemic and resulting economic downturn. In anticipation of lower customer activity levels, weplan implemented a plan in the second quarter of 2020 to reduce our annual operating, corporate and capital costs by between $75 million and $85 million. Horsepower, utilization and revenue experienced declines in the second quarter and are expected to remain at lower levels through 2020 as compared to 2019 in both our contract operations and aftermarket services businesses.costs.
26
The impact of the COVID-19 pandemic on our 2020 results is primarily visible in the $99.8 million non-cash impairment of our goodwill and the impairment’s resulting impact on income taxes.$22.7 million tax benefit in the first quarter of 2020. Revenue, cost of sales long-lived asset impairment and restructuring chargesSG&A were also significantly impacted.impacted in the first quarter of 2021 as compared to the first quarter of 2020. See “Financial Results of Operations” below and Note 7 (“Goodwill”), Note 13 (“Long-Lived Asset Impairment”), Note 14 (“Restructuring Charges”) and Note 15 (“Income Taxes”) to our Financial Statements for further discussion.
30
Operating Highlights
The following table summarizes our available and operating horsepower and utilization (in thousands, except percentages):
| | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | Three Months Ended |
| ||||||
| | June 30, | | June 30, |
| | March 31, |
| ||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| |||||
(in thousands) |
| 2021 |
| 2020 |
| |||||||||
Total available horsepower (at period end)(1) |
| 4,203 |
| 4,096 |
| 4,203 |
| 4,096 | |
| 4,067 |
| 4,386 | |
Total operating horsepower (at period end)(2) | | 3,613 |
| 3,611 |
| 3,613 |
| 3,611 | | | 3,329 |
| 3,883 | |
Average operating horsepower | | 3,752 |
| 3,587 |
| 3,826 |
| 3,567 | | | 3,360 |
| 3,914 | |
Horsepower utilization: | |
|
|
|
|
|
|
| | |
|
|
| |
Spot (at period end) | | 86 | % | 88 | % | 86 | % | 88 | % | | 82 | % | 89 | % |
Average | | 86 | % | 88 | % | 87 | % | 88 | % | | 82 | % | 89 | % |
(1) | Defined as idle and operating horsepower. New compressors completed by a third party manufacturer that have been delivered to us are included in the fleet. |
(2) | Defined as horsepower that is operating under contract and horsepower that is idle but under contract and generating revenue such as standby revenue. |
Non-GAAP Financial Measures
Management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include the non-GAAP financial measure of gross margin.
We define gross margin as total revenue less cost of sales (excluding depreciation and amortization). Gross margin is included as a supplemental disclosure because it is a primary measure used by our management to evaluate the results of revenue and cost of sales (excluding depreciation and amortization), which are key components of our operations. We believe gross margin is important because it focuses on the current operating performance of our operations and excludes the impact of the prior historical costs of the assets acquired or constructed that are utilized in those operations, the indirect costs associated with our SG&A activities, our financing methods and income taxes. In addition, depreciation and amortization may not accurately reflect the costs required to maintain and replenish the operational usage of our assets and therefore may not portray the costs of current operating activity. As an indicator of our operating performance, gross margin should not be considered an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP. Our gross margin may not be comparable to a similarly-titled measure of other entities because other entities may not calculate gross margin in the same manner.
Gross margin has certain material limitations associated with its use as compared to net income (loss). These limitations are primarily due to the exclusion of SG&A, depreciation and amortization, impairments, restatement and other charges, restructuring charges, interest expense, debt extinguishment(gain) loss transaction-related costs, gain (loss) on sale of assets, net, other income (loss),(income) loss, net and provision for (benefit from) income taxes and loss from discontinued operations, net of tax.taxes. Because we intend to finance a portion of our operations through borrowings, interest expense is a necessary element of our costs and our ability to generate revenue. Additionally, because we use capital assets, depreciation expense is a necessary element of our costs and our ability to generate revenue and SG&A is necessary to support our operations and required corporate activities. To compensate for these limitations, management uses this non-GAAP measure as a supplemental measure to other GAAP results to provide a more complete understanding of our performance.
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The following table reconciles net income (loss) to gross margin (in thousands):margin:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | ||||||||||||
| | June 30, | | June 30, | | March 31, | ||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||||
(in thousands) |
| 2021 |
| 2020 | ||||||||||||||
Net income (loss) | | $ | (30,381) | | $ | 11,423 | | $ | (91,568) | | $ | 30,879 | | $ | 4,169 | | $ | (61,187) |
Selling, general and administrative | |
| 28,745 | |
| 28,618 | |
| 59,371 | |
| 57,607 | |
| 25,084 | |
| 30,626 |
Depreciation and amortization | |
| 48,849 | |
| 45,482 | |
| 98,671 | |
| 89,588 | |
| 45,712 | |
| 49,822 |
Long-lived asset impairment | |
| 55,210 | |
| 8,632 | |
| 61,405 | |
| 11,724 | ||||||
Long-lived and other asset impairment | |
| 7,073 | |
| 6,195 | ||||||||||||
Goodwill impairment | | | — | | | — | | | 99,830 | | | — | | | — | | | 99,830 |
Restatement and other charges | |
| — | |
| 24 | |
| — | |
| 445 | ||||||
Restructuring charges | | | 2,408 | | | — | | | 4,136 | | | — | | | 897 | | | 1,728 |
Interest expense | |
| 25,778 | |
| 25,954 | |
| 55,443 | |
| 49,571 | |
| 31,245 | |
| 29,665 |
Debt extinguishment loss | |
| 3,971 | |
| 3,653 | |
| 3,971 | |
| 3,653 | ||||||
Transaction-related costs | |
| — | |
| 2,687 | |
| — | |
| 2,867 | ||||||
(Gain) loss on sale of assets, net | | | 2,189 | | | (1,801) | | | (1,927) | | | (1,785) | ||||||
Gain on sale of assets, net | | | (11,032) | | | (4,116) | ||||||||||||
Other income, net | |
| (438) | |
| (209) | |
| (993) | |
| (430) | |
| (1,889) | |
| (555) |
Provision for (benefit from) income taxes | |
| (8,091) | |
| 1,191 | |
| (24,044) | |
| (1,216) | |
| 7,024 | |
| (15,953) |
Loss from discontinued operations, net of tax | |
| — | |
| — | |
| — | |
| 273 | ||||||
Gross margin | | $ | 128,240 | | $ | 125,654 | | $ | 264,295 | | $ | 243,176 | | $ | 108,283 | | $ | 136,055 |
Financial Results of Operations
Operations: Summary of Results
Revenue.Revenue
Revenue was $220.3$195.4 million and $238.4$249.7 million during the three months ended June 30,March 31, 2021 and 2020, and 2019, and $470.0 million and $474.5 million during the six months ended June 30, 2020 and 2019, respectively. The decrease in revenue during the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was due to a decrease in revenue from our aftermarket services business.
