Docoh
Loading...

AROC Archrock

Filed: 30 Apr 21, 3:12pm

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 March 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 April 23, 2021: 154,054,006 shares.

GLOSSARY

The following terms and abbreviations appearing in the text of this report have the meanings indicated below.

2020 Form 10-K

Annual Report on Form 10-K for the year ended December 31, 2020

2027 Notes

$500.0 million of 6.875% senior notes due April 2027, issued in March 2019

2028 Notes

$800.0 million of 6.25% senior notes due April 2028, $500.0 million of which was issued in December 2019, $300.0 million of which was issued in December 2020

Amendment No. 3

Amendment No. 3 to Credit Agreement, dated February 22, 2021, which amended that Credit Agreement, dated as of March 30, 2017, which governs the Credit Facility

Archrock, our, we, us

Archrock, Inc., individually and together with its wholly-owned subsidiaries

ASU 2016-13

Accounting Standards Update No. 2016-13—Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

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

ATM Agreement

Equity Distribution Agreement, dated February 23, 2021, entered into with Wells Fargo Securities, LLC and BofA Securities, Inc., as sales agents, relating to the at-the-market offer and sale of shares of our common stock from time to time

COVID-19

Coronavirus disease 2019

Credit Facility

$750.0 million asset-based revolving credit facility due November 2024, as governed by Amendment No. 3 to Credit Agreement, dated February 22, 2021, which amended that Credit Agreement, dated as of March 30, 2017

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

February 2021 Disposition

Sale completed in February 2021 of certain contract operations customer service agreements, compressors and other assets

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

OTC

Over-the-counter, as related to aftermarket services parts and components

ROU

Right-of-use, as related to the lease model under Accounting Standards Codification Topic 842 Leases

SEC

U.S. Securities and Exchange Commission

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 2020 Form 10-K 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)

    

March 31, 2021

    

December 31, 2020

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

1,933

$

1,097

Accounts receivable, trade, net of allowance of $3,294 and $3,370, respectively

 

107,535

 

104,425

Inventory

 

66,024

 

63,670

Other current assets

 

12,818

 

12,819

Total current assets

 

188,310

 

182,011

Property, plant and equipment, net

 

2,342,076

 

2,389,674

Operating lease ROU assets

 

19,073

 

19,236

Intangible assets, net

 

57,369

 

61,531

Contract costs, net

 

25,638

 

29,216

Deferred tax assets

 

53,602

 

56,934

Other assets

 

25,733

 

30,084

Noncurrent assets associated with discontinued operations

 

10,730

 

11,036

Total assets

$

2,722,531

$

2,779,722

Liabilities and Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable, trade

$

35,190

$

30,819

Accrued liabilities

 

96,444

 

76,993

Deferred revenue

 

3,099

 

3,880

Total current liabilities

 

134,733

 

111,692

Long-term debt

 

1,619,238

 

1,688,867

Operating lease liabilities

 

16,941

 

16,925

Deferred tax liabilities

 

696

 

725

Other liabilities

 

19,931

 

18,088

Noncurrent liabilities associated with discontinued operations

 

7,868

 

7,868

Total liabilities

 

1,799,407

 

1,844,165

Commitments and contingencies (Note 20)

 

  

 

  

Equity:

 

  

 

  

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, 161,323,492 and 160,014,960 shares issued, respectively

 

1,613

 

1,600

Additional paid-in capital

 

3,430,910

 

3,424,624

Accumulated other comprehensive loss

 

(4,010)

 

(5,006)

Accumulated deficit

 

(2,419,974)

 

(2,401,988)

Treasury stock: 7,263,173 and 7,052,769 common shares, at cost, respectively

 

(85,415)

 

(83,673)

Total equity

 

923,124

 

935,557

Total liabilities and equity

$

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

March 31, 

    

2021

    

2020

Revenue:

 

  

 

  

Contract operations

$

166,034

$

206,974

Aftermarket services

 

