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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
For the quarterly period ended
or
For the transition period from to
Commission File No.
(Exact name of registrant as specified in its charter)
(Address of principal executive offices, zip code)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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.
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).
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.
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
Number of shares of the common stock of the registrant outstanding as of October 26, 2021:
TABLE OF CONTENTS
2
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 |
2022 Notes | $350.0 million of 6.00% senior notes due October 2022, issued in April 2014 |
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 2021 Dispositions | Sales completed in July 2021 of certain contract operations customer service agreements, compressors and other assets |
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)
| September 30, 2021 |
| December 31, 2020 | |||
Assets |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, trade, net of allowance of $ |
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Inventory |
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Other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Operating lease ROU assets |
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Intangible assets, net |
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Contract costs, net |
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Deferred tax assets |
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Other assets |
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Noncurrent assets associated with discontinued operations |
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Total assets | $ | | $ | | ||
Liabilities and Equity |
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Current liabilities: |
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Accounts payable, trade | $ | | $ | | ||
Accrued liabilities |
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Deferred revenue |
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Total current liabilities |
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Long-term debt |
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Operating lease liabilities |
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Deferred tax liabilities |
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Other liabilities |
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Noncurrent liabilities associated with discontinued operations |
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Total liabilities |
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Commitments and contingencies (Note 20) |
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Equity: |
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Preferred stock: $ |
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Common stock: $ |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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Accumulated deficit |
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Treasury stock: |
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Total equity |
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Total liabilities and equity | $ | | $ | | ||
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 | Nine Months Ended | ||||||||||
September 30, | September 30, | |||||||||||
| 2021 |
| 2020 |
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Revenue: |
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Contract operations | $ | | $ | | $ | | $ | | ||||
Aftermarket services |
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Total revenue |
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Cost of sales (excluding depreciation and amortization): |
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Contract operations |
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Aftermarket services |
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Total cost of sales (excluding depreciation and amortization) |
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Selling, general and administrative |
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Depreciation and amortization |
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Long-lived and other asset impairment |
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Goodwill impairment | — | — | — | | ||||||||
Restructuring charges | | | | | ||||||||
Interest expense |
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Debt extinguishment loss |
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Gain on sale of assets, net | ( | ( | ( | ( | ||||||||
Other (income) expense, net |
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Income (loss) before income taxes |
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Provision for (benefit from) income taxes |
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Net income (loss) | $ | | $ | | $ | | $ | ( | ||||
Basic and diluted net income (loss) per common share | $ | | $ | | $ | | $ | ( | ||||
Weighted average common shares outstanding: |
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Basic |
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Diluted |
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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 | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Net income (loss) | $ | |
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Other comprehensive income (loss), net of tax: |
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Interest rate swap gain (loss), net of reclassifications to earnings |
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Amortization of dedesignated interest rate swaps |
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Total other comprehensive income (loss), net of tax |
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Comprehensive income (loss) | $ | | $ | | $ | | $ | ( | ||||
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 |
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| Capital |
| Loss |
| Deficit |
| Amount |
| Shares |
| Total | |||||||
Balance at June 30, 2020 | $ | |
| | $ | | $ | ( | $ | ( | $ | ( |
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Treasury stock purchased | ( | ( | ( | |||||||||||||||||||
Cash dividends ($ |
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Shares issued under ESPP |
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Stock-based compensation, net of forfeitures |
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Comprehensive income |
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Net income |
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Interest rate swap gain, net of reclassifications to earnings |
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Balance at September 30, 2020 | $ | |
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Balance at June 30, 2021 | $ | |
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Treasury stock purchased |
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Cash dividends ($ |
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Shares issued under ESPP |
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Stock-based compensation, net of forfeitures |
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Comprehensive income |
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Net income |
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Interest rate swap gain, net of reclassifications to earnings |
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Amortization of dedesignated interest rate swaps | | | ||||||||||||||||||||
Balance at September 30, 2021 | $ | |
| | $ | | $ | ( | $ | ( | $ | ( |
| ( | $ | | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
Accumulated | ||||||||||||||||||||||
Common | Additional | Other | Treasury | |||||||||||||||||||
Stock | Paid-in | Comprehensive | Accumulated | Stock | ||||||||||||||||||
| Amount |
| Shares |
| Capital |
| Loss |
| Deficit |
| Amount |
| Shares |
| Total | |||||||
Balance at December 31, 2019 | $ | | | $ | | $ | ( | $ | ( | $ | ( | ( | $ | | ||||||||
Treasury stock purchased |
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Cash dividends ($ |
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Shares issued under ESPP |
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Stock-based compensation, net of forfeitures |
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Contribution from Exterran Corporation | | | ||||||||||||||||||||
Impact of ASU 2016-13 adoption | | | ||||||||||||||||||||
Comprehensive loss |
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Net loss |
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Interest rate swap loss, net of reclassifications to earnings |
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Balance at September 30, 2020 | $ | |
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Balance at December 31, 2020 | $ | |
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Treasury stock purchased |
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Cash dividends ($ |
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Shares issued under ESPP |
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Stock-based compensation, net of forfeitures |
