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Archrock, Inc. - Quarter Report: 2022 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

or

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from         to        

Commission File No. 001-33666

Archrock, Inc.

(Exact name of registrant as specified in its charter)

Delaware

74-3204509

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

9807 Katy Freeway, Suite 100, Houston, Texas 77024

(Address of principal executive offices, zip code)

(281) 836-8000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

  

Trading Symbol

  

Name of exchange on which registered

Common stock, $0.01 par value per share

AROC

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

Number of shares of the common stock of the registrant outstanding as of October 26, 2022: 155,611,630 shares.

Table of Contents

TABLE OF CONTENTS

Page

Forward-Looking Statements

3

Part I. Financial Information

Item 1. Financial Statements

4

Unaudited Condensed Consolidated Balance Sheets

4

Unaudited Condensed Consolidated Statements of Operations

5

Unaudited Condensed Consolidated Statements of Comprehensive Income

6

Unaudited Condensed Consolidated Statements of Equity

7

Unaudited Condensed Consolidated Statements of Cash Flows

9

Notes to Unaudited Condensed Consolidated Financial Statements

10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3. Quantitative and Qualitative Disclosures About Market Risk

32

Item 4. Controls and Procedures

32

Part II. Other Information

Item 1. Legal Proceedings

33

Item 1A. Risk Factors

33

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3. Defaults Upon Senior Securities

33

Item 4. Mine Safety Disclosures

33

Item 5. Other Information

33

Item 6. Exhibits

34

Signatures

35

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FORWARD–LOOKING STATEMENTS

This Quarterly Report on Form 10–Q (this “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 Form 10–Q are forward–looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including, without limitation, 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 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 Annual Report on Form 10–K for the year ended December 31, 2021 (the “Form 10–K) and those set forth from time to time in our filings with the United States Securities and Exchange Commission (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 Form 10–Q are based on information available to us on the date of this 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 Form 10–Q.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Archrock, Inc.

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except par value and share amounts)

    

September 30, 2022

    

December 31, 2021

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

2,042

$

1,569

Accounts receivable, net of allowance of $1,487 and $2,152, respectively

 

127,334

 

104,931

Inventory

 

84,091

 

72,869

Other current assets

 

6,817

 

7,201

Total current assets

 

220,284

 

186,570

Property, plant and equipment, net

 

2,214,666

 

2,226,526

Operating lease right-of-use assets

 

16,089

 

17,491

Intangible assets, net

 

39,019

 

47,887

Contract costs, net

 

32,598

 

25,418

Deferred tax assets

 

37,001

 

47,879

Other assets

 

37,051

 

28,384

Assets of discontinued operations

 

8,893

 

9,811

Total assets

$

2,605,601

$

2,589,966

Liabilities and Stockholders' Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

89,602

$

38,920

Accrued liabilities

 

97,021

 

82,517

Deferred revenue

 

7,707

 

3,817

Total current liabilities

 

194,330

 

125,254

Long-term debt

 

1,498,895

 

1,530,825

Operating lease liabilities

 

14,286

 

15,940

Deferred tax liabilities

 

1,076

 

1,136

Other liabilities

 

19,330

 

17,505

Liabilities of discontinued operations

 

7,868

 

7,868

Total liabilities

 

1,735,785

 

1,698,528

Commitments and contingencies (Note 8)

 

  

 

  

Stockholders' equity:

 

  

 

  

Preferred stock: $0.01 par value per share, 50,000,000 shares authorized, zero issued

 

 

Common stock: $0.01 par value per share, 250,000,000 shares authorized, 163,412,780 and 161,482,852 shares issued, respectively

 

1,633

 

1,615

Additional paid-in capital

 

3,453,720

 

3,440,059

Accumulated deficit

 

(2,497,002)

 

(2,463,114)

Accumulated other comprehensive loss

 

 

(984)

Treasury stock: 7,801,150 and 7,417,401 common shares, at cost, respectively

 

(88,535)

 

(86,138)

Total stockholders' equity

 

869,816

 

891,438

Total liabilities and stockholders' equity

$

2,605,601

$

2,589,966

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

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Archrock, Inc.

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Revenue:

 

  

 

  

 

  

 

  

Contract operations

$

170,497

$

158,911

$

500,451

$

488,810

Aftermarket services

 

43,171

 

36,255

 

126,246

 

97,402

Total revenue

 

213,668

 

195,166

 

626,697

 

586,212

Cost of sales (excluding depreciation and amortization):

 

Contract operations

 

71,694

 

61,280

 

204,550

 

184,032

Aftermarket services

 

35,833

 

30,652

 

106,181

 

83,925

Total cost of sales (excluding depreciation and
amortization)

 

107,527

 

91,932

 

310,731

 

267,957

Selling, general and administrative

 

30,500

 

28,839

 

85,964

 

80,000

Depreciation and amortization

 

39,953

 

45,280

 

124,348

 

135,185

Long-lived and other asset impairment

 

4,154

 

5,121

 

16,217

 

15,154

Restructuring charges

313

1,953

Interest expense

 

25,177

 

25,508

 

74,879

 

82,711

Gain on sale of assets, net

(12,695)

(15,393)

(33,755)

(29,549)

Other (income) expense, net

 

(585)

 

337

 

(52)

 

(1,634)

Income before income taxes

 

19,637

 

13,229

 

48,365

 

34,435

Provision for income taxes

 

4,266

 

3,925

 

14,527

 

12,210

Net income

$

15,371

$

9,304

$

33,838

$

22,225

Basic and diluted earnings per common share

$

0.10

$

0.06

$

0.21

$

0.14

Weighted average common shares outstanding:

 

  

 

  

 

  

 

  

Basic

 

153,550

 

152,158

 

153,168

 

151,615

Diluted

 

153,687

 

152,297

 

153,297

 

151,769

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

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Archrock, Inc.

Unaudited Condensed Consolidated Statements of Comprehensive Income

(in thousands)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Net income

$

15,371

    

$

9,304

    

$

33,838

    

$

22,225

Other comprehensive income, net of tax:

 

  

 

  

 

  

 

  

Interest rate swap gain, net of reclassifications to
earnings

 

 

585

 

574

 

2,547

Amortization of dedesignated interest rate swap

 

 

431

 

410

 

431

Total other comprehensive income, net of tax

 

 

1,016

 

984

 

2,978

Comprehensive income

$

15,371

$

10,320

$

34,822

$

25,203

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

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Archrock, Inc.

