What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2022-02-23 compared with 2021-02-23 · 313 added, 382 removed, 1169 unchanged (37% of the section changed)

18 unchanged sentences

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, 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.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our report dated February 23, 2022, expressed an unqualified opinion on those financial statements.

Basis for Opinion

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Equity compensation plans not approved by security holders (5)

(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:

(1) Comprised of the 2013 Plan, 2020 Plan and ESPP.

No additional grants may be made under the 2013 Plan.

(2) Comprised of unvested performance-based restricted stock units payable in common stock upon vesting at target performance.

(3) Performance-based restricted stock units do not have an exercise price.

2 unchanged sentences

(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.

7 unchanged sentences

The following financial statements are filed as a part of this 2021 Form 10-K.

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID 34 )

Bookmark not defined.

Consolidated Balance Sheets

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Notes to Consolidated Financial Statements

Financial Statement Schedule

Schedule II — Valuation and Qualifying Accounts

All other schedules have been omitted as they are not required under the relevant instructions.

Financial Statement Schedules

All financial statement schedules are omitted because they are not applicable or the information is set forth in the consolidated financial statements or notes thereto within Item 8 “Financial Statements and Supplementary Data.”

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

211 unchanged sentences

Award Notice and Agreement for Performance Units (Stock-Settled)

Form of Compensation Letter (incorporated by reference and filed as Exhibit 10.1 to Form 8-K filed on April 30, 2020), incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on June 21, 2021

List of Subsidiaries of Archrock, Inc.

44 unchanged sentences

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”).

and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

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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 .

7 unchanged sentences

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.

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, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s assumptions.

How the Critical Audit Matter Was Addressed in the Audit

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– 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 Fair Market Value assigned by management on impaired units by using Internal Fair Value Specialists.

• 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:

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Net income (loss)

Net income attributable to noncontrolling interest

Net income (loss) attributable to Archrock stockholders

Basic and diluted net income (loss) per common share attributable to Archrock common stockholders

Basic and diluted net income (loss) per common share

Weighted average common shares outstanding:

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

Amortization of terminated interest rate swaps

Merger-related adjustments

Amortization of dedesignated interest rate swap

Total other comprehensive income (loss), net of tax

Comprehensive income (loss)

Comprehensive income attributable to noncontrolling interest

Comprehensive income (loss) attributable to Archrock stockholders

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

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Comprehensive

Noncontrolling

Income (Loss)

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Stock-based compensation, net of forfeitures

Stock options exercised

Contribution from Exterran Corporation

Cash distribution to noncontrolling unitholders of the Partnership

Impact of adoption of ASC 606 Revenue

Impact of adoption of ASU 2017-12

Impact of adoption of ASU 2018-02

Merger-related adjustments

Shares issued for Elite Acquisition

Comprehensive income

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

Amortization of terminated interest rate swaps

Merger-related adjustments

Interest rate swap loss, net of reclassifications to earnings

Balance at December 31, 2019

5 unchanged sentences

Stock-based compensation, net of forfeitures

Shares issued for Elite Acquisition

Comprehensive income

Contribution from Exterran Corporation

Impact of ASU 2016-13 adoption

Comprehensive loss

Interest rate swap loss, net of reclassifications to earnings

4 unchanged sentences

Cash dividends ($ 0.580 per common share)

Shares issued in ESPP

Shares issued under ESPP

Stock-based compensation, net of forfeitures

Contribution from Exterran Corporation

Impact of ASU 2016-13 adoption

Comprehensive loss

Interest rate swap loss, net of reclassifications to earnings

Net proceeds from issuance of common stock

Comprehensive income

Interest rate swap gain, net of reclassifications to earnings

Amortization of dedesignated interest rate swap

Balance at December 31, 2021

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Amortization of debt premium

Amortization of terminated interest rate swaps

Amortization of dedesignated interest rate swap

Debt extinguishment loss

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Cash paid in Elite Acquisition

Net cash used in investing activities

Net cash provided by (used in) investing activities

Cash flows from financing activities:

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Proceeds from (payments for) settlement of interest rate swaps that include financing elements

Dividends paid to Archrock stockholders

Distributions paid to noncontrolling partners in the Partnership

Proceeds from stock options exercised

Dividends paid to stockholders

Net proceeds from issuance of common stock

Proceeds from stock issued under ESPP

2 unchanged sentences

Net cash provided by (used in) financing activities

Net decrease in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of period

7 unchanged sentences

Issuance of Archrock common stock pursuant to Elite Acquisition, net of tax

Issuance of Archrock common stock pursuant to Merger, net of tax

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

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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.

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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.

We 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.

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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.

Service provided based on time and materials is 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.

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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.

At both December 31, 2021 and 2020, Chevron U.S.A.

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

The following table summarizes the activity in our allowance for credit losses:

Year Ended December 31,

(in thousands)

Balance at beginning of period

Impact of adoption of ASU 2016-13 on January 1, 2020

1 unchanged sentence

Write-offs charged against allowance

Balance at December 31, 2020

Balance at end of period

Inventory consists of parts used for maintenance of natural gas compression equipment.

