Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this 2020 Form 10-K, 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 December 31, 2020, 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.
Management’s Annual Report on Internal Control Over Financial Reporting
As required by Exchange Act Rules 13a-15(c) and 15d-15(c), our management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness as to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on the results of management’s evaluation described above, management concluded that our internal control over financial reporting was effective as of December 31, 2020.
The effectiveness of internal control over financial reporting as of December 31, 2020 was audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in its report found within this 2020 Form 10-K.
55
Table of Contents
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
56
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Archrock, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Archrock, Inc. and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and the financial statement schedule as of and for the year ended December 31, 2020, of the Company and our report dated February 22, 2021, expressed an unqualified opinion on those financial statements and financial statement schedule.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 22, 2021
57
Table of Contents
Item 9B. Other Information
None.
58
Table of Contents
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required in Part III Item 10 of this 2020 Form 10-K is incorporated by reference to the sections entitled “Election of Directors,” “Governance” and “Stock Ownership” in our definitive proxy statement to be filed with the SEC within 120 days of the end of our fiscal year.
Item 11. Executive Compensation
The information required in Part III Item 11 of this 2020 Form 10-K is incorporated by reference to the sections entitled “Governance” and “Compensation Discussion and Analysis” in our definitive proxy statement to be filed with the SEC within 120 days of the end of our fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Portions of the information required in Part III Item 12 of this 2020 Form 10-K are incorporated by reference to the section entitled “Stock Ownership” in our definitive proxy statement to be filed with the SEC within 120 days of the end of our fiscal year.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information as of December 31, 2020, with respect to the Archrock compensation plans under which our common stock is authorized for issuance, aggregated as follows:
Number of Securities
to be Issued Upon
Weighted Average
Number of Securities
Exercise of
Exercise Price of
Remaining Available for
Outstanding Options,
Outstanding Options,
Future Issuance Under
Warrants and Rights
Warrants and Rights
Equity Compensation Plans
(a)
(b)
(c)
Equity compensation plans approved by security holders (1)
325,728
(2)
$
25.18
(3)
9,056,628
(4)
Equity compensation plans not approved by security holders (5)
—
—
37,771
Total
325,728
25.18
9,094,399
(1) Comprised of the 2007 Plan, 2013 Plan, 2020 Plan and ESPP. No additional grants may be made under the 2007 Plan and 2013 Plan.
(2) Includes 63,891 outstanding stock options and 261,837 unvested performance-based restricted stock units payable in common stock upon vesting at target performance.
(3) Includes the weighted average exercise price for outstanding options only: performance-based restricted stock units do not have an exercise price.
(4) Includes 8,444,921 shares of common stock under the 2020 Plan and 611,707 shares of common stock under the ESPP. In addition, as of December 31, 2020, 1,730,599 restricted shares were outstanding, which are not included in column (c).
(5) Comprised of our DSDP. As of December 31, 2020, 10,251 restricted stock units are outstanding, which have been deducted in column (c). See Note 24 (“Stock-Based Compensation”) to our Financial Statements for further details of our DSDP.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required in Part III Item 13 of this 2020 Form 10-K is incorporated by reference to the section entitled “Governance” in our definitive proxy statement to be filed with the SEC within 120 days of the end of our fiscal year.
Item 14. Principal Accountant Fees and Services
The information required in Part III Item 14 of this 2020 Form 10-K is incorporated by reference to the section entitled “Ratification of the Appointment of the Independent Registered Public Accounting Firm” in our definitive proxy statement to be filed with the SEC within 120 days of the end of our fiscal year.
59
Table of Contents
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as a part of this 2020 Form 10-K
1. Financial Statements. The following financial statements are filed as a part of this 2020 Form 10-K.
Report of Independent Registered Public Accounting Firm
F-1
Consolidated Balance Sheets
F-3
Consolidated Statements of Operations
F-4
Consolidated Statements of Comprehensive Income
F-5
Consolidated Statements of Equity
F-6
Consolidated Statements of Cash Flows
F-7
Notes to Consolidated Financial Statements
F-9
2. Financial Statement Schedule
Schedule II — Valuation and Qualifying Accounts
S-1
All other schedules have been omitted as they are not required under the relevant instructions.
3. Exhibits
Exhibit No.
Description
2.1
Separation and Distribution Agreement, dated as of November 3, 2015, by and among Exterran Holdings, Inc., Exterran General Holdings LLC, Exterran Energy Solutions, L.P., Exterran Corporation, AROC Corp., EESLP LP LLC, AROC Services GP LLC, AROC Services LP LLC and Archrock Services, L.P., incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
2.2
Amendment No. 1 to Separation and Distribution Agreement, dated as of December 15, 2015, by and among Archrock, Inc., formerly named Exterran Holdings, Inc., Exterran General Holdings LLC, Exterran Energy Solutions, L.P., Exterran Corporation, AROC Corp., EESLP LP LLC, AROC Services GP LLC, AROC Services LP LLC and Archrock Services, L.P., incorporated by reference to Exhibit 2.3 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015
2.3
Agreement and Plan of Merger, dated as of January 1, 2018, by and among Archrock, Inc., Archrock GP LLC, Archrock General Partner, L.P. and Archrock Partners, L.P., incorporated by reference to Exhibit 2.1 of Archrock’s Current Report on Form 8-K filed on January 2, 2018
2.4
Amendment No. 1 to Agreement and Plan of Merger, dated as of January 11, 2018, by and among Archrock, Inc., Archrock GP LLC, Archrock General Partner, L.P., Archrock Partners, L.P. and Amethyst Merger Sub LLC, incorporated by reference to Exhibit 2.2 of Archrock’s Current Report on Form 8-K filed on January 16, 2018
2.5
Asset Purchase Agreement, dated as of June 23, 2019, by and among Archrock Services, L.P., Archrock, Inc. and Elite Compression Services, LLC, incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on June 24, 2019
2.6
Asset Purchase Agreement, dated as of June 23, 2019, by and between Archrock Services, L.P. and Harvest Four Corners, LLC, incorporated by reference to Exhibit 2.2 of the Registrant’s Current Report on Form 8-K filed on June 24, 2019
3.1
Composite Restated Certificate of Incorporation of Archrock, Inc., incorporated by reference to Exhibit 3.3 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015
3.2
Third Amended and Restated Bylaws of Exterran Holdings, Inc. (now Archrock, Inc.), incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on March 20, 2013
3.3
Amendment No. 1 to Third Amended and Restated Bylaws of Archrock, Inc., incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on May 5, 2020
60
Table of Contents
Exhibit No.
Description
4.1
Indenture, dated as of March 21, 2019, by and among Archrock Partners, L.P., Archrock Partners Finance Corp., the guarantors party thereto and Wells Fargo Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed on March 21, 2019
4.2
Indenture, dated as of December 20, 2019, by and among Archrock Partners, L.P., Archrock Partners Finance Corp., the guarantors party thereto and Wells Fargo Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed on December 20, 2019
4.3
Description of Common Stock
10.1
Credit Agreement, dated as of July 10, 2015, by and among Exterran Holdings, Inc. (now Archrock, Inc.), Archrock Services, L.P., the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 16, 2015
10.2
First Amendment to Credit Agreement, dated as of October 5, 2015, by and among Exterran Holdings, Inc. (now Archrock, Inc.), Archrock Services, L.P., the lenders signatory thereto and Wells Fargo Bank, National Association, as administrative agent, incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on October 6, 2015
10.3
Amended and Restated Senior Secured Credit Agreement, dated as of November 3, 2010, by and among EXLP Operating LLC, as Borrower, Exterran Partners, L.P., as Guarantor, Wells Fargo Bank, National Association, as Administrative Agent, Bank of America, N.A. and JPMorgan Chase Bank, N.A., as Co-Syndication Agents, Barclays Bank plc and The Royal Bank of Scotland plc, as Co-Documentation Agents, and the lenders signatory thereto, incorporated by reference to Exhibit 10.1 to Exterran Partners L.P.’s Current Report on Form 8-K filed on November 9, 2010
10.4
First Amendment to Amended and Restated Senior Secured Credit Agreement, dated March 7, 2012, among EXLP Operating LLC, as Borrower, Exterran Partners, L.P., as Guarantor, Wells Fargo Bank, National Association, as Administrative Agent and Swingline Lender, and the other lenders signatory thereto, incorporated by reference to Exhibit 10.1 to Exterran Partners, L.P.’s Current Report on Form 8-K filed on March 13, 2012
10.5
Third Amendment to Amended and Restated Senior Secured Credit Agreement, dated March 27, 2013, among EXLP Operating LLC, as Borrower, Exterran Partners, L.P., as Guarantor, Wells Fargo Bank, National Association, as Administrative Agent, and the other lenders signatory thereto, incorporated by reference to Exhibit 10.1 to Exterran Partners, L.P.’s Current Report on Form 8-K filed on March 28, 2013
10.6
Fourth Amendment to Amended and Restated Senior Secured Credit Agreement, dated February 4, 2015, among EXLP Operating LLC, as Borrower, Exterran Partners, L.P., as Guarantor, Wells Fargo Bank, National Association, as Administrative Agent, and the other lenders signatory thereto, incorporated by reference to Exhibit 10.1 to Exterran Partners, L.P.’s Current Report on Form 8-K filed on February 5, 2015
10.7
Fifth Amendment to Amended and Restated Senior Secured Credit Agreement and First Amendment to Amended and Restated Collateral Agreement, dated May 2, 2016, among Archrock Partners Operating LLC, as Borrower, Archrock Partners, L.P., as Guarantor, Wells Fargo Bank, National Association, as Administrative Agent, and the other lenders party thereto, incorporated by reference to Exhibit 10.1 to Archrock Partners, L.P.’s Current Report on Form 8-K filed on May 6, 2016
10.8
Amended and Restated Guaranty Agreement, dated as of November 3, 2010, made by Exterran Partners, L.P. and EXLP Leasing LLC in favor of Wells Fargo Bank, National Association, as Administrative Agent, incorporated by reference to Exhibit 10.2 to Archrock Partner’s L.P.’s Current Report on Form 8-K filed on November 9, 2010
10.9
Amended and Restated Collateral Agreement, dated as of November 3, 2010, made by EXLP Operating LLC, Exterran Partners, L.P. and EXLP Leasing LLC in favor of Wells Fargo Bank, National Association, as Administrative Agent, incorporated by reference to Exhibit 10.3 to Archrock Partner’s L.P.’s Current Report on Form 8-K filed on November 9, 2010
61
Table of Contents
Exhibit No.
Description
10.10
Second Amendment, Consent and Waiver to Credit Agreement, dated as of May 10, 2016, among Archrock Services, L.P., as Borrower, Archrock, Inc., as Guarantor, Wells Fargo Bank, National Association, as Administrative Agent, and the other lenders party thereto, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 11, 2016
10.11
Third Amendment, Consent and Waiver to Credit Agreement, dated as of July 21, 2016, among Archrock Services, L.P., as Borrower, Archrock, Inc., as Guarantor, Wells Fargo Bank, National Association, as Administrative Agent, and the other lenders party thereto, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on July 26, 2016
10.12
Fourth Amendment, Consent and Waiver to Credit Agreement, dated as of September 21, 2016, among Archrock Services, L.P., as Borrower, Archrock, Inc., as Guarantor, Wells Fargo Bank, National Association, as Administrative Agent, and the other lenders party thereto, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 22, 2016
10.13
Fifth Amendment, Consent and Waiver to Credit Agreement, dated as of December 9, 2016, among Archrock Services, L.P., as Borrower, Archrock, Inc., as Guarantor, Wells Fargo Bank, National Association, as Administrative Agent, and the other lenders party thereto. incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 12, 2016
10.14
Fourth Amended and Restated Omnibus Agreement, dated November 3, 2015, by and among Archrock, Inc. (formerly named Exterran Holdings, Inc.), Archrock Services, L.P. (formerly named Exterran US Services OpCo, L.P.), Archrock GP LLC (formerly named Exterran GP, LLC), Archrock General Partner, L.P. (formerly named Exterran General Partner, L.P.), Archrock Partners, L. P. (formerly named Exterran Partners, L.P.) and Archrock Partners Operating LLC, incorporated by reference to Exhibit 10.16 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015 (portions of this exhibit have been omitted by redacting a portion of the text (indicated by asterisks in the text) and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment)
10.15
First Amendment to Fourth Amended and Restated Omnibus Agreement, dated November 19, 2016, by and among Archrock, Inc., Archrock Services, L.P., Archrock GP LLC, Archrock General Partner, L.P., Archrock Partners, L.P., and Archrock Partners Operating LLC incorporated by reference to the Registrant’s Current Report on Form 8-K filed on November 23, 2016 (portions of this exhibit have been omitted by redacting a portion of the text (indicated by asterisks in the text) and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment)
10.16†
Exterran Holdings, Inc. (now Archrock, Inc.) 2013 Stock Incentive Plan, incorporated by reference to Annex A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 19, 2013
10.17†
First Amendment to the Exterran Holdings, Inc. (now Archrock, Inc.) 2013 Stock Incentive Plan, incorporated by reference to Exhibit 10.13 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
10.18†
Exterran Holdings, Inc. (now Archrock, Inc.) Amended and Restated 2007 Stock Incentive Plan, incorporated by reference to Annex B to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 26, 2009
10.19†
Amendment No. 1 to Exterran Holdings, Inc. (now Archrock, Inc.) Amended and Restated 2007 Stock Incentive Plan, incorporated by reference to Annex A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 26, 2009
10.20†
Amendment No. 2 to Exterran Holdings, Inc. (now Archrock, Inc.) Amended and Restated 2007 Stock Incentive Plan, incorporated by reference to Exhibit 10.10 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009
10.21†
Amendment No. 3 to the Exterran Holdings, Inc. (now Archrock, Inc.) Amended and Restated 2007 Stock Incentive Plan, incorporated by reference to Annex A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 29, 2010
10.22†
Amendment No. 4 to the Exterran Holdings, Inc. (now Archrock, Inc.) Amended and Restated 2007 Stock Incentive Plan, incorporated by reference to Annex A to the Registrant’s Definitive Proxy Statement on Schedule 14A, filed March 29, 2011
62
Table of Contents
Exhibit No.
Description
10.23†
Amendment No. 5 to the Exterran Holdings, Inc. (now Archrock, Inc.) Amended and Restated 2007 Stock Incentive Plan, incorporated by reference to Exhibit 10.14 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
10.24†
Exterran Holdings, Inc. 2011 (now Archrock, Inc.) Employment Inducement Long-Term Equity Plan, incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-8, filed November 4, 2011
10.25†
Exterran Holdings, Inc. (now Archrock, Inc.) Directors’ Stock and Deferral Plan, incorporated by reference to Exhibit 10.16 of the Registrant’s Current Report on Form 8-K filed on August 23, 2007
10.26†
First Amendment to Exterran Holdings, Inc. (now Archrock, Inc.) Directors’ Stock and Deferral Plan, incorporated by reference to Exhibit 10.22 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008
10.27†
Second Amendment to Exterran Holdings, Inc. (now Archrock, Inc.) Directors’ Stock and Deferral Plan, incorporated by reference to Exhibit 10.16 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
10.28†
Exterran Holdings, Inc. (now Archrock, Inc.) Employee Stock Purchase Plan, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on August 23, 2007
10.29†
Amendment No. 1 to the Exterran Holdings, Inc. (now Archrock, Inc.) Employee Stock Purchase Plan, incorporated by reference to Annex D to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 29, 2011
10.30†
Amendment No. 2 to the Exterran Holdings, Inc. (now Archrock, Inc.) Employee Stock Purchase Plan, incorporated by reference to Annex C to the Registrant’s Definitive Proxy Statement on Schedule 14A, filed on March 29, 2011
10.31†
Amendment No. 3 to the Exterran Holdings, Inc. (now Archrock, Inc.) Employee Stock Purchase Plan, incorporated by reference to Exhibit 10.15 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
10.32†
Archrock Deferred Compensation Plan, incorporated by reference to Exhibit 10.17 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
10.33†
Exterran (now Archrock, Inc.) Employees’ Supplemental Savings Plan, incorporated by reference to Exhibit 10.30 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007
10.34†
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice for Time-Vested Incentive Stock Option, incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009
10.35†
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice for Time-Vested Non-Qualified Stock Option, incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009
10.36†
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice for Time-Vested Stock Option for Officers, incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010
10.37†
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice for Time-Vested Non-Qualified Stock Option, incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010
10.38†
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice for Time-Vested Stock Option for Officers, incorporated by reference to Exhibit 10.63 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010
10.39†
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice for Time-Vested Non-Qualified Stock Option, incorporated by reference to Exhibit 10.64 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010
10.40†
Form of Indemnification Agreement, incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed on August 23, 2007
10.41†
Form of Amendment to Indemnification Agreement, incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016
63
Table of Contents
Exhibit No.