Unaudited Condensed Consolidated Statements of Equity

(in thousands, except shares and per share amounts)

Accumulated

Additional

Other

Common Stock

Paid-in

Accumulated

Comprehensive

Treasury Stock

    

Shares

    

Amount

    

Capital

    

Deficit

    

Loss

    

Shares

    

Amount

    

Total

Balance at June 30, 2022

163,385,390

$

1,633

$

3,450,603

$

(2,489,814)

$

(7,740,919)

$

(88,504)

$

873,918

Treasury stock purchased

 

 

 

 

(3,636)

 

(31)

 

(31)

Cash dividends ($0.145 per common share

 

 

 

(22,559)

 

 

 

(22,559)

Shares issued under employee stock
purchase plan ("ESPP")

 

27,390

 

167

 

 

 

 

167

Stock-based compensation, net of forfeitures

 

 

2,998

 

 

(56,595)

 

 

2,998

Net proceeds from issuance of common stock

(48)

(48)

Net income

 

 

 

15,371

 

 

 

15,371

Balance at September 30, 2022

163,412,780

$

1,633

$

3,453,720

$

(2,497,002)

$

(7,801,150)

$

(88,535)

$

869,816

Balance at June 30, 2021

161,339,554

$

1,613

$

3,434,224

$

(2,433,553)

$

(3,044)

(7,278,449)

$

(85,419)

$

913,821

Treasury stock purchased

(92,540)

(663)

(663)

Cash dividends ($0.145 per common share

 

 

 

(22,506)

 

 

 

(22,506)

Shares issued under ESPP

22,425

 

 

175

 

 

 

 

175

Stock-based compensation, net of forfeitures

97,426

 

1

 

2,899

 

 

(31,199)

 

 

2,900

Comprehensive income:

 

Net income

 

 

 

9,304

 

 

 

9,304

Other comprehensive income

1,016

1,016

Balance at September 30, 2021

161,459,405

$

1,614

$

3,437,298

$

(2,446,755)

$

(2,028)

(7,402,188)

$

(86,082)

$

904,047

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Archrock, Inc.

Unaudited Condensed Consolidated Statements of Equity (continued)

(in thousands, except share and per share amounts)

Accumulated

Additional

Other

Common Stock

Paid-in

Accumulated

Comprehensive

Treasury Stock

  

Shares

Amount

  

Capital

  

Deficit

Loss

Shares

Amount

Total

Balance at December 31, 2021

161,482,852

$

1,615

$

3,440,059

$

(2,463,114)

$

(984)

(7,417,401)

$

(86,138)

$

891,438

Treasury stock purchased

 

 

 

 

(276,342)

 

(2,397)

 

(2,397)

Cash dividends ($0.435 per common share)

 

 

 

(67,726)

 

 

 

(67,726)

Shares issued under ESPP

 

66,236

 

462

 

 

 

 

462

Stock-based compensation, net of forfeitures

 

1,416,672

14

 

9,021

 

 

(107,407)

 

 

9,035

Net proceeds from issuance of common stock

447,020

4

4,178

4,182

Comprehensive income:

 

 

Net income

 

 

 

33,838

 

 

 

33,838

Other comprehensive income

984

984

Balance at September 30, 2022

163,412,780

$

1,633

$

3,453,720

$

(2,497,002)

$

(7,801,150)

$

(88,535)

$

869,816

Balance at December 31, 2020

160,014,960

$

1,600

$

3,424,624

$

(2,401,988)

$

(5,006)

(7,052,769)

$

(83,673)

$

935,557

Treasury stock purchased

 

 

 

 

(277,316)

 

(2,409)

 

(2,409)

Cash dividends ($0.435 per common share)

 

 

 

(66,992)

 

 

 

(66,992)

Shares issued under ESPP

 

66,541

 

546

 

 

 

 

546

Stock-based compensation, net of forfeitures

 

1,020,756

10

 

8,731

 

 

(72,103)

 

 

8,741

Net proceeds from issuance of common stock

357,148

4

3,397

3,401

Comprehensive income:

 

 

Net income

 

 

 

22,225

 

 

 

22,225

Other comprehensive income

2,978

2,978

Balance at September 30, 2021

161,459,405

$

1,614

$

3,437,298

$

(2,446,755)

$

(2,028)

(7,402,188)

$

(86,082)

$

904,047

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

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Archrock, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

Nine Months Ended

September 30, 

    

2022

    

2021

Cash flows from operating activities:

  

  

Net income

$

33,838

$

22,225

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

  

Depreciation and amortization

 

124,348

 

135,185

Long-lived and other asset impairment

 

16,217

 

15,154

Inventory write-downs

 

1,040

 

621

Amortization of operating lease right-of-use assets

2,407

2,922

Amortization of debt issuance costs

 

3,864

 

8,839

Amortization of debt premium

(1,504)

(1,504)

Amortization of dedesignated interest rate swap

410

431

Interest rate swaps

 

631

 

2,866

Stock-based compensation expense

 

9,035

 

8,741

Provision for credit losses

 

(28)

 

151

Gain on sale of assets, net

 

(5,535)

 

(10,604)

Gain on sale of business

(28,220)

(18,945)

Deferred income tax provision

 

13,624

 

11,778

Amortization of contract costs

14,211

15,523

Deferred revenue recognized in earnings

(15,709)

(8,081)

Changes in operating assets and liabilities:

 

 

Accounts receivable, net

(29,130)

(2,133)

Inventory

(8,339)

(5,994)

Other assets

697

1,326

Contract costs

(22,486)

(11,481)

Accounts payable and other liabilities

37,251

33,626

Deferred revenue

19,614

8,167

Other

96

(88)

Net cash provided by operating activities

 

166,332

 

208,725

Cash flows from investing activities:

 

  

 

  

Capital expenditures

 

(171,032)

 

(70,881)

Proceeds from sale of property, equipment and other assets

13,348

24,683

Proceeds from sale of business

 

99,785

 

83,075

Proceeds from insurance and other settlements

3,353

977

Investments in unconsolidated entities

(12,000)

Net cash (used in) provided by investing activities

 

(66,546)

 

37,854

Cash flows from financing activities:

 

  

 

  

Borrowings of long-term debt

 

579,483

 

522,751

Repayments of long-term debt

 

(611,983)

 

(695,751)

Payments of debt issuance costs

 

 

(2,451)

Payments for settlement of interest rate swaps that include financing elements

 

(1,334)

 

(3,283)

Dividends paid to stockholders

 

(67,726)

 

(66,992)

Net proceeds from issuance of common stock

4,182

3,401

Proceeds from stock issued under ESPP

 

462

 

546

Purchases of treasury stock

 

(2,397)

 

(2,409)

Net cash used in financing activities

 

(99,313)

 

(244,188)

Net increase in cash and cash equivalents

 

473

 

2,391

Cash and cash equivalents, beginning of period

 

1,569

 

1,097

Cash and cash equivalents, end of period

$

2,042

$

3,488

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

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Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 1. GENERAL

Description of Business

Archrock, Inc. (individually and together with its wholly owned subsidiaries, “we,” “our” or us”) is an energy infrastructure company with a primary focus on midstream natural gas compression. We are the leading provider of natural gas compression services to customers in the energy industry throughout the United States (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 predominant segment, contract operations, primarily includes designing, sourcing, owning, installing, operating, servicing, repairing and maintaining our owned fleet of natural gas compression equipment to provide natural gas compression services to our customers. In our aftermarket services business, we sell parts and components and provide operations, maintenance, overhaul and reconfiguration services to customers who own compression equipment.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements included herein have been prepared in accordance with U.S. Generally Accepted Accounting Policies (“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 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.

All intercompany accounts and transactions have been eliminated in consolidation.  In the Notes to Unaudited Condensed Consolidated Financial Statements, all dollar and share amounts in tabulations are in thousands of dollars and shares, respectively, unless otherwise indicated.  