29,397

 

42,723

Total revenue

 

195,431

 

249,697

Cost of sales (excluding depreciation and amortization):

Contract operations

 

61,365

 

78,651

Aftermarket services

 

25,783

 

34,991

Total cost of sales (excluding depreciation and amortization)

 

87,148

 

113,642

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)

Provision for (benefit from) income taxes

 

7,024

 

(15,953)

Net income (loss)

$

4,169

$

(61,187)

Basic and diluted net income (loss) per common share

$

0.03

$

(0.41)

Weighted average common shares outstanding:

 

  

 

  

Basic

 

151,425

 

150,550

Diluted

 

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

March 31, 

    

2021

    

2020

Net income (loss)

    

$

4,169

    

$

(61,187)

Other comprehensive income (loss), net of tax:

 

  

 

  

Interest rate swap gain (loss), net of reclassifications to earnings

 

996

 

(5,786)

Total other comprehensive income (loss), net of tax

 

996

 

(5,786)

Comprehensive income (loss)

$

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)

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

ARCHROCK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Three Months Ended

March 31, 

    

2021

    

2020

Cash flows from operating activities:

  

  

Net income (loss)

$

4,169

$

(61,187)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

  

 

  

Depreciation and amortization

 

45,712

 

49,822

Long-lived and other asset impairment

 

7,073

 

6,195

Goodwill impairment

99,830

Inventory write-downs

 

218

 

282

Amortization of operating lease ROU assets

 

950

 

781

Amortization of deferred financing costs

 

6,264

 

1,533

Amortization of debt discount

 

 

187

Amortization of debt premium

(501)

0

Interest rate swaps

 

1,071

 

196

Stock-based compensation expense

 

2,663

 

3,006

Non-cash restructuring charges

61

Provision for credit losses

 

224

 

752

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

 

5,591

 

6,805

Deferred revenue recognized in earnings

 

(2,328)

 

(7,735)

Change in assets and liabilities:

 

  

 

  

Accounts receivable, trade

 

(4,108)

 

4,803

Inventory

 

(3,330)

 

1,068

Other assets

 

270

 

(439)

Contract costs, net

 

(2,283)

 

(5,537)

Accounts payable and other liabilities

 

18,881

 

12,936

Deferred revenue

 

1,397

 

5,783

Other

 

62

 

69

Net cash provided by operating activities

 

77,555

 

99,129

Cash flows from investing activities:

 

  

 

  

Capital expenditures

 

(11,539)

 

(71,946)

Proceeds from sale of business

 

18,168

 

24,179

Proceeds from sale of property, plant and equipment and other assets

 

9,114

 

2,543

Proceeds from insurance and other settlements

775

1,083

Net cash provided by (used in) investing activities

 

16,518

 

(44,141)

Cash flows from financing activities:

 

  

 

  

Borrowings of long-term debt

 

159,751

 

227,500

Repayments of long-term debt

 

(229,251)

 

(259,500)

Payments for debt issuance costs

 

(2,401)

 

(596)

Payments for settlement of interest rate swaps that include financing elements

 

(1,075)

 

(88)

Dividends paid to stockholders

 

(22,155)

 

(22,171)

Net proceeds from issuance of common stock

3,401

0

Proceeds from stock issued under ESPP

 

235

 

202

Purchases of treasury stock

 

(1,742)

 

(799)

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

 

1,097

 

3,685

Cash and cash equivalents, end of period

$

1,933

$

3,221

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

9

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 2020 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 Facility 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 March 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-related and contract-based 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 on sale of assets, net in our condensed 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 tax matters agreement, which governs the respective rights, responsibilities and obligations of Exterran Corporation and us with respect to certain 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 sheets. 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 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.

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 constrain our undrawn capacity and as 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 paid on May 17, 2021 to stockholders of record at the close 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 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

Contract Assets

As of March 31, 2021 and December 31, 2020, our receivables from contracts with customers, net of allowance for credit losses, were $99.4 million and $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.