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Identifiable intangibles are amortized over the estimated useful life of the asset.

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.

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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.

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 follows the Accounting Standards Codification Topic 606 Revenue from Contracts with Customers guidance.

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.

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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.

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 as a result.

Internal-Use Software

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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.

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.

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.

In June 2021, we prospectively adopted ASU 2020-04, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued as a result of reference rate reform.

ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022.

Entities may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020.

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.

On June 10, 2021, we amended one of our interest rate swap agreements and determined that the modifications meet the criteria for the optional expedients and exceptions, which allow us to forego dedesignation of the hedging relationship and to subsequently assess effectiveness on a qualitative basis.

The adoption of ASU 2020-04 did not have a material impact on our consolidated financial statements.

In the first quarter, we evaluated Amendment No.

3 to our Credit Facility and determined that ASU 2020-04 was not applicable.

We will continue to assess any modifications to our interest rate swap and Credit Facility agreements during the effective period of this update and will apply the amendments as applicable.

Business Transactions

July 2021 Dispositions

In July 2021, we completed sales of certain contract operations customer service agreements and approximately 575 compressors, comprising approximately 100,000 horsepower, used to provide compression services under those agreements, as well as other assets used to support the operations.

We allocated customer-related and contract-based intangible assets based on a ratio of the horsepower sold relative to the total horsepower of the asset group.

We received cash consideration of $ 60.3 million for the sales and recorded gains on the sales of $ 13.0 million in gain on sale of assets, net in our consolidated statements of operations during the year ended December 31, 2021.

February 2021 Disposition

In February 2021, we completed the sale of certain contract operations customer service agreements and approximately 300 compressors, comprising approximately 40,000 horsepower, used to provide compression services under those agreements as well as other assets used to support the operations.

We allocated customer-related and contract-based intangible assets based on a ratio of the horsepower sold relative to the total horsepower of the asset group.

We recorded a gain on the sale of $ 6.0 million in gain on sale of assets, net in our consolidated statements of operations during the year ended December 31, 2021.

July 2020 Disposition

On July 9, 2020, we completed the sale of the turbocharger business included within our aftermarket services segment .

In July 2020, we completed the sale of the turbocharger business included within our aftermarket services segment .

In connection with the sale, we entered into a supply agreement to purchase a minimum amount of turbocharger goods and services over a two-year term.

In addition to cash of $ 9.5 million received upon closing, an additional $ 3.0 million is due on the first anniversary of the closing date and $ 3.5 million will be received through the purchase of turbocharger goods and services under the supply agreement.

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.

In addition to cash of $ 9.5 million received upon closing, an additional $ 3.0 million was received on the first anniversary of the closing date in July 2021, and $ 3.5 million was received through the purchase of turbocharger goods and services under the supply agreement, including $ 2.8 million that was received during the year ended December 31, 2021.

We recognized a gain on the sale of $ 9.3 million in gain on sale of assets, net in our consolidated statements of operations during the year ended December 31, 2020.

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.

In March 2020, we completed the sale of certain contract operations customer service agreements and approximately 200 compressors, comprising approximately 35,000 horsepower, used to provide compression services under those agreements as well as other assets used to support the operations.

We allocated customer-related and contract-based intangible assets and goodwill based on a ratio of the horsepower sold relative to the total horsepower of the asset group.

1 unchanged sentence

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.

In August 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 under the Credit Facility.

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

Other current assets

Property, plant and equipment

Operating lease ROU assets

Intangible assets

Accounts payable, trade

Accrued liabilities

Operating lease liabilities

Purchase price

The excess of the consideration transferred over those fair values was recorded as goodwill.

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.

The fair value measurements for property, plant and equipment and intangible assets were based on significant inputs that are not observable in the market and therefore represent Level 3 measurements.

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.

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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.

Unaudited pro forma financial information for the year ended December 31, 2019 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:

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• 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,

The unaudited pro forma financial information below is presented 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.

(in thousands)

December 31, 2019

Net income attributable to Archrock stockholders

2 unchanged sentences

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.

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.

In August 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.

1 unchanged sentence

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.

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):

We completed the Spin-off in 2015.

In order to effect the Spin-off and govern our relationship with Exterran Corporation after the Spin-off, we entered into several agreements with Exterran Corporation, including a tax matters agreement, which governs the respective rights, responsibilities and obligations of Exterran Corporation and us with respect to certain tax matters.

As of both December 31, 2021 and 2020, we had $ 7.9 million of unrecognized tax benefits (including interest and penalties) related to Exterran Corporation operations prior to the Spin-off recorded to noncurrent liabilities associated with discontinued operations in our consolidated balance sheets.

We had an offsetting indemnification asset of $ 7.9 million related to these unrecognized tax benefits recorded to noncurrent assets associated with discontinued operations as of both December 31, 2021 and 2020.