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Net proceeds from issuance of common stock | | | | | ||||||||||||||||||
Comprehensive income |
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Net income |
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Interest rate swap gain, net of reclassifications to earnings |
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Amortization of dedesignated interest rate swaps | | | ||||||||||||||||||||
Balance at September 30, 2021 | $ | |
| | $ | | $ | ( | $ | ( | $ | ( |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
9
ARCHROCK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended | ||||||
September 30, | ||||||
| 2021 |
| 2020 | |||
Cash flows from operating activities: |
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Net income (loss) | $ | | $ | ( | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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Long-lived and other asset impairment |
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Goodwill impairment | — | | ||||
Inventory write-downs |
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Amortization of operating lease ROU assets |
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Amortization of deferred financing costs |
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Amortization of debt discount |
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Amortization of debt premium | ( | — | ||||
Amortization of dedesignated interest rate swaps | | — | ||||
Debt extinguishment loss |
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Interest rate swaps |
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Stock-based compensation expense |
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Non-cash restructuring charges | — | | ||||
Provision for credit losses |
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(Gain) loss on sale of assets, net |
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Gain on sale of business | ( | ( | ||||
Deferred income tax provision (benefit) |
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Amortization of contract costs |
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Deferred revenue recognized in earnings |
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Change in assets and liabilities: |
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Accounts receivable, trade |
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Inventory |
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Other assets |
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Contract costs, net |
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Accounts payable and other liabilities |
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Deferred revenue |
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Other |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Capital expenditures |
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Proceeds from sale of business |
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Proceeds from sale of property, plant and equipment and other assets |
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Proceeds from insurance and other settlements | | | ||||
Net cash provided by (used in) investing activities |
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Cash flows from financing activities: |
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Borrowings of long-term debt |
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Repayments of long-term debt |
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Payments for debt issuance costs |
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Payments for settlement of interest rate swaps that include financing elements |
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Dividends paid to stockholders |
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Net proceeds from issuance of common stock | | — | ||||
Proceeds from stock issued under ESPP |
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Purchases of treasury stock |
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Contribution from Exterran Corporation |
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Net cash used in financing activities |
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Net increase (decrease) in cash and cash equivalents |
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Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period | $ | | $ | | ||
Supplemental disclosure of non-cash investing and financing transactions: | ||||||
Non-cash consideration received in July 2020 Disposition | $ | — | $ | | ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
10
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
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 reflects all normal recurring adjustments necessary to fairly present 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 Implemented
Reference Rate Reform
On June 10, 2021, we prospectively adopted 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. On June 10, 2021, we amended one of our interest rate swap agreements and determined that the modifications meet the criteria for the optional expedients and exceptions, which allow us to forego dedesignation of the hedging relationship and to subsequently assess effectiveness on a qualitative basis. The adoption of ASU 2020-04 did not have a material impact on our consolidated financial statements. In the first quarter, we evaluated Amendment No. 3 to our Credit Facility and determined that ASU 2020-04 was not applicable. We will continue to assess any modifications to our interest rate swap and Credit Facility agreements during the effective period of this update and will apply the amendments as applicable.
11
3. Business Transactions
July 2021 Dispositions
In July 2021, we completed sales of certain contract operations customer service agreements and approximately
February 2021 Disposition
In February 2021, we completed the sale of certain contract operations customer service agreements and approximately
July 2020 Disposition
In July 2020, we completed the sale of the turbocharger business included within our . In connection with the sale, we entered into a supply agreement to purchase a minimum amount of turbocharger goods and services over a
March 2020 Disposition
In March 2020, we completed the sale of certain contract operations customer service agreements and approximately
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 both September 30, 2021 and December 31, 2020, we had $
12
The following table presents the balance sheets for our discontinued operations:
(in thousands) |
| September 30, 2021 |
| December 31, 2020 | ||
Other assets | $ | | $ | | ||
Deferred tax assets | | | ||||
Total assets associated with discontinued operations | $ | | $ | | ||
Deferred tax liabilities | $ | | $ | | ||
Total liabilities associated with discontinued operations | $ | | $ | | ||
5. Inventory
(in thousands) |
| September 30, 2021 |
| December 31, 2020 | ||
Parts and supplies | $ | | $ | | ||
Work in progress |
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Inventory | $ | | $ | | ||
6. Property, Plant and Equipment, net
(in thousands) |
| September 30, 2021 |
| December 31, 2020 | ||
Compression equipment, facilities and other fleet assets | $ | | $ | | ||
Land and buildings |
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Transportation and shop equipment |
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Computer hardware and software |
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Other |
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Property, plant and equipment |
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Accumulated depreciation |
| ( |
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Property, plant and equipment, net | $ | | $ | | ||
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 $
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.
13
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.
As of September 30, 2021 and December 31, 2020, we had $
During the three and nine months ended September 30, 2020, we impaired $
9. Long-Term Debt
(in thousands) |
| September 30, 2021 |
| December 31, 2020 | ||
Credit Facility | $ | | $ | | ||
2028 Notes | ||||||
Principal |
| |
| | ||
Debt premium, net of amortization | |
| | |||
Deferred financing costs, net of amortization |
| ( |
| ( | ||
| |
| | |||
2027 Notes | ||||||
Principal | |
| | |||
Deferred financing costs, net of amortization | ( |
| ( | |||
|
| | ||||
Long-term debt | $ | | $ | | ||
Credit Facility
As of September 30, 2021, there were $
We must maintain certain consolidated financial ratios, as defined in our Credit Facility agreement. As of September 30, 2021, the ratio requirements did not constrain our undrawn capacity and as such, $
14
Amendment No. 3
On February 22, 2021, we amended our Credit Facility to, among other things:
| ● | reduce the aggregate revolving commitment from $ |
| ● | 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 |
| |
Total Debt to EBITDA |
|
|
Through fiscal year 2022 | ||
January 1, 2023 through September 30, 2023 |
| |
Thereafter (1) |
|
| (1) | Subject to a temporary increase to |
We incurred $
2022 Notes Redemption
In April 2020, the 2022 Notes were redeemed at
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 loss consists of changes in the fair value of our interest rate swap derivative instruments, net of tax.