NOTE 2. DISPOSITIONS

In September 2022, we completed the sale of certain contract operations customer service agreements and approximately 390 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 allocated customer–related and contract–based intangible assets based on a ratio of the horsepower sold relative to the total horsepower of the asset group. We received cash consideration of $44.3 million for the sale and recorded a gain on the sale of $11.5 million during the three months and nine months ended September 30, 2022.

In May 2022, we completed the sale of certain contract operations customer service agreements and approximately 380 compressors, comprising approximately 70,000 horsepower, used to provide compression services under those agreements, as well as other assets used to support the operations. We allocated customer–related and contract–based intangible assets based on a ratio of the horsepower sold relative to the total horsepower of the asset group. We received cash consideration of $55.5 million for the sale and recorded a gain on the sale of $16.7 million during the nine months ended September 30, 2022.

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Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

NOTE 3. INVENTORY

Inventory is comprised of the following:

    

September 30, 2022

    

December 31, 2021

Parts and supplies

$

67,459

$

63,628

Work in progress

 

16,632

 

9,241

Inventory

$

84,091

$

72,869

NOTE 4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is comprised of the following:

    

September 30, 2022

    

December 31, 2021

Compression equipment, facilities and other fleet assets

$

3,243,488

$

3,273,770

Land and buildings

 

44,056

 

43,540

Transportation and shop equipment

 

90,116

 

92,490

Computer hardware and software

 

77,357

 

76,908

Other

 

5,518

 

6,229

Property, plant and equipment

 

3,460,535

 

3,492,937

Accumulated depreciation

 

(1,245,869)

 

(1,266,411)

Property, plant and equipment, net

$

2,214,666

$

2,226,526

NOTE 5. EQUITY INVESTMENTS

Investments in which we are deemed to exert significant influence, but not control, are accounted for using the equity method of accounting, except in cases where the fair value option is elected. For such investments where we have elected the fair value option, the election is irrevocable and is applied on an investment–by–investment basis at initial recognition.

In April 2022, we agreed to acquire for cash a 25% equity interest in Ecotec International Holdings, LLC. (“ECOTEC”), a company specializing in methane emissions detection, monitoring and management. We have elected the fair value option to account for this investment (see Note 16). As of September 30, 2022, our ownership interest in ECOTEC is 19%, which is included in Other assets in our unaudited condensed consolidated balance sheets.

Changes in the fair value of this investment are recognized in Other (income) expense, net in our unaudited condensed consolidated statements of operations.

NOTE 6. HOSTING ARRANGEMENTS

We have hosting arrangements that are service contracts related to the cloud migration of our Enterprise Resource Planning (“ERP”) system and cloud services for our mobile workforce, telematics and inventory management tools.

As of September 30, 2022 and December 31, 2021, we had $15.1 million and $12.7 million, respectively, of capitalized implementation costs related to these hosting arrangements included in Other assets in our unaudited condensed consolidated balance sheets. Accumulated amortization was $2.1 million and $0.7 million as of September 30, 2022 and December 31, 2021, respectively.

Included in Selling, general and administrative in our unaudited condensed consolidated statements of operations is amortization of $0.6 million and $0.1 million during the three months ended September 30, 2022 and 2021, respectively, and $1.5 million and $0.3 million during the nine months ended September 30, 2022 and 2021, respectively.

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Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

NOTE 7. LONG–TERM DEBT

Long–term debt is comprised of the following:

    

September 30, 2022

    

December 31, 2021

Credit Facility

$

202,000

$

234,500

6.25% senior notes due April 2028

Principal outstanding

 

800,000

 

800,000

Unamortized debt premium

11,031

 

12,536

Unamortized debt issuance costs

 

(9,158)

 

(10,406)

 

801,873

 

802,130

6.875% senior notes due April 2027

Principal outstanding

500,000

 

500,000

Unamortized debt issuance costs

(4,978)

 

(5,805)

495,022

 

494,195

Long-term debt

$

1,498,895

$

1,530,825

Our $750.0 million asset–based revolving Credit Facility, as amended (the “Credit Facility”), matures in November 2024. As of September 30, 2022, there were $5.8 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.4%. The weighted average annual interest rate on the outstanding balance under our Credit Facility, excluding the effect of interest rate swaps, was 5.5% and 2.6% at September 30, 2022 and December 31, 2021, respectively. We incurred $0.5 million of commitment fees on the daily unused amount of the Credit Facility in each of the three months ended September 30, 2022 and 2021 and $1.5 million in each of the nine months ended September 30, 2022 and 2021.

As of September 30, 2022, we were in compliance with all covenants under our Credit Facility agreement. As a result of the Credit Facility’s financial ratio requirements, $486.4 million of the $542.2 million of undrawn capacity was available for additional borrowings as of September 30, 2022.

In February 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 certain financial ratios. We wrote off $4.9 million of unamortized deferred financing costs as a result of the amendment, which was recorded to interest expense in our unaudited condensed consolidated statements of operations during the nine months ended September 30, 2021.

NOTE 8. COMMITMENTS AND CONTINGENCIES

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.

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Notes to Unaudited Condensed Consolidated Financial Statements (continued)

In August 2021, Hurricane Ida caused operational disruptions, damage to compressors and a temporary shutdown of facilities in Louisiana that negatively impacted our financial performance. At December 31, 2021, we had an insurance recovery receivable of $2.8 million related to the facility and compressor damages, which we received in cash during the three months ended March 31, 2022. In September 2022, we received $0.4 million of business interruption insurance recovery proceeds, which resolved the remainder of our insurance claims related to Hurricane Ida.

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, 2022 and December 31, 2021, we had $3.9 million and $5.8 million, respectively, accrued for the outcomes of non–income–based tax audits. We do not expect that the ultimate resolutions of these audits will result in a material variance from the amounts accrued. We do not accrue for unasserted claims for tax audits unless we believe the assertion of a claim is probable, it is probable that it will be determined that the claim is owed and we can reasonably estimate the claim or range of the claim. We believe the likelihood is remote that the impact of potential unasserted claims from non–income–based tax audits could be material to our consolidated financial position, but it is possible that the resolution of future audits could be material to our consolidated results of operations or cash flows.

In 2021, one of our sales and use tax audits advanced from the audit review phase to the contested hearing phase. As of both September 30, 2022 and December 31, 2021, we had $0.6 million accrued for this audit.

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.

NOTE 9. STOCKHOLDERS’ EQUITY

Equity Distribution Agreement

During the nine months ended September 30, 2022, we sold 447,020 shares of common stock for net proceeds of $4.2 million pursuant to an 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 (the “Equity Distribution Agreement”). During the nine months ended September 30, 2021, we sold 357,148 shares of common stock under this program for net proceeds of $3.4 million.

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Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Cash Dividends

The following table summarizes our dividends declared and paid in each of the quarterly periods of 2022 and 2021:

    

Dividends per

    

    

Common Share

    

  Dividends Paid

2022

 

  

 

  

Q3

$

0.145

$

22,559

Q2

0.145

22,494

Q1

0.145

22,673

2021

 

  

 

  

Q4

$

0.145

$

22,351

Q3

 

0.145

 

22,506

Q2

 

0.145

 

22,331

Q1

 

0.145

 

22,155

On October 27, 2022, our Board of Directors declared a quarterly dividend of $0.145 per share of common stock to be paid on November 15, 2022 to stockholders of record at the close of business on November 8, 2022.

