Archrock Inc

Previous wording

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 Form 10-Q and in conjunction with our 2023 Form 10-K.

Current wording

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this Form 10-Q and in conjunction with our 2023 Form 10-K.

Previous wording

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.

Current wording

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 adjusted gross margin.

Previous wording

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.

Current wording

We define adjusted gross margin as total revenue less cost of sales, exclusive of depreciation and amortization. Adjusted 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, exclusive of depreciation and amortization, which are key components of our operations. We believe adjusted 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, adjusted gross margin should not be considered an alternative to, or more meaningful than, gross margin, net income (loss) or any other measure presented in accordance with GAAP. Our adjusted gross margin may not be comparable to a similarly-titled measure of other entities because other entities may not calculate adjusted gross margin in the same manner.

Previous wording

Gross margin has certain material limitations associated with its use as compared to net income. These limitations are primarily due to the exclusion of SG&A, depreciation and amortization, impairments, restructuring charges, interest expense, gain on sale of assets, net, other expense (income), net and provision for 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.

Current wording

Adjusted gross margin has certain material limitations associated with its use as compared to net income. These limitations are primarily due to the exclusion of SG&A, depreciation and amortization, impairments, restructuring charges, interest expense, gain on sale of assets, net, other expense (income), net and provision for 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.

Previous wording

The following table reconciles net income to gross margin:

Current wording

The following table reconciles net income to adjusted gross margin:

Previous wording

Revenue was $268.5 million and $229.8 million during the three months ended March 31, 2024 and 2023, respectively. The increase in consolidated revenue was primarily due to increased revenue from both our contract operations business and aftermarket services business during the three months ended March 31, 2024. See “Contract Operations” and “Aftermarket Services” below for further details.

Current wording

Revenue was $270.5 million and $247.5 million during the three months ended June 30, 2024, and 2023, respectively, and $539.0 million and $477.4 million during the six months ended June 30, 2024 and 2023, respectively. The increase in revenue was primarily due to increased revenue from our contract operations business during the three months ended June 30, 2024 and both our contract operations business and aftermarket services business during the six months ended June 30, 2024. See “Contract Operations” and “Aftermarket Services” below for further details.

Previous wording

Net income was $40.5 million and $16.5 million during the three months ended March 31, 2024 and 2023, respectively. The increase was primarily driven by higher gross margin from both our contract operations business and aftermarket services business. These changes were partially offset by increases in SG&A and depreciation and amortization expense, and a decrease in the gain on sale of assets.

Current wording

Net income was $34.4 million and $24.7 million during the three months ended June 30, 2024, and 2023, respectively. The increase was primarily driven by higher adjusted gross margin from both our contract operations business and aftermarket services business. These changes were partially offset by increases in SG&A, depreciation and amortization expense, transaction-related costs and long-lived and other asset impairment, and a decrease in the unrealized change in the fair value of our investment in an unconsolidated affiliate.

Previous wording

Revenue in our contract operations business increased primarily due to higher rates and an increase in average operating horsepower for contract compression in response to market conditions.

Current wording

Revenue in our contract operations business increased primarily due to higher rates and an increase in average operating horsepower for contract compression in response to higher utilization at Archrock and across our industry.

Previous wording

The decrease in cost of sales was primarily due to a $4.8 million decrease in startup expenses resulting from average horsepower utilization for the fleet at record levels as well as fewer unit stops. This decrease was partially offset by a $1.5 million increase in total employee compensation expense and a $0.8 million increase in parts expense.

Current wording

The increase in cost of sales, exclusive of depreciation and amortization, was primarily due to a $3.7 million increase in total employee compensation expense and a $1.1 million increase in parts expense. This increase was partially offset by a decrease of $1.9 million in startup expenses resulting from average horsepower utilization for the fleet at record levels as well as fewer unit stops.

Previous wording

Depreciation and amortization. The increase in depreciation and amortization expense was primarily due to fixed assets additions and accelerated depreciation associated with certain assets. These increases were partially offset by a decrease in depreciation expense associated with assets reaching the end of their depreciable lives, the impact of compression and other asset sales, and long-lived asset impairments.

Current wording

Depreciation and amortization. The increase in depreciation and amortization expense was primarily due to fixed assets additions and accelerated depreciation associated with certain assets. The increase was partially offset by a decrease in depreciation expense associated with assets reaching the end of their depreciable lives, the impact of compression and other asset sales, and long-lived asset impairments.

Previous wording

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. We also evaluate for impairment our idle units that have been culled from our compression fleet in prior years and are available for sale. During the three months ended March 31, 2024 and 2023, we recognized $2.6 million of impairment charges to write down these compressors to their fair value. See Note 10 (“Long-Lived Asset and Other Impairments”) for further details on these impairment charges. The following table presents the results of our compression fleet impairment review, as recorded in our contract operations segment:

Current wording

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. We also evaluate for impairment our idle units that have been culled from our compression fleet in prior years and are available for sale. During the three months ended June 30, 2024 and 2023, we recognized $4.4 million and $2.9 million, respectively, of impairment charges to write down these compressors to their fair value. See Note 10 (“Long-Lived Asset and Other Impairments”) for further details on these impairment charges. The following table presents the results of our compression fleet impairment review, as recorded in our contract operations segment:

Previous wording

Interest expense. The increase in interest expense was due to a higher average outstanding balance of long–term debt, and an increase in interest rates.

Current wording

Interest expense. The decrease in interest expense was primarily due to the write-off of $1.0 million of unamortized deferred financing costs as a result of the Amended and Restated Credit Agreement during the three months ended June 30, 2023, and a lower average outstanding balance of long-term debt, partially offset by a decrease in capitalized interest and an increase in interest rates.