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.

16

Our allowance for credit losses balance changed as follows during the three months ended March 31, 2021:

(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

Contract Liabilities

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 March 31, 2021 and December 31, 2020, our contract liabilities were $3.6 million and $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 three months ended March 31, 2021 was primarily due to $2.3 million recognized as revenue during the period, partially offset by revenue deferral of $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.

17

The following table presents the results of our compression fleet impairment review as recorded to our contract operations 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 restructuring activities to further streamline our organization and more fully align our teams to improve our customer service and profitability. We incurred severance costs of $1.7 million related to these activities during the three months ended March 31, 2020. NaN additional costs will be incurred for this organizational restructuring.

In response to the decreased activity level of our customers that resulted from the COVID-19 pandemic beginning in the second quarter of 2020, we have incurred severance costs of $6.1 million to right-size our business. We are not currently able to estimate the total amount of restructuring costs to be incurred 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.

During 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.

The severance and property disposal costs incurred under the above restructuring plans were recorded to restructuring charges in our condensed consolidated statements of operations.

The following table presents restructuring charges incurred by 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.

18

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 net 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

The year-to-date effective tax rate for the three months ended March 31, 2021 differed significantly from our statutory rate primarily due to unrecognized tax benefits and the limitation on executive compensation.

Unrecognized Tax Benefits

As of 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 March 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, only distributed earnings (dividends) are allocated to participating securities, as 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 ESPP unless their effect would be anti-dilutive.

19

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:

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:

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:

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.

As of 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 these 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 our derivative instruments.

20

We have designated our interest rate swaps as cash flow hedging instruments. Changes in the fair value of cash 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, in which 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 estimate that $4.8 million of the deferred pre-tax loss attributable to interest rate swaps included in accumulated other comprehensive loss at March 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 March 31, 2021, the weighted average effective fixed interest rate of 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)

    

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 table presents the effect of our derivative instruments designated as cash flow hedging instruments on our condensed consolidated statements of operations:

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 Loss”) and Note 18 (“Fair Value Measurements”) for further details on our derivative instruments.

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 position measured at fair value on a recurring basis, with pricing levels as of the date of valuation:

(in thousands)

    

March 31, 2021

    

December 31, 2020

Derivative liability

$

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 three months ended 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. The following table presents the fair value of our compressors impaired during 2021 and 2020:

(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 follows:

    

Range

    

Weighted Average (1)

Estimated net sale proceeds:

As of March 31, 2021

$0 - $289 per horsepower

$17 per horsepower

As of December 31, 2020

$0 - $289 per horsepower

$20 per horsepower

(1)Calculated based on an estimated discount for market liquidity of 79% and 81% as of March 31, 2021 and December 31, 2020, respectively.

See Note 13 (“Long-Lived and Other Asset Impairment”) for further details.

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)

    

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 premium and unamortized deferred financing costs. See Note 9 (“Long-Term Debt”).

22

19. Stock-Based Compensation

Three Months Ended

March 31, 

(in thousands)

    

2021

    

2020

Equity awards

$

2,663

$

3,006

Liability awards

 

586

 

(548)

Total stock-based compensation expense

$

3,249

$

2,458

The following table presents the activity of our stock-settled restricted stock awards, restricted stock units and performance-based restricted stock units and our cash-settled performance-based restricted stock units during the three months ended March 31, 2021:

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 March 31, 2021 are comprised of 611,000 cash-settled units and 2,494,000 stock-settled awards and units.

As of March 31, 2021, we expect $24.0 million of unrecognized compensation cost related to our non-vested awards and units to be recognized over the weighted average period of 2.2 years.

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 2021 through the fourth quarter of 2022, and maximum potential future payments of $2.2 million. As of 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 March 31, 2021 and December 31, 2020, we accrued $5.4 million and $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 December 31, 2020, we had an indemnification liability (including penalties and interest), in addition to the tax contingency above, of $1.6 million 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.