Description
10.42†
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice and Agreement for Time-Vested Incentive Stock Option for Officers, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 10, 2014
10.43†
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice and Agreement for Time-Vested Non-Qualified Stock Option, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 10, 2014
10.44†
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice and Agreement for Time-Vested Restricted Stock, incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on March 10, 2014
10.45†
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice and Agreement for Time-Vested Cash-Settled Restricted Stock Units, incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on March 10, 2014
10.46†
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice and Agreement for Time-Vested Stock-Settled Restricted Stock Units, incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed on March 10, 2014
10.47†
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice and Agreement for Performance Units, incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K filed on March 10, 2014
10.48†
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice and Agreement for Common Stock Award for Non-Employee Directors, incorporated by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K filed on March 10, 2014
10.49†
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice and Agreement for Performance Units incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 25, 2015
10.50†
Summary of Donna A. Henderson Compensation Arrangement, incorporated by reference to Exhibit 10.50 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015
10.51†
Summary of Jason Ingersoll Compensation Arrangement, incorporated by reference to Exhibit 10.51 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015
10.52†
Form of Compensation Letter applicable to Messrs. Childers, Miller, Rice and Wayne, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 4, 2016.
10.53†
Form of Indemnification Agreement, incorporated by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
10.54†
Form of Employment Letter applicable to Messrs. Childers, Miller, Rice, Wayne and Ingersoll, incorporated by reference to Exhibit 10.8 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
10.55†
Form of Severance Benefit Agreement applicable to Messrs. Childers, Miller, Rice, Wayne and Ingersoll, incorporated by reference to Exhibit 10.9 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
10.56†
Form of Change of Control Agreement applicable to Messrs. Childers, Miller, Rice, Wayne and Ingersoll, incorporated by reference to Exhibit 10.10 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
10.57†
Form of Award Notice and Agreement for Restricted Stock pursuant to the 2013 Stock Incentive Plan, incorporated by reference to Exhibit 10.11 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
10.58†
Form of Award Notice and Agreement for Common Stock Award for Non-Employee Directors pursuant to the 2013 Stock Incentive Plan, incorporated by reference to Exhibit 10.12 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
10.59†
Form of Archrock, Inc. Award Notice and Agreement for Performance Units, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 24, 2016
10.60†
Form of Archrock, Inc. Award Notice and Agreement for Time-Vested Restricted Stock, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 24, 2016
64
Table of Contents
Exhibit No.
Description
10.61†
Form of Archrock, Inc. Award Notice and Agreement for Time-Vested Stock-Settled Restricted Stock Units, incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on February 24, 2016
10.62†
Form of Archrock, Inc. Award Notice and Agreement for Common Stock Award for Non-Employee Directors, incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on February 24, 2016
10.63
Employee Matters Agreement, dated as of November 3, 2015, by and between Exterran Holdings, Inc. (now Archrock, Inc.) and Exterran Corporation, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
10.64
Tax Matters Agreement, dated as of November 3, 2015, by and between Exterran Holdings, Inc. (now Archrock, Inc.) and Exterran Corporation, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
10.65
Transition Services Agreement, dated as of November 3, 2015, by and between Exterran Holdings, Inc. (now Archrock, Inc.) and Exterran Corporation, incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
10.66
Supply Agreement, dated as of November 3, 2015, by and among Archrock Services, L.P., EXLP Operating LLC and Exterran Energy Solutions, L.P., incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
10.67†
Form of Archrock, Inc. Award Notice and Agreement for Performance Units, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 23, 2017
10.68†
Form of Archrock, Inc. Award Notice and Agreement for Restricted Stock for Non-Employee Directors, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 23, 2017
10.69†
Archrock, Inc. 2017 Employee Stock Purchase Plan, incorporated by reference to Annex A to Archrock’s Definitive Proxy Statement filed March 16, 2017
10.70
Sixth Amendment and Consent to Credit Agreement and Second Amendment to Guaranty and Collateral Agreement, dated as of March 30, 2017, by and among Archrock Services, L.P., Archrock, Inc., the Guarantors party thereto, the Lenders party thereto and Wells Fargo Bank, National Association, as administrative agent for the Lenders incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017
10.71
Consulting Agreement between Archrock, Inc. and Donald C. Wayne dated May 11, 2017 incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017
10.72†
Form of Amendment to Severance Benefit Agreement incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017
10.73†
Form of Second Amendment to Severance Benefit Agreement
10.74†
Form of Archrock, Inc. Award Notice and Agreement for Performance Units (Cash-Settled), incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 21, 2018
10.75†
Form of Archrock, Inc. Award Notice and Agreement for Performance Units (Stock-Settled), incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 21, 2018
10.76†
Form of Archrock, Inc. Award Notice and Agreement for Restricted Stock Units, incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on February 21, 2018
10.77†
Form of Letter Agreement Amending the Award Notice and Agreement for 2017 Performance Units, incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on February 21, 2018
10.78†
Form of Second Amendment to Severance Benefit Agreement, incorporated by reference to Exhibit 10.73 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2017
10.79†
Form of Letter Agreement, dated as of March 19, 2018, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 21, 2018
65
Table of Contents
Exhibit No.
Description
10.80
Amendment No. 1 to Credit Agreement, dated as of February 23, 2018, by and among Archrock Partners, L.P., the other Loan Parties thereto, the Lenders thereto, and JPMorgan Chase Bank, N.A., as the Administrative Agent, incorporated by reference to Exhibit 10.1 to the Partnership’s Current Report on Form 8-K filed on February 28, 2018.
10.81
Omnibus Joinder Agreement, dated as of April 26, 2018, by and among Archrock, Inc., Archrock Services, L.P., AROC Corp., AROC Services GP LLC, AROC Services LP LLC, Archrock Services Leasing LLC, Archrock GP LP LLC, and Archrock MLP LP LLC and acknowledged and accepted by JPMorgan Chase Bank, N.A., as the Administrative Agent, incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed on April 26, 2018
10.82
Amendment and Supplement to Pledge and Security Agreement dated as of April 26, 2018, by and among Archrock Partners Operating LLC, Archrock Partners, L.P., Archrock Partners Finance Corp., Archrock Partners Leasing LLC, Archrock, Inc., Archrock Services, L.P., AROC Corp., AROC Services GP LLC, AROC Services LP LLC, Archrock Services Leasing LLC, Archrock GP LP LLC, Archrock MLP LP LLC and JPMorgan Chase Bank, N.A., as the Administrative Agent, incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K filed on April 26, 2018
10.83†
Form of Employment Letter applicable to Mr. Douglas S. Aron, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on July 12, 2018
10.84†
Form of Change of Control Agreement applicable to Mr. Douglas S. Aron, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on July 12, 2018
10.85†
Form of Archrock, Inc. Award Notice and Agreement for Restricted Stock, incorporated by reference to Exhibit 10.85 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2018
10.86†
Form of Archrock, Inc. Award Notice and Agreement for Restricted Stock for Non-Employee Directors, incorporated by reference to Exhibit 10.86 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2018
10.87†
Form of Archrock, Inc. Award Notice and Agreement for Performance Units (Cash-Settled), incorporated by reference to Exhibit 10.87 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2018
10.88†
Form of Archrock, Inc. Award Notice and Agreement for Performance Units (Stock-Settled), incorporated by reference to Exhibit 10.88 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2018
10.89
Purchase Agreement, dated as of March 7, 2019, by and among Archrock Partners, L.P., Archrock Partners Finance Corp., Archrock, Inc., the other guarantors party thereto and J.P. Morgan Securities LLC, as representative of the initial purchasers named therein, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 8, 2019
10.90
Omnibus Joinder Agreement, dated as of March 21, 2019, by and among Archrock GP LLC, Archrock Partners Corp., Archrock General Partner, L.P. and JPMorgan Chase Bank, N.A., incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 21, 2019
10.91
Board Representation Agreement, dated as of August 1, 2019, by and between Archrock, Inc. and JDH Capital Holdings, L.P., incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on August 1, 2019
10.92
Registration Rights Agreement, dated as of August 1, 2019, by and between Archrock, Inc. and JDH Capital Holdings, L.P., incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed on August 1, 2019
10.93
Amendment No. 2 to Credit Agreement, dated as of November 8, 2019, by and among Archrock, Inc., Archrock Partners Operating LLC, Archrock Services, L.P., the other Loan Parties thereto, the Lenders thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on November 12, 2019
66
Table of Contents
Exhibit No.
Description
10.94
Purchase Agreement, dated as of December 16, 2019, by and among Archrock Partners, L.P., Archrock Partners Finance Corp., Archrock, Inc., the other guarantors party thereto and RBC Capital Markets, LLC, as representative of the initial purchasers named therein, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 17, 2019
10.95
Separation Agreement, dated effective as of January 31, 2020 between Archrock, Inc. and Sean K. Clawges, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on February 11, 2020
10.96†
Form of Compensation Letter applicable to Messrs. Childers, Aron, Ingersoll and Thode and Mme. Hildebrandt, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on April 30, 2020
10.97
Purchase Agreement, dated as of December 14, 2020, by and among Archrock Partners, L.P., Archrock Partners Finance Corp., Archrock, Inc., the other guarantors party thereto and RBC Capital Markets, LLC, as representative of the initial purchasers named therein, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on December 15, 2020
10.98
Amendment No. 3 to Credit Agreement, dated as of February 22, 2021, by and among Archrock Inc., Archrock Partners Operating LLC, Archrock Services, L.P., the other Loan Parties thereto, the Lenders thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on February 23, 2021
10.99†*
Form of Letter Agreement
10.100†*
Form of Archrock, Inc. Award Notice and Agreement for Restricted Stock
10.101†*
Form of Archrock, Inc. Award Notice and Agreement for Restricted Stock for Non-Employee Directors
10.102†*
Form of Archrock, Inc. Award Notice and Agreement for Restricted Stock Units for Non-Employee Directors
10.103†*
Form of Archrock, Inc. Award Notice and Agreement for Performance Units (Cash-Settled)
10.104†*
Form of Archrock, Inc. Award Notice and Agreement for Performance Units (Stock-Settled)
21.1*
List of Subsidiaries of Archrock, Inc.
23.1*
Consent of Deloitte & Touche LLP
31.1*
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.1*
Interactive data files pursuant to Rule 405 of Regulation S-T
104.1*
Cover page interactive data files pursuant to Rule 406 of Regulation S-T
†
Management contract or compensatory plan or arrangement.
*
Filed herewith.
**
Furnished, not filed.
67
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ D. BRADLEY CHILDERS
D. Bradley Childers
President and Chief Executive Officer
February 23, 2021
68
Table of Contents
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints D. Bradley Childers, Douglas S. Aron, Donna A. Henderson and Stephanie C. Hildebrandt, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done as fully to all said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 23, 2021.
Signature
Title
/s/ D. BRADLEY CHILDERS
President, Chief Executive Officer and Director
D. Bradley Childers
(Principal Executive Officer)
/s/ DOUGLAS S. ARON
Senior Vice President and Chief Financial Officer
Douglas S. Aron
(Principal Financial Officer)
/s/ DONNA A. HENDERSON
Vice President and Chief Accounting Officer
Donna A. Henderson
(Principal Accounting Officer)
/s/ ANNE-MARIE N. AINSWORTH
Director
Anne-Marie N. Ainsworth
/s/ GORDON T. HALL
Director
Gordon T. Hall
/s/ FRANCES POWELL HAWES
Director
Frances Powell Hawes
/s/ J.W.G. HONEYBOURNE
Director
J.W.G. Honeybourne
/s/ JAMES H. LYTAL
Director
James H. Lytal
/s/ LEONARD W. MALLETT
Director
Leonard W. Mallett
/s/ JASON C. REBROOK
Director
Jason C. Rebrook
/s/ EDMUND P. SEGNER, III
Director
Edmund P. Segner, III
69
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Archrock, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Archrock, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2021 expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relate.
Long-Lived Asset Impairment - Refer to Note 18 to the financial statements .
Critical Audit Matter Description
Management’s evaluation of whether to retire compressor units from its active fleet takes into consideration the future deployment of the units that were not of the type, configuration, condition, make, or model that are cost efficient to maintain or operate. Once a compressor unit is retired from the active fleet, it is tested for impairment. As such, the timing of the identification of compressor units for removal could have a significant impact on the amount of any impairment charge. During the year ended December 31, 2020, the Company retired 730 units from the active fleet resulting in an
F-1
Table of Contents
asset impairment charge of $77.6 million. The determination of impairment requires management to make significant estimates and assumptions related to the timing of the identification of compressor units for removal. Changes in these assumptions could have a significant impact on the amount of impairment charged.
Auditing the decisions on when compressor units are retired from the active fleet required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s assumptions.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s determination of whether to retire compressor unit from the Company’s active fleet included the following, among others:
● We tested the operating effectiveness of internal controls over long-lived asset impairment process, including those over the identification of units to be retired and assessed for impairment, which includes the type, configuration, condition, make, or model that are cost efficient to maintain or operate.
● We tested the completeness and accuracy of the compressor units identified for retirement by performing the following procedures:
- Comparing the final listing of retired compressor units to the list evaluated and approved by management.
- For a sample of compressor units, determining whether those units were (1) properly segregated from the active fleet, (2) identified appropriately in the system, and (3) no longer operating.
● We evaluated the reasonableness of management’s identification of the compressor units for removal, including assessments of type, configuration, condition, make, or model that are cost efficient to maintain or operate, by performing the following procedures:
- Comparing the rationale for compression units identified with historical rationales made for compression units of a similar type, configuration, make, or model.
- For a sample of compression units not retired, making inquiries of management and others within the Company with knowledge of the type, configuration, condition, make, or model and operating costs of the specific compressor units to identify if any units not retired exhibit characteristics indicating that they should be retired.
- Comparing the compression units identified to internal communications to management and the Board of Directors.
- Reading available peer company data and other external sources for information supporting or contradicting management’s conclusions.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 22, 2021
We have served as the Company’s auditor since 2007.