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. See Note 15 for further details on our interest rate swap derivative instruments.

The following table presents the changes in accumulated other comprehensive loss, net of tax:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Beginning accumulated other comprehensive loss

$

$

(3,044)

$

(984)

$

(5,006)

Other comprehensive income, net of tax:

Loss recognized in other comprehensive
income

 

 

(458)

 

(405)

 

(529)

Loss reclassified from accumulated other
comprehensive loss to interest expense

 

 

1,474

 

1,389

 

3,507

Total other comprehensive income

 

 

1,016

 

984

 

2,978

Ending accumulated other comprehensive loss

$

$

(2,028)

$

$

(2,028)

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Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

NOTE 10. REVENUE FROM CONTRACTS WITH CUSTOMERS

The following table presents our revenue from contracts with customers by segment (see Note 18) and disaggregated by revenue source:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Contract operations:

  

  

  

  

0 ― 1,000 horsepower per unit

$

38,967

$

41,576

$

121,298

$

134,413

1,001 ― 1,500 horsepower per unit

 

72,463

 

66,138

 

208,161

 

201,454

Over 1,500 horsepower per unit

 

58,818

 

51,018

 

170,297

 

152,360

Other (1)

 

249

 

179

 

695

 

583

Total contract operations revenue (2)

 

170,497

 

158,911

 

500,451

 

488,810

Aftermarket services:

 

  

 

  

 

  

 

  

Services

 

23,528

 

19,249

 

66,666

 

53,149

Over–the–counter (“OTC”) parts and components sales

 

19,643

 

17,006

 

59,580

 

44,253

Total aftermarket services revenue (3)

 

43,171

 

36,255

 

126,246

 

97,402

Total revenue

$

213,668

$

195,166

$

626,697

$

586,212

(1)Primarily relates to fees associated with owned non-compression equipment.
(2)Includes $0.7 million and $0.7 million for the three months ended September 30, 2022 and 2021, respectively, and $1.8 million and $3.1 million for the nine months ended September 30, 2022 and 2021, respectively, related to billable maintenance on owned compressors that was recognized at a point in time. All other contract operations revenue is recognized over time.
(3)Services revenue within aftermarket services is recognized over time. OTC parts and components sales revenue is recognized at a point in time.

Performance Obligations

As of September 30, 2022, we had $282.3 million of remaining performance obligations related to our contract operations segment, which will be recognized through 2027 as follows:

    

2022

    

2023

    

2024

    

2025

    

2026

    

2027

    

Total

Remaining performance obligations

$

99,377

$

122,031

$

46,882

$

12,870

$

919

$

192

$

282,271

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, 2022 and December 31, 2021, our receivables from contracts with customers, net of allowance for credit losses, were $118.9 million and $84.7 million, respectively.

Allowance for Credit Losses

Trade accounts receivable are due from companies of varying size engaged principally in oil and natural gas activities throughout the U.S. We review the financial condition of customers prior to extending credit and generally do not obtain collateral for trade receivables. Payment terms are on a short-term basis and in accordance with industry practice. We consider this credit risk to be limited due to these companies’ financial resources, the nature of the products and services we provide and the terms of our customer agreements.

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Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Due to the short-term nature of our trade receivables, we consider the amortized cost to be the same as the carrying amount of the receivable, excluding the allowance for credit losses. We recognize an allowance for credit losses when a receivable is recorded, even when the risk of loss is remote. We utilize an aging schedule to determine our allowance for credit losses and measure expected credit losses on a collective (pool) basis when similar risk characteristics exist. We rely primarily on ratings assigned by external rating agencies and credit monitoring services to assess credit risk and aggregate customers first by low, medium or high risk asset pools, and then by delinquency status. We also consider the internal risk associated with geographic location and the services we provide to the customer when determining asset pools. If a customer does not share similar risk characteristics with other customers, we evaluate the customer’s outstanding trade receivables for expected credit losses on an individual basis. Trade receivables evaluated individually are not included in our collective assessment. Each reporting period, we reassess our customers’ risk profiles and determine the appropriate asset pool classification, or perform individual assessments of expected credit losses, based on the customers’ risk characteristics at the reporting date.

The contractual life of our trade receivables is primarily 30 days based on the payment terms specified in the contract. Contract operations services are generally billed monthly at the beginning of the month in which service is being provided. Aftermarket services billings typically occur when parts are delivered or service is completed. Loss rates are separately determined for each asset pool based on the length of time a trade receivable has been outstanding. We analyze two years of internal historical loss data, including the effects of prepayments, write-offs and subsequent recoveries, to determine our historical loss experience. Our historical loss information is a relevant data point for estimating credit losses, as the data closely aligns with trade receivables due from our customers. Ratings assigned by external rating agencies and credit monitoring services consider past performance and forecasts of future economic conditions in assessing credit risk. We routinely update our historical loss data to reflect our customers’ current risk profile, to ensure the historical data and loss rates are relevant to the pool of assets for which we are estimating expected credit losses.

Our allowance for credit losses balance changed as follows during the nine months ended September 30, 2022:

Balance at December 31, 2021

      

$

2,152

Provision for credit losses

(28)

Write-offs charged against allowance

(637)

Balance at September 30, 2022

$

1,487

Contract Liabilities

Freight billings to customers for the transport of compression assets, customer–specified modifications of compression assets and milestone billings on aftermarket services often result in a contract liability. As of September 30, 2022 and December 31, 2021, our contract liabilities were $8.3 million and $4.4 million, respectively.

During the nine months ended September 30, 2022, we deferred revenue of $19.6 million and recognized deferred revenue of $15.7 million. The revenue recognized during the period primarily related to freight billings and milestone billings on aftermarket services.

NOTE 11. STOCK–BASED COMPENSATION

We grant various forms of stock–based compensation to our employees and non–employee directors. These stock–based awards can consist of stock options, stock appreciation rights, restricted stock awards, restricted stock units (“RSUs”), performance–based RSUs, other stock–based awards and dividend equivalent rights. We recognize stock–based compensation expense related to restricted stock awards, RSUs, performance–based RSUs and shares issued under our ESPP.

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Notes to Unaudited Condensed Consolidated Financial Statements (continued)

The following table presents the stock–based compensation expense recognized in our unaudited condensed consolidated statements of operations:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Equity award expense

$

2,998

$

2,900

$

9,035

$

8,741

Liability award expense

 

24

 

127

 

904

 

1,121

Total stock-based compensation expense

$

3,022

$

3,027

$

9,939

$

9,862

The following table presents our restricted stock activity in the nine months ended September 30, 2022:

Weighted

Average

Grant Date

Shares

Fair Value

    

(in thousands)

    

Per Share

Non-vested restricted stock, December 31, 2021

 

2,578

$

10.35

Granted

 

1,861

 

9.03

Vested

 

(1,152)

 

10.25

Canceled

 

(244)

 

9.28

Non-vested restricted stock, September 30, 2022 (1)

 

3,043

$

9.67

(1)Comprised of 508 cash-settled units and 2,534 stock–settled awards and units.