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Beginning accumulated other comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Other comprehensive income (loss), net of tax: | ||||||||||||
Loss recognized in other comprehensive income (loss), net of tax benefit of $ |
| ( |
| ( |
| ( |
| ( | ||||
Loss reclassified from accumulated other comprehensive loss to interest expense, net of tax benefit of $ |
| |
| |
| |
| | ||||
Total other comprehensive income (loss) |
| |
| |
| |
| ( | ||||
Ending accumulated other comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
See Note 17 (“Derivatives”) for further details on our interest rate swap derivative instruments.
15
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 $
During the nine months ended September 30, 2021, we sold
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 |
|
|
|
| ||
Q3 | $ | | $ | | ||
Q2 | | | ||||
Q1 | | | ||||
2020 |
|
|
|
| ||
Q4 | $ | | $ | | ||
Q3 |
| |
| | ||
Q2 |
| |
| | ||
Q1 |
| |
| | ||
On October 28, 2021, our Board of Directors declared a quarterly dividend of $
16
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 | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Contract operations: |
|
|
|
| ||||||||
$ | | $ | | $ | | $ | | |||||
| |
| |
| |
| | |||||
Over |
| |
| |
| |
| | ||||
Other (1) |
| |
| |
| |
| | ||||
Total contract operations revenue (2) |
| |
| |
| |
| | ||||
Aftermarket services: |
|
|
|
|
|
|
|
| ||||
Services |
| |
| |
| |
| | ||||
OTC parts and components sales |
| |
| |
| |
| | ||||
Total aftermarket services revenue (3) |
| |
| |
| |
| | ||||
Total revenue | $ | | $ | | $ | | $ | | ||||
| (1) | Primarily relates to fees associated with owned non-compression equipment. |
| (2) | Includes $ |
| (3) | All services revenue within aftermarket services is recognized over time. All OTC parts and components sales revenue is recognized at a point in time. |
Performance Obligations
As of September 30, 2021, we had $
(in thousands) |
|
|
|
|
|
|
| Total | |||||||||||||
Remaining performance obligations | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
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 September 30, 2021 and December 31, 2020, our receivables from contracts with customers, net of allowance for credit losses, were $
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.
17
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
Our allowance for credit losses balance changed as follows during the nine months ended September 30, 2021:
(in thousands) | |||
Balance at December 31, 2020 |
| $ | |
Provision for credit losses | | ||
Write-offs charged against allowance | ( | ||
Balance at September 30, 2021 | $ | |
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. Our contract liabilities were $
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.
18
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.
The following table presents the results of our compression fleet impairment review as recorded to our contract operations segment:
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Idle compressors retired from the active fleet |
| |
| |
| |
| | ||||
Horsepower of idle compressors retired from the active fleet |
| |
| |
| |
| | ||||
Impairment recorded on idle compressors retired from the active fleet | $ | | $ | | $ | | $ | | ||||
Other Impairment
During the three and nine months ended September 30, 2020, $
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 $
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 incurred severance costs of $
During the third quarter of 2020, a plan to dispose of certain non-core properties was approved by management. We have incurred $
During the third quarter of 2021, management approved and initiated a plan to exit a facility no longer deemed economical for our business. Closing costs incurred during the third quarter were not material, however, we expect to incur approximately $
The severance and property disposal costs incurred under the above restructuring plans were recorded to restructuring charges in our condensed consolidated statements of operations.
19
The following table presents restructuring charges incurred by segment:
| Contract | Aftermarket | ||||||||||
(in thousands) | Operations | Services | Other (1) | Total | ||||||||
Three months ended September 30, 2021 | ||||||||||||
Pandemic restructuring | $ | — | $ | — | $ | | $ | | ||||
Property restructuring - other exit costs | — | — | | | ||||||||
Other restructuring | — | — | | | ||||||||
Total restructuring charges | $ | — | $ | — | $ | | $ | | ||||
Three months ended September 30, 2020 | ||||||||||||
Organizational restructuring | $ | ( | $ | — | $ | ( | $ | ( | ||||
Pandemic restructuring | | | | | ||||||||
Property restructuring | ||||||||||||
Loss on sale | — | — | | | ||||||||
Impairment loss | — | — | | | ||||||||
Total property restructuring | — | — | | | ||||||||
Total restructuring charges | $ | | $ | | $ | | $ | | ||||
Nine months ended September 30, 2021 | ||||||||||||
Pandemic restructuring | $ | | $ | | $ | | $ | | ||||
Property restructuring | ||||||||||||
Impairment loss | — | — | | | ||||||||
Other exit costs | — | — | | | ||||||||
Total property restructuring | — | — | | | ||||||||
Other restructuring | — | — | | | ||||||||
Total restructuring charges | $ | | $ | | $ | | $ | | ||||
Nine months ended September 30, 2020 | ||||||||||||
Organizational restructuring | $ | | $ | | $ | | $ | | ||||
Pandemic restructuring | | | | | ||||||||
Property restructuring | ||||||||||||
Loss on sale | — | — | | | ||||||||
Impairment loss | — | — | | | ||||||||
Total property restructuring | — | — | | | ||||||||
Total restructuring charges | $ | | $ | | $ | | $ | | ||||
| (1) | Represents expense incurred within our corporate function and not directly attributable to our segments. |
20
The following table presents restructuring charges incurred by cost type:
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
(in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||
Severance costs |
| |||||||||||
Organizational restructuring | $ | — | $ | ( | $ | — | $ | | ||||
Pandemic restructuring | |
| |
| |
| | |||||
Total severance costs | | | | | ||||||||
Property disposal costs | ||||||||||||
Loss on sale | — | | — | | ||||||||
Impairment loss | — | | | | ||||||||
Other exit costs | | — | | — | ||||||||
Total property disposal costs |
| |
| |
| |
| | ||||
Other restructuring costs | | — | | — | ||||||||
Total restructuring charges | $ | | $ | | $ | | $ | | ||||
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 nine months ended September 30, 2021 differed significantly from our statutory rate primarily due to unrecognized tax benefits and the limitation on executive compensation.