F-2
Table of Contents
ARCHROCK, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share amounts)
December 31,
2020
2019
Assets
Current assets:
Cash and cash equivalents
$
1,097
$
3,685
Accounts receivable, trade, net of allowance of $ 3,370 and $ 2,210 , respectively
104,425
144,865
Inventory
63,670
74,467
Other current assets
12,819
9,186
Total current assets
182,011
232,203
Property, plant and equipment, net
2,389,674
2,559,398
Operating lease ROU assets
19,236
17,901
Goodwill
—
100,598
Intangible assets, net
61,531
77,471
Contract costs, net
29,216
42,927
Deferred tax assets
56,934
36,642
Other assets
30,084
29,934
Noncurrent assets associated with discontinued operations
11,036
12,901
Total assets
$
2,779,722
$
3,109,975
Liabilities and Equity
Current liabilities:
Accounts payable, trade
$
30,819
$
60,215
Accrued liabilities
76,993
67,845
Deferred revenue
3,880
10,683
Total current liabilities
111,692
138,743
Long-term debt
1,688,867
1,842,549
Operating lease liabilities
16,925
16,094
Deferred tax liabilities
725
1,289
Other liabilities
18,088
16,829
Noncurrent liabilities associated with discontinued operations
7,868
8,508
Total liabilities
1,844,165
2,024,012
Commitments and contingencies (Note 26)
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, 160,014,960 and 158,636,918 shares issued, respectively
1,600
1,587
Additional paid-in capital
3,424,624
3,412,509
Accumulated other comprehensive loss
( 5,006 )
( 1,387 )
Accumulated deficit
( 2,401,988 )
( 2,244,877 )
Treasury stock: 7,052,769 and 6,702,602 common shares, at cost, respectively
( 83,673 )
( 81,869 )
Total equity
935,557
1,085,963
Total liabilities and equity
$
2,779,722
$
3,109,975
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
ARCHROCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31,
2020
2019
2018
Revenue:
Contract operations
$
738,918
$
771,539
$
672,536
Aftermarket services
136,052
193,946
231,905
Total revenue
874,970
965,485
904,441
Cost of sales (excluding depreciation and amortization):
Contract operations
261,087
297,260
273,013
Aftermarket services
116,106
158,978
191,354
Total cost of sales (excluding depreciation and amortization)
377,193
456,238
464,367
Selling, general and administrative
105,100
117,727
101,563
Depreciation and amortization
193,138
188,084
174,946
Long-lived and other asset impairment
79,556
44,663
28,127
Goodwill impairment
99,830
—
—
Restatement and other charges
—
445
19
Restructuring charges
8,450
—
—
Interest expense
105,716
104,681
93,328
Debt extinguishment loss
3,971
3,653
2,450
Transaction-related costs
—
8,213
10,162
Gain on sale of assets, net
( 10,643 )
( 16,016 )
( 5,674 )
Other income, net
( 1,359 )
( 661 )
( 157 )
Income (loss) before income taxes
( 85,982 )
58,458
35,310
Provision for (benefit from) income taxes
( 17,537 )
( 39,145 )
6,150
Income (loss) from continuing operations
( 68,445 )
97,603
29,160
Loss from discontinued operations, net of tax
—
( 273 )
—
Net income (loss)
( 68,445 )
97,330
29,160
Less: Net income attributable to noncontrolling interest
—
—
( 8,097 )
Net income (loss) attributable to Archrock stockholders
$
( 68,445 )
$
97,330
$
21,063
Basic and diluted net income (loss) per common share attributable to Archrock common stockholders
$
( 0.46 )
$
0.70
$
0.19
Weighted average common shares outstanding:
Basic
150,828
137,492
109,305
Diluted
150,828
137,528
109,421
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
ARCHROCK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year Ended December 31,
2020
2019
2018
Net income (loss)
$
( 68,445 )
$
97,330
$
29,160
Other comprehensive income (loss), net of tax:
Interest rate swap gain (loss), net of reclassifications to earnings
( 3,619 )
( 7,160 )
2,681
Amortization of terminated interest rate swaps
—
—
230
Merger-related adjustments
—
—
5,670
Total other comprehensive income (loss), net of tax
( 3,619 )
( 7,160 )
8,581
Comprehensive income (loss)
( 72,064 )
90,170
37,741
Less: Comprehensive income attributable to noncontrolling interest
—
—
( 12,360 )
Comprehensive income (loss) attributable to Archrock stockholders
$
( 72,064 )
$
90,170
$
25,381
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
ARCHROCK, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share data)
Archrock Stockholders
Accumulated
Common
Additional
Other
Treasury
Stock
Paid-in
Comprehensive
Accumulated
Stock
Noncontrolling
Amount
Shares
Capital
Income (Loss)
Deficit
Amount
Shares
Interest
Total
Balance at December 31, 2017
$
769
76,880,862
$
3,093,058
$
1,197
$
( 2,241,243 )
$
( 76,732 )
( 5,930,380 )
$
( 41,431 )
$
735,618
Treasury stock purchased
( 1,759 )
( 167,382 )
( 1,759 )
Cash dividends ($ 0.504 per common share)
( 58,288 )
( 58,288 )
Shares issued in ESPP
1
93,617
802
803
Stock-based compensation, net of forfeitures
10
960,028
7,192
( 141,121 )
( 64 )
7,138
Stock options exercised
2
218,997
1,341
( 1,371 )
( 142,722 )
( 28 )
Contribution from Exterran Corporation
18,744
18,744
Cash distribution to noncontrolling unitholders of the Partnership
( 11,766 )
( 11,766 )
Impact of adoption of ASC 606 Revenue
14,666
14,666
Impact of adoption of ASU 2017-12
383
383
Impact of adoption of ASU 2018-02
258
( 258 )
—
Merger-related adjustments
576
57,634,005
56,845
40,901
98,322
Comprehensive income
Net income
21,063
8,097
29,160
Interest rate swap gain (loss), net of reclassifications to earnings
( 1,582 )
4,263
2,681
Amortization of terminated interest rate swaps
230
230
Merger-related adjustments
5,670
5,670
Balance at December 31, 2018
$
1,358
135,787,509
$
3,177,982
$
5,773
$
( 2,263,677 )
$
( 79,862 )
( 6,381,605 )
$
—
$
841,574
Treasury stock purchased
( 2,007 )
( 212,080 )
( 2,007 )
Cash dividends ($ 0.554 per common share)
( 78,530 )
( 78,530 )
Shares issued in ESPP
1
87,933
770
771
Stock-based compensation, net of forfeitures
11
1,104,793
8,094
( 108,917 )
8,105
Shares issued for Elite Acquisition
217
21,656,683
225,663
225,880
Comprehensive income
Net income
97,330
97,330
Interest rate swap loss, net of reclassifications to earnings
( 7,160 )
( 7,160 )
Balance at December 31, 2019
$
1,587
158,636,918
$
3,412,509
$
( 1,387 )
$
( 2,244,877 )
$
( 81,869 )
( 6,702,602 )
$
—
$
1,085,963
Treasury stock purchased
( 1,804 )
( 236,752 )
( 1,804 )
Cash dividends ($ 0.580 per common share)
( 88,832 )
( 88,832 )
Shares issued in ESPP
2
171,563
681
683
Stock-based compensation, net of forfeitures
11
1,206,479
10,756
( 113,415 )
10,767
Contribution from Exterran Corporation
678
678
Impact of ASU 2016-13 adoption
166
166
Comprehensive loss
Net loss
( 68,445 )
( 68,445 )
Interest rate swap loss, net of reclassifications to earnings
( 3,619 )
( 3,619 )
Balance at December 31, 2020
$
1,600
160,014,960
$
3,424,624
$
( 5,006 )
$
( 2,401,988 )
$
( 83,673 )
( 7,052,769 )
$
—
$
935,557
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
ARCHROCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2020
2019
2018
Cash flows from operating activities:
Net income (loss)
$
( 68,445 )
$
97,330
$
29,160
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Loss from discontinued operations, net of tax
—
273
—
Depreciation and amortization
193,138
188,084
174,946
Long-lived and other asset impairment
79,556
44,663
28,127
Goodwill impairment
99,830
—
—
Inventory write-downs
1,349
944
1,614
Amortization of operating lease ROU assets
3,477
2,931
—
Amortization of deferred financing costs
5,554
6,211
6,113
Amortization of debt discount
187
910
1,410
Amortization of debt premium
( 84 )
—
—
Amortization of terminated interest rate swaps
—
—
291
Debt extinguishment loss
3,971
3,653
2,450
Interest rate swaps
3,178
( 1,071 )
( 131 )
Stock-based compensation expense
10,551
8,105
7,388
Non-cash restructuring charges
1,660
—
—
Provision for credit losses
3,525
2,567
1,677
(Gain) loss on sale of assets, net
1,832
( 16,016 )
( 5,674 )
Gain on sale of business
( 12,475 )
—
—
Deferred income tax provision (benefit)
( 17,764 )
( 39,597 )
5,238
Amortization of contract costs
26,629
23,330
14,939
Deferred revenue recognized in earnings
( 19,489 )
( 42,268 )
( 28,428 )
Change in assets and liabilities, net of acquisition:
Accounts receivable, trade
36,395
3,248
( 21,028 )
Inventory
3,972
6,036
4,210
Other assets
( 5,797 )
4,458
( 15,249 )
Contract costs, net
( 13,262 )
( 27,237 )
( 32,435 )
Accounts payable and other liabilities
( 15,089 )
( 12,728 )
14,964
Deferred revenue
12,732
36,578
36,571
Other
147
12
( 206 )
Net cash provided by continuing operations
335,278
290,416
225,947
Net cash used in discontinued operations
—
( 269 )
—
Net cash provided by operating activities
335,278
290,147
225,947
Cash flows from investing activities:
Capital expenditures
( 140,302 )
( 385,198 )
( 319,102 )
Proceeds from sale of business
33,651
—
—
Proceeds from sale of property, plant and equipment and other assets
18,911
80,961
33,927
Proceeds from insurance and other settlements
2,709
3,696
252
Cash paid in Elite Acquisition
—
( 214,019 )
—
Net cash used in investing activities
( 85,031 )
( 514,560 )
( 284,923 )
Cash flows from financing activities:
Borrowings of long-term debt
1,049,000
2,395,250
714,830
Repayments of long-term debt
( 1,204,375 )
( 2,071,750 )
( 605,636 )
Payments for debt issuance costs
( 5,269 )
( 22,426 )
( 3,332 )
Proceeds from (payments for) settlement of interest rate swaps that include financing elements
( 2,916 )
1,180
190
F-7
Table of Contents
Dividends paid to Archrock stockholders
( 88,832 )
( 78,530 )
( 58,288 )
Distributions paid to noncontrolling partners in the Partnership
—
—
( 11,766 )
Proceeds from stock options exercised
—
—
264
Proceeds from stock issued under ESPP
683
771
803
Purchases of treasury stock
( 1,804 )
( 2,007 )
( 1,759 )
Contribution from Exterran Corporation
678
—
18,744
Net cash provided by (used in) financing activities
( 252,835 )
222,488
54,050
Net decrease in cash and cash equivalents
( 2,588 )
( 1,925 )
( 4,926 )
Cash and cash equivalents, beginning of period
3,685
5,610
10,536
Cash and cash equivalents, end of period
$
1,097
$
3,685
$
5,610
Supplemental disclosure of cash flow information:
Interest paid
$
( 99,797 )
$
( 97,451 )
$
( 86,758 )
Income taxes refunded (paid), net
( 94 )
1,973
2,131
Supplemental disclosure of non-cash investing and financing transactions:
Accrued capital expenditures
$
1,624
$
11,767
$
17,491
Non-cash consideration received in July 2020 Disposition
5,762
—
—
Issuance of Archrock common stock pursuant to Elite Acquisition, net of tax
—
225,880
—
Issuance of Archrock common stock pursuant to Merger, net of tax
—
—
57,421
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Table of Contents
ARCHROCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
We are an energy infrastructure company with a pure-play focus on midstream natural gas compression. We are the leading provider of natural gas compression services to customers in the oil and natural gas industry throughout the U.S. and a leading supplier of aftermarket services to customers that own compression equipment in the U.S. We operate in two business segments: contract operations and aftermarket services. Our 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.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
Our Financial Statements include Archrock and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation.
Our Financial Statements are prepared in accordance with GAAP and the rules and regulations of the SEC. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. Because of the inherent uncertainties in this process, actual future results could differ from those expected as of the reporting date. Management believes that the estimates and assumptions used are reasonable.
Significant Accounting Policies
Cash and Cash Equivalents
We consider all highly-liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Revenue Recognition
We recognize revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we are entitled to receive in exchange for those goods or services. Sales and usage-based taxes that are collected from the customer are excluded from revenue.
Contract Operations
Natural gas compression services. Natural gas compression services are generally satisfied over time, as the customer simultaneously receives and consumes the benefits provided by these services. Our performance obligation is a series in which the unit of service is one month, as the customer receives substantially the same benefit each month from the services regardless of the type of service activity performed, which may vary. If the transaction price is based on a fixed fee, revenue is recognized monthly on a straight-line basis over the period that we are providing services to the customer. Amounts invoiced to customers for costs associated with moving our compression assets to a customer site are also included in the transaction price and are amortized over the initial contract term. We do not consider the effects of the time value of money, as the expected time between the transfer of services and payment for such services is less than one year.
F-9
Table of Contents
Variable consideration exists if customers are billed at a lesser standby rate when a unit is not running. We recognize revenue for such variable consideration monthly, as the invoice corresponds directly to the value transferred to the customer based on our performance completed to date. The rate for standby service is lower to reflect the decrease in costs and effort required to provide standby service when a unit is not running.
Billable Maintenance Service . We also perform billable maintenance service on our natural gas compression equipment at the customer’s request on an as-needed basis. The performance obligation is satisfied and revenue is recognized at the agreed-upon transaction price at the point in time when service is complete and the customer has accepted the work performed and can obtain the remaining benefits of the service that the unit will provide.
Aftermarket Services
OTC Parts and Components Sales . For sales of OTC parts and components, the performance obligation is generally satisfied at the point in time when delivery takes place and the customer obtains control of the part or component. The transaction price is the fixed sales price for the part stated in the contract. Revenue is recognized upon delivery, as we have a present right to payment and the customer has legal title.
Maintenance, Overhaul and Reconfiguration Services . For our service activities, the performance obligation is satisfied over time, as the work performed enhances the customer-controlled asset and another entity would not have to substantially re-perform the work we completed if they were to fulfill the remaining performance obligation. The transaction price may be a fixed monthly service fee, a fixed quoted fee or entirely variable, calculated on a time and materials basis.
For service provided based on a fixed monthly fee, the performance obligation is a series in which the unit of service is one month. The customer receives substantially the same benefit each month from the service, regardless of the type of service activity performed, which may vary. As the progress towards satisfaction of the performance obligation is measured based on the passage of time, revenue is recognized monthly based on the fixed fee provided for in the contract.
For service provided based on a quoted fixed fee, progress towards satisfaction of the performance obligation is measured using an input method based on the actual amount of labor and material costs incurred. The amount of the transaction price recognized as revenue each reporting period is determined by multiplying the transaction price by the ratio of actual costs incurred to date to total estimated costs expected for the service. Significant judgment is involved in the estimation of the progress to completion. Any adjustments to the measure of the progress to completion is accounted for on a prospective basis. Changes to the scope of service is recognized as an adjustment to the transaction price in the period in which the change occurs.
Service provided based on time and materials are generally short-term in nature and labor rates and parts pricing is agreed upon prior to commencing the service. We apply an estimated gross margin percentage, which is fixed based on historical time and materials-based service, to actual costs incurred. We evaluate the estimated gross margin percentage at the end of each reporting period and adjust the transaction price as appropriate.
Contract Assets and Liabilities
We recognize a contract asset when we have the right to consideration in exchange for goods or services transferred to a customer when the right is conditioned on something other than the passage of time. We recognize a contract liability when we have an obligation to transfer goods or services to a customer for which we have already received consideration.
F-10
Table of Contents
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents and trade accounts receivable. Our temporary cash investments have a zero loss expectation because we maintain minimal balances in our cash investment accounts and have no history of loss. Trade accounts receivable are due from companies of varying size engaged principally in oil and natural gas activities throughout the U.S. We review the financial condition of customers prior to extending credit and generally do not obtain collateral for trade receivables. Payment terms are on a short-term basis and in accordance with industry practice. We consider this credit risk to be limited due to these companies’ financial resources, the nature of the products and services we provide and the terms of our customer agreements.
Due to the short-term nature of our trade receivables, we consider the amortized cost to be the same as the carrying amount of the receivable, excluding the allowance for credit losses. We recognize an allowance for credit losses when a receivable is recorded, even when the risk of loss is remote. We utilize an aging schedule to determine our allowance for credit losses, and measure expected credit losses on a collective (pool) basis when similar risk characteristics exist. We rely primarily on ratings assigned by external rating agencies and credit monitoring services to assess credit risk and aggregate customers first by low, medium or high risk asset pools, and then by delinquency status. We also consider the internal risk associated with geographic location and the services we provide to the customer when determining asset pools. If a customer does not share similar risk characteristics with other customers, we evaluate the customer’s outstanding trade receivables for expected credit losses on an individual basis. Trade receivables evaluated individually are not included in our collective assessment. Each reporting period, we reassess our customers’ risk profiles and determine the appropriate asset pool classification, or perform individual assessments of expected credit losses, based on the customers’ risk characteristics at the reporting date.
The contractual life of our trade receivables is primarily 30 days based on the payment terms specified in the contract. Contract operations services are generally billed monthly at the beginning of the month in which service is being provided. Aftermarket services billings typically occur when parts are delivered or service is completed. Loss rates are separately determined for each asset pool based on the length of time a trade receivable has been outstanding. We analyze two years of internal historical loss data, including the effects of prepayments, write-offs and subsequent recoveries, to determine our historical loss experience. Our historical loss information is a relevant data point for estimating credit losses, as the data closely aligns with trade receivables due from our customers. Ratings assigned by external rating agencies and credit monitoring services consider past performance and forecasts of future economic conditions in assessing credit risk. We routinely update our historical loss data to reflect our customers’ current risk profile, to ensure the historical data and loss rates are relevant to the pool of assets for which we are estimating expected credit losses.
At December 31, 2020, Chevron U.S.A. Inc. and Williams Partners accounted for 14 % and 10 % of our trade accounts receivable balance, respectively. No customer accounted for more than 10% of our trade accounts receivable balance at December 31, 2019. During the years ended December 31, 2020, 2019 and 2018, we recorded bad debt expense of $ 3.5 million, $ 2.6 million and $ 1.7 million, respectively. The following table summarizes the changes in our allowance for credit losses balance during the year ended December 31, 2020 (in thousands):
Balance at December 31, 2019
$
2,210
Impact of adoption of ASU 2016-13 on January 1, 2020
( 216 )
Provision for credit losses
3,525
Write-offs charged against allowance
( 2,149 )
Balance at December 31, 2020
$
3,370
Inventory
Inventory consists of parts used for maintenance of natural gas compression equipment. Inventory is stated at the lower of cost and net realizable value using the average cost method.