The following table presents the balance sheets for our discontinued operations:

(in thousands)

Deferred tax assets

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Total liabilities associated with discontinued operations

The following table presents the statements of operations for our discontinued operations (in thousands):

The following table presents the statements of operations for our discontinued operations:

Year Ended December 31,

(in thousands)

Other (income) expense, net

1 unchanged sentence

Loss from discontinued operations, net of tax

Inventory consisted of the following (in thousands):

(in thousands)

Parts and supplies

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Property, Plant and Equipment, net

Property, plant and equipment, net, consisted of the following (in thousands):

(in thousands)

Compression equipment, facilities and other fleet assets

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Depreciation expense was $ 167.6 million, $ 177.5 million and $ 172.8 million during the years ended December 31, 2021, 2020 and 2019, 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 .

Assets under construction of $ 30.1 million and $ 17.6 million at December 31, 2021 and 2020, respectively, primarily consisted of compression equipment, facilities and other fleet assets .

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 .

Our leases have remaining lease terms of less than one year to approximately nine years and most include options to extend the lease term, at our discretion, for an additional six months to ten 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):

Financial and other supplemental information related to our operating leases follows.

(in thousands)

Classification

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Total lease liabilities

The components of lease cost follow (in thousands):

Year Ended December 31,

(in thousands)

Operating lease cost

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Total lease cost

Cash flow and noncash information related to our operating leases follow (in thousands):

Year Ended December 31,

(in thousands)

Operating cash flows - cash paid for amounts included in the measurement of operating lease liabilities

Operating lease ROU assets obtained in exchange for new lease liabilities

Other supplemental information related to our operating leases follows:

Operating lease ROU assets obtained in exchange for lease liabilities, net (1)

(1) Includes decreases to our ROU assets of $ 0.3 million and $ 0.1 million related to lease amendments and terminations during the years ended December 31, 2021 and 2020, respectively.

Weighted average remaining lease term (in years)

Weighted average discount rate

Remaining maturities of lease liabilities as of December 31, 2020 were as follows (in thousands):

Remaining maturities of our lease liabilities as of December 31, 2021 were as follows:

(in thousands)

Total lease payments

Total lease liabilities

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.

We recognized goodwill in connection with the Elite Acquisition, which represented 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.

Beginning in the first quarter of 2020, the COVID-19 pandemic caused a significant deterioration in global macroeconomic conditions, which commenced substantial spending cuts by our customers and a decline in production.

This global response to the pandemic significantly impacted our market capitalization and estimates of future revenues and cash flows, which triggered the need to perform a quantitative test of the fair value of our contract operations reporting unit as of March 31, 2020.

The quantitative test determined that the carrying amount of our contract operations reporting unit exceeded its fair value and we recorded a goodwill impairment loss of $ 99.8 million during the first quarter of 2020.

Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions, which have a significant impact on the fair value determined.

We 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.

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

Impairment loss

Balance at December 31, 2020

We determined the fair value of our reporting unit using an equal weighting of both the expected present value of future cash flows and a market approach.

The present value of future cash flows was estimated using our most recent forecast and the weighted average cost of capital.

The market approach used a market multiple on the earnings before interest expense, provision for income taxes and depreciation and amortization expense of comparable peer companies.

Significant estimates for our reporting unit included in our impairment analysis were our cash flow forecasts, our estimate of the market’s weighted average cost of capital and market multiples.

Intangible Assets, net

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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):

Intangible assets, net consisted of the following:

December 31, 2021

December 31, 2020

(in thousands)

Customer-related ( 15 ― 25 year life)

2 unchanged sentences

Amortization expense of these intangible assets totaled $ 11.3 million, $ 15.6 million and $ 15.3 million during the years ended December 31, 2021, 2020 and 2019, respectively.

Estimated future intangible assets amortization expense as of December 31, 2020 was as follows (in thousands):

Estimated future intangible assets amortization expense as of December 31, 2021 was as follows:

(in thousands)

Contract Costs

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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.

In the fourth quarter of 2018, we began a process and technology transformation project that has, among other things, replaced our existing ERP, supply chain and inventory management systems and expanded 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, 2021 and 2020, we had $ 12.7 million and $ 7.7 million, respectively, of capitalized implementation costs related to our hosting arrangements that are service contracts included in other assets in our 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.

Accumulated amortization was $ 0.7 million and $ 0.3 million at December 31, 2021 and 2020, respectively.

We recorded $ 0.3 million of amortization expense to SG&A in our consolidated statements of operations during each of the years ended December 31, 2021 and 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.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

(in thousands)

Accrued salaries and other benefits

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Long-Term Debt

Long-term debt consisted of the following (in thousands):

(in thousands)

Credit Facility

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Deferred financing costs, net of amortization

Debt discount, net of amortization

Deferred financing costs, net of amortization

Long-term debt

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As a result of the facility’s ratio requirements (see below), $ 502.5 million of the $ 506.6 million of undrawn capacity was available for additional borrowings as of December 31, 2021.

As of December 31, 2020, we were in compliance with all covenants under the Credit Facility agreement.