The decrease in revenue during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was due to a decrease in revenue from our aftermarket services business, which was largely offset by an increasedecreases in revenue from our contract operations business.
and aftermarket services businesses. See “Contract Operations” and “Aftermarket Services” below for further details.
Net income (loss).
We had net income of $4.2 million and a net loss of $30.4 million and net income of $11.4$61.2 million during the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and a net loss of $91.6 million and net income of $30.9 million during the six months ended June 30, 2020 and 2019, respectively.
The change from net incomeloss to net loss during the three months ended June 30, 2020 compared to the three months ended June 30, 2019income was primarily driven by increasesdecreases in long-lived assetgoodwill impairment, SG&A and depreciation and amortization and restructuring charges, a decreaseas well as an increase in gross margin from our aftermarket services business and the change in (gain) lossgain on sale of assets, net,net. These changes were partially offset by the change in provision for (benefit from) income taxes, an increasedecreases in gross margin from our contract operations businessand aftermarket services businesses and a decrease in transaction-related costs.
The change from net income to net loss during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily driven by goodwill impairment of $99.8 million, increases in long-lived asset impairment, depreciation and amortization, interest expense and restructuring charges and a decrease in gross margin from our aftermarket services business, partially offset by increases in benefit from to a provision for income taxes and gross margin from our contract operations business and a decrease in transaction-related costs.taxes.
32
Operations: Three Months Ended June 30, 2020March 31, 2021 Compared to Three Months Ended June 30, 2019March 31, 2020
Contract Operations
(dollars in thousands)
| | | | | | | | | | | | | | | | | | |
|
| Three Months Ended | | | |
| Three Months Ended | | | | ||||||||
| | June 30, | | Increase | | | March 31, | | Increase | | ||||||||
|
| 2020 |
| 2019 |
| (Decrease) | | |||||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| (Decrease) | | |||||||||||
Revenue | | $ | 187,949 | | $ | 186,258 | | 1 | % | | $ | 166,034 | | $ | 206,974 | | (20) | % |
Cost of sales (excluding depreciation and amortization expense) | |
| 63,390 | |
| 70,521 | | (10) | % | |||||||||
Cost of sales (excluding depreciation and amortization) | |
| 61,365 | |
| 78,651 | | (22) | % | |||||||||
Gross margin | | $ | 124,559 | | $ | 115,737 | | 8 | % | | $ | 104,669 | | $ | 128,323 | | (18) | % |
Gross margin percentage (1) | |
| 66 | % |
| 62 | % | 4 | % | |
| 63 | % |
| 62 | % | 1 | % |
(1) | Defined as gross margin divided by revenue. |
During the three months ended June 30, 2020, revenue included the benefit from significant horsepower additions in the second half of 2019, including the Elite Acquisition completed in August 2019, which was partially offset by the disposition of other horsepower in 2019 and in the first half of this year. In addition, revenueRevenue decreased as a result ofprimarily due to returns of horsepower due to the market downturn and a decrease in contract operations rates. Therates amidst the market downturn, as well as the strategic disposition of horsepower in 2020.
28
Gross margin also decreased due to this decrease in ratesrevenue, however, the decline was driven by customer shiftspartially mitigated through aggressive cost control actions and the corresponding, and larger, decrease in cost of sales. Cost of sales benefited from the lower operating horsepower discussed above, which resulted in decreased maintenance, lube oil and mobilization expense. In addition, execution of the cost savings plan implemented in response to standby status and rate concessions given to customers impacted by the COVID-19 pandemic.
Gross margin and gross margin percentage increased during the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily due to decreases in costs to mobilize compression packages, maintenance and lube oil expense, which were driven by the decreasespandemic drove a further reduction in operating horsepower mentioned above. These decreases were partially offset by increases in maintenance and lube oil expense associated with the operating horsepower acquired in the Elite Acquisition.costs.