F-11
Table of Contents
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives as follows:
Compression equipment, facilities and other fleet assets
3 to 30 years
Buildings
20 to 35 years
Transportation and shop equipment
3 to 10 years
Computer hardware and software
3 to 5 years
Other
3 to 10 years
Major improvements that extend the useful life of an asset are capitalized and depreciated over the estimated useful life of the major improvement, up to seven years . Repairs and maintenance are expensed as incurred.
Long-Lived Assets
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. An impairment loss exists when estimated undiscounted cash flows expected from the use of the asset and its eventual disposition are less than its carrying amount. Impairment losses are recognized in the period in which the impairment occurs and represent the excess of the asset carrying value over its fair value. Identifiable intangibles are amortized over the estimated useful life of the asset.
Leases
As a result of our adoption of ASC 842 Leases on January 1, 2019, we recorded an operating lease ROU asset and an operating lease liability on our consolidated balance sheet. Under previous guidance, operating leases were not recorded to the balance sheet. We determine if an arrangement is a lease at inception and determine lease classification and recognize ROU assets and liabilities on the lease commencement date based on the present value of lease payments over the lease term. As the discount rate implicit in the lease is rarely readily determinable, we estimate our incremental borrowing rate using information available at commencement date in determining the present value of the lease payments. The lease term includes options to extend when we are reasonably certain to exercise the option. Short-term leases, those with an initial term of 12 months or less, are not recorded on the balance sheet. Variable costs such as our proportionate share of actual costs for utilities, common area maintenance, property taxes and insurance are not included in the lease liability and are recognized in the period in which they are incurred. Operating lease expense for lease payments is recognized on a straight-line basis over the term of the lease.
Our facility leases, of which we are the lessee, contain lease and nonlease components, which we have elected to account for as a single lease component, as the nonlease components are not significant to the total consideration of the contract and separating the nonlease component would have no effect on lease classification. As it relates to our contract operations service agreements in which we are a lessor, the services nonlease component is predominant over the compression package lease component and therefore recognition of these agreements will continue to follow the ASC 606 Revenue guidance. Under previous guidance, no separation of lease and nonlease components is required, for either lessee or lessor.
Goodwill
The goodwill acquired in connection with the Elite Acquisition represented the excess of consideration transferred over the fair value of the assets and liabilities acquired. We review the carrying amount of our goodwill in the fourth quarter of every year, or whenever indicators of potential impairment exist, to determine if the carrying amount of a reporting unit exceeds its fair value, including the applicable goodwill. We perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is impaired. If the fair value is more likely than not impaired, we perform a quantitative impairment test to identify impairment and measure the amount of impairment loss to be recognized, if any.
F-12
Table of Contents
Our qualitative assessment includes consideration of various events and circumstances and their potential impact to a reporting unit’s fair value, including macroeconomic and industry conditions such as a deterioration in our operating environment and limitations on access to capital and other developments in the equity and credit markets, cost factors that could have a negative effect on earnings and cash flows, relevant entity-specific and reporting unit-specific events and overall financial performance such as declining earnings or cash flows or a sustained decrease in share price.
The quantitative impairment test (i) allocates goodwill and our other assets and liabilities to our reporting units, contract operations and aftermarket services, (ii) calculates the fair value of the reporting units and (iii) determines the impairment loss, if any, as the amount by which the carrying amount of the reporting unit exceeds its fair value (limited to the total amount of goodwill allocated to that reporting unit). All of the goodwill recognized in the Elite Acquisition was allocated to our contract operations reporting unit. The fair value of the contract operations reporting unit is calculated using the expected present value of future cash flows method. Significant estimates are made to determine future cash flows including future revenues, costs and capital requirements and the appropriate risk-adjusted discount rate by which to discount the estimated future cash flows.
In the first quarter of 2020, the global response to the COVID-19 pandemic significantly impacted our market capitalization and estimates of future revenues and cash flows, which triggered the need to perform a quantitative test of the fair value of our contract operations reporting unit as of March 31, 2020. The quantitative test determined that the carrying amount of our contract operations reporting unit exceeded its fair value and we recorded a full impairment loss on goodwill in the first quarter as a result.
Internal-Use Software
Certain of our contracts have been deemed to be hosting arrangements that are service contracts, including those related to the cloud migration of our ERP system and cloud services for our new mobile workforce, telematics and inventory management tools. Certain costs incurred for the implementation of a hosting arrangement that is a service contract are capitalized and amortized on a straight-line basis over the term of the respective contract. Amortization begins for each component of the hosting arrangement when the component becomes ready for its intended use. Capitalized implementation costs are presented in other assets, the same line item in our consolidated balance sheets that a prepayment of the fees for the associated hosting arrangement would be presented. Amortization expense of the capitalized implementation costs is presented in SG&A, the same line item in our consolidated statements of operations as the expense for fees for the associated hosting arrangement.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rate on deferred tax assets and liabilities is recognized in income in the period of the enactment date.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such a determination, we consider all available positive and negative evidence including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. If a valuation allowance was previously recorded and we subsequently determined we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax assets’ valuation allowance, which would reduce the provision for income taxes.
We record uncertain tax positions in accordance with the accounting standard on income taxes under a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
F-13
Table of Contents
Hedging and Use of Derivative Instruments
We use derivative instruments to manage our exposure to fluctuations in the variable interest rate of our Credit Facility and thereby minimize the risks and costs associated with financial activities. We do not use derivative instruments for trading or other speculative purposes. We record interest rate swaps on the balance sheet as either derivative assets or derivative liabilities measured at their fair value. The fair value of our derivatives is based on the income approach (discounted cash flow) using market observable inputs, including LIBOR forward curves. Changes in the fair value of the derivatives designated as cash flow hedges 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 consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions unless the derivative contract contains a significant financing element, in which case, the cash settlements for these derivatives are classified as cash flows from financing activities.
To qualify for hedge accounting treatment, we must formally document, designate and assess the effectiveness of the transactions. We perform quarterly qualitative prospective and retrospective hedge effectiveness assessments unless facts and circumstances related to the hedging relationships change such that we can no longer assert qualitatively that the cash flow hedge relationships were and continue to be highly effective. If the necessary correlation ceases to exist or if the anticipated transaction is no longer probable, we would discontinue hedge accounting and apply mark-to-market accounting. Amounts paid or received from interest rate swap agreements are recorded in interest expense and matched with the cash flows and interest expense of the debt being hedged, resulting in an adjustment to the effective interest rate.
3. Recent Accounting Developments
Accounting Standards Updates Implemented
Credit Losses
In June 2016, the FASB issued ASU 2016-13, which changes the impairment model for financial assets measured at amortized cost and certain other instruments, and requires entities to use a new current expected credit loss model that results in recognition of expected losses over the contractual life of an asset. We adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. The adoption resulted in a $ 0.2 million decrease in our allowance for credit losses and a corresponding pre-tax cumulative effect adjustment to retained earnings in our consolidated balance sheet at January 1, 2020. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
Fair Value Measurements
On January 1, 2020, we adopted ASU 2018-13, which amends the required fair value measurements disclosures related to valuation techniques and inputs used, uncertainty in measurement and changes in measurements applied. These amendments resulted in new, prospective disclosures of the range and weighted average of the significant unobservable inputs used to develop our Level 3 fair value measurements related to our idle and previously-culled compressors. The adoption of ASU 2018-13 had no impact on our consolidated financial statements.
Income Taxes
On January 1, 2020, we adopted ASU 2019-12, which simplifies the accounting for income taxes by, among other things, removing certain exceptions related to the incremental approach for intraperiod tax allocation, the year-to-date loss methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities on outside basis differences. ASU 2019-12 also clarifies other aspects of the accounting for income taxes in order to improve consistency of application. The adoption of ASU 2019-12 had no impact on our consolidated financial statements.
F-14
Table of Contents
Accounting Standards Updates Not Yet Implemented
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued as a result of reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. Entities may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. Modifications to our interest rate swap and Credit Facility agreements during the effective period of this amendment will be assessed and if the modifications meet the criteria for the optional expedients and exceptions, we intend to adopt ASU 2020-04 and apply the amendments as applicable.
4. Business Transactions
July 2020 Disposition
On July 9, 2020, we completed the sale of the turbocharger business included within our aftermarket services segment . In connection with the sale, we entered into a supply agreement to purchase a minimum amount of turbocharger goods and services over a two-year term. In addition to cash of $ 9.5 million received upon closing, an additional $ 3.0 million is due on the first anniversary of the closing date and $ 3.5 million will be received through the purchase of turbocharger goods and services under the supply agreement. During the year ended December 31, 2020, we received cash of $ 0.7 million under the supply agreement and recognized a gain on the sale of $ 9.3 million in gain on sale of assets, net in our consolidated statements of operations.
March 2020 Disposition
On March 1, 2020, we completed the sale of certain contract operations customer service agreements and approximately 200 compressors, comprising approximately 35,000 horsepower, used to provide compression services under those agreements as well as other assets used to support the operations. We allocated customer-related and contract-based intangible assets and goodwill based on a ratio of the horsepower sold relative to the total horsepower of the asset group. We recognized a gain on the sale of $ 3.2 million in gain on sale of assets, net in our consolidated statements of operations during the year ended December 31, 2020.
Elite Acquisition
On August 1, 2019, we completed the Elite Acquisition whereby we acquired from Elite Compression substantially all of its assets, including a fleet of predominantly large compressors comprising approximately 430,000 horsepower, vehicles, real property and inventory, and certain liabilities for aggregate consideration consisting of $ 214.0 million in cash and 21.7 million shares of common stock with an acquisition date fair value of $ 225.9 million. The cash portion of the acquisition was funded with borrowings on the Credit Facility.
F-15
Table of Contents
The Elite Acquisition was accounted for using the acquisition method, which requires, among other things, assets acquired and liabilities assumed to be recorded at their fair value on the acquisition date. The excess of the consideration transferred over those fair values is recorded as goodwill. The following table summarizes the purchase price allocation based on the estimated fair values of the acquired assets and liabilities as of the acquisition date (in thousands):
Accounts receivable
$
9,007
Inventory
7,987
Other current assets
608
Property, plant and equipment
286,158
Operating lease ROU assets
682
Goodwill
100,598
Intangible assets
40,237
Accounts payable, trade
( 2,079 )
Accrued liabilities
( 2,973 )
Operating lease liabilities
( 326 )
Purchase price
$
439,899
Our valuation methodology and significant inputs for fair value measurements are detailed by asset class below. The fair value measurements for property, plant and equipment and intangible assets are based on significant inputs that are not observable in the market and therefore represent Level 3 measurements.
Goodwill
The goodwill resulting from the acquisition was attributable to the expansion of our services in various regions in which we currently operate and was allocated to our contract operations segment. The goodwill had an indefinite life that was to be reviewed annually for impairment or more frequently if indicators of potential impairment existed. All of the goodwill recorded for this acquisition is expected to be deductible for U.S. federal income tax purposes. See Note 9 (“Goodwill”) for details on the 2020 impairment of our goodwill.
Property, Plant and Equipment
The property, plant and equipment is primarily comprised of compression equipment that will be depreciated on a straight-line basis over an estimated average remaining useful life of 15 years. The fair value of the property, plant and equipment was determined using the cost approach, whereby we estimated the replacement cost of the assets by evaluating recent purchases of similar assets or published data, and then adjusted replacement cost for physical deterioration and functional and economic obsolescence, as applicable.
Intangible Assets
The intangible assets consist of customer relationships that have an estimated useful life of 15 years. The amount of intangible assets and their associated useful life were determined based on the period over which the assets are expected to contribute directly or indirectly to our future cash flows. The fair value of the identifiable intangible assets was determined using the multi-period excess earnings method, which is a specific application of the discounted cash flow method, an income approach, whereby we estimated and then discounted the future cash flows of the intangible asset by adjusting overall business revenue for attrition, obsolescence, cost of sales, operating expenses, taxes and the required returns attributable to other contributory assets acquired. Significant estimates made in arriving at expected future cash flows included our expected customer attrition rate and the amount of earnings attributable to the assets. To discount the estimated future cash flows, we utilized a discount rate that was at a premium to our weighted average cost of capital to reflect the less liquid nature of the customer relationships relative to the tangible assets acquired.
F-16
Table of Contents
Unaudited Pro Forma Financial Information
Unaudited pro forma financial information for the years ended December 31, 2019 and 2018 was derived by adjusting our historical financial statements in order to give effect to the assets and liabilities acquired in the Elite Acquisition. The Elite Acquisition is presented in this unaudited pro forma financial information as though the acquisition occurred as of January 1, 2018, and reflects the following:
● the acquisition of substantially all of Elite Compression’s assets, including a compression fleet of approximately 430,000 horsepower, vehicles, real property and inventory, and certain liabilities;
● borrowings of $ 214.0 million under the Credit Facility for cash consideration exchanged in the acquisition; and
● the exclusion of $ 7.8 million of financial advisory, legal and other professional fees incurred related to the acquisition and recorded to transaction-related costs in our consolidated statements of operations during the year ended December 31, 2019.
The unaudited pro forma financial information below is presented (in thousands) for informational purposes only and is not necessarily indicative of our results of operations that would have occurred had the transaction been consummated at the beginning of the period presented, nor is it necessarily indicative of future results.
Year Ended December 31,
2019
2018
Revenue
$
1,009,763
$
977,929
Net income attributable to Archrock stockholders
106,521
24,566
The results of operations attributable to the assets and liabilities acquired in the Elite Acquisition have been included in our consolidated financial statements as part of our contract operations segment since the date of acquisition. Revenue attributable to the assets acquired from the date of acquisition, August 1, 2019, through December 31, 2019 was $ 33.2 million. We are unable to provide earnings attributable to the assets and liabilities acquired since the date of acquisition as we do not prepare full stand-alone earnings reports for those assets and liabilities.
Harvest Sale
On August 1, 2019, we completed an asset sale in which Harvest acquired from us approximately 80,000 active and idle compression horsepower, vehicles and parts inventory for cash consideration of $ 30.0 million. We recorded a $ 6.6 million gain on this sale to gain on sale of assets, net in our consolidated statements of operations during the year ended December 31, 2019. The assets were previously reported under our contract operations segment.
5. Discontinued Operations
Spin-off of Exterran Corporation
In 2015 we completed the Spin-off. In order to effect the Spin-off and govern our relationship with Exterran Corporation after the Spin-off, we entered into several agreements with Exterran Corporation, which include, but are not limited to, the separation and distribution agreement and the tax matters agreement.
The separation and distribution agreement specifies, among other things, our right to promptly receive payments from Exterran Corporation based on a notional amount corresponding to payments received by Exterran Corporation from PDVSA in respect of the sale of Exterran Corporation’s previously nationalized assets after such amounts are collected by Exterran Corporation. During the years ended December 31, 2020 and 2018, we received $ 0.7 million and $ 18.7 million, respectively, from Exterran Corporation pursuant to this term of the separation and distribution agreement. We entered into an assignment from Exterran Corporation in 2020 such that any future payments by PDVSA would be received directly by us.
F-17
Table of Contents
The tax matters agreement governs the respective rights, responsibilities and obligations of Exterran Corporation and us with respect to certain tax matters. As of December 31, 2020 and 2019, we had $ 7.9 million and $ 8.5 million, respectively, of unrecognized tax benefits (including interest and penalties) related to Exterran Corporation operations prior to the Spin-off recorded to noncurrent liabilities associated with discontinued operations in our consolidated balance sheets. We had an offsetting indemnification asset of $ 7.9 million and $ 8.5 million related to these unrecognized tax benefits recorded to noncurrent assets associated with discontinued operations as of December 31, 2020 and 2019, respectively.
The following table presents the balance sheet for our discontinued operations (in thousands):
December 31,
2020
2019
Other assets
$
7,868
$
8,508
Deferred tax assets
3,168
4,393
Total assets associated with discontinued operations
$
11,036
$
12,901
Deferred tax liabilities
$
7,868
$
8,508
Total liabilities associated with discontinued operations
$
7,868
$
8,508
The following table presents the statements of operations for our discontinued operations (in thousands):
Year Ended December 31,
2020
2019
2018
Other (income) expense, net
$
640
$
( 1,473 )
$
( 654 )
Provision for (benefit from) income taxes
( 640 )
1,746
654
Loss from discontinued operations, net of tax
$
—
$
( 273 )
$
—
6. Inventory
Inventory consisted of the following (in thousands):
December 31,
2020
2019
Parts and supplies
$
57,433
$
66,121
Work in progress
6,237
8,346
Inventory
$
63,670
$
74,467
During the years ended December 31, 2020, 2019 and 2018, we recorded write-downs to inventory of $ 1.3 million, $ 0.9 million and $ 1.6 million, respectively, for inventory considered to be excess, obsolete or carried at an amount in excess of net realizable value.