We were in compliance with all other covenants under our Credit Facility agreement.

Amendments to the Credit Facility

Amendment No.

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.

● change the applicable margin for borrowings under the Credit Facility to those discussed in “Other Facility Terms” below.

In February 2021, we amended our Credit Facility to, among other things, reduce the aggregate revolving commitment from $ 1.25 billion to $ 750.0 million and adjust the maximum Senior Secured Debt to EBITDA and Total Debt to EBITDA ratios, as defined in the Credit Facility agreement, to those listed in the table below.

We incurred $ 1.8 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.

3, which were included in other assets in our consolidated balance sheets and are being amortized over the remaining term of the Credit Facility.

In addition, we wrote off $ 4.9 million of unamortized deferred financing costs as a result of the amendment, which was recorded to interest expense in our consolidated statements of operations during the year ended December 31, 2021.

Amendment No.

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;

● effective upon completion of the Merger in April 2018:

increase the aggregate revolving commitment from $ 1.1 billion to $ 1.25 billion;

increase the amount available for the issuance of letters of credit from $ 25.0 million to $ 50.0 million;

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.

In November 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 and change the applicable margin for borrowings to those discussed in “Other Facility Terms” below.

We incurred $ 6.4 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.

2, which were included in other assets in our consolidated balance sheets and are being amortized over the remaining 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.

Subject to certain conditions, including 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 and $ 50.0 million is available for the issuance of letters of credit.

The Credit Facility bears interest at a base rate or LIBOR, at our option, plus an applicable margin.

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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.

We incurred $ 2.0 million, $ 2.0 million and $ 1.9 million in commitment fees during the years ended December 31, 2021, 2020 and 2019, respectively.

The Credit Facility borrowing base consists of eligible accounts receivable, inventory and compressors, the largest of which is compressors.

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Total Debt to EBITDA

January 1 through June 30, 2020

Through fiscal year 2022

January 1, 2023 through September 30, 2023

Thereafter (1)

(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.

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.

In December 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 %.

The $ 500.0 million of notes were issued at 100 % of their face value and have an effective interest rate of 6.8 %.

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 $ 500.0 million of notes were issued at 100 % of their face value and have an effective interest rate of 7.9 %.

The net proceeds from the 2027 Notes and 2028 Notes were used to repay borrowings outstanding under our Credit Facility.

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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.

and Archrock Partners 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.

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.

In April 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.

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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):

Contractual maturities of long-term debt over the next five years, excluding interest to be accrued, as of December 31, 2021, were as follows:

(in thousands)

Long-term debt maturities through 2026

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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):

Our accumulated other comprehensive income (loss) consists of changes in the fair value of our interest rate swap derivative instruments, net of tax.

Year Ended December 31,

(in thousands)

Beginning accumulated other comprehensive income (loss)

Loss recognized in other comprehensive income (loss), net of tax provision (benefit) of $( 1,776 ), $( 1,425 ) and $ 169 , respectively

Other comprehensive income (loss), net of tax:

Loss recognized in other comprehensive income (loss), net of tax benefit of $ 257 , $ 1,776 and $ 1,425 , respectively

(Gain) loss reclassified from accumulated other comprehensive income (loss) to interest expense, net of tax provision (benefit) of $( 1,324 ), $( 814 ) and $ 478 , respectively

Merger-related adjustments (2)

Other comprehensive income (loss) attributable to Archrock stockholders

Ending accumulated other comprehensive income (loss)

(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 .

Total other comprehensive income (loss)

Ending accumulated other comprehensive loss

See Note 22 (“Derivatives”) for further details on our interest rate swap derivative instruments.

At-the-Market Continuous Equity Offering Program

In February 2021, we entered into the ATM Agreement, pursuant to which we may offer and sell shares of our common stock from time to time for an aggregate offering price of up to $ 50.0 million.

We use the net proceeds of these offerings, after deducting sales agent fees and offering expenses, for general corporate purposes.

Offerings of common stock pursuant to the ATM Agreement will terminate upon the earlier of (i) the sale of all shares of common stock subject to the ATM Agreement or (ii) the termination of the ATM Agreement by us or by each of the sales agents.

Any sales agent may also terminate the ATM Agreement but only with respect to itself.

During the year ended December 31, 2021, we sold 357,148 shares of common stock for net proceeds of $ 3.4 million pursuant to the ATM Agreement.

Elite Acquisition

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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.

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):

December 31, 2018

Net income attributable to Archrock stockholders

Increase in Archrock stockholders’ additional paid-in capital for change in ownership of Partnership common units

Increase from net income attributable to Archrock stockholders and transfers from noncontrolling interest

Cash Dividends

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(in thousands)

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.

On January 27, 2022, our Board of Directors declared a quarterly dividend of $ 0.145 per share of common stock, or approximately $ 22.6 million, which was paid on February 15, 2022 to stockholders of record at the close of business on February 8, 2022.