As of September 30, 2022, there was $17.1 million of unrecognized stock–based compensation expense which is expected to be recognized over a weighted average period of 1.9 years.

NOTE 12. 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.

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.

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Notes to Unaudited Condensed Consolidated Financial Statements (continued)

The following table presents the results of our compression fleet impairment review as recorded in our contract operations segment:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Idle compressors retired from the active fleet

 

25

 

60

 

100

 

175

Horsepower of idle compressors retired from the active
fleet

 

23,000

 

24,000

 

80,000

 

61,000

Impairment recorded on idle compressors retired from
the active fleet

$

4,149

$

5,120

$

16,205

$

14,964

See Note 16 for additional information.

NOTE 13. 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, interest limitation 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, 2022 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, 2022, we believe it is reasonably possible that $2.7 million of our unrecognized tax benefits, including penalties, interest and discontinued operations, will be reduced prior to September 30, 2023 due to the settlement of audits or the expiration of statutes of limitations or both. However, due to the uncertain and complex application of the tax regulations, it is possible that the ultimate resolution of these matters may result in liabilities that could materially differ from this estimate.

Impact of New Legislation

On August 16, 2022, President Biden signed into law the Inflation Reduction Act (Public Law Number 117–169). This legislation is expected to have an immaterial impact to our unaudited condensed consolidated financial statements.

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Notes to Unaudited Condensed Consolidated Financial Statements (continued)

NOTE 14. EARNINGS PER COMMON 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.

Diluted net income (loss) per common share is computed using the weighted average number of common shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options, performance–based RSUs and stock to be issued pursuant to our ESPP unless their effect would have been anti–dilutive.

The following table shows the calculation of net income attributable to common stockholders, which is used in the calculation of basic and diluted earnings per common share, potential shares of common stock that were included in computing diluted earnings per common share and the potential shares of common stock issuable that were excluded from computing diluted earnings per common share as their inclusion would have been anti–dilutive:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Net income

$

15,371

$

9,304

$

33,838

$

22,225

Allocation of earnings to participating securities

 

(294)

 

(456)

 

(1,114)

 

(909)

Net income attributable to common stockholders

$

15,077

$

8,848

$

32,724

$

21,316

Weighted average common shares outstanding used in
basic earnings per common share

153,550

152,158

153,168

151,615

Effect of dilutive securities:

Restricted stock units

131

138

125

152

ESPP shares

6

1

4

2

Weighted average common shares outstanding used in
diluted earnings per common share

153,687

152,297

153,297

151,769

On exercise of options where exercise price is greater than average market price for the period

15

27

NOTE 15. DERIVATIVES AND HEDGING

We are exposed to market risks associated with changes in the variable interest rate of our Credit Facility. We have used derivative instruments, in the form of interest rate swaps, 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.

In March 2022, our $300.0 million notional value of interest rate swaps expired. We previously entered into these swaps to offset changes in expected cash flows due to fluctuations in the associated variable interest rates and designated them as cash flow hedges. There was no nonperformance by any counterparty during the terms of the interest rate swaps and no collateral was posted for the instruments.

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Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Prior to expiration, during the third quarter of 2021, we dedesignated $125.0 million notional value of our interest rate swaps. The fair value of this interest rate swap immediately prior to dedesignation was a liability of $1.6 million. The associated amount in accumulated other comprehensive loss related to this interest rate swap was amortized into interest expense over the remaining term of the swap through March 2022. Changes in the fair value of the dedesignated interest rate swap after dedesignation and prior to expiration were recorded in interest expense.

The remaining $175.0 million notional value of our interest rate swaps were designated as (highly effective) cash flow hedging instruments until their expiration. Changes in the fair value of cash flow hedging instruments are recognized as a component of other comprehensive income (loss) until the hedged transaction affects earnings. At that time, amounts are reclassified into earnings to interest expense, the same statement of operations line item to which the earnings effect of the hedged item is recorded. Cash flows from derivatives designated as hedges are classified in our unaudited condensed consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions unless the derivative contract contains a significant financing element, in which case, the cash settlements for those derivatives are classified as cash flows from financing activities.

The following table presents the effect of our derivative instruments on our unaudited condensed consolidated statements of operations:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Total amount of interest expense in which the effects of cash flow hedges and undesignated interest rate swaps are recorded

$

25,177

$

25,508

$

74,879

$

82,711

Interest rate swaps designated as cash flow hedging
instruments:

Pre-tax loss recognized in other comprehensive
income

$

$

(581)

$

(512)

$

(670)

Pre-tax loss reclassified from accumulated other
comprehensive loss into interest expense

 

 

(1,867)

 

(1,758)

 

(4,440)

Interest rate swaps not designated as hedging
instruments:

Gain recognized in interest expense

$

$

532

$

523

$

532

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Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

The following table presents the effect of our derivative instruments on our unaudited condensed consolidated balance sheets:

    

September 30, 2022

    

December 31, 2021

Interest rate swaps designated as cash flow hedging instruments

Accrued liabilities

$

$

727

Interest rate swaps not designated as hedging instruments

Accrued liabilities

523

Total derivative liabilities

$

$

1,250

Please see Note 9 and Note 16 for additional details on our derivative instruments.

16. FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Investment in ECOTEC

During the nine months ended September 30, 2022, we acquired a 19% equity interest in ECOTEC. We have elected the fair value option to account for this investment. The investment is valued at its transaction price, unless and until there is a significant change in the investment, such as an impairment or an additional investment. The investment’s fair value is reviewed periodically and is classified as a Level 3 measurement. As of September 30, 2022, the fair value of our investment in ECOTEC was as follows:

    

September 30, 2022

Investment in ECOTEC

$

12,000

Interest Rate Swaps

Prior to their expiration in the first quarter of 2022, our interest rate swap derivative instruments were valued quarterly based on the income approach (discounted cash flows) using market observable inputs, including LIBOR forward curves. These fair value measurements were 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:

September 30, 2022

December 31, 2021

Derivative liabilities

$

$

1,250

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

During the three months and nine months ended September 30, 2022, we recorded nonrecurring fair value measurements of $4.1 million and $16.2 million, respectively, related to our idle compressors (see Note 12). Our estimate of the compressors’ fair value was primarily based on the expected net sale proceeds compared with 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 four years. The fair value of our compressors impaired in 2022 and 2021 was as follows:

    

September 30, 2022

    

December 31, 2021

Impaired compressors

$

1,548

$

4,380

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Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

These fair value measurements are classified as Level 3. 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, 2022

$0 - $621 per horsepower

$44 per horsepower

As of December 31, 2021

$0 - $621 per horsepower

$35 per horsepower

(1)Calculated based on an estimated discount for market liquidity of 56% and 64% as of September 30, 2022 and December 31, 2021, respectively.

Other Financial Instruments

The carrying amounts of our cash, accounts receivable and accounts payable approximate fair value due to the short–term nature of these instruments.