F-18
Table of Contents
7. Property, Plant and Equipment, net
Property, plant and equipment, net, consisted of the following (in thousands):
December 31,
2020
2019
Compression equipment, facilities and other fleet assets
$
3,439,432
$
3,653,930
Land and buildings
45,167
50,743
Transportation and shop equipment
106,868
116,057
Computer hardware and software
84,680
93,695
Other
14,457
15,308
Property, plant and equipment
3,690,604
3,929,733
Accumulated depreciation
( 1,300,930 )
( 1,370,335 )
Property, plant and equipment, net
$
2,389,674
$
2,559,398
Depreciation expense was $ 177.5 million, $ 172.8 million and $ 158.4 million during the years ended December 31, 2020, 2019 and 2018, respectively. Assets under construction of $ 17.6 million and $ 51.0 million at December 31, 2020 and 2019, respectively, were primarily included in compression equipment, facilities and other fleet assets .
8. Leases
We have operating leases and subleases for office space, temporary housing, storage and shops. Our leases have remaining lease terms of less than one year to approximately 10 years and most include options to extend the lease term, at our discretion, for an additional one to five years . We are not, however, reasonably certain that we will exercise any of the options to extend and as such, they have not been included in the remaining lease terms.
Balance sheet information related to our operating leases follows (in thousands):
December 31,
Classification
2020
2019
ROU assets
Operating lease ROU assets
$
19,236
$
17,901
Lease liabilities
Current
Accrued liabilities
$
3,564
$
3,037
Noncurrent
Operating lease liabilities
16,925
16,094
Total lease liabilities
$
20,489
$
19,131
The components of lease cost follow (in thousands):
Year Ended December 31,
2020
2019
Operating lease cost
$
4,508
$
3,966
Short-term lease cost
52
348
Variable lease cost
1,652
1,607
Total lease cost
$
6,212
$
5,921
F-19
Table of Contents
Cash flow and noncash information related to our operating leases follow (in thousands):
Year Ended December 31,
2020
2019
Operating cash flows - cash paid for amounts included in the measurement of operating lease liabilities
$
5,885
$
5,420
Operating lease ROU assets obtained in exchange for new lease liabilities
4,812
2,247
Other supplemental information related to our operating leases follows:
December 31,
2020
2019
Weighted average remaining lease term (in years)
7.9
8.2
Weighted average discount rate
4.8
%
5.3
%
Remaining maturities of lease liabilities as of December 31, 2020 were as follows (in thousands):
2021
$
4,126
2022
3,288
2023
2,933
2024
2,513
2025
2,213
Thereafter
9,766
Total lease payments
24,839
Less: Interest
( 4,350 )
Total lease liabilities
$
20,489
9. Goodwill
Our goodwill was recognized in connection with the Elite Acquisition and represents the excess of consideration transferred over the fair value of the assets and liabilities acquired. All of the goodwill was allocated to our contract operations reporting unit. We review the carrying amount of our goodwill in the fourth quarter of every year, or whenever indicators of potential impairment exist, to determine if the carrying amount of our contract operations reporting unit exceeds its fair value, including the goodwill. Beginning in the first quarter of 2020, the COVID-19 pandemic caused a significant deterioration in global macroeconomic conditions, including a collapse in the demand for oil coupled with an oversupply of oil, which commenced substantial spending cuts by our customers and a decline in production. This global response to the pandemic significantly impacted our market capitalization and estimates of future revenues and cash flows, which triggered the need to perform a quantitative test of the fair value of our contract operations reporting unit as of March 31, 2020. The quantitative test determined that the carrying amount of our contract operations reporting unit exceeded its fair value and we recorded a full impairment loss on goodwill in the first quarter as a result.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions, which have a significant impact on the fair value determined. We determine the fair value of our reporting unit using an equal weighting of both the expected present value of future cash flows and a market approach. The present value of future cash flows is estimated using our most recent forecast and the weighted average cost of capital. The market approach uses a market multiple on the earnings before interest expense, provision for income taxes and depreciation and amortization expense of comparable peer companies. Significant estimates for our reporting unit included in our impairment analysis are our cash flow forecasts, our estimate of the market’s weighted average cost of capital and market multiples.
F-20
Table of Contents
The following table presents the change in the carrying amount of goodwill during the year ended December 31, 2020 (in thousands):
Balance at December 31, 2019
$
100,598
Dispositions
( 768 )
Impairment loss
( 99,830 )
Balance at December 31, 2020
$
—
10. Intangible Assets, net
Intangible assets include customer relationships and contracts associated with various business and asset acquisitions. These acquired intangible assets were recorded at fair value determined as of the acquisition date and are being amortized over the period we expect to benefit from the assets. Intangible assets, net consisted of the following (in thousands):
December 31, 2020
December 31, 2019
Gross
Gross
Carrying
Accumulated
Carrying
Accumulated
Amount
Amortization
Amount
Amortization
Customer-related (10- 25 year life)
$
147,169
$
( 86,512 )
$
147,244
$
( 76,176 )
Contract-based ( 5 -7 year life)
37,730
( 36,856 )
37,773
( 31,370 )
Intangible assets
$
184,899
$
( 123,368 )
$
185,017
$
( 107,546 )
Amortization expense of these intangible assets totaled $ 15.6 million, $ 15.3 million and $ 16.5 million during the years ended December 31, 2020, 2019 and 2018, respectively.
Estimated future intangible assets amortization expense as of December 31, 2020 was as follows (in thousands):
2021
$
11,372
2022
9,171
2023
7,318
2024
6,158
2025
3,947
Thereafter
23,565
Total
$
61,531
11. Contract Costs
We capitalize incremental costs to obtain a contract with a customer if we expect to recover those costs. Capitalized costs include commissions paid to our sales force to obtain contract operations contracts. We expense commissions paid for sales of service contracts and OTC parts and components within our aftermarket services segment, as the amortization period is less than one year. We had contract costs of $ 3.2 million and $ 4.8 million associated with sales commissions recorded in our consolidated balance sheets at December 31, 2020 and 2019, respectively.
We capitalize costs incurred to fulfill a contract if those costs relate directly to a contract, enhance resources that we will use in satisfying performance obligations and if we expect to recover those costs. Capitalized costs incurred to fulfill our customer contracts include freight charges to transport compression assets before transferring services to the customer and mobilization activities associated with our contract operations services. Aftermarket services fulfillment costs are recognized based on the percentage-of-completion method applicable to the customer contract and do not typically result in the recognition of contract costs. We had contract costs of $ 26.0 million and $ 38.1 million associated with freight and mobilization recorded in our consolidated balance sheets at December 31, 2020 and 2019, respectively.
F-21
Table of Contents
Contract operations obtainment and fulfillment costs are amortized based on the transfer of service to which the assets relate, which is estimated to be 38 months based on average contract term, including anticipated renewals. We assess periodically whether the 38 -month estimate fairly represents the average contract term and adjust as appropriate. Contract costs associated with commissions are amortized to SG&A. Contract costs associated with freight and mobilization are amortized to cost of sales (excluding depreciation and amortization). During the years ended December 31, 2020, 2019 and 2018, we amortized $ 3.0 million, $ 2.6 million and $ 1.5 million, respectively, related to sales commissions and $ 23.6 million, $ 20.7 million and $ 13.4 million, respectively, related to freight and mobilization.
12. Hosting Arrangements
In the fourth quarter of 2018 we began a process and technology transformation project that will, among other things, upgrade or replace our existing ERP, supply chain and inventory management systems and expand the remote monitoring capabilities of our compression fleet. Included in this project are hosting arrangements that are service contracts related to the cloud migration of our ERP system and cloud services for our new mobile workforce, telematics and inventory management tools.
As of December 31, 2020 and 2019, we had $ 7.7 million and $ 5.5 million, respectively, of capitalized implementation costs related to our hosting arrangements that are service contracts included in other assets in our consolidated balance sheets. Accumulated amortization was $ 0.3 million at December 31, 2020. We recorded $ 0.3 million of amortization expense to SG&A in our consolidated statements of operations during the year ended December 31, 2020.
During the year ended December 31, 2020, we impaired $ 1.6 million of capitalized implementation costs related to the hosting arrangements of the mobile workforce component of our project due to the termination of the agreement, which was included in long-lived and other asset impairment in our consolidated statements of operations.
13. Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
December 31,
2020
2019
Accrued salaries and other benefits
$
16,332
$
19,300
Accrued income and other taxes
11,414
11,019
Accrued interest
22,693
16,462
Derivative liability - current
4,809
593
Other accrued liabilities
21,745
20,471
Accrued liabilities
$
76,993
$
67,845
F-22
Table of Contents
14. Long-Term Debt
Long-term debt consisted of the following (in thousands):
December 31,
2020
2019
Credit Facility
$
393,000
$
513,000
2028 Notes
800,000
500,000
Add: Debt premium, net of amortization
14,541
—
Less: Deferred financing costs, net of amortization
( 11,766 )
( 8,090 )
802,775
491,910
2027 Notes
500,000
500,000
Less: Deferred financing costs, net of amortization
( 6,908 )
( 7,999 )
493,092
492,001
2022 Notes
—
350,000
Less: Debt discount, net of amortization
—
( 2,046 )
Less: Deferred financing costs, net of amortization
—
( 2,316 )
—
345,638
Long-term debt
$
1,688,867
$
1,842,549
Credit Facility
As of December 31, 2020, there were $ 12.4 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.4 %. The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 2.7 % and 4.3 % at December 31, 2020 and 2019, respectively. As a result of the facility’s ratio requirements (see below), $ 444.1 million of the $ 844.6 million of undrawn capacity was available for additional borrowings as of December 31, 2020. As of December 31, 2020, we were in compliance with all covenants under the Credit Facility agreement.
Amendment No. 2
On November 8, 2019, we amended the Credit Facility to, among other things:
● extend the maturity date of the Credit Facility from March 30, 2022 to November 8, 2024, effective as of the execution of Amendment No. 2; and
● change the applicable margin for borrowings under the Credit Facility to those discussed in “Other Facility Terms” below.
We incurred $ 6.4 million in transaction costs related to Amendment No. 2, which were included in other assets in our consolidated balance sheet and are being amortized over the term of the Credit Facility.
Amendment No. 1
In February 2018, we amended the Credit Facility to, among other things:
● increase the maximum Total Debt to EBITDA ratios, as defined in the Credit Facility agreement (see below for the revised ratios), effective as of the execution of Amendment No. 1 in February 2018; and
● effective upon completion of the Merger in April 2018:
–
increase the aggregate revolving commitment from $ 1.1 billion to $ 1.25 billion;
F-23
Table of Contents
–
increase the amount available for the issuance of letters of credit from $ 25.0 million to $ 50.0 million; and
–
increase the basket sizes under certain covenants including covenants limiting our ability to make investments, incur debt, make restricted payments, incur liens and make asset dispositions.
We incurred $ 3.3 million in transaction costs related to Amendment No. 1, which were included in other assets in our consolidated balance sheet and are being amortized over the term of the Credit Facility.
Other Facility Terms
Subject to certain conditions, including the approval by the lenders, we are able to increase the aggregate commitments under the Credit Facility by up to an additional $ 250.0 million. Portions of the Credit Facility up to $ 50.0 million are available for the issuance of swing line loans.
The Credit Facility bears interest at a base rate or LIBOR, at our option, plus an applicable margin. Depending on our leverage ratio, the applicable margin varies (i) in the case of LIBOR loans, from 2.00 % to 2.75 % and (ii) in the case of base rate loans, from 1.00 % to 1.75 %. The base rate is the highest of (i) the prime rate announced by JPMorgan Chase Bank, (ii) the Federal Funds Effective Rate plus 0.50 % and (iii) one-month LIBOR plus 1.00 %.
Additionally, we are required to pay commitment fees based on the daily unused amount of the Credit Facility at a rate of 0.375 %. We incurred $ 2.0 million, $ 1.9 million and $ 2.1 million in commitment fees on the daily unused amount of our facilities during the years ended December 31, 2020, 2019 and 2018, respectively.
The Credit Facility borrowing base consists of eligible accounts receivable, inventory and compressors, the largest of which is compressors. Borrowings under the Credit Facility are secured by substantially all of our personal property assets and our Significant Domestic Subsidiaries (as defined in the Credit Facility agreement), including all of the membership interests of our Domestic Subsidiaries (as defined in the Credit Facility agreement).
The Credit Facility agreement contains various covenants including, but not limited to, restrictions on the use of proceeds from borrowings and limitations on our ability to incur additional indebtedness, engage in transactions with affiliates, merge or consolidate, sell assets, make certain investments and acquisitions, make loans, grant liens, repurchase equity and pay distributions. The Credit Facility agreement also contains various covenants requiring mandatory prepayments from the net cash proceeds of certain asset transfers.
As of December 31, 2020, the following consolidated financial ratios, as defined in our Credit Facility agreement, were required:
EBITDA to Interest Expense
2.5 to 1.0
Senior Secured Debt to EBITDA
3.5 to 1.0
Total Debt to EBITDA
January 1 through June 30, 2020
5.50 to 1.0
Thereafter (1)
5.25 to 1.0
(1) Subject to a temporary increase to 5.50 to 1.0 for any quarter during which an acquisition satisfying certain thresholds is completed and for the two quarters immediately following such quarter.
Former Credit Facility
In April 2018, in connection with the Merger, the Former Credit Facility was terminated. Upon termination, we repaid $ 63.2 million in borrowings and accrued and unpaid interest and fees outstanding. All commitments under the Former Credit Facility were terminated and the $ 15.4 million of letters of credit outstanding under the Former Credit Facility were converted to letters of credit under the Credit Facility. As a result of the termination, we recorded a debt extinguishment loss of $ 2.5 million. We were in compliance with all covenants under the Former Credit Facility through its closing.
F-24
Table of Contents
2028 Notes and 2027 Notes
On December 17, 2020, we completed a private offering of $ 300.0 million aggregate principal amount of 6.25 % senior notes due April 2028, which were issued pursuant to the indenture under which we completed a private offering of $ 500.0 million aggregate principal amount of 6.25 % senior notes in December 2019. The notes of the two offerings have identical terms and are treated as a single class of securities. The $ 300.0 million of notes were issued at 104.875 % of their face value and have an effective interest rate of 5.6 %. We received net proceeds of $ 309.9 million, after deducting issuance costs of $ 4.7 million, from our December 2020 offering and net proceeds of $ 491.8 million, after deducting issuance costs of $ 8.2 million, from our December 2019 offering.
In March 2019, we completed a private offering of $ 500.0 million aggregate principal amount of 6.875 % senior notes due April 2027 and received net proceeds of $ 491.2 million after deducting issuance costs of $ 8.8 million.
The net proceeds from the 2027 Notes and 2028 Notes were used to repay borrowings outstanding under our Credit Facility. Issuance costs related to the 2027 Notes and 2028 Notes are considered deferred financing costs, and together with the issue premium of the December 2020 offering of 2028 Notes, are recorded within long-term debt in our consolidated balance sheets and are being amortized to interest expense in our consolidated statements of operations over the terms of the notes.
The 2027 Notes and 2028 Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by us and all of our existing subsidiaries, other than Archrock Partners, L.P. and APLP Finance Corp., which are co-issuers of both offerings, and certain of our future subsidiaries. The 2027 Notes and 2028 Notes and the guarantees rank equally in right of payment with all of our and the guarantors’ existing and future senior indebtedness.
The 2027 Notes and 2028 Notes may be redeemed at any time, in whole or in part, at specified redemption prices and make-whole premiums, plus any accrued and unpaid interest.
2022 Notes
On April 1, 2020, the 2022 Notes were redeemed at 100 % of their $ 350.0 million aggregate principal amount plus accrued and unpaid interest of $ 10.5 million with borrowings under the Credit Facility. A debt extinguishment loss of $ 4.0 million related to the redemption was recognized during the year ended December 31, 2020.
2021 Notes
In April 2019, the 2021 Notes were redeemed at 100 % of their $ 350.0 million aggregate principal amount plus accrued and unpaid interest of $ 0.2 million with borrowings under the Credit Facility. We recorded a debt extinguishment loss of $ 3.7 million related to the redemption during the year ended December 31, 2019.