Aftermarket Services
(dollars in thousands)
| | | | | | | | | | | | | | | | | | |
|
| Three Months Ended |
| | |
| Three Months Ended |
| | | ||||||||
| | June 30, | | Increase | | | March 31, | | Increase | | ||||||||
|
| 2020 |
| 2019 |
| (Decrease) | | |||||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| (Decrease) | | |||||||||||
Revenue | | $ | 32,367 | | $ | 52,132 |
| (38) | % | | $ | 29,397 | | $ | 42,723 |
| (31) | % |
Cost of sales (excluding depreciation and amortization expense) | |
| 28,686 | |
| 42,215 |
| (32) | % | |||||||||
Cost of sales (excluding depreciation and amortization) | |
| 25,783 | |
| 34,991 |
| (26) | % | |||||||||
Gross margin | | $ | 3,681 | | $ | 9,917 |
| (63) | % | | $ | 3,614 | | $ | 7,732 |
| (53) | % |
Gross margin percentage | |
| 11 | % |
| 19 | % | (8) | % | |
| 12 | % |
| 18 | % | (6) | % |
The decrease in revenue during the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarilyRevenue decreased due to decreases in service activities and parts sales, which were primarily driven by commodity price declinesreduced customer demand and customer deferral of maintenance activities amidst the market downturn, reduced customer activity levels as a result of severe winter weather in the COVID-19 pandemic.first quarter of 2021 and the impact of the sale of our turbocharger business in July 2020.
Gross margin and gross margin percentagealso decreased during the three months ended June 30, 2020 compared to the three months ended June 30, 2019 due to thethis decrease in revenue, mentioned above andbut benefited from a decrease in cost of sales, which was primarily driven by the decreasesame decreases in service activities and parts sales.sales discussed above. The decrease in gross margin percentage was largely due to pricing pressure as a result of the market decline.
33
Costs and Expenses
(dollars in thousands)
| | | | | | | | | | | | |
|
| Three Months Ended |
| Three Months Ended | ||||||||
| | June 30, | | March 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
(in thousands) |
| 2021 |
| 2020 | ||||||||
Selling, general and administrative | | $ | 28,745 | | $ | 28,618 | | $ | 25,084 | | $ | 30,626 |
Depreciation and amortization | |
| 48,849 | |
| 45,482 | |
| 45,712 | |
| 49,822 |
Long-lived asset impairment | |
| 55,210 | |
| 8,632 | ||||||
Restatement and other charges | |
| — | |
| 24 | ||||||
Long-lived and other asset impairment | |
| 7,073 | |
| 6,195 | ||||||
Goodwill impairment | | | — | | | 99,830 | ||||||
Restructuring charges | | | 2,408 | | | — | | | 897 | | | 1,728 |
Interest expense | |
| 25,778 | |
| 25,954 | |
| 31,245 | |
| 29,665 |
Debt extinguishment loss | | | 3,971 | | | 3,653 | ||||||
Transaction-related costs | |
| — | |
| 2,687 | ||||||
(Gain) loss on sale of assets, net | | | 2,189 | | | (1,801) | ||||||
Gain on sale of assets, net | | | (11,032) | | | (4,116) | ||||||
Other income, net | |
| (438) | |
| (209) | |
| (1,889) | |
| (555) |
Selling, general and administrative.administrative. The decrease in SG&A was flat during the three months ended June 30, 2020 comparedprimarily due to the three months ended June 30, 2019 as the result of several offsetting factors. SG&A increased $1.6a $1.9 million decrease in sales and use tax, a $1.2 million decrease in compensation and benefits, a $0.8 million decrease in employee travel and meeting expenses, a $0.5 million decrease in bad debt expense and $1.1a $0.5 million decrease in salescosts related to our process and use and miscellaneous taxes. These increases were offset by decreases of $1.2 million in professional expenses, $0.7 million in compensation and benefits and $0.7 million in employee travel and meeting expense.technology transformation project.
Depreciation and amortization.amortization. The increasedecrease in depreciation and amortization expense during the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily due to an increase in depreciation expense associated with fixed assets acquired in the Elite Acquisition as well as other fixed asset additions during 2019, partially offset by a decrease in depreciation expense resulting from assets reaching the end of their depreciable lives as well as the impact of compression asset impairments and compression asset sales during 2019.2020, partially offset by an increase in depreciation expense associated with fixed asset additions during 2020.
29
Long-lived and other asset impairment.impairment. During the three months ended June 30, 2020 and 2019, we reviewedWe periodically review the future deployment of our idle compressors for units that wereare not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. In addition, we evaluatedevaluate for impairment idle units that hadhave been culled from our compression fleet in prior years and wereare available for sale. See Note 13 (“Long-Lived and Other Asset Impairment”) to our Financial Statements for further details.
The following table presents the results of our compression fleet impairment review, as recorded toin our contract operations segment (dollars in thousands):segment:
| | | | | | | | | | | | |
|
| Three Months Ended |
| Three Months Ended | ||||||||
| | June 30, | | March 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
(dollars in thousands) |
| 2021 |
| 2020 | ||||||||
Idle compressors retired from the active fleet |
| | 450 |
| | 160 |
| | 70 |
| | 85 |
Horsepower of idle compressors retired from the active fleet |
| | 184,000 |
| | 41,000 |
| | 24,000 |
| | 23,000 |
Impairment recorded on idle compressors retired from the active fleet | | $ | 55,210 | | $ | 8,632 | | $ | 7,012 | | $ | 6,195 |
Goodwill impairment.Restructuring charges. We recorded $2.4 million of severance costs related to restructuring activities during During the three months ended June 30, 2020. See Note 14 (“Restructuring Charges”) to our Financial Statements for further details.
Interest expense. The slight decrease in interest expense during the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was due to a decrease in the weighted average effective interest rate, which was offset by an increase in the average outstanding balance of long-term debt.