The carrying amount of borrowings outstanding under our Credit Facility approximates fair value due to the variable interest rate. The measurement of 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:

    

September 30, 2022

    

December 31, 2021

Carrying amount of fixed rate debt (1)

$

1,296,895

$

1,296,325

Fair value of fixed rate debt

 

1,155,760

 

1,361,000

(1)Carrying amounts are shown net of unamortized premium and deferred financing costs. See Note 7.

NOTE 17. RELATED PARTY TRANSACTIONS

Old Ocean Reserves, LP (“Old Ocean Reserves”), formerly JDH Capital Holdings, L.P., an affiliate of our customer Hilcorp Energy Company (“Hilcorp”), has the right to designate one director to serve on our board of directors as long as Old Ocean Reserves or its successors (together with its affiliates) owns at least 7.5% of our outstanding common stock. As of September 30, 2022, Old Ocean Reserves owned 10.8% of our outstanding common stock. Jason C. Rebrook, Chief Executive Officer and Director of Harvest Midstream Company, a Hilcorp affiliate, has served as Old Ocean Reserves’ representative director since July 2020.

Revenue from Hilcorp was $9.2 million and $9.5 million during the three months ended September 30, 2022 and 2021, respectively, and $27.8 million and $28.6 million during the nine months ended September 30, 2022 and 2021, respectively. Accounts receivable, net due from Hilcorp was $3.2 million and $3.7 million as of September 30, 2022 and December 31, 2021, respectively.

NOTE 18. SEGMENT INFORMATION

We manage our business segments primarily based on the type of product or service provided. We have two segments: contract operations and aftermarket services. Our contract operations segment primarily provides natural gas compression services to meet specific customer requirements. Our aftermarket services segment provides a full range of services to support the compression needs of customers, from parts sales and normal maintenance services to full operation of a customer’s owned assets. All of our operations are located in the U.S.

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Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

We evaluate the performance of our segments based on gross margin, defined as revenue less cost of sales (excluding depreciation and amortization) for each segment. Segment revenue includes only sales to external customers.

Summarized financial information for our reporting segments is shown below:

    

Contract

    

Aftermarket

    

    

Operations

    

Services

    

Total

Three months ended September 30, 2022

 

  

 

  

 

  

Revenue

$

170,497

$

43,171

$

213,668

Gross margin

 

98,803

 

7,338

 

106,141

Three months ended September 30, 2021

 

  

 

  

 

  

Revenue

$

158,911

$

36,255

$

195,166

Gross margin

 

97,631

 

5,603

 

103,234

Nine months ended September 30, 2022

 

  

 

  

 

  

Revenue

$

500,451

$

126,246

$

626,697

Gross margin

 

295,901

 

20,065

 

315,966

Nine months ended September 30, 2021

 

  

 

  

 

  

Revenue

$

488,810

$

97,402

$

586,212

Gross margin

 

304,778

 

13,477

 

318,255

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

Three Months Ended

    

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Total gross margin

$

106,141

$

103,234

$

315,966

$

318,255

Less:

 

  

 

  

 

  

 

  

Selling, general and administrative

 

30,500

 

28,839

 

85,964

 

80,000

Depreciation and amortization

 

39,953

 

45,280

 

124,348

 

135,185

Long-lived and other asset impairment

 

4,154

 

5,121

 

16,217

 

15,154

Restructuring charges

313

1,953

Interest expense

 

25,177

 

25,508

 

74,879

 

82,711

Gain on sale of assets, net

(12,695)

(15,393)

(33,755)

(29,549)

Other (income) expense, net

 

(585)

 

337

 

(52)

 

(1,634)

Income before income taxes

$

19,637

$

13,229

$

48,365

$

34,435

NOTE 19. SUBSEQUENT EVENTS

On October 3, 2022, we acquired an additional equity interest in ECOTEC, which increased our total ownership interest to 23%.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included in this Form 10–Q, as well as our Form 10–K.

OVERVIEW

We are an energy infrastructure company with a primary focus on midstream natural gas compression. We are the leading provider of natural gas compression services to customers in the energy 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

Dispositions

In September 2022, we completed the sale of certain contract operations customer service agreements and approximately 390 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 $44.3 million for the sale and recorded a gain on the sale of $11.5 million during the three months and nine months ended September 30, 2022.

In May 2022, we completed the sale of certain contract operations customer service agreements and approximately 380 compressors, comprising approximately 70,000 horsepower, used to provide compression services under those agreements, as well as other assets used to support the operations. We received cash consideration of $55.5 million for the sale and recorded a gain on the sale of $16.7 million during the nine months ended September 30, 2022.

Investment in ECOTEC

In April 2022, we agreed to acquire for cash a 25% equity interest in ECOTEC, a company specializing in methane emissions monitoring and management. As of September 30, 2022, our equity interest was 19%. See Note 5 in our Notes to Unaudited Condensed Consolidated Financial Statements for additional information about this investment.

Operating Highlights

Three Months Ended

Nine Months Ended

 

September 30, 

September 30, 

 

    

2022

    

2021

    

    

2022

    

2021

    

Total available horsepower (at period end)(1)

    

3,747

    

3,913

    

    

3,747

    

3,913

Total operating horsepower (at period end)(2)

3,353

 

3,196

 

3,353

 

3,196

Average operating horsepower

3,355

 

3,225

 

3,304

 

3,298

Horsepower utilization:

  

 

  

 

  

 

  

Spot (at period end)

89

%  

82

%  

89

%  

82

%

Average

88

%  

82

%  

86

%  

82

%

(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.

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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 selling, general & administrative (“SG&A”) activities, our financing methods and income taxes. In addition, depreciation and amortization may not accurately reflect the costs required to maintain and replenish the operational usage of our assets and therefore may not portray the costs of current operating activity. As an indicator of our operating performance, gross margin should not be considered an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP. Our gross margin may not be comparable to a similarly–titled measure of other entities because other entities may not calculate gross margin in the same manner.

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

The following table reconciles net income to gross margin:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Net income

$

15,371

$

9,304

$

33,838

$

22,225

Selling, general and administrative

 

30,500

 

28,839

 

85,964

 

80,000

Depreciation and amortization

 

39,953

 

45,280

 

124,348

 

135,185

Long-lived and other asset impairment

 

4,154

 

5,121

 

16,217

 

15,154

Restructuring charges

313

1,953

Interest expense

 

25,177

 

25,508

 

74,879

 

82,711

Gain on sale of assets, net

(12,695)

(15,393)

(33,755)

(29,549)

Other (income) expense, net

 

(585)

 

337

 

(52)

 

(1,634)

Provision for income taxes

 

4,266

 

3,925

 

14,527

 

12,210

Gross margin

$

106,141

$

103,234

$

315,966

$

318,255

RESULTS OF OPERATIONS

Summary of Results

Revenue was $213.7 million and $195.2 million during the three months ended September 30, 2022 and 2021, respectively, and $626.7 million and $586.2 million during the nine months ended September 30, 2022 and 2021, respectively. The increases in consolidated revenue during these periods were primarily due to increased revenue from both our contract operations business and aftermarket services business. See “Contract Operations” and “Aftermarket Services” below for further details.