Revenue from Contracts with Customers

The following table presents our revenue from contracts with customers disaggregated by revenue source (in thousands):

The following table presents our revenue from contracts with customers by segment (see Note 22 (“Segments”)) and disaggregated by revenue source:

Year Ended December 31,

(in thousands)

Contract operations:

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Over 1,500 horsepower per unit

Total contract operations (3)

Total contract operations revenue (2)

Aftermarket services:

OTC parts and components sales

Total aftermarket services (5)

Total aftermarket services revenue (4)

Total revenue

(1) We operate in two segments:

contract operations and aftermarket services.

See Note 28 (“Segments”) for further details regarding our segments.

(1) 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.

(2) Includes $ 4.0 million, $ 5.6 million and $ 7.9 million during the years ended December 31, 2021, 2020 and 2019, respectively, related to billable maintenance on owned compressors that was recognized at a point in time.

All other contract operations revenue is recognized over time.

(3) 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.

(4) Services revenue within aftermarket services is recognized over time.

OTC parts and components sales revenue is recognized at a point in time.

Performance Obligations

As of 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):

As of December 31, 2021, we had $ 264.6 million of remaining performance obligations related to our contract operations segment, which will be recognized through 2026 as follows:

(in thousands)

Remaining performance obligations

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Contract Assets and Liabilities

Contract Assets

As of December 31, 2021 and 2020, our receivables from contracts with customers, net of allowance for credit losses, were $ 84.7 million and $ 95.6 million, respectively.

Contract Liabilities

Freight billings to customers for the transport of compression assets, customer-specified modifications of compression assets and milestone billings on aftermarket services often result in a contract liability.

As of 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.

Our contract liabilities were $ 4.4 million and $ 4.6 million as of December 31, 2021 and 2020, respectively, and were included in deferred revenue and other liabilities in our consolidated balance sheets.

During the year ended December 31, 2021, we deferred revenue of $ 10.2 million and recognized $ 10.4 million as revenue.

The revenue recognized and deferred during the period primarily related to freight billings and milestone billings on aftermarket services.

Long-Lived and Other Asset Impairment

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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.

No similar impairment has been indicated subsequent to the first quarter of 2020.

Compression Fleet

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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):

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

Year Ended December 31,

(dollars in thousands)

Idle compressors retired from the active fleet

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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.

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 process and technology transformation project was impaired.

See Note 12 (“Hosting Arrangements”) for further details.

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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.

We incurred severance costs of $ 1.7 million related to these activities during the first quarter of 2020.

No additional costs will be incurred for this organizational restructuring.

In response to the decreased activity level of our customers that resulted from the COVID-19 pandemic beginning in the second quarter of 2020, we incurred severance costs of $ 7.0 million to right-size our business.

No additional costs will be incurred under this restructuring plan.

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.

We have incurred $ 1.5 million of costs as a result of these property disposals.

No additional costs will be incurred under this restructuring plan.

During the third quarter of 2021, management approved and initiated a plan to exit a facility no longer deemed economical for our business, and in the fourth quarter, we incurred $ 0.9 million of costs to complete the exit of this facility.

We do not expect to incur additional material costs under this restructuring plan.

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

The following table presents the changes to our accrued liability balance related to restructuring charges during the year ended December 31, 2021:

(in thousands)

Restructuring

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Restructuring

Balance at December 31, 2020

Charges incurred

Non-cash expense (2)

Balance at December 31, 2021

(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):

The following table presents restructuring charges incurred by segment:

(in thousands)

Year ended December 31, 2021

Pandemic restructuring

2020 Property restructuring - other exit costs

2021 Property restructuring - other exit costs

Other restructuring

Total restructuring charges

Year ended December 31, 2020

Organizational restructuring

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(1) Represents expense incurred within our corporate function and not directly attributable to our segments.

The following table presents, by cost type, restructuring charges incurred during the year ended December 31, 2020 (in thousands):

December 31, 2020

The following table presents restructuring charges incurred by cost type:

Years Ended December 31,

(in thousands)

Severance costs

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Total severance costs

Property restructuring

Property disposal costs

Impairment loss

Total property restructuring

Other exit costs

Total property disposal costs

Other restructuring costs

Total restructuring charges

Current and Deferred Tax Provision

Our provision for (benefit from) income taxes consisted of the following (in thousands):

Our provision for (benefit from) income taxes consisted of the following:

Year Ended December 31,

(in thousands)

Current tax provision (benefit):

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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):

statutory rate of 21 %, the rate in effect during the years ended December 31, 2021, 2020 and 2019:

Year Ended December 31,

(in thousands)

Income taxes at U.S.

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Net state income taxes

Noncontrolling interest

Unrecognized tax benefits (1)

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Provision for (benefit from) income taxes

(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.

(1) Includes the expiration of statute of limitations and in 2019, also reflects a decrease in our uncertain tax benefit, net of federal benefit, due to settlements of tax audits.

See “Unrecognized Tax Benefits” below for further details.

(2) See “Tax Attributes and Valuation Allowances” below for further details.