34
Debt extinguishment loss. We recorded a debt extinguishment loss of $4.0 million during the three months ended June 30, 2020 as a result of the redemption of the 2022 Notes. We recorded a debt extinguishment loss of $3.7 million during the three months ended June 30, 2019 as a result of the redemption of the 2021 Notes. See Note 9 (“Long-Term Debt”) to our Financial Statements for further details.
Transaction-related costs. We incurred $2.7 million of financial advisory, legal and other professional fees during the three months ended June 30, 2019 related primarily to the Elite Acquisition.
(Gain) loss on sale of assets, net. The change in gain (loss) on sale of assets, net was primarily due to a $2.9 million loss on compression assets sold during the three months ended June 30, 2020 compared to a $1.3 million gain on compression assets sold during the three months ended June 30, 2019.
Provision for (Benefit from) Income Taxes
(dollars in thousands)
| | | | | | | | | |
|
| Three Months Ended |
| | | ||||
| | June 30, | | Increase | | ||||
|
| 2020 |
| 2019 |
| (Decrease) | | ||
Provision for (benefit from) income taxes | | $ | (8,091) | | $ | 1,191 |
| (779) | % |
Effective tax rate | |
| 21 | % |
| 9 | % | 12 | % |
The change in provision for (benefit from) income taxes was primarily due to the tax effect of the decrease in book income during the three months ended June 30, 2020 compared to the three months ended June 30, 2019, partially offset by a reduction in a valuation allowance recorded during the three months ended June 30, 2019. See Note 15 (“Income Taxes”) to our Financial Statements for further details of the tax impact on the decrease in book income.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Contract Operations
(dollars in thousands)
| | | | | | | | | |
|
| Six Months Ended | | | | ||||
| | June 30, | | Increase | | ||||
|
| 2020 |
| 2019 |
| (Decrease) | | ||
Revenue | | $ | 394,923 | | $ | 368,765 | | 7 | % |
Cost of sales (excluding depreciation and amortization) | |
| 142,041 | |
| 145,256 | | (2) | % |
Gross margin | | $ | 252,882 | | $ | 223,509 | | 13 | % |
Gross margin percentage | |
| 64 | % |
| 61 | % | 3 | % |
During the six months ended June 30, 2020, revenue included the benefit from significant horsepower additions in the second half of 2019, including the Elite Acquisition completed in August 2019, which was partially offset by the disposition of other horsepower in 2019 and the first half of this year. In addition, revenue increased due to an increase in contract operations rates year over year, which was the net result of increased customer demand in 2019, partially offset by an increase in units on standby status and rate concessions given to customers impacted by the COVID-19 pandemic in the second quarter of 2020. These increases were partially offset by a decrease in revenue related to returns of horsepower due to the market downturn.
Gross margin and gross margin percentage increased during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 due to the overall increase in revenue mentioned above and decreases in costs to mobilize compression packages, maintenance and lube oil expense, which were driven by the decreases in operating horsepower mentioned above. These decreases were partially offset by increases in maintenance and lube oil expense associated with the operating horsepower acquired in the Elite Acquisition.
35
Aftermarket Services
(dollars in thousands)
| | | | | | | | | |
|
| Six Months Ended |
| | | ||||
| | June 30, | | Increase | | ||||
|
| 2020 |
| 2019 |
| (Decrease) | | ||
Revenue | | $ | 75,090 | | $ | 105,784 |
| (29) | % |
Cost of sales (excluding depreciation and amortization) | |
| 63,677 | |
| 86,117 |
| (26) | % |
Gross margin | | $ | 11,413 | | $ | 19,667 |
| (42) | % |
Gross margin percentage | |
| 15 | % |
| 19 | % | (4) | % |
The decrease in revenue during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily due to decreases in service activities and parts sales, which were driven by commodity price declines and customer deferral of maintenance activities as a result of the COVID-19 pandemic.
Gross margin and gross margin percentage decreased during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 due to the decrease in revenue mentioned above and a decrease in cost of sales, which was primarily driven by the decrease in service activities and parts sales.
Costs and Expenses
(dollars in thousands)
| | | | | | |
|
| Six Months Ended | ||||
| | June 30, | ||||
|
| 2020 |
| 2019 | ||
Selling, general and administrative | | $ | 59,371 | | $ | 57,607 |
Depreciation and amortization | |
| 98,671 | | | 89,588 |
Long-lived asset impairment | |
| 61,405 | | | 11,724 |
Goodwill impairment | | | 99,830 | | | — |
Restatement and other charges | |
| — | | | 445 |
Restructuring charges | | | 4,136 | | | — |
Interest expense | |
| 55,443 | | | 49,571 |
Debt extinguishment loss | |
| 3,971 | | | 3,653 |
Transaction-related costs | |
| — | | | 2,867 |
Gain on sale of assets, net | | | (1,927) | | | (1,785) |
Other income, net | |
| (993) | | | (430) |
Selling, general and administrative. The increase in SG&A during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily due to increases of $1.9 million in bad debt expense, $1.4 million in sales and use and miscellaneous taxes and $0.7 million in costs associated with software and cloud subscriptions not yet commenced in 2019, including those related to our technology transformation project and contracts acquired in the Elite Acquisition. These increases were partially offset by decreases of $1.4 million in professional expenses, $0.9 million in compensation and benefits and $0.6 million in employee travel and meeting expenses.