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Net income was $15.4 million and $9.3 million during the three months ended September 30, 2022 and 2021, respectively. The increase was primarily driven by a higher gross margin from both our aftermarket services business and our contract operations business and decreased depreciation and amortization expense, partially offset by increased SG&A and lower gain on sale of assets, net.

Net income was $33.8 million and $22.2 million during the nine months ended September 30, 2022 and 2021, respectively. The increase was primarily driven by a higher gross margin from our aftermarket services business, decreased depreciation and amortization expense and interest expense and an increased gain on sale of assets, net, partially offset by a lower gross margin from our contract operations business and higher SG&A.

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Contract Operations

 

Three Months Ended

September 30, 

Increase

    

2022

    

2021

    

(Decrease)

Revenue

$

170,497

$

158,911

7

%

Cost of sales (excluding depreciation and amortization)

 

71,694

 

61,280

17

%

Gross margin

$

98,803

$

97,631

1

%

Gross margin percentage (1)

 

58

%  

 

61

%  

(3)

%

(1)Defined as gross margin divided by revenue.

Revenue in our contract operations business increased primarily due to an increase in average operating horsepower and higher rates in response to improving market conditions, partially offset by the impact of the strategic dispositions in 2021 and 2022. Average operating horsepower for the three months ended September 30, 2022 increased when compared with the three months ended September 30, 2021 before adjusting for the dispositions.

Despite the increase in revenue, the increase in gross margin in our contract operations business was partially offset by our increase in cost of sales. Start–up, maintenance, lube oil and other operating expenses increased, driven by higher pricing throughout our supply chain, as well as increased volumes associated with unit redeployment as customer activity accelerated. Partially offsetting these cost increases was the decrease in expense attributable to the horsepower sold in 2021 and 2022.

Aftermarket Services

 

Three Months Ended

 

September 30, 

Increase

    

2022

    

2021

    

(Decrease)

Revenue

$

43,171

$

36,255

 

19

%

Cost of sales (excluding depreciation and amortization)

 

35,833

 

30,652

 

17

%

Gross margin

$

7,338

$

5,603

 

31

%

Gross margin percentage

 

17

%  

 

15

%  

2

%

Revenue in our aftermarket services business increased primarily due to higher parts sales and service activities, as the market recovery drove an increase in customer demand.

Gross margin increased in our aftermarket services business as a result of increased revenue partially offset by the associated increase in cost of sales, which was primarily driven by the same increases in parts sales and service activities.

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Costs and Expenses

 

Three Months Ended

September 30, 

    

2022

    

2021

Selling, general and administrative

$

30,500

$

28,839

Depreciation and amortization

 

39,953

 

45,280

Long-lived and other asset impairment

 

4,154

 

5,121

Restructuring charges

313

Interest expense

 

25,177

 

25,508

Gain on sale of assets, net

(12,695)

(15,393)

Other (income) expense, net

(585)

337

Provision for income taxes

4,266

3,925

Effective tax rate

 

22%

 

30%

Selling, general and administrative. The increase in SG&A was primarily due to a $1.1 million increase in employee compensation costs and a $0.9 million increase in information technology expense related to increased amortization of capitalized implementation costs and increased service agreement costs related to the substantial completion of our process and technology transformation project at the end of 2021.

Depreciation and amortization. The decrease in depreciation and amortization expense was primarily due to the impact of assets reaching the end of their depreciable lives and compression and other asset sales, partially offset by the impact of fixed asset additions.

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 September 30, 2022 and 2021, we recognized $4.2 million and $5.1 million, respectively, of impairment charges to write down these compressors to their fair value. See Note 12 in our Notes to Unaudited Condensed Consolidated Financial Statements for additional information about these impairment charges. The following table presents the results of our compression fleet impairment review, as recorded in our contract operations segment:

 

Three Months Ended

September 30, 

    

2022

    

2021

Idle compressors retired from the active fleet

 

25

 

60

Horsepower of idle compressors retired from the active fleet

 

23,000

 

24,000

Impairment recorded on idle compressors retired from the active fleet

$

4,149

$

5,120

Interest expense. The decrease in interest expense was due to a lower average outstanding balance of long–term debt, partially offset by a higher average interest rate as a result of the expiration of our interest rate swaps in the first quarter of 2022.

Gain on sale of assets, net. The net gain on sale of assets during the three months ended September 30, 2022 was primarily the result of the $11.5 million of gain recognized on the September 2022 disposition of assets and gains of $1.2 million recognized on sales of other compression, transportation and shop assets during the period.

The net gain on sale of assets during the three months ended September 30, 2021 was primarily the result of the $13.0 million of gain recognized on the July 2021 disposition of assets and gains of $2.2 million recognized in on other compression asset sales during the period.

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Provision for income taxes. The increase in provision for income taxes was primarily due to the tax effect of the increase in book income during the three months ended September 30, 2022 compared with the three months ended September 30, 2021.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Contract Operations

 

Nine Months Ended

September 30, 

Increase

    

2022

    

2021

    

(Decrease)

Revenue

$

500,451

$

488,810

2

%

Cost of sales (excluding depreciation and amortization)

 

204,550

 

184,032

11

%

Gross margin

$

295,901

$

304,778

(3)

%

Gross margin percentage

 

59

%  

 

62

%  

(3)

%

Revenue in our contract operations business increased primarily due to higher rates and an increase in average operating horsepower in response to improving market conditions, partially offset by the impact of the strategic dispositions in 2021 and 2022. Average operating horsepower for the nine months ended September 30, 2022 increased when compared with the nine months ended September 30, 2021 before adjusting for the dispositions.

Despite the increase in revenue, the decrease in gross margin in our contract operations business reflects the impact of a larger increase in cost of sales. Start–up, maintenance, lube oil and other operating expenses increased, driven by higher pricing throughout our supply chain, as well as increased volumes associated with unit redeployment as customer activity accelerated. Partially offsetting these cost increases was the decrease in expense attributable to the horsepower sold in 2021 and 2022.

Aftermarket Services

 

Nine Months Ended

 

September 30, 

Increase

    

2022

    

2021

    

(Decrease)

Revenue

$

126,246

$

97,402

 

30

%

Cost of sales (excluding depreciation and amortization)

 

106,181

 

83,925

 

27

%

Gross margin

$

20,065

$

13,477

 

49

%

Gross margin percentage

 

16

%  

 

14

%  

2

%

Revenue in our aftermarket services business increased primarily due to higher parts sales and service activities, as the market recovery drove an increase in customer demand.

Gross margin in our aftermarket services business increased due to an increase in revenue and despite an increase in cost of sales, which was primarily driven by the same increases in parts sales and service activities.

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Costs and Expenses

 

Nine Months Ended

September 30, 

    

2022

    

2021

Selling, general and administrative

$

85,964

$

80,000

Depreciation and amortization

 

124,348

135,185

Long-lived and other asset impairment

 

16,217

15,154

Restructuring charges

1,953

Interest expense

 

74,879

82,711

Gain on sale of assets, net

(33,755)

(29,549)

Other (income), net

(52)

(1,634)

Provision for income taxes

14,527

12,210

Effective tax rate

 

30%

35%

Selling, general and administrative. The increase in SG&A was primarily due to a $2.0 million increase in sales and use tax resulting from audit settlements reached during the nine months ended September 30, 2021, a $1.7 million increase in information technology expense related to increased amortization of capitalized implementation costs and increased service agreement costs related to the substantial completion of our process and technology transformation project at the end of 2021, a $0.9 million increase in employee compensation costs and a $0.9 million increase in higher travel and meeting expenses.