Long-Term Debt Maturity
Contractual maturities of long-term debt over the next five years, excluding interest to be accrued, at December 31, 2020 were as follows (in thousands):
2021
$
—
2022
—
2023
—
2024
393,000
2025
—
Long-term debt maturities through 2025
$
393,000
F-25
Table of Contents
15. Accumulated Other Comprehensive Income (Loss)
Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with owners. Our accumulated other comprehensive income (loss) consists of changes in the fair value of our interest rate swap derivative instruments, net of tax, which are designated as cash flow hedges, amortization of terminated interest rate swaps and adjustments related to changes in our ownership of the Partnership as the result of the Merger.
The following table presents the changes in accumulated other comprehensive income (loss) of our derivative cash flow hedges, net of tax and excluding noncontrolling interest (in thousands):
Year Ended December 31,
2020
2019
2018
Beginning accumulated other comprehensive income (loss)
$
( 1,387 )
$
5,773
$
1,197
Loss recognized in other comprehensive income (loss), net of tax provision (benefit) of $( 1,776 ), $( 1,425 ) and $ 169 , respectively
( 6,683 )
( 5,360 )
( 659 )
(Gain) loss reclassified from accumulated other comprehensive income (loss) to interest expense, net of tax provision (benefit) of $( 814 ), $ 478 and $ 185 , respectively (1)
3,064
( 1,800 )
( 435 )
Merger-related adjustments (2)
—
—
5,670
Other comprehensive income (loss) attributable to Archrock stockholders
( 3,619 )
( 7,160 )
4,576
Ending accumulated other comprehensive income (loss)
$
( 5,006 )
$
( 1,387 )
$
5,773
(1) Included stranded tax effects resulting from the Tax Cuts and Jobs Act of $ 0.3 million reclassified to accumulated deficit during the year ended December 31, 2018.
(2) Pursuant to the Merger, we reclassified a gain of $ 5.7 million from noncontrolling interest to accumulated other comprehensive income (loss) related to the fair value of our derivative instruments that was previously attributed to public ownership of the Partnership .
See Note 22 (“Derivatives”) for further details on our interest rate swap derivative instruments.
16. Equity
Elite Acquisition
In August 2019, we completed the Elite Acquisition. A portion of the acquisition’s purchase price was funded through the issuance of 21.7 million shares of common stock with an acquisition date fair value of $ 225.9 million, which was recorded to common stock and additional paid-in capital in our consolidated statements of equity. See Note 4 (“Business Transactions”) for further details of this acquisition.
Merger Transaction
In April 2018, we completed the Merger and issued 57.6 million shares of our common stock to acquire the 41.2 million common units of the Partnership not owned by us prior to the Merger at a fixed exchange ratio of 1.40 shares of our common stock for each Partnership common unit for total implied consideration of $ 625.3 million. Additionally, the incentive distribution rights in the Partnership, all of which we owned prior to the Merger, were canceled and ceased to exist. As a result of the Merger, the Partnership’s common units are no longer publicly traded.
As we controlled the Partnership prior to the Merger and continue to control the Partnership after the Merger, we accounted for the change in our ownership interest in the Partnership as an equity transaction in the second quarter of 2018. No gain or loss was recognized in our consolidated statements of operations as a result of the Merger.
F-26
Table of Contents
Prior to the Merger, public unitholders held a 57 % ownership interest in the Partnership and we owned the remaining 43 % equity interest. The equity interests in the Partnership that were owned by the public prior to the Merger are reflected in noncontrolling interest in our consolidated statements of equity. The earnings of the Partnership that were attributed to its common units held by the public prior to the Merger are reflected in net income attributable to noncontrolling interest in our consolidated statements of operations.
The tax effects of the Merger were reported as adjustments to other assets, noncurrent assets associated with discontinued operations, deferred tax liabilities, additional paid-in capital and other comprehensive income. The change in ownership and tax step up from the consideration given in the Merger caused us to record a $ 156.0 million deferred tax asset, which resulted in an overall $ 52.2 million net deferred tax asset. We evaluated the realizability of our resulting net deferred tax asset position by assessing the available positive and negative evidence and concluded, based on the weight of the evidence, that a $ 50.8 million valuation allowance was required. The $ 105.2 million net tax impact of the change in deferred tax assets and the valuation allowance was recorded as an offsetting increase to additional paid-in capital.
We incurred $ 0.5 million and $ 10.2 million of transaction costs directly attributable to the Merger during the years ended December 31, 2019 and 2018, respectively, including financial advisory, legal service and other professional fees, which were recorded to transaction-related costs in our consolidated statements of operations.
The following table presents the effects of changes in our ownership interest in the Partnership on the equity attributable to Archrock stockholders during the year ended December 31, 2018 (in thousands):
Year Ended
December 31, 2018
Net income attributable to Archrock stockholders
$
21,063
Increase in Archrock stockholders’ additional paid-in capital for change in ownership of Partnership common units
56,845
Increase from net income attributable to Archrock stockholders and transfers from noncontrolling interest
$
77,908
Cash Dividends
The following table summarizes our dividends declared and paid in each of the quarterly periods of 2020, 2019 and 2018:
Declared Dividends
Dividends Paid
per Common Share
(in thousands)
2020
Q1
$
0.145
$
22,171
Q2
0.145
22,176
Q3
0.145
22,308
Q4
0.145
22,177
2019
Q1
$
0.132
$
17,231
Q2
0.132
17,206
Q3
0.145
22,062
Q4
0.145
22,031
2018
Q1
$
0.120
$
8,532
Q2
0.120
15,486
Q3
0.132
17,114
Q4
0.132
17,156
F-27
Table of Contents
On January 27, 2021, our Board of Directors declared a quarterly dividend of $ 0.145 per share of common stock, or approximately $ 22.2 million, that was paid on February 16, 2021 to stockholders of record at the close of business on February 8, 2021.
17. Revenue from Contracts with Customers
The following table presents our revenue from contracts with customers disaggregated by revenue source (in thousands):
Year Ended December 31,
2020
2019
2018
Contract operations (1) :
0 - 1,000 horsepower per unit
$
224,702
$
259,985
$
241,810
1,001 - 1,500 horsepower per unit
305,185
316,082
276,775
Over 1,500 horsepower per unit
206,749
191,510
149,783
Other (2)
2,282
3,962
4,168
Total contract operations (3)
738,918
771,539
672,536
Aftermarket services (1) :
Services (4)
79,012
122,076
142,476
OTC parts and components sales
57,040
71,870
89,429
Total aftermarket services (5)
136,052
193,946
231,905
Total revenue
$
874,970
$
965,485
$
904,441
(1) We operate in two segments: contract operations and aftermarket services. See Note 28 (“Segments”) for further details regarding our segments.
(2) Primarily relates to fees associated with owned non-compression equipment.
(3) Includes $ 5.6 million, $ 7.9 million and $ 6.6 million for the years ended December 31, 2020, 2019 and 2018, 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.
(4) Includes a reversal of $ 0.9 million of revenue during the year ended December 31, 2019 related to changes in estimates of performance obligations partially satisfied in prior periods.
(5) All service revenue within aftermarket services is recognized over time. All OTC parts and components sales revenue is recognized at a point in time.
Performance Obligations
As of December 31, 2020, we had $ 350.0 million of remaining performance obligations related to our contract operations segment. Our remaining performance obligations will be recognized through 2025 as follows (in thousands):
2021
2022
2023
2024
2025
Total
Remaining performance obligations
$
252,807
$
82,366
$
13,216
$
1,436
$
168
$
349,993
We do not disclose the aggregate transaction price for the remaining performance obligations for aftermarket services as there are no contracts with customers with an original contract term that is greater than one year.
Contract Assets and Liabilities
As of December 31, 2020 and 2019, our receivables from contracts with customers, net of allowance for credit losses, were $ 95.6 million and $ 139.4 million, respectively.
F-28
Table of Contents
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 December 31, 2020 and 2019, our contract liabilities were $ 4.6 million and $ 11.4 million, respectively, which were included in deferred revenue and other liabilities in our consolidated balance sheets. The decrease in the contract liability balance during the year ended December 31, 2020 was primarily due to $ 19.5 million recognized as revenue during the period, partially offset by revenue deferral of $ 12.7 million, each primarily related to freight billings and milestone billings on aftermarket services.
18. Long-Lived and Other Asset Impairment
We review long-lived assets, including property, plant and equipment and identifiable intangibles that are being amortized, for impairment whenever events or changes in circumstances, including the removal of compressors from our active fleet, indicate that the carrying amount of an asset may not be recoverable.
In the first quarter of 2020, we determined that the impairment of our contract operations reporting unit’s goodwill was an indicator of potential impairment of the carrying amount of our long-lived assets, including our compressor fleet and associated customer and contract-based intangible assets. Accordingly, we performed a quantitative impairment test of our long-lived assets, by which we determined that they were not also impaired. No similar impairment has been indicated subsequent to the first quarter.
Compression Fleet
We periodically review the future deployment of our idle compression assets for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. Based on these reviews, we determine that certain idle compressors should be retired from the active fleet. The retirement of these units from the active fleet triggers a review of these assets for impairment and as a result of our review, we may record an asset impairment to reduce the book value of each unit to its estimated fair value. The fair value of each unit is estimated based on the expected net sale proceeds compared to other fleet units we recently sold, a review of other units recently offered for sale by third parties or the estimated component value of the equipment we plan to use.
In connection with our review of our idle compression assets, we evaluate for impairment idle units that were culled from our fleet in prior years and are available for sale. Based on that review, we may reduce the expected proceeds from disposition and record additional impairment to reduce the book value of each unit to its estimated fair value.
The following table presents the results of our compression fleet impairment review as recorded to our contract operations segment (dollars in thousands):
Year Ended December 31,
2020
2019
2018
Idle compressors retired from the active fleet
730
975
310
Horsepower of idle compressors retired from the active fleet
261,000
170,000
115,000
Impairment recorded on idle compressors retired from the active fleet
$
77,590
$
44,663
$
28,127
Other Impairment
During the year ended December 31, 2020, $ 1.7 million of capitalized implementation and unamortized prepaid costs related to the mobile workforce component of our multi-year process and technology transformation project was impaired. See Note 12 (“Hosting Arrangements”) for further details.
F-29
Table of Contents
19. Restructuring Charges
During the first quarter of 2020, we completed restructuring activities to further streamline our organization and more fully align our teams to improve our customer service and profitability. We incurred severance costs during the first quarter related to these activities. No additional costs will be incurred related to these restructuring activities.
In response to the decreased activity level of our customers that resulted from the COVID-19 pandemic beginning in the second quarter of 2020, we have incurred severance costs to right-size our business. We are not currently able to estimate the total amount of restructuring costs to be incurred as a result of the COVID-19 pandemic, as the magnitude and duration of the pandemic and its impact on our operations remain difficult to predict.
During the third quarter of 2020, a plan to dispose of certain non-core properties was approved by management. We are not currently able to estimate the total amount of restructuring costs to be incurred as a result of our property disposals, as the timing of the disposals and magnitude of the financial impact of their ultimate disposition remain difficult to predict.
The severance and property disposal costs incurred under the above restructuring plans were recorded to restructuring charges in our consolidated statements of operations.
The following table presents the changes to our accrued liability balance related to restructuring charges during the year ended December 31, 2020 (in thousands):
Organizational
Pandemic
Property
Restructuring
Restructuring
Restructuring
Total
Balance at December 31, 2019
$
—
$
—
$
—
$
—
Charges incurred (1)
1,695
5,257
1,498
8,450
Non-cash expense (2)
( 61 )
( 101 )
( 1,498 )
( 1,660 )
Payments
( 1,634 )
( 4,955 )
—
( 6,589 )
Balance at December 31, 2020
$
—
$
201
$
—
$
201
(1) Includes a loss on sale of $ 0.9 million and an impairment loss of $ 0.6 million related to the property restructuring during the year ended December 31, 2020.
(2) Represents accelerated vesting of stock awards related to the organizational and pandemic restructuring activities and the loss on sale and impairment loss related to the property restructuring during the year ended December 31, 2020.
The following table presents, by segment, restructuring charges incurred during the year ended December 31, 2020 (in thousands):
Contract
Aftermarket
Operations
Services
Other (1)
Total
Organizational restructuring
$
458
$
625
$
612
$
1,695
Pandemic restructuring
2,505
1,218
1,534
5,257
Property restructuring
Loss on sale
—
—
915
915
Impairment loss
—
—
583
583
Total property restructuring
—
—
1,498
1,498
Total restructuring charges
$
2,963
$
1,843
$
3,644
$
8,450
(1) Represents expense incurred within our corporate function and not directly attributable to our segments.
F-30
Table of Contents
The following table presents, by cost type, restructuring charges incurred during the year ended December 31, 2020 (in thousands):
Year Ended
December 31, 2020
Severance costs
Organizational restructuring
$
1,695
Pandemic restructuring
5,257
Total severance costs
6,952
Property restructuring
Loss on sale
915
Impairment loss
583
Total property restructuring
1,498
Total restructuring charges
$
8,450
20. Income Taxes
Current and Deferred Tax Provision
Our provision for (benefit from) income taxes consisted of the following (in thousands):
Year Ended December 31,
2020
2019
2018
Current tax provision (benefit):
U.S. federal
$
( 99 )
$
75
$
—
State
326
377
912
Total current
227
452
912
Deferred tax provision (benefit):
U.S. federal
( 17,246 )
( 35,597 )
6,197
State
( 518 )
( 4,000 )
( 959 )
Total deferred
( 17,764 )
( 39,597 )
5,238
Provision for (benefit from) income taxes
$
( 17,537 )
$
( 39,145 )
$
6,150
The provision for (benefit from) income taxes for the years ended December 31, 2020, 2019 and 2018 resulted in effective tax rates on continuing operations of 20.4 %, ( 67.0 )% and 17.4 %, respectively. The following table reconciles these effective tax rates to the U.S. statutory rate of 21 %, the rate in effect during 2020, 2019 and 2018 (in thousands):
Year Ended December 31,
2020
2019
2018
Income taxes at U.S. federal statutory rate
$
( 18,056 )
$
12,276
$
7,415
Net state income taxes
( 817 )
1,634
1,570
Tax credits
( 1,256 )
( 1,757 )
( 244 )
Noncontrolling interest
—
—
( 1,793 )
Unrecognized tax benefits (1)
772
( 1,958 )
( 1,443 )
Valuation allowances and write off of tax attributes (2)
236
( 50,219 )
( 58 )
Executive compensation limitation
1,159
1,102
977
Stock
538
66
( 455 )
Other
( 113 )
( 289 )
181
Provision for (benefit from) income taxes
$
( 17,537 )
$
( 39,145 )
$
6,150
(1) Reflects a decrease in our uncertain tax benefit, net of federal benefit, due to settlements of tax audits and expiration of statute of limitations in 2019 and 2018.
(2) See “Tax Attributes and Valuation Allowances” below for further details.
F-31
Table of Contents
Deferred income tax balances are the direct effect of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the taxes are actually paid or recovered. The tax effects of temporary differences that gave rise to deferred tax assets and deferred tax liabilities were as follows (in thousands):
December 31,
2020
2019
Deferred tax assets:
Net operating loss carryforwards
$
158,916
$
116,378
Accrued liabilities
3,133
3,486
Other
12,124
12,479
174,173
132,343
Valuation allowances (1)
( 1,027 )
( 822 )
Total deferred tax assets
173,146
131,521
Deferred tax liabilities:
Property, plant and equipment
( 6,066 )
( 6,440 )
Basis difference in the Partnership
( 103,721 )
( 81,645 )
Other
( 7,150 )
( 8,083 )
Total deferred tax liabilities
( 116,937 )
( 96,168 )
Net deferred tax asset (2)
$
56,209
$
35,353
(1) See “Tax Attributes and Valuation Allowances” below for further details.
(2) The 2020 and 2019 net deferred tax asset are reflected in our consolidated balance sheets as deferred tax assets of $ 56.9 million and $ 36.6 million, respectively, and deferred tax liabilities of $ 0.7 million and $ 1.3 million, respectively.
Both the 2020 and 2019 balances are based on a U.S. federal tax rate of 21 %.
Tax Attributes and Valuation Allowances
Pursuant to Sections 382 and 383 of the Code, utilization of loss and credit carryforwards are subject to annual limitations due to any ownership changes of 5% stockholders. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a rolling three-year period. In 2018, the common stock we issued in the Merger caused a new ownership change to occur for Archrock. The limitations from this ownership change may cause us to pay U.S. federal income taxes earlier; however, we do not currently expect that any loss carryforwards or credit carryforwards will expire as a result of any 382 or 383 limitations. Our ability to utilize loss carryforwards and credit carryforwards against future U.S. federal taxable income and future U.S. federal income tax may be limited in the future if we have another 50% or more ownership change in our 5% stockholders.
We record valuation allowances when it is more likely than not that some portion or all of our deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the appropriate taxing jurisdictions in the future. If we do not meet our expectations with respect to taxable income, we may not realize the full benefit from our deferred tax assets, which would require us to record a valuation allowance in our tax provision in future years. As of each reporting date, we consider new evidence to evaluate the realizability of our net deferred tax asset position by assessing the available positive and negative evidence. Changes to the valuation allowance are reflected in the statement of operations.
F-32
Table of Contents
In 2018, the change in ownership and tax step up from the consideration given in the Merger caused us to record a $ 156.0 million deferred tax asset, which resulted in an overall $ 52.2 million net deferred tax asset, of which $ 46.6 million and $ 5.6 million related to continuing operations and discontinued operations, respectively. As of December 31, 2018, we had incurred a three-year cumulative book loss, which outweighed the positive evidence of projected future taxable income. Based on the weight of the evidence, we concluded that a $ 50.8 million valuation allowance was required, of which $ 45.2 million and $ 5.6 million were recorded to continuing operations and discontinued operations, respectively. The tax impact from the Merger was accounted for as an equity transaction; therefore, the valuation allowance was recorded as a decrease to additional paid-in capital.
As of December 31, 2019, we achieved a three-year cumulative book income, and together with other positive and negative evidence, we concluded that there is sufficient positive evidence of projected future taxable income to release the $ 50.8 million valuation allowance previously required for our overall net deferred tax asset position. This release was offset by a $ 0.6 million increase in the valuation allowance on our state NOL deferred tax asset. The overall impact of the change in the valuation allowance was recorded as a $ 50.2 million benefit from income taxes in our consolidated statements of operations and a $ 50.2 million increase in deferred tax assets in our consolidated balance sheets, of which $ 44.6 million and $ 5.6 million were recorded to continuing operations and discontinued operations, respectively.
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 NOL carryforwards and tax credit carryforwards. This may result in the need to record a valuation allowance against all or a portion of our deferred tax assets.
At December 31, 2020, we had U.S. federal and state NOL carryforwards of $ 696.3 million and $ 257.6 million, respectively, included in our NOL deferred tax asset that are available to offset future taxable income. If not used, the federal and state NOL carryforwards will begin to expire in 2025 and 2021, respectively, though $ 457.3 million of the U.S. federal and $ 88.3 million of the state NOL carryforwards have no expiration date. In connection with the state NOL deferred tax asset, we recorded a valuation allowance of $ 1.0 million and $ 0.8 million as of December 31, 2020 and 2019, respectively.
At December 31, 2020, we had U.S. federal and state tax credit carryforwards of $ 2.5 million and $ 0.2 million, respectively. If not used, the federal and state tax credit carryforwards will begin to expire in 2037 and 2040, respectively.
Unrecognized Tax Benefits
A reconciliation of the unrecognized tax benefit (including discontinued operations) activity is shown below (in thousands):
Year Ended December 31,
2020
2019
2018
Beginning balance
$
18,453
$
19,560
$
21,400
Additions based on tax positions related to current year
2,397
2,227
1,893
Additions based on tax positions related to prior years
—
2,047
450
Reductions based on settlement refunds from government authorities
—
( 4,414 )
( 3,461 )
Reductions based on tax positions related to prior years
( 73 )
( 51 )
( 20 )
Reductions based on lapse of statute of limitations
( 1,885 )
( 916 )
( 702 )
Ending balance
$
18,892
$
18,453
$
19,560
F-33
Table of Contents
We had $ 18.9 million, $ 18.5 million and $ 19.6 million of unrecognized tax benefits at December 31, 2020, 2019 and 2018, respectively, of which $ 2.9 million, $ 3.2 million and $ 6.9 million, respectively, would affect the effective tax rate if recognized and $ 7.9 million, $ 8.3 million and $ 6.9 million, respectively, would be reflected in income from discontinued operations, net of tax if recognized.
We recorded $ 2.1 million, $ 2.1 million and $ 2.2 million of potential interest expense and penalties related to unrecognized tax benefits associated with uncertain tax positions (including discontinued operations) in our consolidated balance sheets as of the years ended December 31, 2020, 2019 and 2018, respectively. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as reductions in income tax expense. During each of the years ended December 31, 2020 and 2019, we recorded releases of potential interest expense and penalties of $ 0.1 million and in the year ended December 31, 2018, we recorded $ 0.7 million of potential interest expense and penalties in our consolidated statements of operations.
Subject to the provisions of our tax matters agreement with Exterran Corporation, both parties agreed to indemnify the primary obligor of any return for tax periods beginning before and ending before or after the Spin-off (including any ongoing or future amendments and audits for these returns) for the portion of the tax liability (including interest and penalties) that relates to their respective operations reported in the filing. As of December 31, 2020 and 2019, we recorded an indemnification asset (including penalties and interest) of $ 7.9 million and $ 8.5 million, respectively, related to unrecognized tax benefits in our consolidated balance sheets.
We and our subsidiaries file consolidated and separate income tax returns in the U.S. federal jurisdiction and in numerous state jurisdictions. U.S. federal income tax returns are generally subject to examination for up to three years after filing the returns. Due to our NOL carryforwards, our U.S. federal income tax returns can be examined back to the inception of our NOL carryforwards; therefore, expanding our examination period beyond 20 years. In 2020, the IRS completed their examination of our 2014 and 2015 tax years. Due to this audit being related to tax periods that commenced prior to the Spin-off, Exterran Corporation was also involved in the audit. The tax adjustments recorded from this audit did not have a material impact on our consolidated financial position or results of operations.
State income tax returns are generally subject to examination for a period of three to five years after filing the returns. However, the state impact of any U.S. federal audit adjustments and amendments remains subject to examination by various states for up to one year after formal notification to the states. We are currently involved in two state audits. During the years ended December 31, 2019 and 2018, we settled certain state audits, which resulted in refunds of $ 2.4 million and $ 1.7 million, respectively, and reductions in previously-accrued uncertain tax benefits of $ 4.4 million and $ 3.5 million, respectively. As of December 31, 2020, we did not have any state audits underway that we believe would have a material impact on our consolidated financial statements.
As of December 31, 2020, 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 December 31, 2021 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.
CARES Act
On March 27, 2020, President Trump signed into law the CARES Act, which includes, among other things, refundable payroll tax credits, deferment of employer-side social security payments, NOL carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act provisions did not have a material impact on our consolidated financial statements. Future regulatory guidance under the CARES Act or additional legislation enacted by Congress in connection with the COVID-19 pandemic could impact our tax provision in future periods.
F-34
Table of Contents
21. Earnings per Share
Basic net income (loss) per common share attributable to Archrock common stockholders 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 attributable to Archrock common stockholders is determined by dividing net income (loss) attributable to Archrock common stockholders, after deducting amounts allocated to participating securities, by the weighted average number of common shares outstanding for the period. Participating securities include unvested restricted stock and stock-settled restricted stock units that have nonforfeitable rights to receive dividends or dividend equivalents, whether paid or unpaid. During periods of net loss, only distributed earnings (dividends) are allocated to participating securities, as they do not have a contractual obligation to participate in our undistributed losses.
Diluted net income (loss) per common share attributable to Archrock common stockholders is computed using the weighted average number of shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options, performance-based restricted stock units and stock to be issued pursuant to our ESPP unless their effect would be anti-dilutive.
The following table shows the calculation for net income (loss) attributable to Archrock common stockholders, which is used in the calculation of basic and diluted net income (loss) per common share attributable to Archrock common stockholders (in thousands):
Year Ended December 31,
2020
2019
2018
Income (loss) from continuing operations attributable to Archrock stockholders
$
( 68,445 )
$
97,603
$
21,063
Loss from discontinued operations, net of tax
—
( 273 )
—
Net income (loss) attributable to Archrock stockholders
( 68,445 )
97,330
21,063
Less: Earnings attributable to participating securities
( 1,338 )
( 1,348 )
( 815 )
Net income (loss) attributable to Archrock common stockholders
$
( 69,783 )
$
95,982
$
20,248
The following table shows the potential shares of common stock that were included in computing diluted net income (loss) per common share attributable to Archrock common stockholders (in thousands):
Year Ended December 31,
2020
2019
2018
Weighted average common shares outstanding including participating securities
152,827
139,317
110,843
Less: Weighted average participating securities outstanding
( 1,999 )
( 1,825 )
( 1,538 )
Weighted average common shares outstanding used in basic net income (loss) per common share
150,828
137,492
109,305
Net dilutive potential common shares issuable:
On exercise of options and vesting of performance-based restricted stock units
—
34
111
On settlement of ESPP shares
—
2
5
Weighted average common shares outstanding used in diluted net income (loss) per common share
150,828
137,528
109,421
F-35
Table of Contents
The following table shows the potential shares of common stock issuable that were excluded from computing diluted net income (loss) per common share attributable to Archrock common stockholders as their inclusion would have been anti-dilutive (in thousands):
Year Ended December 31,
2020
2019
2018
On exercise of options where exercise price is greater than average market value for the period
96
154
195
On exercise of options and vesting of performance-based restricted stock units
54
—
—
On settlement of ESPP shares
17
—
—
Net dilutive potential common shares issuable
167
154
195
22. Derivatives
We are exposed to market risks associated with changes in the variable interest rate of our Credit Facility. We use derivative instruments to manage our exposure to fluctuations in this variable interest rate and thereby minimize the risks and costs associated with financial activities. We do not use derivative instruments for trading or other speculative purposes.
As of December 31, 2020, we had $ 300.0 million notional value of interest rate swaps outstanding, which expire in March 2022 and were entered into to offset changes in expected cash flows due to fluctuations in the associated variable interest rates. We have designated these interest rate swaps as cash flow hedging instruments. The counterparties to our derivative agreements are major financial institutions. We monitor the credit quality of these financial institutions and do not expect nonperformance by any counterparty, although such nonperformance could have a material adverse effect on us. We have no collateral posted for our derivative instruments.
We expect the hedging relationship to be highly effective as the interest rate swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate. We estimate that $ 4.8 million of the deferred pre-tax loss attributable to interest rate swaps included in accumulated other comprehensive loss at December 31, 2020 will be reclassified into earnings as interest expense at then-current values during the next 12 months as the underlying hedged transactions occur.
As of December 31, 2020, the weighted average effective fixed interest rate on our interest rate swaps was 1.8 %.
The following table presents the effect of our derivative instruments designated as cash flow hedging instruments on our consolidated balance sheets (in thousands):
December 31,
2020
2019
Other current assets
$
—
$
12
Total derivative assets
$
—
$
12
Accrued liabilities
$
4,810
$
593
Other liabilities
1,527
1,175
Total derivative liabilities
$
6,337
$
1,768
F-36
Table of Contents
The following table presents the effect of our derivative instruments designated as cash flow hedging instruments on our consolidated statements of operations (in thousands):
Year Ended December 31,
2020
2019
2018
Pre-tax gain (loss) recognized in other comprehensive income (loss)
$
( 8,459 )
$
( 6,785 )
$
3,512
Pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense
( 3,878 )
2,278
617
Total amount of interest expense in which the effects of cash flow hedges are recorded
105,716
104,681
93,328
See Note 2 (“Basis of Presentation and Significant Accounting Policies”), Note 15 (“Accumulated Other Comprehensive Income (Loss)”) and Note 23 (“Fair Value Measurements”) for further details on our derivative instruments.
23. Fair Value Measurements
The accounting standard for fair value measurements and disclosures establishes a fair value hierarchy that prioritizes the inputs of valuation techniques used to measure fair value into the following three categories:
• Level 1 — Quoted unadjusted prices for identical instruments in active markets to which we have access at the date of measurement.
• Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or prices vary substantially over time or among brokered market makers.
• Level 3 — Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect our own assumptions regarding how market participants would price the asset or liability based on the best available information.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
On a quarterly basis, our interest rate swap derivative instruments are valued based on the income approach (discounted cash flow) using market observable inputs, including LIBOR forward curves. These fair value measurements are classified as Level 2. The following table presents our derivative asset and liability measured at fair value on a recurring basis, with pricing levels as of the date of valuation (in thousands):
December 31,
2020
2019
Derivative asset
$
—
$
12
Derivative liability
6,337
1,768
F-37
Table of Contents
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Goodwill
In the first quarter of 2020, we determined that the significant deterioration in global macroeconomic conditions caused by the COVID-19 pandemic was an indicator of potential impairment of our goodwill, and we performed a quantitative impairment test as of March 31, 2020 that resulted in a $ 99.8 million impairment of our goodwill. Significant estimates used in our impairment analysis included cash flow forecasts, our estimate of the market’s weighted average cost of capital and market multiples, which are Level 3 inputs. See Note 9 (“Goodwill”) for further details of the valuation methodology used in connection with the goodwill impairment.
Properties
During the third quarter of 2020, a plan to dispose of certain non-core properties was approved by management. The properties not sold at auction were impaired and written down to fair value. The commercial real estate market where these properties are located is not an active market. Our estimate of fair value included inputs from offers received as well as market transactions for similar properties, which are Level 3 inputs. The fair value of our impaired properties was as follows (in thousands):
December 31, 2020
Impaired properties
$
430
The significant unobservable inputs used to develop the Level 3 fair value measurements for the properties were the estimated sale values in an inactive market. In reviewing sales trends for the past three years, the probable pricing information based on market comparisons was as follows (in thousands):
Range
Weighted Average
Estimated sale proceeds
$ 100 - $ 600
$ 427
See Note 19 (“Restructuring Charges”) for further details of our approved plan of disposal.
Compressors
During the years ended December 31, 2020 and 2019, we recorded nonrecurring fair value measurements related to our idle and previously-culled compressors. Our estimate of the compressors’ fair value was primarily based on the expected net sale proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use. We discounted the expected proceeds, net of selling and other carrying costs, using a weighted average disposal period of four years. These fair value measurements are classified as Level 3. The fair value of our compressors impaired during the years ended December 31, 2020 and 2019 was as follows:
December 31,
2020
2019
Impaired compressors
$
19,046
$
5,859
The significant unobservable inputs used to develop the above fair value measurements were weighted by the relative fair value of the compressors being measured. Additional quantitative information related to our significant unobservable inputs as of December 31, 2020 follows:
Range
Weighted Average (1)
Estimated net sale proceeds
$ 0 - $ 289 per horsepower
$ 20 per horsepower
(1) Calculated based on an estimated discount for market liquidity of 81 % .
F-38
Table of Contents
See Note 18 (“Long-Lived and Other Asset Impairment”) for further details.
Other Financial Instruments
The carrying amounts of our cash, receivables and payables approximate fair value due to the short-term nature of those instruments.
The carrying amount of borrowings outstanding under our Credit Facility approximates fair value due to its variable interest rate. The fair value of these outstanding borrowings is a Level 3 measurement.
The fair value of our fixed rate debt is estimated using yields observable in active markets, which are Level 2 inputs, and was as follows (in thousands):
December 31,
2020
2019
Carrying amount of fixed rate debt (1)
$
1,295,867
$
1,329,549
Fair value of fixed rate debt
1,371,000
1,400,000
(1) Carrying amounts are shown net of unamortized debt discounts and unamortized deferred financing costs. See Note 14 (“Long-Term Debt”).
24. Stock-Based Compensation
We recognize stock-based compensation expense related to stock options, restricted stock units, performance units, phantom units and our ESPP. We account for forfeitures as they occur.
Stock-based compensation expense consisted of the following (in thousands):
Year Ended December 31,
2020
2019
2018
Equity awards
$
10,551
$
8,105
$
7,388
Liability awards
1,521
2,336
1,096
Total stock-based compensation expense
$
12,072
$
10,441
$
8,484
Stock Incentive Plans
The 2020 Plan was adopted in April 2020 and provides for the granting of stock options, restricted stock, restricted stock units, stock appreciation rights, performance awards, other stock-based awards and dividend equivalent rights to employees, directors and consultants of Archrock. The 2020 Plan is administered by the compensation committee of our Board of Directors. Under the 2020 Plan, the maximum number of shares of common stock available for issuance is 8,500,000 . Each stock-settled award granted under the 2020 Plan reduces the number of shares available for issuance by one share. Cash-settled awards are not counted against the aggregate share limit. Shares subject to awards granted under the 2020 Plan that are subsequently canceled, terminated, settled in cash or forfeited, excluding shares withheld to satisfy tax withholding obligations or to pay the exercise price of an option, are available for future grant under the 2020 Plan. No additional grants may be made under the 2013 Plan following the adoption of the 2020 Plan. Previous grants made under the 2013 Plan continue to be governed by that plan and the applicable award agreements.
The 2020 Plan and 2013 Plan allow us to withhold shares upon vesting of restricted stock at the then-current market price to cover taxes required to be withheld on the vesting date. During the years ended December 31, 2020, 2019 and 2018, we withheld 236,752 shares valued at $ 1.8 million, 212,080 shares valued at $ 2.0 million and 167,382 shares valued at $ 1.8 million, respectively, to cover tax withholding.
F-39
Table of Contents
The compensation committee of our Board of Directors generally establishes its schedule for making annual long-term incentive awards, consisting of a combination of restricted shares and performance units vesting over multiple years, several months in advance and does not make such awards based on knowledge of material nonpublic information. Although the compensation committee of our Board of Directors has historically granted awards on a regular, predictable cycle, such awards may be granted at other times during the year, as determined in the sole discretion of the compensation committee.
Stock Options
Stock options are granted at fair market value at the grant date, are exercisable according to the vesting schedule established by the compensation committee of our Board of Directors in its sole discretion and expire no later than seven years after the grant date. Stock options generally vest one -third per year on each of the first three anniversaries of the grant date, subject to continued service through the applicable vesting date . During the years ended December 31, 2020, 2019 and 2018, we did no t grant any stock options. Stock option activity during the year ended December 31, 2020 was as follows:
Weighted
Weighted
Aggregate
Stock
Average
Average
Intrinsic
Options
Exercise Price
Remaining Life
Value
(in thousands)
per Share
(in years)
(in thousands)
Options outstanding and exercisable, December 31, 2019
154
$
19.40
Canceled
( 90 )
15.32
Options outstanding and exercisable, December 31, 2020
64
25.18
0.2
$
—
Intrinsic value is the difference between the market value of our stock and the exercise price of each stock option multiplied by the number of stock options outstanding for those stock options where the market value exceeds their exercise price. The total intrinsic value of stock options exercised during the year ended December 31, 2018 was $ 0.8 million. There were no stock options exercised during the years ended December 31, 2020 and 2019. Stock options outstanding at December 31, 2020 expire in March 2021.
Restricted Stock, Restricted Stock Units, Performance-Based Restricted Stock Units, Cash-Settled Restricted Stock Units and Cash-Settled Performance Units
For grants of restricted stock and restricted stock units, we recognize compensation expense over the vesting period equal to the fair value of our common stock at the grant date. Our restricted stock and restricted stock units include rights to receive dividends or dividend equivalents. We periodically remeasure the fair value of cash-settled restricted stock units and cash-settled performance units and record a cumulative adjustment of the expense previously recognized. Our obligation related to the cash-settled restricted stock units and cash-settled performance units is reflected as a liability in our consolidated balance sheets. Restricted stock, restricted stock units, cash-settled restricted stock units and cash-settled performance units generally vest one -third per year on dates as specified in the applicable award agreement , subject to continued service through the applicable vesting date.
We also grant performance-based restricted stock units, which in addition to service conditions, have a market-based condition, which determines the number of restricted stock units and dividend equivalents earned. The market condition is based on our total shareholder return ranked against that of a predetermined peer group over a three-year performance period. The awards vest in their entirety on a date specified in the award agreement in the year following the conclusion of the performance period. The fair value of the performance-based restricted stock units, incorporating the market condition, is estimated on the grant date using a Monte Carlo simulation model. Expected volatilities for us and each peer company utilized in the model are estimated using a historical period consistent with the awards’ remaining performance period as of the grant date. The risk-free interest rate is based on the yield on U.S. Treasury Separate Trading of Registered Interest and Principal Securities for a term consistent with the remaining performance period. The dividend yield used is 0.0 % to approximate accumulation of earnings.
F-40
Table of Contents
The following table presents the inputs used and the grant date fair value calculated in the Monte Carlo simulation model for the performance-based restricted stock units awarded during the years ended December 31, 2020, 2019 and 2018.
Year Ended December 31,
2020
2019
2018
Remaining performance period as of grant date (in years)
2.9
2.9
2.8
Risk-free interest rate used
1.4
%
2.6
%
2.4
%
Grant-date fair value
$
11.33
$
12.91
$
13.46
The following table presents restricted stock, restricted stock unit, performance-based restricted stock unit, cash-settled restricted stock unit and cash-settled performance unit activity during the year ended December 31, 2020:
Weighted
Average
Grant Date
Fair Value
Shares
Per Share
Non-vested awards, December 31, 2019
2,022
$
10.25
Granted (1)
1,467
9.37
Vested (2)
( 933 )
10.39
Canceled
( 110 )
9.78
Non-vested awards, December 31, 2020 (3)
2,446
9.69
(1) The weighted average grant date fair value of shares granted during the years ended December 31, 2020, 2019 and 2018 was $ 9.37 , $ 10.01 and $ 9.66 , respectively.
(2) The total fair value of all awards vested during the years ended December 31, 2020, 2019 and 2018 was $ 7.1 million, $ 9.0 million and $ 8.2 million, respectively.
(3) Non-vested awards as of December 31, 2020 were comprised of 454,000 cash-settled restricted stock units and cash-settled performance units and 1,992,000 restricted stock, stock-settled restricted stock units and stock-settled performance-based restricted stock units.
As of December 31, 2020, we expect $ 13.7 million of unrecognized compensation cost related to unvested restricted stock, stock-settled restricted stock units, performance units, cash-settled restricted stock units and cash-settled performance units to be recognized over the weighted-average period of 1.7 years. Cash paid upon vesting of cash-settled restricted stock units during the years ended December 31, 2020, 2019 and 2018 was $ 0.5 million, $ 1.3 million and $ 1.1 million, respectively.
Employee Stock Purchase Plan
Adopted in 2017, our ESPP provides employees with an opportunity to participate in our long-term performance and success through the purchase of shares of common stock at a price that may be less than fair market value. Each quarter, eligible employees may elect to withhold a portion of their salary up to the lesser of $ 25,000 per year or 10 % of their eligible pay to purchase shares of our common stock at a price equal to 85 % to 100 % of the fair market value of the stock as defined by the plan. The ESPP will terminate on the date that all shares of common stock authorized for sale under the ESPP have been purchased, unless it is extended. The maximum number of shares of common stock available for purchase under the ESPP is 1,000,000 . As of December 31, 2020, 611,707 shares remained available for purchase under the ESPP. Our ESPP is compensatory and, as a result, we record an expense in our consolidated statements of operations related to the ESPP. The purchase discount under the ESPP is 5 % of the fair market value of our common stock on the first trading day of the quarter or the last trading day of the quarter, whichever is lower.
F-41
Table of Contents
Directors’ Stock and Deferral Plan
Adopted in 2007, our DSDP provides non-employee members of the Board of Directors with an opportunity to elect to receive our common stock as payment for a portion or all of their retainer. The number of shares paid each quarter is determined by dividing the dollar amount of fees elected to be paid in common stock by the closing sales price per share of the common stock on the last day of the quarter. In addition, directors who elect to receive a portion or all of their fees in the form of common stock may also elect to defer, until a later date, the receipt of a portion or all of their fees to be received in common stock. We have reserved 100,000 shares under the DSDP and, as of December 31, 2020, 37,771 shares remained available to be issued under the plan.
25. Retirement Benefit Plan
Our 401(k) retirement plan provides for optional employee contributions up to the applicable Internal Revenue Service annual limit and discretionary employer matching contributions. We make discretionary matching contributions to each participant’s account at a rate of 100 % of each participant’s contributions up to 5 % of eligible compensation. We recorded matching contributions of $ 5.6 million, $ 6.8 million and $ 6.5 million during the years ended December 31, 2020, 2019 and 2018, respectively.
26. Commitments and Contingencies
Performance Bonds
In the normal course of business we have issued performance bonds to various state authorities that ensure payment of certain obligations. We have also issued a bond to protect our 401(k) retirement plan against losses caused by acts of fraud or dishonesty. The bonds have expiration dates in 2021 through the fourth quarter of 2022 and maximum potential future payments of $ 2.2 million. As of December 31, 2020, we were in compliance with all obligations to which the performance bonds pertain.
Tax Matters
We are subject to a number of state and local taxes that are not income-based. As many of these taxes are subject to audit by the taxing authorities, it is possible that an audit could result in additional taxes due. We accrue for such additional taxes when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the liability. As of December 31, 2020 and 2019, we accrued $ 5.6 million and $ 2.5 million, respectively, for the outcomes of non-income-based tax audits. We do not expect that the ultimate resolutions of these audits will result in a material variance from the amounts accrued. We do not accrue for unasserted claims for tax audits unless we believe the assertion of a claim is probable, it is probable that it will be determined that the claim is owed and we can reasonably estimate the claim or range of the claim. We believe the likelihood is remote that the impact of potential unasserted claims from non-income-based tax audits could be material to our consolidated financial position, but it is possible that the resolution of future audits could be material to our consolidated results of operations or cash flows.
Subject to the provisions of the tax matters agreement between Exterran Corporation and us, both parties agreed to indemnify the primary obligor of any return for tax periods beginning before and ending before or after the Spin-off (including any ongoing or future amendments and audits for these returns) for the portion of the tax liability (including interest and penalties) that relates to their respective operations reported in the filing. The tax contingencies mentioned above relate to tax matters for which we are responsible in managing the audit. As of December 31, 2020 and 2019, we had an indemnification liability (including penalties and interest), in addition to the tax contingency above, of $ 1.6 million and $ 2.8 million, respectively, for our share of non-income based tax contingencies related to audits being managed by Exterran Corporation.
F-42
Table of Contents
During the third quarter of 2020, we settled a certain sales and use tax audit for which we recorded a $ 12.4 million net benefit in our consolidated statements of operations. This net benefit was primarily reflected as decreases of $ 4.4 million and $ 7.9 million to cost of sales (excluding depreciation and amortization) and SG&A, respectively. We received a cash refund of $ 17.3 million in the fourth quarter of 2020 and have a $ 2.0 million accrued liability recorded as of December 31, 2020 related to this settlement.
Insurance Matters
Our business can be hazardous, involving unforeseen circumstances such as uncontrollable flows of natural gas or well fluids and fires or explosions. As is customary in our industry, we review our safety equipment and procedures and carry insurance against some, but not all, risks of our business. Our insurance coverage includes property damage, general liability and commercial automobile liability and other coverage we believe is appropriate. We believe that our insurance coverage is customary for the industry and adequate for our business; however, losses and liabilities not covered by insurance would increase our costs.
Additionally, we are substantially self-insured for workers’ compensation and employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses up to the deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages. We are also self-insured for property damage to our offshore assets.
Litigation and Claims
In the ordinary course of business, we are involved in various pending or threatened legal actions. While we are unable to predict the ultimate outcome of these actions, we believe that any ultimate liability arising from any of these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends.
27. Related Party Transactions
In connection with the closing of the Elite Acquisition, we issued 21.7 million shares of our common stock to JDH Capital, an affiliate of our customer Hilcorp. As long as JDH Capital, together with affiliates of Hilcorp, owns at least 7.5 % of our outstanding common stock, it will have the right to designate one director to our Board of Directors. Jeffery D. Hildebrand, founder and executive chairman of Hilcorp, was appointed Director in August 2019 and served until his resignation on July 29, 2020, at which time Jason C. Rebrook, President of Hilcorp, was appointed Director to fill the resulting vacancy. Mr. Hildebrand did no t receive and Mr. Rebrook receives no compensation for their role as Director. As of December 31, 2020, JDH Capital owned 14.2 % of our outstanding common stock.
Revenue from Hilcorp and affiliates was $ 40.3 million, $ 31.4 million and $ 12.0 million during the years ended December 31, 2020, 2019 and 2018, respectively. Accounts receivable, net due from Hilcorp and affiliates was $ 3.9 million and $ 5.1 million as of December 31, 2020 and 2019, respectively.
28. Segments
We manage our business segments primarily based on the type of product or service provided. We have two segments which we operate within the U.S.: contract operations and aftermarket services. The contract operations segment primarily provides natural gas compression services to meet specific customer requirements. The aftermarket services segment provides a full range of services to support the compression needs of customers, from parts sales and normal maintenance services to full operation of a customer’s owned assets. We evaluate the performance of our segments based on gross margin for each segment. Revenue includes only sales to external customers.
F-43
Table of Contents
No single customer accounted for 10% or more of our revenue during the years ended December 31, 2020 and 2019. During the year ended December 31, 2018, Williams Partners accounted for 11 % of our contract operations and aftermarket services revenue.
The following table presents revenue, gross margin and capital expenditures by segment during the years ended December 31, 2020, 2019 and 2018 (in thousands):
Contract
Aftermarket
Segments
Operations
Services
Total
Other (1)
Total
2020
Revenue
$
738,918
$
136,052
$
874,970
$
—
$
874,970
Gross margin
477,831
19,946
497,777
—
497,777
Capital expenditures
133,492
5,308
138,800
1,502
140,302
2019
Revenue
$
771,539
$
193,946
$
965,485
$
—
$
965,485
Gross margin
474,279
34,968
509,247
—
509,247
Capital expenditures
374,650
8,714
383,364
1,834
385,198
2018
Revenue
$
672,536
$
231,905
$
904,441
$
—
$
904,441
Gross margin
399,523
40,551
440,074
—
440,074
Capital expenditures
307,048
6,111
313,159
5,943
319,102
(1) Corporate-related items.
The following table presents assets by segment reconciled to total assets per the consolidated balance sheets (in thousands):
December 31,
2020
2019
Contract operations
$
2,593,864
$
2,915,724
Aftermarket services
45,985
67,832
Segment assets
2,639,849
2,983,556
Other assets (1)
128,837
113,518
Assets associated with discontinued operations
11,036
12,901
Total assets
$
2,779,722
$
3,109,975
(1) Corporate-related items.
F-44
Table of Contents
The following table reconciles total gross margin to income (loss) before income taxes (in thousands):
Year Ended December 31,
2020
2019
2018
Total gross margin
$
497,777
$
509,247
$
440,074
Less:
Selling, general and administrative
105,100
117,727
101,563
Depreciation and amortization
193,138
188,084
174,946
Long-lived and other asset impairment
79,556
44,663
28,127
Goodwill impairment
99,830
—
—
Restatement and other charges
—
445
19
Restructuring charges
8,450
—
—
Interest expense
105,716
104,681
93,328
Debt extinguishment loss
3,971
3,653
2,450
Transaction-related costs
—
8,213
10,162
Gain on sale of assets, net
( 10,643 )
( 16,016 )
( 5,674 )
Other income, net
( 1,359 )
( 661 )
( 157 )
Income (loss) before income taxes
$
( 85,982 )
$
58,458
$
35,310
29. Subsequent Events
February 2021 Disposition
On February 10, 2021, we completed the sale of certain contract operations customer service agreements and approximately 300 compressors, comprising approximately 40,000 horsepower, used to provide compression services under those agreements as well as other assets used to support the operations. We allocated customer-related and contract-based intangible assets based on a ratio of the horsepower sold relative to the total horsepower of the asset group. A gain on the sale of approximately $ 6.0 million will be recognized in the first quarter of 2021.
Amendment No. 3 to Credit Facility
On February 22, 2021, we amended our credit facility to, among other things:
● reduce the aggregate revolving commitment from $ 1.25 billion to $ 750.0 million, and
● increase the maximum Total Debt to EBITDA ratios and reduce the maximum Senior Secured Debt to EBITDA ratio, as defined in the credit facility agreement, to the following:
Senior Secured Debt to EBITDA
3.00 to 1.0
Total Debt to EBITDA
Through fiscal year 2022
5.75 to 1.0
January 1, 2023 through September 30, 2023
5.50 to 1.0
Thereafter (1)
5.25 to 1.0
(1) Subject to a temporary increase to 5.50 to 1.0 for any quarter during which an acquisition satisfying certain thresholds is completed and for the two quarters immediately following such quarter.
We incurred approximately $ 1.8 million in transaction costs related to Amendment No. 3 during the first quarter of 2021.
F-45
Table of Contents
ARCHROCK, INC.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at
Charged to
Balance at
Beginning
Costs and
End of
of Period
Expenses
Deductions (1)
Period
Allowance for credit losses applied to accounts receivable in the balance sheet
December 31, 2020
$
2,210
$
3,525
$
2,365
$
3,370
December 31, 2019
1,452
2,567
1,809
2,210
December 31, 2018
1,794
1,677
2,019
1,452
(1) Primarily represents uncollectible accounts written off and, for 2020, the impact of the adoption of ASU 2016-13 on January 1, 2020.
S-1