Depreciation and amortization. The increase in depreciation and amortization expense during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily due to an increase in depreciation expense associated with fixed assets acquired in the Elite Acquisition as well as other fixed asset additions during 2019, partially offset by a decrease in depreciation expense resulting from assets reaching the end of their depreciable lives as well as the impact of asset impairments and compression asset sales during 2019.
Long-lived asset impairment. During the six months ended June 30, 2020 and 2019, we reviewed the future deployment of our idle compressors for units that were not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. In addition, we evaluated for impairment idle units that had been culled from our fleet in prior years and were available for sale. See Note 13 (“Long-Lived Asset Impairment”) to our Financial Statements for further details.
36
The following table presents the results of our impairment review, as recorded to our contract operations segment (dollars in thousands):
| | | | | | |
|
| Six Months Ended | ||||
| | June 30, | ||||
|
| 2020 |
| 2019 | ||
Idle compressor units retired from the active fleet |
| | 535 |
| | 180 |
Horsepower of idle compressor units retired from the active fleet |
| | 207,000 |
| | 56,000 |
Impairment recorded on idle compressor units retired from the active fleet | | $ | 61,405 | | $ | 11,724 |
Goodwill impairment. During the six months ended June 30,March 31, 2020, we recorded $99.8 million of goodwill impairment due to the decline in the fair value of our contract operations reporting unit. See Note 7 (“Goodwill”) to our Financial Statements for further details.
Restructuring charges. We recorded $4.1$0.9 million and $1.7 million of severance costsrestructuring charges related to restructuring activities during the sixthree months ended June 30, 2020.March 31, 2021 and 2020, respectively. See Note 14 (“Restructuring Charges”) to our Financial Statements for further details.
Interest expense.expense. The increase in interest expense during the six months ended June 30, 2020 comparedwas primarily due to the six months ended June 30, 2019$4.9 million write-off of unamortized deferred financing costs related to Amendment No. 3, partially offset by a decrease in expense that was due to an increasedriven by decreases in the average outstanding balance of long-term debt partially offset by a decrease inand the weighted average effective interest rate.
Debt extinguishment loss. We recorded a debt extinguishment loss of $4.0 million during the six months ended June 30, 2020 as a result of the redemption of the 2022 Notes. We recorded a debt extinguishment loss of $3.7 million during the six months ended June 30, 2019 as a result of the redemption of the 2021 Notes. See Note 9 (“Long-Term Debt”) to our Financial Statements for further details.
Transaction-related costs. We incurred $2.9 million of financial advisory, legal and other professional fees during the six months ended June 30, 2019 related primarily to the Elite Acquisition.
Gain on sale of assets, net. The increase in gain on sale of assets, net was primarily due to a $6.0 million gain on the February 2021 Disposition and a $4.3 million gain recognized on other compression asset sales during the three months ended March 31, 2021, compared to a $3.2 million gain on the March 2020 Disposition which included a $4.8 million gain on the compression assets sold, partially offset by a $2.8 million loss on other compression assets sold during the sixthree months ended June 30,March 31, 2020. See Note 3 (“Business Transactions”) to our Financial Statements for further details of these sales.
Other income, net. The increase in other income, net during the six months ended June 30, 2020 compared to the six months ended June 30, 2020 was primarily due to a $0.4$0.7 million decrease in indemnification expense incurredremitted pursuant to our tax matters agreement with Exterran Corporation.Corporation, income of $0.3 million related to compressor parts recycling during 2021 and income of $0.3 million related to equipment damaged at a customer site.
Benefit fromProvision for (Benefit from) Income Taxes
(dollars in thousands)
| | | | | | | | | | | | | | | | | | |
|
| Six Months Ended |
| | |
| Three Months Ended |
| | | ||||||||
| | June 30, | | Increase | | | March 31, | | Increase | | ||||||||
|
| 2020 |
| 2019 |
| (Decrease) | | |||||||||||
Benefit from income taxes | | $ | (24,044) | | $ | (1,216) |
| 1,877 | % | |||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| (Decrease) | | |||||||||||
Provision for (benefit from) income taxes | | $ | 7,024 | | $ | (15,953) |
| (144) | % | |||||||||
Effective tax rate | |
| 21 | % |
| (4) | % | 25 | % | |
| 63 | % |
| 21 | % | 42 | % |
The increase inchange from a benefit from to a provision for income taxes was primarily due to the tax effect of the decreaseincrease in book income during the sixthree months ended June 30, 2020March 31, 2021 compared to the sixthree months ended June 30, 2019, partially offset by a reduction in a valuation allowance and the release of an unrecognized tax benefit due to the settlement of a tax audit recorded during the six months ended June 30, 2019. See Note 15 (“Income Taxes”) to our Financial Statements for further details of the tax impact on the decrease in book income.March 31, 2020.
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Liquidity and Capital Resources
Overview
Our ability to fund operations, finance capital expenditures and pay dividends depends on the levels of our operating cash flows and access to the capital and credit markets. Our primary sources of liquidity are cash flows generated from our operations and our borrowing availability under the Credit Facility. Our cash flow is affected by numerous factors including prices and demand for our services, oil and natural gas exploration and production spending, conditions in the financial markets and other factors. Beginning in the first quarter of 2020, the COVID-19 pandemic has caused a deterioration in global macroeconomic conditions, which has significantly impacted our estimates of future revenues and cash flows. However, we have no near-term maturities and believe that our operating cash flows and borrowings under the Credit Facility will be sufficient to meet our future liquidity needs.