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. 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 appointed 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 fill the resulting vacancy. Mr. Hildebrand did 0t receive compensation in his role as Director and Mr. Rebrook received 0 compensation in his role as Director in 2020. In December 2020, the Board of Directors voted to approve the payment of Director cash and equity compensation to Mr. Rebrook beginning in 2021.

Revenue from Hilcorp and affiliates was $9.5 million and $10.7 million during the three months ended March 31, 2021 and 2020, respectively. Accounts receivable, net due from Hilcorp and affiliates was $7.1 million and $3.9 million as of March 31, 2021 and December 31, 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.

    

Contract

    

Aftermarket

    

(in thousands)

    

Operations

    

Services

    

Total

Three months ended March 31, 2021

 

  

 

  

 

  

Revenue

$

166,034

$

29,397

$

195,431

Gross margin

 

104,669

 

3,614

 

108,283

Three months ended March 31, 2020

 

  

 

  

 

  

Revenue

$

206,974

$

42,723

$

249,697

Gross margin

 

128,323

 

7,732

 

136,055

The following table reconciles total gross margin to income (loss) before income taxes:

    

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)

25

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 2020 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

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 recorded a gain on the sale of $6.0 million during the three months ended March 31, 2021. See Note 3 (“Business Transactions”) to our Financial Statements for further details of this transaction.

COVID-19 Pandemic

Beginning in the 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, which led to substantial spending cuts by our customers and a decline in natural gas and crude oil production. This global response to the pandemic has adversely impacted our revenue and cash flows. Though demand has shown modest improvement since the lows reached in the second quarter of 2020 as economies have reopened and vaccine rollout is underway globally, the potential for additional surges and variants of the disease remains and as such, uncertainty still exists around the timing and magnitude of a full economic recovery.

The key driver of our business is the production of U.S. natural gas and crude oil. Changes in natural gas and crude oil production spending therefore typically result in changes in demand for our services. According to the U.S. Energy Information Administration’s April 2021 Short-Term Energy Outlook, U.S. dry natural gas and crude oil production is expected to be flat and decline 2%, respectively, in 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 and 7% for crude oil.

Our customers substantially cut spending and activity beginning in the second quarter of 2020 as a result of the significant declines in natural gas and crude oil prices and demand. Our horsepower, utilization and revenue have experienced declines and are expected to remain at lower levels into 2021 as compared to the first quarter of 2020 and periods prior in both our contract operations and aftermarket services businesses. However, U.S. onshore activity is on the rise, 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 plan implemented in the second quarter of 2020 to reduce our annual operating, corporate and capital costs.

26

The impact of the COVID-19 pandemic on our results is primarily visible in the $99.8 million non-cash impairment of goodwill and the impairment’s resulting $22.7 million tax benefit in the first quarter of 2020. Revenue, cost of sales and SG&A were also significantly 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”) to our Financial Statements for further discussion.

Operating Highlights

Three Months Ended

 

March 31, 

 

(in thousands)

    

2021

    

2020

    

Total available horsepower (at period end)(1)

    

4,067

    

4,386

Total operating horsepower (at period end)(2)

3,329

 

3,883

Average operating horsepower

3,360

 

3,914

Horsepower utilization:

  

 

  

Spot (at period end)

82

%  

89

%

Average

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, restructuring charges, interest expense, (gain) loss on sale of assets, net, other (income) loss, net and provision for (benefit from) income 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.

27

The following table reconciles net income (loss) to gross margin:

Three Months Ended

March 31, 

(in thousands)

    

2021

    

2020

Net income (loss)

$

4,169

$

(61,187)

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)

Provision for (benefit from) income taxes

 

7,024

 

(15,953)

Gross margin

$

108,283

$

136,055

Financial Results of Operations: Summary of Results

Revenue

Revenue was $195.4 million and $249.7 million during the three months ended March 31, 2021 and 2020, respectively. The decrease in revenue was due to decreases in revenue from our contract operations 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 $61.2 million during the three months ended March 31, 2021 and 2020, respectively. The change from net loss to net income was primarily driven by decreases in goodwill impairment, SG&A and depreciation and amortization as well as an increase in gain on sale of assets, net. These changes were partially offset by decreases in gross margin from our contract operations and aftermarket services businesses and a change from a benefit from to a provision for income taxes.

Financial Results of Operations: Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Contract Operations

 

Three Months Ended

March 31, 

Increase

(dollars in thousands)

    

2021

    

2020

    

(Decrease)

Revenue

$

166,034

$

206,974

(20)

%

Cost of sales (excluding depreciation and amortization)

 

61,365

 

78,651

(22)

%

Gross margin

$

104,669

$

128,323

(18)

%

Gross margin percentage (1)

 

63

%  

 

62

%  

1

%

(1)Defined as gross margin divided by revenue.

Revenue decreased primarily due to returns of horsepower and a decrease in contract operations rates amidst the market downturn, as well as the strategic disposition of horsepower in 2020.

28

Gross margin also decreased due to this decrease in revenue, however, the decline was partially 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 the COVID-19 pandemic drove a further reduction in operating costs.

Aftermarket Services

 

Three Months Ended

 

March 31, 

Increase

(dollars in thousands)

    

2021

    

2020

    

(Decrease)

Revenue

$

29,397

$

42,723

 

(31)

%

Cost of sales (excluding depreciation and amortization)

 

25,783

 

34,991

 

(26)

%

Gross margin

$

3,614

$

7,732

 

(53)

%

Gross margin percentage

 

12

%  

 

18

%  

(6)

%

Revenue decreased due to decreases in service activities and parts sales, which were primarily driven by reduced 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 first quarter of 2021 and the impact of the sale of our turbocharger business in July 2020.

Gross margin also decreased due to this decrease in revenue, but benefited from a decrease in cost of sales, which was driven by the same decreases in service activities and parts sales discussed above. The decrease in gross margin percentage was largely due to pricing pressure as a result of the market decline.

Costs and Expenses

 

Three Months Ended

March 31, 

(in thousands)

    

2021

    

2020

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)

Selling, general and administrative. The decrease in SG&A was primarily due to a $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 a $0.5 million decrease in costs related to our process and technology transformation project.

Depreciation and amortization. The decrease in depreciation and amortization expense was primarily due to 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 sales during 2020, partially offset by an increase in depreciation expense associated with fixed asset additions during 2020.

29

Long-lived and other asset impairment. We periodically review the future deployment of our idle compressors for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. In addition, we evaluate for impairment idle units that have been culled from our compression fleet in prior years and are 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 in our contract operations 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

Goodwill impairment. During the three months ended 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 $0.9 million and $1.7 million of restructuring charges related to restructuring activities during the three months ended March 31, 2021 and 2020, respectively. See Note 14 (“Restructuring Charges”) to our Financial Statements for further details.

Interest expense. The increase in interest expense was primarily due to the $4.9 million write-off of unamortized deferred financing costs related to Amendment No. 3, partially offset by a decrease in expense that was driven by decreases in the average outstanding balance of long-term debt and the weighted average effective interest rate.

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 during the three months ended 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 was primarily due to a $0.7 million decrease in indemnification expense remitted pursuant to our tax matters agreement with Exterran 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.

Provision for (Benefit from) Income Taxes

 

Three Months Ended

 

March 31, 

Increase

(dollars in thousands)

    

2021

    

2020

    

(Decrease)

Provision for (benefit from) income taxes

$

7,024

$

(15,953)

 

(144)

%

Effective tax rate

 

63

%  

 

21

%  

42

%

The change from a benefit from to a provision for income taxes was primarily due to the tax effect of the increase in book income during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

30

Liquidity and Capital Resources

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 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 exceed our cost of capital. In addition to newly-acquired compressors, growth capital expenditures 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 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 or 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 application for which the compression package was designed.