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):

The tax effects of temporary differences that gave rise to deferred tax assets and deferred tax liabilities were as follows:

(in thousands)

Deferred tax assets:

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(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.

(2) The 2021 and 2020 net deferred tax assets are reflected in our consolidated balance sheets as deferred tax assets of $ 47.9 million and $ 56.9 million, respectively, and deferred tax liabilities of $ 1.1 million and $ 0.7 million, respectively.

Both the 2021 and 2020 balances are based on a U.S.

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Tax Attributes and Valuation Allowances

Year Ended December 31,

(in thousands)

Balance at beginning of period (1)

Additions to valuation allowance

Reductions to valuation allowance (1)

Balance at end of period

(1) In 2019, excludes $ 5.6 million related to discontinued operations .

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.

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.

federal income tax may be limited in the future if we have a 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.

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Changes to the valuation allowance are reflected in the statement of operations.

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.

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 was 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.

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Unrecognized Tax Benefits

A reconciliation of the unrecognized tax benefit (including discontinued operations) activity is shown below (in thousands):

A reconciliation of the unrecognized tax benefit (including discontinued operations) activity is shown below:

Year Ended December 31,

(in thousands)

Beginning balance

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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.

We recorded $ 0.1 million of potential interest expense and penalties in our consolidated statements of operations during the year ended December 31, 2021, and releases of $ 0.1 million during each of the years ended December 31, 2020 and 2019.

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.

As of both December 31, 2021 and 2020, we recorded an indemnification asset (including penalties and interest) of $ 7.9 million, which is 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.

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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.

We are not currently involved in any state audits.

During the year ended December 31, 2019, we settled certain state audits, which resulted in a refund of $ 2.4 million and a reduction in previously-accrued uncertain tax benefits of $ 4.4 million.

As of December 31, 2021, we believe it is reasonably possible that $ 2.6 million of our unrecognized tax benefits, including penalties, interest and discontinued operations, will be reduced prior to December 31, 2022 due to the settlement of audits or the expiration of statutes of limitations or both.

However, due to the uncertain and complex application of the tax regulations, it is possible that the ultimate resolution of these matters may result in liabilities that could materially differ from this estimate.

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.

In March 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.

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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.

Basic net income (loss) per common share is computed using the two-class method, which is an earnings allocation formula that determines net income (loss) per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings.

Under the two-class method, basic net income (loss) per common share is determined by dividing net income (loss), after deducting amounts allocated to participating securities, by the weighted average number of common shares outstanding for the period.

Participating securities include unvested restricted stock and stock-settled restricted stock units that have nonforfeitable rights to receive dividends or dividend equivalents, whether paid or unpaid.

During periods of net loss, only distributed earnings (dividends) are allocated to participating securities, as they do not have a contractual obligation to participate in our undistributed losses.

Diluted net income (loss) per common share 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):

During periods of net loss, only distributed earnings (dividends) are allocated to participating securities, as participating securities do not have a contractual obligation to participate in our undistributed losses.

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

The following table shows the calculation for net income (loss) attributable to common stockholders, which is used in the calculation of basic and diluted net income (loss) per common share:

Year Ended December 31,

Income (loss) from continuing operations attributable to Archrock stockholders

(in thousands)

Income (loss) from continuing operations

Loss from discontinued operations, net of tax

Net income (loss) attributable to Archrock stockholders

Net income (loss)

Earnings attributable to participating securities

Net income (loss) attributable to Archrock common stockholders

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):

Net income (loss) attributable to common stockholders

The following table shows the potential shares of common stock that were included in computing diluted net income (loss) per common share:

Year Ended December 31,

(in thousands)

Weighted average common shares outstanding including participating securities

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Weighted average common shares outstanding used in diluted net income (loss) per common share

The following table shows the potential shares of common stock issuable that were excluded from computing diluted net income (loss) per common share attributable to Archrock common stockholders as their inclusion would have been anti-dilutive (in thousands):

The following table shows the potential shares of common stock issuable that were excluded from computing diluted net income (loss) per common share as their inclusion would have been anti-dilutive:

Year Ended December 31,

(in thousands)

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

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Net dilutive potential common shares issuable

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 use derivative instruments to manage our exposure to fluctuations in the variable interest rate of our Credit Facility.

As of December 31, 2021, we had $ 300.0 million notional value of interest rate swaps outstanding, which expire in March 2022.

We entered into these swaps to offset changes in expected cash flows due to fluctuations in the associated variable interest rates and designated them as cash flow hedges.

The counterparties to these derivative agreements are major financial institutions.

We monitor the credit quality of these financial institutions and do not expect nonperformance by any counterparty, although such nonperformance could have an adverse effect on us.

We have no collateral posted for our derivative instruments.

During the year ended December 31, 2021, we dedesignated $ 125.0 million notional value of our interest rate swaps.

The fair value of this interest rate swap immediately prior to dedesignation was a liability of $ 1.6 million.

The associated amount in accumulated other comprehensive loss related to this interest rate swap is being amortized into interest expense over the remaining term of the swap through March 2022.