We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
Capital Requirements
Our contract operations business is capital intensive, requiring significant investment to maintain and upgrade existing operations. Our capital spending is primarily dependent on the demand for our contract operations services and the availability of the type of compression equipment required for us to provide those contract operations services to our customers. Our capital requirements have primarily consisted primarily of, and we anticipate will continue to consist of, the following:
● | growth capital expenditures, which are made to expand or to replace partially or fully depreciated assets or to expand the operating capacity or revenue-generating capabilities of existing or new assets; and |
● | maintenance capital expenditures, which are made to maintain the existing operating capacity of our assets and related cash flows, further extending the useful lives of the assets. |
The majority of our growth capital expenditures are related to the acquisition cost of new compressors when our idle equipment cannot be reconfigured to economically fulfill a project’s requirements and the new compressor is expected to generate economic returns over its expected useful life that we add toexceed our fleet.cost of capital. In addition to the cost of newly-acquired compressors, growth capital expenditures can also include the upgrading of major components on an existing compression package where the current configuration of the compression package is no longer in demand and the compressor is not likely to return to an operating status without the capital expenditures. These latter expenditures substantially modify the operating parameters of the compression package such that it can be used in applications for which it previously was not suited.
Maintenance capital expenditures are related to major overhauls ofor significant components of a compression package such as the engine, compressor and cooler, which return the components to a like-new condition but do not modify the applicationsapplication for which the compression package was designed.
Projected Capital Spend
We generally invest funds necessary to purchase fleet additions when our idle equipment cannot be reconfigured to economically fulfill a project’s requirements and the new equipment expenditure is expected to generate economic returns over its expected useful life that exceed our cost of capital. In response to the impact that we anticipate the COVID-19 pandemic will have on our customer demand, we decreased our planned capital expenditures for 2020, and currently plan to spend a total of approximately $130$80 million to $155$106 million in capital expenditures during 2021, primarily consisting of approximately $70$30 million to $85$50 million for growth capital expenditures and approximately $37$40 million to $43$45 million for maintenance capital expenditures. We anticipate decreased 2021 capital expenditures, particularly growth capital expenditures, as compared to 2020 due to the impact that we expect the COVID-19 pandemic will continue to have on customer demand.
Financial Resources
Overview
Our ability to fund operations, finance capital expenditures and pay dividends depends on the levels of our operating cash flows and access to the capital and credit markets. Our primary sources of liquidity are cash flows generated from our operations and our borrowing availability under our Credit Facility. Our cash flow is affected by numerous factors including prices and demand for our services, oil and natural gas exploration and production spending, conditions in the financial markets and other factors. Beginning in the first quarter of 2020, the COVID-19 pandemic caused a deterioration in global macroeconomic conditions, which has adversely impacted our estimates of future revenues and cash flows. However, we have no near-term maturities and believe that our operating cash flows and borrowings under the Credit Facility will be sufficient to meet our future liquidity needs.
We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
3831
Financial Resources
Credit Facility
During the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, the Credit Facility had an average daily balance of $675.5$354.8 million and $784.0$508.4 million, respectively. The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 2.6% and 2.7% and 4.3% at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. As of June 30, 2020,March 31, 2021, there were $12.4 million letters of credit outstanding under the Credit Facility.
We must maintain certain consolidated financial ratios as defined in our Credit Facility agreement.agreement (see below). As of June 30, 2020,March 31, 2021, the ratio requirements did not constrain our undrawn capacity and as such, $414.6$414.1 million was available for additional borrowings. As of June 30, 2020,March 31, 2021, we were in compliance with all covenants under the Credit Facility.Facility agreement.
2022 Notes Redemption
Amendment No. 3.On April 1, 2020, the 2022 Notes were redeemed at 100% of their $350.0 million aggregate principal amount plus accrued and unpaid interest of $10.5 million with borrowings from theFebruary 22, 2021, we amended our Credit Facility. A debt extinguishment loss of $4.0 million relatedFacility to, the redemption was recognized in the second quarter of 2020. among other things:
● | reduce the aggregate revolving commitment from $1.25 billion to $750.0 million, and |
● | adjust the maximum Senior Secured Debt to EBITDA and Total Debt to EBITDA ratios, as defined in the Credit Facility agreement, to the following: |
| | |
Senior Secured Debt to EBITDA | 3.00 to 1.0 | |
Total Debt to EBITDA | ||
Through fiscal year 2022 | | 5.75 to 1.0 |
January 1, 2023 through September 30, 2023 | 5.50 to 1.0 | |
Thereafter (1) | 5.25 to 1.0 |
(1) | Subject to a temporary increase to 5.50 to 1.0 for any quarter during which an acquisition satisfying certain thresholds is completed and for the two quarters immediately following such quarter. |
See Note 9 (“Long-Term Debt”) to our Financial Statements for further details.details on Amendment No. 3.
At-the-Market Continuous Equity Offering Program
On February 23, 2021, we entered into the ATM Agreement whereby we may sell from time to time shares of our common stock having an aggregate offering price of up to $50.0 million. We intend to use the net proceeds of these offerings for general corporate purposes. During the three months ended March 31, 2021, we sold 357,148 shares of common stock for net proceeds of $3.4 million pursuant to the ATM Agreement. See Note 11 (“Equity”) to our Financial Statements for further details on the ATM Agreement.