Projected Capital Spend

We currently plan to spend approximately $80 million to $106 million in capital expenditures during 2021, primarily consisting of approximately $30 million to $50 million for growth capital expenditures and approximately $40 million to $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.

31

Credit Facility

During the three months ended March 31, 2021 and 2020, the Credit Facility had an average daily balance of $354.8 million and $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% at March 31, 2021 and December 31, 2020, respectively. As of 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 (see below). As of March 31, 2021, the ratio requirements did not constrain our undrawn capacity and as 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.

See Note 9 (“Long-Term Debt”) to our Financial Statements for further 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:

 

Three Months Ended

March 31, 

(in thousands)

    

2021

    

2020

Net cash provided by (used in):

 

  

 

  

Operating activities

$

77,555

$

99,129

Investing activities

 

16,518

 

(44,141)

Financing activities

 

(93,237)

 

(55,452)

Net increase (decrease) in cash and cash equivalents

$

836

$

(464)

32

Operating 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) investing activities was primarily due to a $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, partially offset by $3.4 million of net proceeds from the issuance of common stock under the ATM Agreement during the three months ended March 31, 2021.

Dividends

On April 28, 2021, our Board of Directors declared a quarterly dividend of $0.145 per share of common stock to be paid on May 17, 2021 to stockholders of record at the close of business on May 10, 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

For quantitative and qualitative disclosures about market risk, see Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our 2020 Form 10-K. Our exposures as of March 31, 2021 have not changed materially since December 31, 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.

33

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 March 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.

34

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

There have been no material changes or updates to the risk factors previously disclosed in our 2020 Form 10-K.

Item 2. Purchases of Equity Securities by Issuer and Affiliated Purchasers

The following table summarizes our purchases of equity securities during the three months ended March 31, 2021:

Maximum

Number of Shares

Total Number of

That May Yet be

Average

Shares Purchased

Purchased Under

Total Number

Price

as Part of Publicly

the Publicly

of Shares

Paid per

Announced Plans

Announced Plans

    

Purchased (1)

    

Share

    

or Programs

    

or Programs

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

 

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 upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

35

Item 6. Exhibits

Exhibit No.

    

Description

2.1

Asset Purchase Agreement, dated as of June 23, 2019, by and among Archrock Services, L.P., Archrock, Inc. and Elite Compression Services, LLC, incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on June 24, 2019

2.2

Asset Purchase Agreement, dated as of June 23, 2019, by and between Archrock Services, L.P. and Harvest Four Corners, LLC, incorporated by reference to Exhibit 2.2 of the Registrant’s Current Report on Form 8-K filed on June 24, 2019

3.1

Composite Certificate of Incorporation of Archrock, Inc. (as amended as of November 3, 2015), incorporated by reference to Exhibit 3.3 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015

3.2

Third Amended and Restated Bylaws of Exterran Holdings, Inc. (now Archrock, Inc.), incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on March 20, 2013

3.3

Amendment No. 1 to Third Amended and Restated Bylaws of Archrock, Inc., incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on May 5, 2020

4.1

Indenture, dated as of March 21, 2019, by and among Archrock Partners, L.P., Archrock Partners Finance Corp., the guarantors party thereto and Wells Fargo Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed on March 21, 2019

4.2

Indenture, dated as of December 20, 2019, by and among Archrock Partners, L.P., Archrock Partners Finance Corp., the guarantors party thereto and Wells Fargo Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed on December 20, 2019

10.1

Amendment No. 3 to Credit Agreement, dated as of February 22, 2021, by and among Archrock, Inc., Archrock Partners Operating LLC, Archrock Services, L.P., the other Loan Parties thereto, the Lenders thereto, and JPMorgan Chase Bank, N.A., as the Administrative Agent, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on February 23, 2021

31.1*

Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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.

36

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)

April 30, 2021

37