Depreciation and amortization. The decrease in depreciation and amortization expense was primarily due to the impact of assets reaching the end of their depreciable lives, compression and other asset sales and impairments, partially offset by the impact of fixed asset additions.

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 nine months ended September 30, 2022 and 2021, we recognized $16.2 million and $15.2 million, respectively, of impairment charges to write down these compressors to their fair value. See Note 12 in our Notes to Unaudited Condensed Consolidated Financial Statements for additional information about these impairment charges. The following table presents the results of our compression fleet impairment review, as recorded in our contract operations segment:

 

Nine Months Ended

September 30, 

    

2022

    

2021

Idle compressors retired from the active fleet

 

100

 

175

Horsepower of idle compressors retired from the active fleet

 

80,000

 

61,000

Impairment recorded on idle compressors retired from the active fleet

$

16,205

$

14,964

Interest expense. The decrease in interest expense was due to the $4.9 million write–off of unamortized deferred financing costs related to the amendment of our Credit Facility in the first quarter of 2021 and a lower average outstanding balance of long–term debt, offset by a higher average interest rate as a result of the expiration of our interest rate swaps in the first quarter of 2022.

Gain on sale of assets, net. The net gain on sale of assets during the nine months ended September 30, 2022 was primarily the result of the $28.2 million of gains recognized on the May 2022 and September 2022 dispositions of assets and gains of $5.6 million recognized on sales of other compression, transportation and shop assets during the period.

The net gain on sale of assets during the nine months ended September 30, 2021 was primarily the result of the $19.0 million of gains recognized on the February 2021 and July 2021 dispositions of assets and gains of $8.6 million recognized on other compression asset sales during the period.

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Provision for income taxes. The increase in provision for income taxes was primarily due to the tax effect of the increase in book income during the nine months ended September 30, 2022 compared with the nine months ended September 30, 2021.

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. 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 or debt securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, may be material, will be upon terms and prices as we may determine and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

Cash 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 consisted primarily of, and we anticipate will continue to consist of, the following:

operating expenses, namely employee compensation and benefits and inventory and lube oil purchases;
growth capital expenditures;
maintenance capital expenditures;
interest on our outstanding debt obligations; and
dividend payments to our stockholders.

Capital Expenditures

Growth Capital Expenditures. 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 that exceed our cost of capital over the compressor’s expected useful life. 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. 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 Expenditures. We currently plan to spend approximately $230 million to $235 million in capital expenditures during 2022, primarily consisting of approximately $150 million for growth capital expenditures and approximately $70 million to $75 million for maintenance capital expenditures. The increase in 2022 capital expenditures, particularly growth capital expenditures, as compared to 2021 is due to increased investment in new compression equipment as a result of higher customer demand.

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Dividends

On October 27, 2022, our Board of Directors declared a quarterly dividend of $0.145 per share of common stock to be paid on November 15, 2022 to stockholders of record at the close of business on November 8, 2022. 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.

Sources of Cash

Revolving Credit Facility

During the nine months ended September 30, 2022 and 2021, our Credit Facility had an average debt balance of $228.9 million and $310.9 million, respectively. The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 5.5% and 2.6% at September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022, there were $5.8 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.4%.

As of September 30, 2022, we were in compliance with all covenants under our Credit Facility. As a result of the facility’s financial ratio requirements, $486.4 million of the $542.2 million of undrawn capacity was available for additional borrowings as of September 30, 2022.

Equity Distribution Agreement

During the nine months ended September 30, 2022 and 2021, we sold 447,020 and 357,148 shares of common stock for net proceeds of $4.2 million and $3.4 million, respectively, pursuant to the Equity Distribution Agreement.

Cash Flows

Our cash flows, as reflected in our unaudited condensed consolidated statements of cash flows, are summarized below:

 

Nine Months Ended

September 30, 

    

2022

    

2021

Net cash provided by (used in):

 

  

 

  

Operating activities

$

166,332

$

208,725

Investing activities

 

(66,546)

 

37,854

Financing activities

 

(99,313)

 

(244,188)

Operating Activities

The decrease in net cash provided by operating activities was primarily due to increased cash outflow for cost of sales, contract costs, and SG&A, as well as decreased cash inflow from accounts receivable. Partially offsetting these decreases in operating cash were increased cash inflow from revenue and deferred revenue.

Investing Activities

The change in net cash used in (provided by) investing activities was primarily due to a $100.2 million increase in capital expenditures and the $12.0 million investment made in unconsolidated entities during the nine months ended September 30, 2022. These cash outflows were partially offset by an increase of $5.4 million in proceeds from business dispositions and other sales of property, plant and equipment and an increase of $2.4 million in insurance and other settlements.

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Financing Activities

The decrease in net cash used in financing activities was primarily due to $32.5 million of net repayments of long–term debt during the nine months ended September 30, 2022 compared with $173.0 million of net repayments of long–term debt during the nine months ended September 30, 2021.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks associated with changes in the variable interest rate of our Credit Facility. We have previously used derivative instruments to manage our exposure to fluctuation in this variable interest rate; however, our interest rate swaps expired in the first quarter of 2022, and all borrowings under our Credit Facility are now subject to variable interest rates.

A 1% increase in the effective interest rate on our Credit Facility’s outstanding balance at September 30, 2022 would have resulted in an annual increase in our interest expense of $2.0 million.

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 Form 10–Q 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, 2022 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

In the first quarter of 2022, we implemented a new ERP system, which replaced our existing core financial systems, resulting in changes to our financial close processes and procedures. As a result of the implementation, certain internal controls over financial reporting were automated, modified or implemented. While we believe the new ERP system will enhance our internal controls, there are inherent risks in implementing any new system, and we will continue to evaluate these control changes as part of our assessment of control design and effectiveness throughout 2022.

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) that occurred 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 Form 10–K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES BY ISSUER AND USE OF PROCEEDS

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

The following table summarizes our purchases of equity securities during the nine months ended September 30, 2022:

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, 2022 — July 31, 2022

2,919

$

8.39

N/A

N/A

August 1, 2022 — August 31, 2022

 

717

 

8.25

 

N/A

 

N/A

September 1, 2022 — September 30, 2022

 

 

 

N/A

 

N/A

Total

 

3,636

8.36

 

N/A

 

N/A

(1)Represents shares of common stock purchased from employees to satisfy 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

The exhibits listed below are filed or furnished as part of this report:

3.1

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

3.2

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

3.3

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

31.1*

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

31.2*

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

32.1**

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

32.2**

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

101.1*

Interactive data files (formatted in Inline XBRL) pursuant to Rule 405 of Regulation S–T

104.1*

Cover page interactive data file (formatted in Inline XBRL) 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 3, 2022

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