Cash Flows
Our cash flows from operating, investing and financing activities, as reflected in our condensed consolidated statements of cash flows, are summarized below (in thousands):below:
| | | | | | | | | | | | |
|
| Six Months Ended |
| Three Months Ended | ||||||||
| | June 30, | | March 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
(in thousands) |
| 2021 |
| 2020 | ||||||||
Net cash provided by (used in): |
| |
|
| |
|
| |
|
| |
|
Operating activities | | $ | 167,074 | | $ | 148,663 | | $ | 77,555 | | $ | 99,129 |
Investing activities | |
| (82,688) | |
| (212,342) | |
| 16,518 | |
| (44,141) |
Financing activities | |
| (85,866) | |
| 60,084 | |
| (93,237) | |
| (55,452) |
Net decrease in cash and cash equivalents | | $ | (1,480) | | $ | (3,595) | ||||||
Net increase (decrease) in cash and cash equivalents | | $ | 836 | | $ | (464) |
Operating Activities
The increase in net cash provided by operating activities during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily due to decreases in accounts receivable, costs of sales, contract costs and transaction-related costs. These cash inflows were partially offset by the receipt of cash proceeds in the first quarter of 2019 pursuant to a settlement of certain sales and use tax audits, a decrease in revenue and increases in accounts payable and other liabilities, deferred revenue, restructuring charges and interest paid on our debt instruments.
Investing Activities
The decrease in net cash used in investing activities during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily due to a $121.7 million decrease in capital expenditures and the receipt of proceeds of $24.2 million from the March 2020 Disposition, partially offset by a $16.9 million decrease in proceeds from other sales of property, plant and equipment.
3932
FinancingOperating Activities
The decrease in net cash provided by operating activities was primarily due to reduced cash inflows from revenue, deferred revenue and accounts receivable as well as increased cash outflow for inventory, partially offset by decreased cash outflows for cost of sales, SG&A expenses, contract costs and interest paid on long-term debt.
Investing Activities
The change in net cash provided by (used in) financinginvesting activities during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily due to $40.0a $60.4 million decrease in capital expenditures and a $6.6 million increase in proceeds from sales of property, plant and equipment, partially offset by a $6.0 million decrease in proceeds from business dispositions.
Financing Activities
The increase in net cash used in financing activities was primarily due to a $37.5 million increase in net repayments of long-term debt, in 2020 compared to $103.0partially offset by $3.4 million of net borrowings in 2019 and a $9.9 million increase in dividends paid to stockholders, partially offset by a $7.9 million decrease in payments for debtproceeds from the issuance costs.of common stock under the ATM Agreement during the three months ended March 31, 2021.
Dividends
On July 29, 2020,April 28, 2021, our Board of Directors declared a quarterly dividend of $0.145 per share of common stock to be paid on August 14, 2020May 17, 2021 to stockholders of record at the close of business on AugustMay 10, 2020.2021. Any future determinations to pay cash dividends to our stockholders will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations and credit and loan agreements in effect at that time and other factors deemed relevant by our Board of Directors.
Off-Balance Sheet Arrangements
For information on our obligations with respect to letters of credit and performance bonds see Note 9 (“Long-Term Debt”) and Note 20 (“Commitments and Contingencies”), respectively, to our Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed toFor quantitative and qualitative disclosures about market risk, associated with changes in the variable interest ratesee Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Credit Facility. We use derivative instruments to manage our exposure to fluctuations in this variable interest rate and thereby minimize the risks and costs associated with financing activities. We do2020 Form 10-K. Our exposures as of March 31, 2021 have not use derivative instruments for trading or other speculative purposes.
As of June 30, 2020 andchanged materially since December 31, 2019, after taking into consideration interest rate swaps, we had $523.0 million and $113.0 million, respectively, of outstanding indebtedness that was effectively subject to variable interest rates. A 1% increase in the effective interest rate on our outstanding debt subject to variable interest rates at June 30, 2020 and December 31, 2019 would have resulted in an annual increase in our interest expense of $5.2 million and $1.1 million, respectively.
See Note 17 (“Derivatives”) to our Financial Statements for further information regarding our use of interest rate swaps in managing our exposure to interest rate fluctuations.2020.
Item 4. Controls and Procedures
This Item 4 includes information concerning the controls and controls evaluation referred to in the certifications of our Chief Executive Officer and Chief Financial Officer required by Rule 13a-14 of the Exchange Act included in this Quarterly Report as Exhibits 31.1 and 31.2.
Management’s Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosures.
4033
As of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act), which are designed to provide reasonable assurance that we are able to record, process, summarize and report the information required to be disclosed in our reports under the Exchange Act within the time periods specified in the rules and forms of the SEC. Based on the evaluation, as of June 30, 2020March 31, 2021 our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to management, and made known to our principal executive officer and principal financial officer, on a timely basis to ensure that it is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, we are involved in various pending or threatened legal actions. While we are unable to predict the ultimate outcome of these actions, we believe that any ultimate liability arising from any of these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends.
Item 1A. Risk Factors
The following risk factors became significantThere have been no material changes or updates to us in the first half of 2020 and should be read in conjunction with the risk factors previously disclosed in our 20192020 Form 10-K.
The COVID-19 pandemic is expected to significantly reduce demand for our services, and may have a material adverse impact on our financial condition, results of operations and cash flows.
The effects of the COVID-19 pandemic, including actions taken by businesses and governments, have resulted in a significant and swift reduction in U.S. economic activity. These effects have materially adversely affected the demand for oil and, to a lesser extent, natural gas, and are expected to have a negative impact on demand for our services and products. The collapse in the demand for oil caused by this unprecedented global health and economic crisis, coupled with oil oversupply, is expected to adversely impact the demand for our services, which in turn could adversely impact our financial condition, results of operations and cash flows.