Changes in the fair value of the dedesignated interest rate swap subsequent to dedesignation are recorded in interest expense.

The remaining $ 175.0 million notional value of our interest rate swaps continue to be designated as cash flow hedging 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 $ 1.2 million of the deferred pre-tax loss attributable to interest rate swaps included in accumulated other comprehensive loss at December 31, 2021 will be reclassified into earnings as interest expense at then-current values during the next 12 months as the underlying hedged transactions occur.

As of 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):

Other current assets

Total derivative assets

As of December 31, 2021, the weighted average effective fixed interest rate of our interest rate swaps was 1.8 %.

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

(in thousands)

Interest rate swaps designated as cash flow hedging instruments

Accrued liabilities

Other liabilities

Total derivatives designated as cash flow hedging instruments

Interest rate swaps not designated as hedging instruments

Accrued liabilities

Total derivative liabilities

The following table presents the effect of our derivative instruments designated as cash flow hedging instruments on our consolidated statements of operations (in thousands):

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

Year Ended December 31,

Pre-tax gain (loss) recognized in other comprehensive income (loss)

(in thousands)

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

Interest rate swaps designated as cash flow hedging instruments

Pre-tax loss recognized in other comprehensive income (loss)

Pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense

Total amount of interest expense in which the effects of cash flow hedges are recorded

Interest rate swaps not designated as hedging instruments

Gain recognized in interest expense

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.

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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):

Derivative asset

Derivative liability

The following table presents our derivative position measured at fair value on a recurring basis, with pricing levels as of the date of valuation:

(in thousands)

Derivative liabilities

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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See Note 9 (“Goodwill”) for further details of the valuation methodology used in connection with the goodwill impairment.

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

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):

Weighted Average

Estimated sale proceeds

$ 100 - $ 600

See Note 19 (“Restructuring Charges”) for further details of our approved plan of disposal.

During the years ended December 31, 2020 and 2019, we recorded nonrecurring fair value measurements related to our idle and previously-culled compressors.

During the years ended December 31, 2021 and 2020, we recorded nonrecurring fair value measurements related to our idle 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.

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The fair value of our compressors impaired during the years ended December 31, 2021 and 2020 was as follows:

(in thousands)

Impaired compressors

The significant unobservable inputs used to develop the above fair value measurements were weighted by the relative fair value of the compressors being measured.

Additional quantitative information related to our significant unobservable inputs as of December 31, 2020 follows:

Additional quantitative information related to our significant unobservable inputs follows:

Weighted Average (1)

Estimated net sale proceeds:

As of December 31, 2021

$ 0 - $ 621 per horsepower

$ 35 per horsepower

(1) Calculated based on an estimated discount for market liquidity of 81 % .

As of December 31, 2020

$ 0 - $ 289 per horsepower

$ 20 per horsepower

(1) Calculated based on an estimated discount for market liquidity of 64 % and 81 % as of December 31, 2021 and 2020, respectively .

See Note 18 (“Long-Lived and Other Asset Impairment”) for further details.

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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):

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)

Carrying amount of fixed rate debt (1)

Fair value of fixed rate debt

(1) Carrying amounts are shown net of unamortized debt discounts and unamortized deferred financing costs.

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

See Note 14 (“Long-Term Debt”).

Stock-Based Compensation

We recognize stock-based compensation expense related to stock options, restricted stock units, performance units, phantom units and our ESPP.

We recognize stock-based compensation expense related to restricted stock awards, restricted stock units, performance-based restricted stock units and shares issued under our ESPP.

We account for forfeitures as they occur.

Stock-based compensation expense consisted of the following (in thousands):

Year Ended December 31,

Equity awards

Liability awards

(in thousands)

Equity award expense

Liability award (benefit) expense (1)

Total stock-based compensation expense

(1) In 2021, includes a reversal of prior period expense of $ 2.1 million during the fourth quarter as the result of revised estimates of performance achievement of our 2019 and 2020 cash-settled performance-based restricted stock units.

Stock Incentive Plans

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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:

Exercise Price

Remaining Life

(in thousands)

Options outstanding and exercisable, December 31, 2019

Options outstanding and exercisable, December 31, 2020

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.

Restricted Stock

Our outstanding restricted stock generally consists of stock-settled restricted stock awards and performance-based restricted stock units, and cash-settled performance-based restricted stock units.

For grants of restricted stock, we recognize compensation expense over the vesting period equal to the fair value of our common stock at the grant date.

Our restricted stock includes rights to receive dividends or dividend equivalents.

We periodically remeasure the fair value of our cash-settled units and record a cumulative adjustment of the expense previously recognized.

Our obligation related to the cash-settled units is reflected as a liability in our consolidated balance sheets.

Restricted stock awards generally vest one-third per year , subject to continued service through the applicable vesting date.

Performance-based restricted stock units generally vest in their entirety at the end of a three-year vesting period, also subject to continued service through the applicable vesting date.