Unrecognized Tax Benefits
As of September 30, 2021, we believe it is reasonably possible that $
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 participating securities do not have a contractual obligation to participate in our undistributed losses.
21
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.
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 | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Net income (loss) | $ | | $ | | $ | | $ | ( | ||||
Less: Earnings attributable to participating securities |
| ( |
| ( |
| ( |
| ( | ||||
Net income (loss) attributable to common stockholders | | | | ( | ||||||||
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 | Nine Months Ended | |||||||
September 30, | September 30, | |||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
Weighted average common shares outstanding including participating securities | | | ||||||
Less: Weighted average participating securities outstanding |
| ( |
| ( |
| ( |
| ( |
Weighted average common shares outstanding used in basic net income (loss) per common share |
| |
| |
| |
| |
Net dilutive potential common shares issuable: |
|
|
|
|
|
|
| |
On exercise of options and vesting of performance-based restricted stock units |
| | |
| |
| — | |
On settlement of ESPP shares |
| | |
| |
| — | |
Weighted average common shares outstanding used in diluted net income (loss) per common share |
| |
| |
| |
| |
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 | Nine Months Ended | |||||||
September 30, | September 30, | |||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
On exercise of options where exercise price is greater than average market value for the period |
|
|
| |||||
On exercise of options and vesting of performance-based restricted stock units | — | — | — | | ||||
On settlement of ESPP shares | — | — | — | | ||||
Net dilutive potential common shares issuable | ||||||||
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.
22
As of September 30, 2021, we had $
During the three months ended September 30, 2021, we dedesignated $
The remaining $
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 $
As of September 30, 2021, the weighted average effective fixed interest rate of our interest rate swaps was
The following table presents the effect of our derivative instruments on our condensed consolidated balance sheets:
(in thousands) |
| September 30, 2021 |
| December 31, 2020 | ||
Interest rate swaps designated as cash flow hedging instruments | ||||||
Accrued liabilities | $ | | $ | | ||
Other liabilities |
| — |
| | ||
Total derivatives designated as cash flow hedging instruments | | | ||||
Interest rate swaps not designated as hedging instruments | ||||||
Accrued liabilities | | — | ||||
Total derivative liabilities | $ | | $ | | ||
23
The following table presents the effect of our derivative instruments on our condensed consolidated statements of operations:
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Total amount of interest expense in which the effects of cash flow hedges and undesignated interest rate swaps are recorded | $ | | $ | | $ | | $ | | ||||
Interest rate swaps designated as cash flow hedging instruments | ||||||||||||
Pre-tax loss recognized in other comprehensive income (loss) | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Pre-tax loss reclassified from accumulated other comprehensive loss into interest expense |
| ( |
| ( |
| ( |
| ( | ||||
Interest rate swaps not designated as hedging instruments | ||||||||||||
Gain recognized in interest expense | $ | | $ | — | $ | | $ | — | ||||
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) |
| September 30, 2021 |
| December 31, 2020 | ||
Derivative liabilities | $ | | $ | | ||
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 $
24
Compressors
During the nine months ended September 30, 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
(in thousands) |
| September 30, 2021 |
| December 31, 2020 | ||
Impaired compressors | $ | | $ | | ||
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 September 30, 2021 | $ | $ | ||
As of December 31, 2020 | $ | $ |
| (1) | Calculated based on an estimated discount for market liquidity of |
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) |
| September 30, 2021 |
| December 31, 2020 | ||
Carrying amount of fixed rate debt (1) | $ | | $ | | ||
Fair value of fixed rate debt |
| |
| | ||
| (1) | Carrying amounts are shown net of unamortized debt premium and unamortized deferred financing costs. See Note 9 (“Long-Term Debt”). |
19. Stock-Based Compensation
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Equity award expense | $ | | $ | | $ | | $ | | ||||
Liability award expense |
| |
| |
| |
| | ||||
Total stock-based compensation expense | $ | | $ | | $ | | $ | | ||||
25
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 nine months ended September 30, 2021:
Weighted | |||||
Average | |||||
Grant Date | |||||
Fair Value | |||||
(shares in thousands) |
| Shares |
| Per Share | |
Non-vested, December 31, 2020 |
| | $ | | |
Granted |
| |
| | |
Vested |
| ( |
| | |
Canceled |
| ( |
| | |
Non-vested, September 30, 2021 (1) |
| |
| | |
| (1) | Comprised of |
As of September 30, 2021, we expect $
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 $
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 September 30, 2021 and December 31, 2020, we accrued $
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 $
26
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
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
Revenue from Hilcorp and affiliates was $
22. Segments
We manage our business segments primarily based on the type of product or service provided. We have
We evaluate the performance of our segments based on gross margin for each segment. Revenue includes only sales to external customers.
27
| Contract |
| Aftermarket |
| |||||
(in thousands) |
| Operations |
| Services |
| Total | |||
Three months ended September 30, 2021 |
|
|
|
|
|
| |||
Revenue | $ | | $ | | $ | | |||
Gross margin |
| |
| |
| | |||
Three months ended September 30, 2020 |
|
|
|
|
|
| |||
Revenue | $ | | $ | | $ | | |||
Gross margin |
| |
| |
| | |||
Nine months ended September 30, 2021 |
|
|
|
|
|
| |||
Revenue | $ | | $ | | $ | | |||
Gross margin |
| |
| |
| | |||
Nine months ended September 30, 2020 |
|
|
|
|
|
| |||
Revenue | $ | | $ | | $ | | |||
Gross margin |
| |
| |
| | |||
The following table reconciles total gross margin to income (loss) before income taxes:
Three Months Ended |
| Nine Months Ended | ||||||||||
September 30, | September 30, | |||||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Total gross margin | $ | | $ | | $ | | $ | | ||||
Less: |
|
|
|
|
|
|
|
| ||||
Selling, general and administrative |
| |
| |
| |
| | ||||
Depreciation and amortization |
| |
| |
| |
| | ||||
Long-lived and other asset impairment |
| |
| |
| |
| | ||||
Goodwill impairment | — | — | — | | ||||||||
Restructuring charges | | | | | ||||||||
Interest expense |
| |
| |
| |
| | ||||
Debt extinguishment loss |
| — |
| — |
| — |
| | ||||
Gain on sale of assets, net | ( | ( | ( | ( | ||||||||
Other (income) expense, net |
| |
| ( |
| ( |
| ( | ||||
Income (loss) before income taxes | $ | | $ | | $ | | $ | ( | ||||
23. Impact of Hurricane
Hurricane Ida made landfall in Louisiana on August 29, 2021, causing operational disruptions, damage to compressors and a temporary shutdown of facilities in Louisiana that negatively impacted our financial performance in the quarter. During the three months ended September 30, 2021, we recorded $
We have notified our insurance underwriters and filed a claim for damages caused by Hurricane Ida and are working with an adjuster. We are evaluating and documenting the damage caused including finalizing inspections of damaged compressors and other property. As of September 30, 2021, we are unable to estimate the expected amount to be recovered from insurance, which will be subject to a deductible currently estimated at $
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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
July 2021 Dispositions
In July 2021, we completed sales of certain contract operations customer service agreements and approximately 575 compressors, comprising approximately 100,000 horsepower, used to provide compression services under those agreements, as well as other assets used to support the operations. We received cash consideration of $60.3 million for the sales and recorded gains on the sales of $13.0 million during the three and nine months ended September 30, 2021. The proceeds received from the sales were used to repay borrowings outstanding under our Credit Facility. See Note 3 (“Business Transactions”) to our Financial Statements for further details of this transaction.
February 2021 Disposition
In February 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 nine months ended September 30, 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 and commodity prices have shown 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 October 2021 Short-Term Energy Outlook, U.S. dry natural gas and crude oil production is expected to increase 1% and decline 2%, respectively, in 2021 as producers continue to 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 4% for dry natural gas and 6% for crude oil.
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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 in 2021 as compared to early 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 gradually result in higher demand for our business as we move into 2022.
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, SG&A, long-lived and other asset impairment and restructuring charges have also been significantly impacted. See “Financial Results of Operations” below and Note 7 (“Goodwill”), Note 13 (“Long-Lived and Other Asset Impairment”) and Note 14 (“Restructuring Charges”) to our Financial Statements for further discussion.
Operating Highlights
Three Months Ended | Nine Months Ended |
| ||||||||
September 30, | September 30, |
| ||||||||
(in thousands) |
| 2021 |
| 2020 |
|
| 2021 |
| 2020 |
|
Total available horsepower (at period end)(1) |
| 3,913 |
| 4,153 |
|
| 3,913 |
| 4,153 | |
Total operating horsepower (at period end)(2) | 3,196 |
| 3,465 |
| 3,196 |
| 3,465 | |||
Average operating horsepower | 3,225 |
| 3,536 |
| 3,298 |
| 3,731 | |||
Horsepower utilization: |
|
|
|
|
|
|
| |||
Spot (at period end) | 82 | % | 83 | % | 82 | % | 83 | % | ||
Average | 82 | % | 85 | % | 82 | % | 86 | % | ||
| (1) | Defined as idle and operating horsepower. Includes new compressors completed by third party manufacturers that have been delivered to us. |
| (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, debt extinguishment loss, (gain) loss on sale of assets, net, other (income) expense, 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.
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The following table reconciles net income (loss) to gross margin:
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
(in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Net income (loss) | $ | 9,304 | $ | 18,332 | $ | 22,225 | $ | (73,236) | ||||
Selling, general and administrative |
| 28,839 |
| 18,681 |
| 80,000 |
| 78,052 | ||||
Depreciation and amortization |
| 45,280 |
| 47,279 |
| 135,185 |
| 145,950 | ||||
Long-lived and other asset impairment |
| 5,121 |
| 10,727 |
| 15,154 |
| 72,132 | ||||
Goodwill impairment | — | — | — | 99,830 | ||||||||
Restructuring charges | 313 | 2,900 | 1,953 | 7,036 | ||||||||
Interest expense |
| 25,508 |
| 25,221 |
| 82,711 |
| 80,664 | ||||
Debt extinguishment loss |
| — |
| — |
| — |
| 3,971 | ||||
Gain on sale of assets, net | (15,393) | (9,146) | (29,549) | (11,073) | ||||||||
Other (income) expense, net |
| 337 |
| (324) |
| (1,634) |
| (1,317) | ||||
Provision for (benefit from) income taxes |
| 3,925 |
| 5,808 |
| 12,210 |
| (18,236) | ||||
Gross margin | $ | 103,234 | $ | 119,478 | $ | 318,255 | $ | 383,773 | ||||
Results of Operations: Summary of Results
Revenue
Revenue decreased to $195.2 million from $205.6 million during the three months ended September 30, 2021 and 2020, respectively, due to a decrease in revenue from our contract operations business that was partially offset by an increase in revenue from our aftermarket services business.
Revenue decreased to $586.2 million from $675.6 million during the nine months ended September 30, 2021 and 2020, respectively, 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)
Net income was $9.3 million and $18.3 million during the three months ended September 30, 2021 and 2020, respectively. The decrease in net income was primarily driven by a decrease in gross margin of our contract operations business and an increase in SG&A, partially offset by an increase in gain on sale of assets, net and decreases in long-lived and other asset impairment, restructuring charges, depreciation and amortization and provision for income taxes.
We had net income of $22.2 million and a net loss of $73.2 million during the nine months ended September 30, 2021 and 2020, respectively. The change from net loss to net income was primarily driven by decreases in goodwill impairment, long-lived and other asset impairment, depreciation and amortization, restructuring charges and debt extinguishment loss, as well as an increase in gain on sale of assets, net. These changes were partially offset by decreases in gross margin of our contract operations and aftermarket services businesses and the change from a benefit from to a provision for income taxes.
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Results of Operations: Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
Contract Operations
| Three Months Ended | ||||||||
September 30, | Increase | ||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| (Decrease) | |||
Revenue | $ | 158,911 | $ | 175,223 | (9) | % | |||
Cost of sales (excluding depreciation and amortization) |
| 61,280 |
| 60,444 | 1 | % | |||
Gross margin | $ | 97,631 | $ | 114,779 | (15) | % | |||
Gross margin percentage (1) |
| 61 | % |
| 66 | % | (5) | % | |
| (1) | Defined as gross margin divided by revenue. |
Revenue decreased primarily due to returns of horsepower amidst the market downturn, as well as the strategic disposition of horsepower in 2020 and 2021. Partially offsetting these decreases was an increase in contract operations rates, which was driven by customer shifts from standby to operating status.
Gross margin decreased due to the overall decrease in revenue discussed above, as total cost of sales was relatively unchanged quarter over quarter. Cost of sales increased due to a decrease in our sales and use tax benefit as the result of audit settlements in 2020 and no comparable settlements in 2021, and increases in lube oil expense, which was primarily due to an increase in commodity price, and start-up expense, which resulted from an increase in unit redeployment in 2021. These increases were substantially offset by decreases in maintenance and other operating expenses, which were driven by the lower operating horsepower discussed above.
Aftermarket Services
| Three Months Ended |
| |||||||
September 30, | Increase | ||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| (Decrease) | |||
Revenue | $ | 36,255 | $ | 30,408 |
| 19 | % | ||
Cost of sales (excluding depreciation and amortization) |
| 30,652 |
| 25,709 |
| 19 | % | ||
Gross margin | $ | 5,603 | $ | 4,699 |
| 19 | % | ||
Gross margin percentage |
| 15 | % |
| 15 | % | 0 | % | |
Revenue increased primarily due to an increase in parts sales and service activities as a result of an increase in customer demand that began in the second quarter of 2021.
Gross margin increased due to this increase in revenue and despite an increase in cost of sales, which was driven by the same increase in parts sales and service activities.
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Costs and Expenses
| Three Months Ended | |||||
September 30, | ||||||
(in thousands) |
| 2021 |
| 2020 | ||
Selling, general and administrative | $ | 28,839 | $ | 18,681 | ||
Depreciation and amortization |
| 45,280 |
| 47,279 | ||
Long-lived and other asset impairment |
| 5,121 |
| 10,727 | ||
Restructuring charges | 313 | 2,900 | ||||
Interest expense |
| 25,508 |
| 25,221 | ||
Gain on sale of assets, net | (15,393) | (9,146) | ||||
Other (income) expense, net |
| 337 |
| (324) | ||
Selling, general and administrative. The increase in SG&A was primarily due to a $6.6 million change in sales and use tax from a benefit to expense as the result of audit settlements in 2020 and no comparable settlements in 2021, a $1.6 million increase in compensation and benefits, increases of $0.4 million in each of bad debt expense, professional expenses and information technology expenses, and a $0.3 million increase in employee travel and meeting expense.
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, the impact of compression and other asset sales during 2020 and early 2021 and a decrease in amortization expense as certain intangible assets reached the end of their useful lives. These decreases were partially offset by increases in depreciation expense associated with fixed asset additions during 2020 and early 2021 and the write-off of compression and building assets damaged by Hurricane Ida in the third quarter of 2021.
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 | |||||
September 30, | ||||||
(dollars in thousands) |
| 2021 |
| 2020 | ||
Idle compressors retired from the active fleet |
| 60 |
| 105 | ||
Horsepower of idle compressors retired from the active fleet |
| 24,000 |
| 28,000 | ||
Impairment recorded on idle compressors retired from the active fleet | $ | 5,120 | $ | 8,137 | ||
Also during the three months ended September 30, 2020, we impaired $1.7 million of capitalized implementation and unamortized prepaid costs related to the mobile workforce component of our multi-year process and technology transformation project. See Note 8 (“Hosting Arrangements”) to our Financial Statements for further details.
Restructuring charges. Restructuring charges of $0.3 million and $2.9 million during the three months ended September 30, 2021 and 2020, respectively, primarily consisted of severance and property disposal costs related to our restructuring activities. See Note 14 (“Restructuring Charges”) to our Financial Statements for further details.
Interest expense. Total interest expense was relatively unchanged due to a decrease in the average outstanding balance of long-term debt that offset the impact of an increase in the weighted average effective interest rate.
Gain on sale of assets, net. Our net gain on sale of assets during the three months ended September 30, 2021 was primarily the result of $13.0 million of gains recognized on the July 2021 Dispositions, which primarily related to the compression assets sold, and $2.2 million of gains recognized on other compression asset sales during the quarter.
33
Our net gain on sale of assets during the three months ended September 30, 2020 was primarily due to the $9.3 million gain on the July 2020 Disposition.
Other (income) expense, net. The change from net other income to net other expense was primarily driven by a $0.3 million reduction in indemnification expense recorded during the three months ended September 30, 2020 due to the settlement of an audit pursuant to our tax matters agreement with Exterran Corporation.
Provision for Income Taxes
| Three Months Ended |
| |||||||
September 30, | Increase | ||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| (Decrease) | |||
Provision for income taxes | $ | 3,925 | $ | 5,808 |
| (32) | % | ||
Effective tax rate |
| 30 | % |
| 24 | % | 6 | % | |
The decrease in provision for income taxes was primarily due to the tax effect of the decrease in book income during the three months ended September 30, 2021 compared to the three months ended September 30, 2020.
Results of Operations: Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
Contract Operations
| Nine Months Ended | ||||||||
September 30, | Increase | ||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| (Decrease) | |||
Revenue | $ | 488,810 | $ | 570,146 | (14) | % | |||
Cost of sales (excluding depreciation and amortization) |
| 184,032 |
| 202,485 | (9) | % | |||
Gross margin | $ | 304,778 | $ | 367,661 | (17) | % | |||
Gross margin percentage |
| 62 | % |
| 64 | % | (2) | % | |
Revenue decreased primarily due to returns of horsepower amidst the market downturn, as well as the strategic disposition of horsepower in 2020 and 2021.
Gross margin decreased due to the decrease in revenue, however, the decline was partially mitigated by the decrease in cost of sales. The lower operating horsepower discussed above drove a decrease in maintenance, freight and other operating expenses. Offsetting these decreases was a decrease in our sales and use tax benefit, which resulted from audit settlements in 2020 and no comparable settlements in 2021.
Aftermarket Services
| Nine Months Ended |
| |||||||
September 30, | Increase | ||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| (Decrease) | |||
Revenue | $ | 97,402 | $ | 105,498 |
| (8) | % | ||
Cost of sales (excluding depreciation and amortization) |
| 83,925 |
| 89,386 |
| (6) | % | ||
Gross margin | $ | 13,477 | $ | 16,112 |
| (16) | % | ||
Gross margin percentage |
| 14 | % |
| 15 | % | (1) | % | |
Revenue decreased due to the impact of the sale of our turbocharger business in July 2020, as well as a decrease in service activities, which was primarily driven by customer deferral of maintenance activities amidst the market downturn. These decreases were partially offset by an increase in parts sales that resulted from an increase in customer demand beginning in the second quarter of 2021.
34
Gross margin decreased due to the decrease in revenue, however, the decline was partially mitigated by the decrease in cost of sales. The decrease in cost of sales was driven by the decrease in service activities and the sale of our turbocharger business, and was partially offset by the increase in parts sales. Excluding the impact of the July 2020 Disposition, gross margin was relatively unchanged.
Costs and Expenses
| Nine Months Ended | |||||
September 30, | ||||||
(in thousands) |
| 2021 |
| 2020 | ||
Selling, general and administrative | $ | 80,000 | $ | 78,052 | ||
Depreciation and amortization |
| 135,185 | 145,950 | |||
Long-lived and other asset impairment |
| 15,154 | 72,132 | |||
Goodwill impairment | — | 99,830 | ||||
Restructuring charges | 1,953 | 7,036 | ||||
Interest expense |
| 82,711 | 80,664 | |||
Debt extinguishment loss |
| — | 3,971 | |||
Gain on sale of assets, net | (29,549) | (11,073) | ||||
Other income, net |
| (1,634) | (1,317) | |||
Selling, general and administrative. The increase in SG&A was primarily due to a $4.3 million increase in sales and use tax that was mainly driven by audit settlements in 2020 and no comparable settlements in 2021, partially offset by a $2.1 million decrease in bad debt expense and a $0.5 million decrease in employee travel and meeting expense.
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, the impact of compression and other asset impairments and sales during 2020 and early 2021 and a decrease in amortization expense as certain intangible assets reached the end of their useful lives. These decreases were partially offset by increases in depreciation expense associated with fixed asset additions during 2020 and early 2021 and the write-off of compression and building assets damaged by Hurricane Ida in 2021.
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:
| Nine Months Ended | |||||
September 30, | ||||||
(dollars in thousands) |
| 2021 |
| 2020 | ||
Idle compressors retired from the active fleet |
| 175 |
| 640 | ||
Horsepower of idle compressors retired from the active fleet |
| 61,000 |
| 235,000 | ||
Impairment recorded on idle compressors retired from the active fleet | $ | 14,964 | $ | 69,542 | ||
Also during the nine months ended September 30, 2020, we impaired $1.7 million of capitalized implementation and unamortized prepaid costs related to the mobile workforce component of our multi-year process and technology transformation project. See Note 8 (“Hosting Arrangements”) to our Financial Statements for further details.
Goodwill impairment. During the nine months ended September 30, 2020, we recorded goodwill impairment of $99.8 million 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.
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Restructuring charges. Restructuring charges of $2.0 million and $7.0 million during the nine months ended September 30, 2021 and 2020, respectively, primarily consisted of severance and property disposal costs related to our restructuring activities. See Note 14 (“Restructuring Charges”) to our Financial Statements for further details.
Interest expense. The increase in interest expense was primarily due to an increase in the weighted average effective interest rate and the $4.9 million write-off of unamortized deferred financing costs related to Amendment No. 3, partially offset by a decrease in the average outstanding balance of long-term debt.
Debt extinguishment loss. We recorded a debt extinguishment loss of $4.0 million during the nine months ended September 30, 2020 as a result of the redemption of the 2022 Notes. See Note 9 (“Long-Term Debt”) to our Financial Statements for further details.
Gain on sale of assets, net. Our net gain on sale of assets during the nine months ended September 30, 2021 was primarily the result of $13.0 million of gains recognized on the July 2021 Dispositions, the $6.0 million gain on the February 2021 Disposition and $8.6 million of gains recognized on other compression asset sales during the period.
Our net gain on sale of assets during the nine months ended September 30, 2020 was primarily due to the $9.3 million gain on the July 2020 Disposition, the $3.2 million gain on the March 2020 Disposition and a $2.5 million gain on other transportation and shop asset sales. These gains were partially offset by a $3.9 million loss on other compression asset sales during the period.
Other income, net. The increase in other income, net was primarily driven by a $0.4 million decrease in indemnification expense remitted pursuant to our tax matters agreement with Exterran Corporation.
Provision for (Benefit from) Income Taxes
| Nine Months Ended |
| |||||||
September 30, | Increase | ||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| (Decrease) | |||
Provision for (benefit from) income taxes | $ | 12,210 | $ | (18,236) |
| (167) | % | ||
Effective tax rate |
| 35 | % |
| 20 | % | 15 | % | |
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 nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.
Liquidity and Capital Resources
Overview
Our ability to fund operations, finance capital expenditures and pay dividends depends on the levels of our operating cash flows and access to the capital and credit markets. Our primary sources of liquidity are cash flows generated from our operations and our borrowing availability under 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 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.
36
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 of 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
Credit Facility
During the nine months ended September 30, 2021 and 2020, the Credit Facility had an average daily balance of $310.9 million and $711.8 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 September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021, there were $12.5 million letters of credit outstanding under the Credit Facility.
We must maintain certain consolidated financial ratios as defined in our Credit Facility agreement. As of September 30, 2021, the ratio requirements did not constrain our undrawn capacity and as such, $517.5 million was available for additional borrowings. As of September 30, 2021, we were in compliance with all covenants under the Credit Facility agreement.
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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 nine months ended September 30, 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:
| Nine Months Ended | |||||
September 30, | ||||||
(in thousands) |
| 2021 |
| 2020 | ||
Net cash provided by (used in): |
|
|
|
| ||
Operating activities | $ | 208,725 | $ | 266,834 | ||
Investing activities |
| 37,854 |
| (81,995) | ||
Financing activities |
| (244,188) |
| (187,048) | ||
Net increase (decrease) in cash and cash equivalents | $ | 2,391 | $ | (2,209) | ||
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, accounts payable and other liabilities, SG&A expenses, restructuring charges and interest paid on long-term debt and the receipt of additional cash proceeds from the July 2020 Disposition in the third quarter of 2021.
Investing Activities
The change from net cash used in to net cash provided by investing activities was primarily due to a $60.8 million increase in proceeds from business dispositions and other sales of property, plant and equipment and a $59.5 million decrease in capital expenditures.
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Financing Activities
The increase in net cash used in financing activities was primarily due to a $56.0 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 nine months ended September 30, 2021.
Dividends
On October 28, 2021, our Board of Directors declared a quarterly dividend of $0.145 per share of common stock to be paid on November 16, 2021 to stockholders of record at the close of business on November 9, 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.
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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 September 30, 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.
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 September 30, 2021 our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to management, and made known to our principal executive officer and principal financial officer, on a timely basis to ensure that it is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, we are involved in various pending or threatened legal actions. While we are unable to predict the ultimate outcome of these actions, we believe that any ultimate liability arising from any of these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends.
Item 1A. Risk Factors
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 September 30, 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 | ||
July 1, 2021 — July 31, 2021 | — | $ | — | N/A | N/A | ||||
August 1, 2021 — August 31, 2021 |
| 92,540 |
| 7.30 |
| N/A |
| N/A | |
September 1, 2021 — September 30, 2021 |
| — |
| — |
| N/A |
| N/A | |
Total |
| 92,540 | 7.30 |
| 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.
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Item 6. Exhibits
Exhibit No. |
| Description |
2.1 | ||
2.2 | ||
3.1 | ||
3.2 | ||
3.3 | ||
4.1 | ||
4.2 | ||
31.1* | ||
31.2* | ||
32.1** | ||
32.2** | ||
101.1* | Interactive data files pursuant to Rule 405 of Regulation S-T | |
104.1* | Cover page interactive data files pursuant to Rule 406 of Regulation S-T |
* Filed herewith.
** Furnished, not filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Archrock, Inc. | ||
By: | /s/ Douglas S. Aron | |
Douglas S. Aron | ||
Senior Vice President and Chief Financial Officer | ||
(Principal Financial Officer) | ||
By: | /s/ Donna A. Henderson | |
Donna A. Henderson | ||
Vice President and Chief Accounting Officer | ||
(Principal Accounting Officer) | ||
November 2, 2021 | ||
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