While the magnitude and duration of potential social, economic and labor instability as a direct result of the COVID-19 pandemic cannot be estimated at this time, we are closely monitoring the effects of the pandemic on commodity demands and on our customers, as well as on our operations and employees. These effects may include adverse revenue and net income effects; disruptions to our operations and supply chain; customer shutdowns of oil and gas exploration and production; employee impacts from illness, school closures and other community response measures; and temporary inaccessibility or closures of our facilities or the facilities of our customers and suppliers.
The extent to which our operating and financial results are affected by the COVID-19 pandemic will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic; additional actions by businesses and governments in response to the pandemic; and the speed and effectiveness of responses to combat the virus. The COVID-19 pandemic, and the volatile regional and global economic conditions stemming from the pandemic, could also aggravate the other risk factors that we identify in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The COVID-19 pandemic also may materially adversely affect our operating and financial results in a manner that is not currently known to us or that we do not currently consider to present significant risks to our operations.
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Our ability to use NOLs to offset future income may be limited.
Our ability to use any NOLs generated by us could be substantially limited if we were to experience an “ownership change” as defined under Section 382 of the Code. In general, an “ownership change” would occur if our “5-percent stockholders,” as defined under Section 382 of the Code, including certain groups of persons treated as “5-percent stockholders,” collectively increased their ownership in us by more than 50 percentage points over a rolling three-year period. An ownership change can occur as a result of a public offering of our common stock, as well as through secondary market purchases of our common stock and certain types of reorganization transactions. We have experienced ownership changes, which may result in an annual limitation on the use of its pre-ownership change NOLs (and certain other losses and/or credits) equal to the equity value of our stock immediately before the ownership change, multiplied by the long-term tax-exempt rate for the month in which the ownership change occurs. Market volatility due to reduced demand from the COVID-19 pandemic and oil oversupply may cause increased interest in our common stock, which may result in an additional ownership change. Due to the COVID-19 pandemic, the U.S. Federal Reserve has lowered the long-term tax-exempt rate. Additionally, our equity value has decreased due to the above-mentioned impacts of the COVID-19 pandemic and oil oversupply. Both of these changes could further limit our use of pre-ownership change NOLs if we experienced an additional ownership change. Furthermore, the IRS has recently proposed regulations that would prevent us from using unrealized built-in gains to increase this limitation. If these regulations were finalized and we experienced an ownership change our ability to use our NOLs may be limited. Such a limitation could, for any given year, have the effect of increasing the amount of our U.S. federal income tax liability, which would negatively impact the amount of after-tax cash available for distribution to our stockholders and our financial condition.
Item 2. Unregistered SalesPurchases of Equity Securities by Issuer and Affiliated Purchasers
The following table summarizes our purchases of equity securities during the three months ended June 30, 2020:March 31, 2021:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | Maximum | | | | | | | | | Maximum |
| | | | | | | | | Number of Shares | | | | | | | | | Number of Shares |
| | | | | | | Total Number of | | That May Yet be | | | | | | | Total Number of | | That May Yet be |
| | | | Average | | Shares Purchased | | Purchased Under | | | | Average | | Shares Purchased | | Purchased Under | ||
| | Total Number | | Price | | as Part of Publicly | | the Publicly | | Total Number | | Price | | as Part of Publicly | | the Publicly | ||
| | of Shares | | Paid per | | Announced Plans | | Announced Plans | | of Shares | | Paid per | | Announced Plans | | Announced Plans | ||
| | Purchased (1) | | Share | | or Programs | | or Programs |
| Purchased (1) |
| Share |
| or Programs |
| or Programs | ||
April 1, 2020 — April 30, 2020 |
| 383 |
| $ | 3.36 |
| N/A |
| N/A | |||||||||
May 1, 2020 — May 31, 2020 |
| — | |
| — |
| N/A |
| N/A | |||||||||
June 1, 2020 — June 30, 2020 |
| 5,180 | |
| 6.50 |
| N/A |
| N/A | |||||||||
January 1, 2021 — January 31, 2021 | | 184,393 | | $ | 9.45 | | N/A | | N/A | |||||||||
February 1, 2021 — February 28, 2021 |
| — | |
| — |
| N/A |
| N/A | |||||||||
March 1, 2021 — March 31, 2021 |
| — | |
| — |
| N/A |
| N/A | |||||||||
Total |
| 5,563 | | | 6.28 |
| N/A |
| N/A |
| 184,393 | | | 9.45 |
| N/A |
| N/A |
(1) | Represents shares withheld to satisfy employees’ tax withholding obligations in connection with the vesting of restricted stock awards during the period. |
Item 3. Defaults Uponupon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
| | |
| | |
Exhibit No. |
| Description |
2.1 | | |
2.2 | | |
3.1 | | |
3.2 | | |
3.3 | | |
4.1 | | |
4.2 | | |
10.1 | | |
31.1* | | |
31.2* | | |
32.1** | | |
32.2** | | |
101.1* | | Interactive data files pursuant to Rule 405 of Regulation S-T |
104.1* | | Cover page interactive data files pursuant to Rule 406 of Regulation S-T |
| | |
* Filed herewith.
** Furnished, not filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
| Archrock, Inc. | |
| | |
| By: | /s/ Douglas S. Aron |
| | Douglas S. Aron |
| | Senior Vice President and Chief Financial Officer |
| | (Principal Financial Officer) |
| | |
| By: | /s/ Donna A. Henderson |
| | Donna A. Henderson |
| | Vice President and Chief Accounting Officer |
| | (Principal Accounting Officer) |
| | |
| |
|
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