Previous wording

Gain on sale of assets, net. The decrease in gain on sale of assets was primarily due to gains of $2.2 million on compression asset sales during the three months ended March 31, 2024, compared to gains of $3.3 million on compression asset sales during the three months ended March 31, 2023.

Current wording

Gain on sale of assets, net. The decrease in gain on sale of assets was primarily due to gains of $0.3 million on compression asset sales and $0.3 million on transportation asset sales during the three months ended June 30, 2024, compared to gains of $0.6 million on compression asset sales and $0.4 million on other asset sales during the three months ended June 30, 2023.

Previous wording

Gross margin increased in our aftermarket services business as a result of increased revenue which exceeded the increase in cost of sales due to differences in the scope, timing and type of services performed.

Current wording

Adjusted gross margin increased in our aftermarket services business as a result of increased revenue which exceeded the increase in cost of sales, exclusive of depreciation and amortization, due to differences in the scope, timing and type of services performed.

Previous wording

Selling, general and administrative. The increase in SG&A includes a $3.4 million increase in long-term incentive compensation expense, a $0.7 million increase in software and maintenance expense, a $0.3 million increase in short-term incentive compensation expense and a $0.3 million reduction in benefit from credit losses, partially offset by a $0.5 million decrease in professional expense.

Current wording

Selling, general and administrative. The increase in SG&A included primarily a $5.7 million increase in long-term incentive compensation expense, a $0.6 million increase in short-term incentive compensation expense, a $0.5 million increase in network and computer related costs, a $0.4 million increase in amortization of capitalized implementation costs, a $0.3 million increase in insurance expense and a $0.2 million increase in sales commissions expense, partially offset by a decrease of $0.7 million in professional fees.

Previous wording

Restructuring charges. Restructuring charges of $1.0 million during the three months ended March 31, 2023 consisted of severance and consulting costs related to our restructuring activities. See Note 11 (“Restructuring Charges”) for further details on these restructuring charges.

Current wording

*Restructuring charges.*Restructuring charges of $1.0 million during the six months ended June 30, 2023 consisted of severance and consulting costs related to our restructuring activities. See Note 11 (“Restructuring Charges”) for further details on these restructuring charges.

Previous wording

The increase in provision for income taxes was primarily due to the tax effect of the increase in book income and the limitation on executive compensation offset by the benefit from equity-settled long term incentive compensation during the three months ended March 31, 2024 compared with the three months ended March 31, 2023.

Current wording

The increase in provision for income taxes was primarily due to the tax effect of the increase in book income and the limitation on executive compensation offset by the benefit from equity-settled long term incentive compensation and reduction in valuation allowance during the six months ended June 30, 2024 compared with the six months ended June 30, 2023.

Previous wording

During the three months ended March 31, 2024 and 2023, our Credit Facility had an average debt balance of $274.6 million and $252.3 million, respectively. The weighted average annual interest rate on the outstanding balance under the Credit Facility was 7.8% and 7.7% at March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024, there were $3.8 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.2%.

Current wording

During the six months ended June 30, 2024 and 2023, our Credit Facility had an average debt balance of $287.0 million and $282.5 million, respectively. The weighted average annual interest rate on the outstanding balance under the Credit Facility was 7.6% and 7.7% at June 30, 2024 and December 31, 2023, respectively. As of June 30, 2024, there were $4.1 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.1%.

Previous wording

The increase in net cash provided by operating activities was primarily due to increased cash inflows of $39.0 million from gross margin, excluding deferred revenue recognized in earnings and amortization of freight and mobilization charges, changes of $12.2 million in accounts receivable due to increased cash receipts from customers, of $6.6 million in deferred income tax provision due to increased usage of tax attributes and of $5.4 million of inventory as a result of improvement in the lead time for parts. Partially offsetting these increases was a decrease in accounts payable and other liabilities of $4.3 million.

Current wording

The increase in net cash provided by operating activities was primarily due to increased cash inflows of $65.9 million from adjusted gross margin, excluding deferred revenue recognized in earnings and amortization of freight and mobilization charges, changes of $14.3 million in accounts receivable due to increased cash receipts from customers, $11.4 million in accounts payable and accrued liabilities due to a reduction in overall spend and timing of vendor invoice payments and $8.7 million of inventory as a result of improvement in the lead time for parts.

Previous wording

The increase in net cash used in investing activities was primarily due to a $15.4 million increase in capital expenditures and a $14.9 million decrease in proceeds from the sale of property, plant and equipment, partially offset by a $1.9 million decrease in investments in non-consolidated affiliates.

Current wording

The increase in net cash used in investing activities was primarily due to a $20.5 million decrease in proceeds from the sale of property, plant and equipment and a $3.6 million increase in capital expenditures, partially offset by a $1.9 million decrease in investments in non-consolidated affiliates.

Previous wording

The increase in net cash used in financing activities was primarily due to a $17.3 million increase in net repayments of long-term debt, a $2.7 million increase in taxes paid related to net share settlement of equity awards, a $2.0 million increase in dividends paid to stockholders and a $1.2 million increase in common stock purchased under the Share Repurchase Program.

Current wording

The change from net cash provided by financing activities to net cash used in financing activities was primarily due to a $66.9 million decrease in net borrowings of long-term debt, a $4.5 million increase in dividends paid to stockholders and a $2.7 million increase in taxes paid related to net share settlement of equity awards, partially offset by a $5.5 million decrease in payments of debt issuance costs and a $1.2 million increase in common stock purchased under the Share Repurchase Program.