Some of our performance-based restricted stock units have a market-based condition that 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 awards vest in their entirety on the date specified in the award agreement 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.

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Grant-date fair value

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:

Non-vested awards, December 31, 2019

Non-vested awards, December 31, 2020 (3)

The following table presents our restricted stock activity during the year ended December 31, 2021:

(in thousands)

Non-vested restricted stock, December 31, 2020

Non-vested restricted stock, December 31, 2021 (3)

(1) The weighted average grant date fair value of shares granted during the years ended December 31, 2021, 2020 and 2019 was $ 11.20 , $ 9.37 and $ 10.01 , respectively.

(2) The total fair value of all awards vested during the years ended December 31, 2021, 2020 and 2019 was $ 9.1 million, $ 7.1 million and $ 9.0 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.

(3) Non-vested awards as of December 31, 2021 were comprised of 523 cash-settled units and 2,055 stock-settled awards and units.

As of December 31, 2021, we expect $ 12.6 million of unrecognized compensation cost related to our non-vested awards and units to be recognized over the weighted-average period of 1.8 years.

Cash paid upon vesting of cash-settled restricted stock units during the years ended December 31, 2021, 2020 and 2019 was $ 0.6 million, $ 0.5 million and $ 1.3 million, respectively.

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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.

The purchase discount under the ESPP is 5 % of the fair market value of our common stock on the first or last trading day of the quarter, whichever is lower.

Directors’ Stock and Deferral Plan

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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.

There are 100,000 shares reserved under the DSDP and, as of December 31, 2021, 37,771 shares remained available to be issued under the plan.

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.

Our 401(k) retirement plan provides for optional employee contributions up to the applicable IRS 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.

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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.

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.

We are subject to a number of state and local taxes that are not income-based.

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We believe the likelihood is remote that the impact of potential unasserted claims from non-income-based tax audits could be material to our consolidated financial position, but it is possible that the resolution of future audits could be material to our consolidated results of operations or cash flows.

In 2021, one of our sales and use tax audits advanced from the audit review phase to the contested hearing phase.

We accrued $ 0.6 million and $ 0.9 million for this audit as of December 31, 2021 and 2020, respectively.

In 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 related to this settlement and have a $ 2.0 million accrued liability recorded as of December 31, 2021, which is included in our accrual for non-income-based tax audits discussed above.

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.

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.

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.

As of December 31, 2020, we had an indemnification liability (including penalties and interest), in addition to the tax contingency above, of $ 1.6 million for our share of non-income-based tax contingencies related to audits being managed by Exterran Corporation.

During the year ended December 31, 2021, these audits were settled and our indemnification liability was reduced to zero .

Litigation and Claims

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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.

As of December 31, 2021, JDH Capital owned 11.1 % of our outstanding common stock.

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.

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.

Hildebrand did no t receive compensation in his role as Director and Mr.

Rebrook received no compensation in his role as Director in 2020.

In December 2020, the Board of Directors voted to approve the payment of Director cash and equity compensation to Mr.

Rebrook beginning in 2021.

Revenue from Hilcorp and affiliates was $ 38.2 million, $ 40.3 million and $ 31.4 million during the years ended December 31, 2021, 2020 and 2019, respectively.

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No single customer accounted for 10% or more of our revenue during the years ended December 31, 2021, 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):

(in thousands)

Capital expenditures

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(1) Corporate-related items.

The following table presents assets by segment reconciled to total assets per the consolidated balance sheets (in thousands):

Contract operations

Aftermarket services

The following table presents assets by segment reconciled to total assets per the consolidated balance sheets:

(in thousands)

Contract operations assets

Aftermarket services assets

Segment assets

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(1) Corporate-related items.

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

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

Year Ended December 31,

(in thousands)

Total gross margin

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Income (loss) before income taxes

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

Total Debt to EBITDA

Through fiscal year 2022

January 1, 2023 through September 30, 2023

Thereafter (1)

(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.

ARCHROCK, INC.

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

Deductions (1)

Allowance for credit losses applied to accounts receivable in the balance sheet

December 31, 2020

December 31, 2019

December 31, 2018

(1) Primarily represents uncollectible accounts written off and, for 2020, the impact of the adoption of ASU 2016-13 on January 1, 2020.

Impact of Hurricane

Hurricane Ida made landfall in Louisiana on August 29, 2021, causing operational disruptions, damage to compressors and a temporary shutdown of facilities in Louisiana that negatively impacted our financial performance in the quarter.

In the third quarter of 2021, we recorded $ 2.0 million in depreciation expense associated with the damaged assets, and in the fourth quarter, we recognized an insurance recovery of $ 2.8 million related to the facility and compressor damages in other income, net in our consolidated statements of operations, after a deductible of $ 0.9 million.

A corresponding receivable for $ 2.8 million was recorded to our consolidated balance sheet as of December 31, 2021.

The remaining portion of our insurance claim pertaining to business interruption is in process.

We are currently unable to estimate the expected amount to be recovered, however, any amount recovered will not be subject to an additional deductible.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures