Item 9A. Controls and Procedures
ITEM 9A. CONTROLS AND PROCEDURES
Management’s Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this 2022 Form 10–K, our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a–15(e) of the Exchange Act), which are designed to provide reasonable assurance that we are able to record, process, summarize and report the information required to be disclosed in our reports under the Exchange Act within the time periods specified in the rules and forms of the SEC. Based on the evaluation, as of December 31, 2022, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to management, and made known to our principal executive officer and principal financial officer, on a timely basis to ensure that it is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management’s Annual Report on Internal Control Over Financial Reporting
As required by Exchange Act Rules 13a–15(c) and 15d–15(c), our management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness as to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on the results of management’s evaluation described above, management concluded that our internal control over financial reporting was effective as of December 31, 2022.
The effectiveness of internal control over financial reporting as of December 31, 2022 was audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in its report found within this 2022 Form 10–K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Archrock, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Archrock, Inc. and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, 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 as of and for the year ended December 31, 2022, of the Company and our report dated February 22, 2023, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting . Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 22, 2023
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ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated by reference to the sections entitled “Election of Directors,” “Governance” and “Stock Ownership” in our Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the sections entitled “Governance” and “Compensation Discussion and Analysis” in our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Portions of the information required in Item 12 are incorporated by reference to the section entitled “Stock Ownership” in our Proxy Statement.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information as of December 31, 2022, with respect to our compensation plans under which our common stock is authorized for issuance, aggregated as follows:
Number of Securities
to be Issued Upon
Weighted Average
Number of Securities
Exercise of
Exercise Price of
Remaining Available for
Outstanding Options,
Outstanding Options,
Future Issuance Under
Warrants and Rights
Warrants and Rights
Equity Compensation Plans
(a)
(b)
(c)
Equity compensation plans approved by security holders (1)
508,753
(2)
$
—
(3)
6,345,361
Equity compensation plans not approved by security holders (4)
—
—
37,771
Total
508,753
—
6,383,132
(1) Comprised of the 2013 Plan, the 2020 Plan and the 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.
(4) Comprised of our DSDP. See Note 18 to our Financial Statements for further details of our DSDP.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated by reference to the section entitled “Governance” in our Proxy Statement.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated by reference to the section entitled “Ratification of the Appointment of the Independent Registered Public Accounting Firm” in our Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
List of Documents filed as a part of this 2022 Form 10–K
(1)
Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID 34 )
F–1
Consolidated Balance Sheets
F–3
Consolidated Statements of Operations
F–4
Consolidated Statements of Comprehensive Income
F–5
Consolidated Statements of Equity
F–6
Consolidated Statements of Cash Flows
F–7
Notes to Consolidated Financial Statements
F–9
(2) Financial Statement 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.”
(3) Exhibits
Exhibit No.
Description
2.1
Separation and Distribution Agreement, dated as of November 3, 2015, by and among Exterran Holdings, Inc., Exterran General Holdings LLC, Exterran Energy Solutions, L.P., Exterran Corporation, AROC Corp., EESLP LP LLC, AROC Services GP LLC, AROC Services LP LLC and Archrock Services, L.P., incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8–K filed on November 5, 2015
2.2
Amendment No. 1 to Separation and Distribution Agreement, dated as of December 15, 2015, by and among Archrock, Inc., formerly named Exterran Holdings, Inc., Exterran General Holdings LLC, Exterran Energy Solutions, L.P., Exterran Corporation, AROC Corp., EESLP LP LLC, AROC Services GP LLC, AROC Services LP LLC and Archrock Services, L.P., incorporated by reference to Exhibit 2.3 to the Registrant’s Annual Report on Form 10–K for the year ended December 31, 2015
2.3
Agreement and Plan of Merger, dated as of January 1, 2018, by and among Archrock, Inc., Archrock GP LLC, Archrock General Partner, L.P. and Archrock Partners, L.P., incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8–K filed on January 2, 2018
2.4
Amendment No. 1 to Agreement and Plan of Merger, dated as of January 11, 2018, by and among Archrock, Inc., Archrock GP LLC, Archrock General Partner, L.P., Archrock Partners, L.P. and Amethyst Merger Sub LLC, incorporated by reference to Exhibit 2.2 to the Registrant’s Current Report on Form 8–K filed on January 16, 2018
2.5
Asset Purchase Agreement, dated as of June 23, 2019, by and among Archrock Services, L.P., Archrock, Inc. and Elite Compression Services, LLC, incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8–K filed on June 24, 2019
2.6
Asset Purchase Agreement, dated as of June 23, 2019, by and between Archrock Services, L.P. and Harvest Four Corners, LLC, incorporated by reference to Exhibit 2.2 of the Registrant’s Current Report on Form 8–K filed on June 24, 2019
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Exhibit No.
Description
3.1
Composite Restated Certificate of Incorporation of Archrock, Inc., incorporated by reference to Exhibit 3.3 to the Registrant’s Annual Report on Form 10–K for the year ended December 31, 2015
3.2
Third Amended and Restated Bylaws of Exterran Holdings, Inc. (now Archrock, Inc.), incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8–K filed on March 20, 2013
3.3
Amendment No. 1 to Third Amended and Restated Bylaws of Archrock, Inc., incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8–K filed on May 5, 2020
4.1
Indenture, dated as of March 21, 2019, by and among Archrock Partners, L.P., Archrock Partners Finance Corp., the guarantors party thereto and Wells Fargo Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8–K filed on March 21, 2019
4.2
Indenture, dated as of December 20, 2019, by and among Archrock Partners, L.P., Archrock Partners Finance Corp., the guarantors party thereto and Wells Fargo Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8–K filed on December 20, 2019
4.3
Description of Common Stock
10.1
Fourth Amended and Restated Omnibus Agreement, dated November 3, 2015, by and among Archrock, Inc. (formerly named Exterran Holdings, Inc.), Archrock Services, L.P. (formerly named Exterran US Services OpCo, L.P.), Archrock GP LLC (formerly named Exterran GP, LLC), Archrock General Partner, L.P. (formerly named Exterran General Partner, L.P.), Archrock Partners, L. P. (formerly named Exterran Partners, L.P.) and Archrock Partners Operating LLC, incorporated by reference to Exhibit 10.16 to the Registrant’s Annual Report on Form 10–K filed on February 29, 2016 (portions of this exhibit have been omitted by redacting a portion of the text (indicated by asterisks in the text) and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment)
10.2
First Amendment to Fourth Amended and Restated Omnibus Agreement, dated November 19, 2016, by and among Archrock, Inc., Archrock Services, L.P., Archrock GP LLC, Archrock General Partner, L.P., Archrock Partners, L.P., and Archrock Partners Operating LLC incorporated by reference to the Registrant’s Current Report on Form 8–K filed on November 23, 2016 (portions of this exhibit have been omitted by redacting a portion of the text (indicated by asterisks in the text) and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment)
10.3†
Exterran Holdings, Inc. (now Archrock, Inc.) Directors’ Stock and Deferral Plan, incorporated by reference to Exhibit 10.16 of the Registrant’s Current Report on Form 8–K filed on August 23, 2007
10.4†
First Amendment to Exterran Holdings, Inc. (now Archrock, Inc.) Directors’ Stock and Deferral Plan, incorporated by reference to Exhibit 10.22 of the Registrant’s Annual Report on Form 10–K for the year ended December 31, 2008
10.5†
Second Amendment to Exterran Holdings, Inc. (now Archrock, Inc.) Directors’ Stock and Deferral Plan, incorporated by reference to Exhibit 10.16 to the Registrant’s Current Report on Form 8–K filed on November 5, 2015
10.6†
Archrock Deferred Compensation Plan, incorporated by reference to Exhibit 10.17 to the Registrant’s Current Report on Form 8–K filed on November 5, 2015
10.7†
Exterran (now Archrock, Inc.) Employees’ Supplemental Savings Plan, incorporated by reference to Exhibit 10.30 of the Registrant’s Annual Report on Form 10–K for the year ended December 31, 2007
10.8†
Summary of Donna A. Henderson Compensation Arrangement, incorporated by reference to Exhibit 10.50 to the Registrant’s Annual Report on Form 10–K for the year ended December 31, 2015
10.9†
Summary of Jason Ingersoll Compensation Arrangement, incorporated by reference to Exhibit 10.51 to the Registrant’s Annual Report on Form 10–K for the year ended December 31, 2015
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Exhibit No.
Description
10.10†
Form of Compensation Letter applicable to Mr. Childers, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8–K filed on August 4, 2016.
10.11†
Form of Indemnification Agreement, incorporated by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8–K filed on November 5, 2015
10.12†
Form of Employment Letter applicable to Messrs. Childers and Ingersoll, incorporated by reference to Exhibit 10.8 to the Registrant’s Current Report on Form 8–K filed on November 5, 2015
10.13†
Form of Severance Benefit Agreement applicable to Messrs. Childers and Ingersoll, incorporated by reference to Exhibit 10.9 to the Registrant’s Current Report on Form 8–K filed on November 5, 2015
10.14†
Form of Change of Control Agreement applicable to Messrs. Childers and Ingersoll, incorporated by reference to Exhibit 10.10 to the Registrant’s Current Report on Form 8–K filed on November 5, 2015
10.15
Employee Matters Agreement, dated as of November 3, 2015, by and between Exterran Holdings, Inc. (now Archrock, Inc.) and Exterran Corporation, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8–K filed on November 5, 2015
10.16
Tax Matters Agreement, dated as of November 3, 2015, by and between Exterran Holdings, Inc. (now Archrock, Inc.) and Exterran Corporation, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8–K filed on November 5, 2015
10.17
Transition Services Agreement, dated as of November 3, 2015, by and between Exterran Holdings, Inc. (now Archrock, Inc.) and Exterran Corporation, incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8–K filed on November 5, 2015
10.18
Supply Agreement, dated as of November 3, 2015, by and among Archrock Services, L.P., EXLP Operating LLC and Exterran Energy Solutions, L.P., incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8–K filed on November 5, 2015
10.19†
Archrock, Inc. 2017 Employee Stock Purchase Plan, incorporated by reference to Annex A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed March 16, 2017
10.20†
Form of Amendment to Severance Benefit Agreement incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10–Q for the quarter ended June 30, 2017
10.21†
Form of Second Amendment to Severance Benefit Agreement, incorporated by reference to Exhibit 10.73 to the Registrant’s Annual Report on Form 10–K for the year ended December 31, 2017
10.22
Credit Agreement, dated as of March 30, 2017, among Archrock Partners Operating LLC, as Borrower, the other Loan Parties party thereto, the Lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent for the Lenders, as an Issuing Bank and as Swingline Lender, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8–K filed on April 5, 2017.
10.23
Pledge and Security Agreement, dated as of March 30, 2017, among Archrock Partners Operating LLC and the other Grantors party thereto in favor or JPMorgan Chase Bank, N.A., as Administrative Agent, incorporated by reference to Exhibit 10.2 to Archrock Partners, L.P.’s Current Report on Form 8–K filed on April 5, 2017.
10.24
Amendment No. 1 to Credit Agreement, dated as of February 23, 2018, by and among Archrock Partners, L.P., the other Loan Parties thereto, the Lenders thereto, and JPMorgan Chase Bank, N.A., as the Administrative Agent, incorporated by reference to Exhibit 10.1 to the Partnership’s Current Report on Form 8–K filed on February 28, 2018.
10.25
Omnibus Joinder Agreement, dated as of April 26, 2018, by and among Archrock, Inc., Archrock Services, L.P., AROC Corp., AROC Services GP LLC, AROC Services LP LLC, Archrock Services Leasing LLC, Archrock GP LP LLC, and Archrock MLP LP LLC and acknowledged and accepted by JPMorgan Chase Bank, N.A., as the Administrative Agent, incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8–K filed on April 26, 2018
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Exhibit No.
Description
10.26
Amendment and Supplement to Pledge and Security Agreement dated as of April 26, 2018, by and among Archrock Partners Operating LLC, Archrock Partners, L.P., Archrock Partners Finance Corp., Archrock Partners Leasing LLC, Archrock, Inc., Archrock Services, L.P., AROC Corp., AROC Services GP LLC, AROC Services LP LLC, Archrock Services Leasing LLC, Archrock GP LP LLC, Archrock MLP LP LLC and JPMorgan Chase Bank, N.A., as the Administrative Agent, incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8–K filed on April 26, 2018
10.27†
Form of Employment Letter applicable to Mr. Douglas S. Aron, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8–K filed on July 12, 2018
10.28†
Form of Change of Control Agreement applicable to Mr. Douglas S. Aron, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8–K filed on July 12, 2018
10.29†
Form of Archrock, Inc. Award Notice and Agreement for Restricted Stock, incorporated by reference to Exhibit 10.85 to the Registrant’s Annual Report on Form 10–K filed on February 20, 2019
10.30†
Form of Archrock, Inc. Award Notice and Agreement for Performance Units (Cash–Settled), incorporated by reference to Exhibit 10.87 to the Registrant’s Annual Report on Form 10–K filed on February 20, 2019
10.31†
Form of Archrock, Inc. Award Notice and Agreement for Performance Units (Stock–Settled), incorporated by reference to Exhibit 10.88 to the Registrant’s Annual Report on Form 10–K filed on February 20, 2019
10.32
Purchase Agreement, dated as of March 7, 2019, by and among Archrock Partners, L.P., Archrock Partners Finance Corp., Archrock, Inc., the other guarantors party thereto and J.P. Morgan Securities LLC, as representative of the initial purchasers named therein, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8–K filed on March 8, 2019
10.33
Omnibus Joinder Agreement, dated as of March 21, 2019, by and among Archrock GP LLC, Archrock Partners Corp., Archrock General Partner, L.P. and JPMorgan Chase Bank, N.A., incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8–K filed on March 21, 2019
10.34
Board Representation Agreement, dated as of August 1, 2019, by and between Archrock, Inc. and JDH Capital Holdings, L.P., incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8–K filed on August 1, 2019
10.35
Registration Rights Agreement, dated as of August 1, 2019, by and between Archrock, Inc. and JDH Capital Holdings, L.P., incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8–K filed on August 1, 2019
10.36
Amendment No. 2 to Credit Agreement, dated as of November 8, 2019, by and among Archrock, Inc., Archrock Partners Operating LLC, Archrock Services, L.P., the other Loan Parties thereto, the Lenders thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8–K filed on November 12, 2019
10.37
Purchase Agreement, dated as of December 16, 2019, by and among Archrock Partners, L.P., Archrock Partners Finance Corp., Archrock, Inc., the other guarantors party thereto and RBC Capital Markets, LLC, as representative of the initial purchasers named therein, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8–K filed on December 17, 2019
10.38†
Form of Compensation Letter applicable to Messrs. Childers, Aron, Ingersoll and Thode and Mme. Hildebrandt, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8–K filed on April 30, 2020
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Exhibit No.
Description
10.39
Purchase Agreement, dated as of December 14, 2020, by and among Archrock Partners, L.P., Archrock Partners Finance Corp., Archrock, Inc., the other guarantors party thereto and RBC Capital Markets, LLC, as representative of the initial purchasers named therein, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8–K filed on December 15, 2020
10.40
Amendment No. 3 to Credit Agreement, dated as of February 22, 2021, by and among Archrock Inc., Archrock Partners Operating LLC, Archrock Services, L.P., the other Loan Parties thereto, the Lenders thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8–K filed on February 23, 2021
10.41†*
Archrock, Inc. 2020 Stock Incentive Plan
10.42†
Form of Letter Agreement , incorporated by reference to Exhibit 10.99 of the Registrant’s Annual Report on Form 10–K filed on February 23, 2022
10.43†
Form of Archrock, Inc. Award Notice and Agreement for Restricted Stock , incorporated by reference to Exhibit 10.100 of the Registrant’s Annual Report on Form 10–K filed on February 23, 2022
10.44†
Form of Archrock, Inc. Award Notice and Agreement for Restricted Stock for Non–Employee Directors , incorporated by reference to Exhibit 10.101 of the Registrant’s Annual Report on Form 10–K filed on February 23, 2022
10.45†
Form of Archrock, Inc. Award Notice and Agreement for Restricted Stock Units for Non–Employee Directors , incorporated by reference to Exhibit 10.102 of the Registrant’s Annual Report on Form 10–K filed on February 23, 2022
10.46†
Form of Archrock, Inc. Award Notice and Agreement for Performance Units (Cash–Settled) , incorporated by reference to Exhibit 10.103 of the Registrant’s Annual Report on Form 10–K filed on February 23, 2022
10.47†
Form of Archrock, Inc. Award Notice and Agreement for Performance Units (Stock–Settled) , incorporated by reference to Exhibit 10.104 of the Registrant’s Annual Report on Form 10–K filed on February 23, 2022
10.48†
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
21.1*
List of Subsidiaries of Archrock, Inc.
23.1*
Consent of Deloitte & Touche LLP
31.1*
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes–Oxley Act of 2002
31.2*
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes–Oxley Act of 2002
32.1**
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002
32.2**
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002
101.1*
Interactive data files pursuant to Rule 405 of Regulation S–T
104.1*
Cover page interactive data files pursuant to Rule 406 of Regulation S–T
†
Management contract or compensatory plan or arrangement.
*
Filed herewith.
**
Furnished, not filed .
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Archrock, Inc.
/s/ D. Bradley Childers
D. Bradley Childers
President and Chief Executive Officer
February 22, 2023
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POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints D. Bradley Childers, Douglas S. Aron, Donna A. Henderson and Stephanie C. Hildebrandt, and each of them, his or her true and lawful attorneys–in–fact and agents, with full power of substitution and resubstitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys–in–fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done as fully to all said attorneys–in–fact and agents, or any of them, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 22, 2023.
Signature
Title
/s/ D. Bradley Childers
President, Chief Executive Officer and Director
D. Bradley Childers
(Principal Executive Officer)
/s/ Douglas S. Aron
Senior Vice President and Chief Financial Officer
Douglas S. Aron
(Principal Financial Officer)
/s/ Donna A. Henderson
Vice President and Chief Accounting Officer
Donna A. Henderson
(Principal Accounting Officer)
/s/ Anne–Marie N. Ainsworth
Director
Anne–Marie N. Ainsworth
/s/ Gordon T. Hall
Director
Gordon T. Hall
/s/ Frances Powell Hawes
Director
Frances Powell Hawes
/s/ J.W.G. Honeybourne
Director
J.W.G. Honeybourne
/s/ James H. Lytal
Director
James H. Lytal
/s/ Leonard W. Mallett
Director
Leonard W. Mallett
/s/ Jason C. Rebrook
Director
Jason C. Rebrook
/s/ Edmund P. Segner, III
Director
Edmund P. Segner, III
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Archrock, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Archrock, Inc. and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2023 expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current–period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Long–Lived Asset Impairment – Refer to Note 20 to the financial statements .
Critical Audit Matter Description
F-1
Management’s evaluation of whether to retire compressor units from its active fleet takes into consideration the future deployment of the units that were not of the type, configuration, condition, make, or model that are cost efficient to maintain or operate. Once a compressor unit is retired from the active fleet, it is tested for impairment. As such, the timing of the identification of compressor units for removal could have a significant impact on the amount of any impairment charge. During the year ended December 31, 2022, the Company retired 145 units from the active fleet resulting in an asset impairment charge of $21.4 million. The determination of impairment requires management to make significant estimates and assumptions related to the timing of the identification of compressor units for removal. Changes in these assumptions could have a significant impact on the amount of impairment charged.
Auditing the decisions on when compressor units are retired from the active fleet required a high degree of auditor judgment and an increased extent of effort, 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
Our audit procedures related to management’s determination of whether to retire compressor unit from the Company’s active fleet included the following, among others:
• We tested the operating effectiveness of internal controls over long–lived asset impairment process, including those over the identification of units to be retired and assessed for impairment, which includes the type, configuration, condition, make, or model that are cost efficient to maintain or operate.
• We tested the completeness and accuracy of the compressor units identified for retirement by performing the following procedures:
– Comparing the final listing of retired compressor units to the list evaluated and approved by management.
– For a sample of compressor units, determining whether those units were (1) properly segregated from the active fleet, (2) identified appropriately in the system, and (3) no longer operating.
• We evaluated the reasonableness of 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:
– Comparing the rationale for compression units identified with historical rationales made for compression units of a similar type, configuration, make, or model.
– For a sample of compression units not retired, making inquiries of management and others within the Company with knowledge of the type, configuration, condition, make, or model and operating costs of the specific compressor units to identify if any units not retired exhibit characteristics indicating that they should be retired.
– Comparing the compression units identified to internal communications to management and the Board of Directors.
– Reading available peer company data and other external sources for information supporting or contradicting management’s conclusions.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 22, 2023
We have served as the Company’s auditor since 2007
F-2
Archrock, Inc.
Consolidated Balance Sheets
(in thousands, except par value and share amounts )
December 31,
2022
2021
Assets
Current assets:
Cash and cash equivalents
$
1,566
$
1,569
Accounts receivable, net
137,544
104,931
Inventory
84,622
72,869
Other current assets
8,228
7,201
Total current assets
231,960
186,570
Property, plant and equipment, net
2,199,253
2,226,526
Operating lease ROU asset
16,706
17,491
Intangible assets, net
37,077
47,887
Contract costs, net
34,736
25,418
Deferred tax assets
33,353
47,879
Other assets
37,079
28,384
Assets of discontinued operations
8,586
9,811
Total assets
$
2,598,750
$
2,589,966
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
$
64,324
$
38,920
Accrued liabilities
76,915
82,517
Deferred revenue
7,332
3,817
Total current liabilities
148,571
125,254
Long-term debt
1,548,334
1,530,825
Operating lease liabilities
14,861
15,940
Deferred tax liabilities
854
1,136
Other liabilities
17,569
17,505
Liabilities of discontinued operations
7,868
7,868
Total liabilities
1,738,057
1,698,528
Commitments and contingencies (Note 15)
Stockholders' equity:
Preferred stock: $ 0.01 par value, 50,000,000 shares authorized, zero issued
—
—
Common stock: $ 0.01 par value 250,000,000 shares authorized, 163,439,013 and 161,482,852 shares issued, respectively
1,634
1,615
Additional paid-in capital
3,456,777
3,440,059
Accumulated deficit
( 2,509,133 )
( 2,463,114 )
Accumulated other comprehensive loss
—
( 984 )
Treasury stock: 7,810,548 and 7,417,401 common shares, at cost, respectively
( 88,585 )
( 86,138 )
Total stockholders' equity
860,693
891,438
Total liabilities and stockholders' equity
$
2,598,750
$
2,589,966
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Archrock, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
Year Ended December 31,
2022
2021
2020
Revenue:
Contract operations
$
677,801
$
648,311
$
738,918
Aftermarket services
167,767
133,150
136,052
Total revenue
845,568
781,461
874,970
Cost of sales (excluding depreciation and amortization):
Contract operations
278,898
244,486
261,087
Aftermarket services
140,586
114,431
116,106
Total cost of sales (excluding depreciation and amortization)
419,484
358,917
377,193
Selling, general and administrative
117,184
107,167
105,100
Depreciation and amortization
164,259
178,946
193,138
Long-lived and other asset impairment
21,442
21,397
79,556
Goodwill impairment
—
—
99,830
Restructuring charges
—
2,903
8,450
Interest expense
101,259
108,135
105,716
Debt extinguishment loss
—
—
3,971
Gain on sale of assets, net
( 40,494 )
( 30,258 )
( 10,643 )
Other expense (income), net
1,845
( 4,707 )
( 1,359 )
Income (loss) before income taxes
60,589
38,961
( 85,982 )
Provision for (benefit from) income taxes
16,293
10,744
( 17,537 )
Net income (loss)
$
44,296
$
28,217
$
( 68,445 )
Basic and diluted income (loss) per common share
$
0.28
$
0.18
$
( 0.46 )
Weighted average common shares outstanding:
Basic
153,281
151,684
150,828
Diluted
153,410
151,830
150,828
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Archrock, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Year Ended December 31,
2022
2021
2020
Net income (loss)
$
44,296
$
28,217
$
( 68,445 )
Other comprehensive income (loss), net of tax:
Interest rate swap gain (loss), net of reclassifications to earnings
574
3,159
( 3,619 )
Amortization of dedesignated interest rate swap
410
863
—
Total other comprehensive income (loss), net of tax
984
4,022
( 3,619 )
Comprehensive income (loss)
$
45,280
$
32,239
$
( 72,064 )
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Archrock, Inc.
Consolidated Statements of Equity
(in thousands, except share amounts)
Accumulated
Additional
Other
Common Stock
Paid-in
Accumulated
Comprehensive
Treasury Stock
Shares
Amount
Capital
Deficit
Income (Loss)
Shares
Amount
Total
Balance at December 31, 2019
158,636,918
$
1,587
$
3,412,509
$
( 2,244,877 )
$
( 1,387 )
( 6,702,602 )
$
( 81,869 )
$
1,085,963
Treasury stock purchased
—
—
—
—
—
( 236,752 )
( 1,804 )
( 1,804 )
Cash dividends ($ 0.58 per common share)
—
—
—
( 88,832 )
—
—
—
( 88,832 )
Shares issued in ESPP
171,563
2
681
—
—
—
—
683
Stock-based compensation, net of forfeitures
1,206,479
11
10,756
—
—
( 113,415 )
—
10,767
Contribution from Exterran Corporation
—
—
678
—
—
—
—
678
Impact of ASU 2016-13 adoption
—
—
—
166
—
—
—
166
Comprehensive loss:
—
Net loss
—
—
—
( 68,445 )
—
—
—
( 68,445 )
Other comprehensive loss
—
—
—
—
( 3,619 )
—
—
( 3,619 )
Balance at December 31, 2020
160,014,960
$
1,600
$
3,424,624
$
( 2,401,988 )
$
( 5,006 )
( 7,052,769 )
$
( 83,673 )
$
935,557
Treasury stock purchased
—
—
—
—
—
( 283,972 )
( 2,465 )
( 2,465 )
Cash dividends ($ 0.58 per common share)
—
—
—
( 89,343 )
—
—
—
( 89,343 )
Shares issued in ESPP
89,988
1
712
—
—
—
—
713
Stock-based compensation, net of forfeitures
1,020,756
10
11,326
—
—
( 80,660 )
—
11,336
Net proceeds from issuance of common stock
357,148
4
3,397
—
—
—
—
3,401
Comprehensive income
—
Net income
—
—
—
28,217
—
—
—
28,217
Other comprehensive income
—
—
—
—
4,022
—
—
4,022
Balance at December 31, 2021
161,482,852
$
1,615
$
3,440,059
$
( 2,463,114 )
$
( 984 )
( 7,417,401 )
$
( 86,138 )
$
891,438
Treasury stock purchased
—
—
—
—
—
( 283,024 )
( 2,447 )
( 2,447 )
Cash dividends ($ 0.58 per common share)
—
—
( 90,315 )
—
—
—
( 90,315 )
Shares issued under ESPP
92,469
1
632
—
—
—
—
633
Stock-based compensation, net of forfeitures
1,416,672
14
11,914
—
—
( 110,123 )
—
11,928
Net proceeds from issuance of common stock
447,020
4
4,172
—
—
—
—
4,176
Comprehensive income
—
Net income
—
—
—
44,296
—
—
—
44,296
Other comprehensive income
—
—
—
984
—
—
984
Balance at December 31, 2022
163,439,013
$
1,634
$
3,456,777
$
( 2,509,133 )
$
—
( 7,810,548 )
$
( 88,585 )
$
860,693
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Archrock, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
2022
2021
2020
Cash flows from operating activities:
Net income (loss)
$
44,296
$
28,217
$
( 68,445 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
164,259
178,946
193,138
Long-lived and other asset impairment
21,442
21,397
79,556
Goodwill impairment
—
—
99,830
Unrealized change in fair value of investment in unconsolidated affiliate
1,864
—
—
Inventory write-downs
1,640
997
1,349
Amortization of operating lease ROU asset
3,206
3,880
3,477
Amortization of debt issuance costs
5,152
10,127
5,554
Amortization of debt discount
—
—
187
Amortization of debt premium
( 2,006 )
( 2,006 )
( 84 )
Amortization of capitalized implementation costs
1,984
—
—
Amortization of dedesignated interest rate swap
410
863
—
Debt extinguishment loss
—
—
3,971
Interest rate swaps
631
3,539
3,178
Stock-based compensation expense
11,928
11,336
10,551
Non-cash restructuring charges
—
—
1,660
Provision for (benefit from) credit losses
206
( 90 )
3,525
(Gain) loss on sale of assets, net
( 12,396 )
( 11,313 )
1,832
Gain on sale of business
( 28,098 )
( 18,945 )
( 12,475 )
Deferred income tax provision (benefit)
15,229
10,379
( 17,764 )
Amortization of contract costs
19,162
19,990
26,629
Deferred revenue recognized in earnings
( 20,956 )
( 10,382 )
( 19,489 )
Changes in operating assets and liabilities:
Accounts receivable, net
( 19,971 )
4,445
36,395
Inventory
( 10,520 )
( 12,989 )
3,972
Other assets
( 2,653 )
635
( 5,797 )
Contract costs
( 29,575 )
( 16,991 )
( 13,262 )
Accounts payable and other liabilities
13,529
5,269
( 15,089 )
Deferred revenue
24,642
10,217
12,732
Other
45
( 121 )
147
Net cash provided by operating activities
203,450
237,400
335,278
Cash flows from investing activities:
Capital expenditures
( 239,867 )
( 97,885 )
( 140,302 )
Proceeds from sale of business
99,611
83,345
33,651
Proceeds from sale of property, equipment and other assets
20,654
29,562
18,911
Proceeds from insurance and other settlements
3,353
1,085
2,709
Investments in unconsolidated entities
( 14,667 )
—
Net cash (used in) provided by investing activities
( 130,916 )
16,107
( 85,031 )
Cash flows from financing activities:
Borrowings of long-term debt
826,733
704,751
1,049,000
Repayments of long-term debt
( 809,983 )
( 863,251 )
( 1,204,375 )
Payments of debt issuance costs
—
( 2,451 )
( 5,269 )
Payments for settlement of interest rate swaps that include financing elements
( 1,334 )
( 4,390 )
( 2,916 )
Dividends paid to stockholders
( 90,315 )
( 89,343 )
( 88,832 )
Net proceeds from issuance of common stock
4,176
3,401
—
Proceeds from stock issued under ESPP
633
713
683
Purchases of treasury stock
( 2,447 )
( 2,465 )
( 1,804 )
Contribution from Exterran Corporation
—
—
678
Net cash used in financing activities
( 72,537 )
( 253,035 )
( 252,835 )
F-7
Archrock, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Net increase (decrease) in cash and cash equivalents
( 3 )
472
( 2,588 )
Cash and cash equivalents, beginning of period
1,569
1,097
3,685
Cash and cash equivalents, end of period
$
1,566
$
1,569
$
1,097
Supplemental disclosure of cash flow information:
Interest paid
$
98,406
$
100,002
$
99,797
Income taxes refunded (paid), net
( 407 )
( 247 )
( 94 )
Supplemental disclosure of non-cash investing and financing transactions:
Accrued capital expenditures
$
9,899
$
7,641
$
1,624
Non-cash consideration received in sales of a business
—
—
5,762
The accompanying notes are an integral part of these consolidated financial statements .
F-8
Archrock, Inc.
Notes to Consolidated Financial Statements
NOTE 1. DESCRIPTION OF BUSINESS
We are an energy infrastructure company with a primary focus on midstream natural gas compression. We are the leading provider of natural gas compression services to customers in the oil and natural gas industry throughout the U.S. and a leading supplier of aftermarket services to customers that own compression equipment in the U.S. We operate in two business segments: contract operations and aftermarket services. Our predominant segment, contract operations, primarily includes designing, sourcing, owning, installing, operating, servicing, repairing and maintaining our owned fleet of natural gas compression equipment to provide natural gas compression services to our customers. In our aftermarket services business, we sell parts and components and provide operations, maintenance, overhaul and reconfiguration services to customers who own compression equipment.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our consolidated financial statements include the accounts of Archrock and its wholly–owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. In the Notes to Consolidated Financial Statements, all dollar and share amounts in tabulations are in thousands of dollars and shares, respectively, unless otherwise noted.
Our Financial Statements are prepared in accordance with GAAP and the rules and regulations of the SEC. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures of contingent assets and liabilities. Because of the inherent uncertainties in this process, actual future results could differ from those expected as of the reporting date. Management believes that the estimates and assumptions sued are reasonable.
Cash and Cash Equivalents
We consider all highly–liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable and Allowance for Credit Losses
The contractual life of our trade receivables is primarily 30 days based on the payment terms specified in the contract. Contract operations services are generally billed monthly at the beginning of the month in which service is being provided. Aftermarket services billings typically occur when parts are delivered or service is completed. Due to the short–term nature of our trade accounts receivable, we consider the amortized cost to be the same as the carrying value amount of the receivable, excluding the allowance for credit losses.
We recognize an allowance for credit losses when a receivable is recorded, even when the risk of loss is remote. We utilize an aging schedule to determine our allowance for credit losses, and measure expected credit losses on a collective (pool) basis when similar risk characteristics exist. We rely primarily on ratings assigned by external rating agencies and credit monitoring services to assess credit risk and aggregate customers first by low, medium or high risk asset pools, and then by delinquency status. We also consider the internal risk associated with geographic location and the services we provide to the customer when determining asset pools. If a customer does not share similar risk characteristics with other customers, we evaluate the customer’s outstanding trade receivables for expected credit losses on an individual basis. Each reporting period, we reassess our customers’ risk profiles and determine the appropriate asset pool classification, or perform individual assessments of expected credit losses, based on the customers’ risk characteristics at the reporting date.
F-9
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
Loss rates are separately determined for each asset pool based on the length of time a trade receivable has been outstanding. We analyze two years of internal historical loss data, including the effects of prepayments, write–offs and subsequent recoveries, to determine our historical loss experience. Our historical loss information is a relevant data point for estimating credit losses, as the data closely aligns with trade receivables due from our customers. Ratings assigned by external rating agencies and credit monitoring services consider past performance and forecasts of future economic conditions in assessing credit risk.
Inventory
Inventory consists of parts used for maintenance of natural gas compression equipment. Inventory is stated at the lower of cost and net realizable value using the average cost method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and depreciated using the straight–line method over their estimated useful lives as follows:
Compression equipment, facilities and other fleet assets
3 to 30 years
Buildings
20 to 35 years
Transportation and shop equipment
3 to 10 years
Computer hardware and software
3 to 5 years
Other
3 to 10 years
Major improvements that extend the useful life of an asset are capitalized and depreciated over the estimated useful life of the major improvement, up to seven years . Repairs and maintenance are expensed as incurred.
Leases
We determine if an arrangement is a lease, or contains a lease, at inception and record the leases in our consolidated financial statements upon lease commencement, which is the date when the underlying asset is made available for use by the lessor. We recognize ROU assets and liabilities based on the present value of lease payments over the lease term. As the discount rate implicit in the lease is rarely readily determinable, we estimate our incremental borrowing rate using information available at commencement date in determining the present value of the lease payments.
The lease term includes options to extend when we are reasonably certain to exercise the option. Short–term leases, those with an initial term of 12 months or less, are not recorded on the balance sheet. Variable costs such as our proportionate share of actual costs for utilities, common area maintenance, property taxes and insurance are not included in the lease liability and are recognized in the period in which they are incurred. Operating lease expense for lease payments is recognized on a straight–line basis over the term of the lease.
Our facility leases, of which we are the lessee, contain lease and nonlease components, which we have elected to account for as a single lease component, as the nonlease components are not significant to the total consideration of the contract and separating the nonlease component would have no effect on lease classification.
For contract operations service agreements in which we are a lessor, as the services nonlease component is predominant over the compression package lease component, we do not account for these agreements as operating leases.
F-10
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
Impairment of Long–Lived Assets
We review long–lived assets, including property, plant and equipment and identifiable intangibles that are being amortized, for impairment whenever events or changes in circumstances, including the removal of compressors from our active fleet, indicate that the carrying amount of an asset may not be recoverable. An impairment loss exists when estimated undiscounted cash flows expected from the use of the asset and its eventual disposition are less than its carrying amount. Impairment losses are recognized in the period in which the impairment occurs and represent the excess of the asset carrying value over its fair value.
Internal–Use Software
Certain of our contracts have been deemed to be hosting arrangements that are service contracts, including those related to the cloud migration of our ERP system and cloud services for our new mobile workforce, telematics and inventory management tools. Certain costs incurred for the implementation of a hosting arrangement that is a service contract are capitalized and amortized on a straight–line basis over the term of the respective contract. Amortization begins for each component of the hosting arrangement when the component becomes ready for its intended use.
Capitalized implementation costs are presented in other assets, the same line item in our consolidated balance sheets that a prepayment of the fees for the associated hosting arrangement would be presented. Amortization expense of the capitalized implementation costs is presented in SG&A, the same line item in our consolidated statements of operations as the expense for fees for the associated hosting arrangement.
Revenue Recognition
We recognize revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we are entitled to receive in exchange for those goods or services. Sales and usage–based taxes that are collected from the customer are excluded from revenue.
Contract Operations
Natural gas compression services. Natural gas compression services are generally satisfied over time, as the customer simultaneously receives and consumes the benefits provided by these services. Our performance obligation is a series in which the unit of service is one month, as the customer receives substantially the same benefit each month from the services regardless of the type of service activity performed, which may vary. If the transaction price is based on a fixed fee, revenue is recognized monthly on a straight–line basis over the period that we are providing services to the customer. Amounts invoiced to customers for costs associated with moving our compression assets to a customer site are also included in the transaction price and are amortized over the initial contract term. We do not consider the effects of the time value of money, as the expected time between the transfer of services and payment for such services is less than one year.
Variable consideration exists if customers are billed at a lesser standby rate when a unit is not running. We recognize revenue for such variable consideration monthly, as the invoice corresponds directly to the value transferred to the customer based on our performance completed to date. The rate for standby service is lower to reflect the decrease in costs and effort required to provide standby service when a unit is not running.
Billable Maintenance Service . We 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.
F-11
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
Aftermarket Services
OTC Parts and Components Sales . For sales of OTC parts and components, the performance obligation is generally satisfied at the point in time when delivery takes place and the customer obtains control of the part or component. The transaction price is the fixed sales price for the part stated in the contract. Revenue is recognized upon delivery, as we have a present right to payment and the customer has legal title.
Maintenance, Overhaul and Reconfiguration Services . For our service activities, the performance obligation is satisfied over time, as the work performed enhances the customer–controlled asset and another entity would not have to substantially re–perform the work we completed if they were to fulfill the remaining performance obligation. The transaction price may be a fixed monthly service fee, a fixed quoted fee or entirely variable, calculated on a time and materials basis.
For service provided based on a fixed monthly fee, the performance obligation is a series in which the unit of service is one month. The customer receives substantially the same benefit each month from the service, regardless of the type of service activity performed, which may vary. As the progress towards satisfaction of the performance obligation is measured based on the passage of time, revenue is recognized monthly based on the fixed fee provided for in the contract.
For service provided based on a quoted fixed fee, progress towards satisfaction of the performance obligation is measured using an input method based on the actual amount of labor and material costs incurred. The amount of the transaction price recognized as revenue each reporting period is determined by multiplying the transaction price by the ratio of actual costs incurred to date to total estimated costs expected for the service. Significant judgment is involved in the estimation of the progress to completion. Any adjustments to the measure of the progress to completion is accounted for on a prospective basis. Changes to the scope of service is recognized as an adjustment to the transaction price in the period in which the change occurs.
Service provided based on time and materials 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. We evaluate the estimated gross margin percentage at the end of each reporting period and adjust the transaction price as appropriate.
Contract Assets and Liabilities
We recognize a contract asset when we have the right to consideration in exchange for goods or services transferred to a customer when the right is conditioned on something other than the passage of time. We recognize a contract liability when we have an obligation to transfer goods or services to a customer for which we have already received consideration.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rate on deferred tax assets and liabilities is recognized in income in the period of the enactment date.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax–planning strategies and results of recent operations. If a valuation allowance was previously recorded and we subsequently determined we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax assets’ valuation allowance, which would reduce the provision for income taxes.
F-12
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
We record uncertain tax positions in accordance with the accounting standard on income taxes under a two–step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more–likely–than–not recognition threshold, we recognize the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents and trade accounts receivable. Our temporary cash investments have a zero–loss expectation because we maintain minimal balances in our cash investment accounts and have no history of loss. Trade accounts receivable are due from companies of varying size engaged principally in oil and natural gas activities throughout the U.S; therefore, our customers may be similarly affected by changes in economic and other conditions within the industry. We perform periodic evaluations of our customers’ financial condition, including monitoring our customers’ payment history and current credit worthiness to manage this risk. We generally do not obtain collateral for trade receivables, but we may require payment in advance. Payment terms are on a short–term basis and in accordance with industry practice. We consider this credit risk to be limited due to these companies’ financial resources, the nature of the products and services we provide and the terms of our customer agreements.
During the years ended December 31, 2022, 2021 and 2020, no customers accounted for more than 10% of our consolidated revenues.
Accounting Standard Update Implemented
In December 2022, the FASB issued ASU No. 2022–06, Deferral of the Sunset Date of Reference Rate Reform (Topic 848) . Topic 848 provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate (e.g., LIBOR) reform if certain criteria are met, for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. ASU 2022–06 deferred the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. The ASU is effective as of December 21, 2022 through December 31, 2024. We adopted ASU 2022–06 during 2022, and the adoption did not and is currently not expected to have a material impact on our consolidated financial statements. We continue to evaluate transactions or contract modifications occurring as a result of reference rate reform and determine whether to apply the optional guidance on an ongoing basis.
No other new accounting pronouncements issued or effective during 2022 have had or are expected to have a material impact on our consolidated financial statements.
NOTE 3. DISPOSITIONS
During 2022, we completed sales of certain contract operations customer service agreements and approximately 770 compressors, comprising approximately 172,000 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 recognized an aggregate gain of $ 28.1 million.
During 2021, we completed sales of certain contract operations customer service agreements and approximately 875 compressors, comprising approximately 140,000 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 recognized an aggregate gain on the sales of $ 19.0 million.
F-13
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
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 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 in 2021. We recognized a gain on the sale of $ 9.3 million in 2020.
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. We recognized a gain on the sale of $ 3.2 million in 2020.
NOTE 4. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net is comprised of the following:
December 31,
2022
2021
Customer related:
Third party
$
110,636
$
83,204
Related parties (1)
2,998
3,675
Other (2)
25,584
20,204
Accounts receivable
139,218
107,083
Allowance for credit losses
( 1,674 )
( 2,152 )
Accounts receivable, net
$
137,544
$
104,931
(1) See Note 27 for additional information.
(2) Other receivables primarily consist of amounts due from the sale of used equipment.
The changes in our allowance for credit losses are as follows:
Year Ended December 31,
2022
2021
2020
Balance at January 1
$
2,152
$
3,370
$
2,210
Impact of adoption of new accounting standard
—
—
( 216 )
Provision for credit losses
206
( 90 )
3,525
Write-offs charged against allowance
( 684 )
( 1,128 )
( 2,149 )
Balance at December 31
$
1,674
$
2,152
$
3,370
F-14
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE 5. INVENTORY
Inventory is comprised of the following:
December 31,
2022
2021
Parts and supplies
$
70,228
$
63,628
Work in progress
14,394
9,241
Inventory
$
84,622
$
72,869
During the years ended December 31, 2022, 2021 and 2020 we recorded write–downs to inventory of $ 1.6 million, $ 1.0 million and $ 1.3 million, respectively, for inventory considered to be excess, obsolete or carried at an amount in excess of net realizable value.
NOTE 6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net is comprised of the following:
December 31,
2022
2021
Compression equipment, facilities and other fleet assets
$
3,234,239
$
3,273,770
Land and buildings
44,304
43,540
Transportation and shop equipment
93,189
92,490
Computer hardware and software
77,357
76,908
Other
5,754
6,229
Property, plant and equipment
3,454,843
3,492,937
Accumulated depreciation
( 1,255,590 )
( 1,266,411 )
Property, plant and equipment, net
$
2,199,253
$
2,226,526
Depreciation expense was $ 155.4 million, $ 167.6 million and $ 177.5 million during the years ended December 31, 2022, 2021 and 2020, respectively. Assets under construction of $ 92.5 million and $ 30.1 million at December 31, 2022 and 2021, respectively, primarily consisted of compression equipment, facilities and other fleet assets .
NOTE 7. LEASES
We have operating leases and subleases for office space, temporary housing, storage and shops. Our leases have remaining lease terms of less than one year to approximately ten 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.
Financial and other supplemental information related to our operating leases is as follows:
December 31,
Classification
2022
2021
ROU assets
Operating lease ROU assets
$
16,706
$
17,491
Lease liabilities
Current
Accrued liabilities
$
3,244
$
2,940
Noncurrent
Operating lease liabilities
14,861
15,940
Total lease liabilities
$
18,105
$
18,880
F-15
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
Year Ended December 31,
2022
2021
2020
Operating lease cost
$
4,041
$
4,836
$
4,508
Short-term lease cost
447
169
52
Variable lease cost
1,802
2,123
1,652
Total lease cost
$
6,290
$
7,128
$
6,212
Year Ended December 31,
2022
2021
2020
Operating cash flows - cash paid for amounts included in the measurement of operating lease liabilities
$
5,951
$
6,568
$
5,885
Operating lease ROU assets obtained in exchange for lease liabilities, net (1)
2,421
2,135
4,812
(3) Includes decreases to our ROU assets of $ 0.2 million and $ 0.6 million related to lease amendments and terminations during 2022 and 2021, respectively.
December 31,
2022
2021
2020
Weighted average remaining lease term (in years)
6.7
7.2
7.9
Weighted average discount rate
4.7
%
4.6
%
4.8
%
Remaining maturities of our lease liabilities as of December 31, 2022 are as follows:
2023
$
3,719
2024
3,425
2025
2,846
2026
2,556
2027
2,374
Thereafter
6,486
Total lease payments
21,406
Less: Interest
( 3,301 )
Total lease liabilities
$
18,105
NOTE 8. INTANGIBLE ASSETS, NET
Intangible assets include customer relationships associated with various business and asset acquisitions. These acquired intangible assets were recorded at fair value determined as of the date of acquisition and are being amortized over the period we expect to benefit from the assets.
Intangible assets, net is comprised of the following:
December 31,
2022
2021
Gross carrying amount
$
141,462
$
144,322
Accumulated amortization
( 104,385 )
( 96,435 )
Intangible assets, net
$
37,077
$
47,887
F-16
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
Intangible assets are amortized on a straight–line basis with estimated useful lives ranging from 15 to 25 years . Amortization expense was $ 8.9 million, $ 11.3 million and $ 15.6 million during the years ended December 31, 2022, 2021 and 2020, respectively.
Estimated amortization expense for each of the subsequent five fiscal years is expected to be as follows:
2023
$
6,890
2024
5,721
2025
3,595
2026
3,032
2027
2,157
Thereafter
15,682
Total
$
37,077
NOTE 9. CONTRACT COSTS
We capitalize incremental costs to obtain a contract with a customer if we expect to recover those costs. Capitalized contract costs included commissions paid to our sales force to obtain contract operations contracts. As of December 31, 2022 and 2021, we had contract costs of $ 3.0 million and $ 2.6 million associated with sales commissions recorded in our consolidated balance sheets.
We also capitalize costs incurred to fulfill a contract if those costs relate directly to a contract, enhance resources that we will use in satisfying performance obligations and we expect to recover those costs. Contract costs incurred to fulfill our customer contracts include freight charges to transport compression assets before transferring services to the customer and mobilization activities associated with our contract operations services. As of December 31, 2022 and 2021, we had contract costs of $ 31.7 million and $ 22.8 million associated with freight and mobilization recorded in our consolidated balance sheets. Aftermarket services fulfillment costs are recognized based on the percentage–of–completion method applicable to the customer contract and do not typically result in the recognition of a contract asset.
These obtainment and fulfillment costs associated with our contract operations segment are amortized based on the transfer of service to which the assets relate, which is estimated to be 36 months based on average contract term, including anticipated renewals. We periodically assess whether the 36 –month estimate fairly represents the average contract term and adjust as appropriate. Costs associated with sales commissions in our aftermarket services segment are expensed when paid, as the amortization period is less than one year . Aftermarket services fulfillment costs are recognized based on the percentage–of–completion method applicable to the customer contract and do not typically result in the recognition of a contract asset.
Costs associated with sales commissions in our contract operations segment are amortized to SG&A. During the years ended December 31, 2022, 2021 and 2020, we amortized $ 1.9 million, $ 2.2 million and $ 3.0 million, respectively, related to sales commissions. Contract costs associated with freight and mobilization are amortized to costs of sales (excluding depreciation and amortization). During the years ended December 31, 2022, 2021 and 2020, we amortized $ 17.3 million, $ 17.8 million and $ 23.6 million, respectively, related to freight and mobilization.
F-17
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE 10. HOSTING ARRANGEMENTS
We have hosting arrangements that are service contracts for cloud applications including our ERP, mobile workforce, telematics and inventory management tools.
Capitalized implementation costs and accumulated amortization related to our hosting arrangements that are service contracts are as follows:
December 31,
2022
2021
Hosting arrangements
$
15,675
$
12,674
Accumulated amortization
( 2,637 )
( 653 )
Hosting arrangements, net
$
13,038
$
12,021
These costs are included in other assets in our consolidated balance sheets. Amortization expense, which is recorded in SG&A in our consolidated statements of operations, was $ 2.0 million, $ 0.3 million and $ 0.3 million during the years ended December 31, 2022, 2021 and 2020, respectively.
During the year ended December 31, 2020, we impaired $ 1.7 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.
NOTE 11. INVESTMENT IN UNCONSOLIDATED AFFILIATE
Investments in which we are deemed to exert significant influence, but not control, are accounted for using the equity method of accounting, except in cases where the fair value option is elected. For such investments where we have elected the fair value option, the election is irrevocable and is applied on an investment–by–investment basis at initial recognition.
In April 2022, we agreed to acquire for cash a 25 % equity interest in ECOTEC, a company specializing in methane emissions detection, monitoring and management. We have elected the fair value option to account for this investment, and during the year ended December 31, 2022, we recognized an unrealized loss of $ 1.9 million related to the change in fair value of our investment (see Note 25). Changes in the fair value of this investment are recognized in other (income) expense, net in our consolidated statements of operations. As of December 31, 2022, our ownership interest in ECOTEC is 22.7 %, which is included in other assets in our consolidated balance sheets. The remaining 2.3 % interest was acquired in January 2023.
NOTE 12. ACCRUED LIABILITIES
Accrued liabilities are comprised of the following:
December 31,
2022
2021
Accrued salaries and other benefits
$
22,288
$
20,891
Accrued income and other taxes
10,108
9,957
Accrued interest
22,380
22,368
Derivative liability
—
1,250
Other accrued liabilities
22,139
28,051
Accrued liabilities
$
76,915
$
82,517
F-18
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE 13. CONTRACT LIABILITIES
As of December 31, 2022 and 2021, our contract liabilities were $ 8.0 million and $ 4.4 million, respectively. These liabilities are included in deferred revenue and other liabilities in our consolidated balance sheets.
We deferred revenue of $ 24.6 million and $ 10.2 million, respectively, and recognized $ 21.0 million and $ 10.4 million, respectively, as revenue during the years ended December 31, 2022 and 2021, respectively. The revenue recognized and deferred during the periods primarily related to freight billings and milestone billings on aftermarket services.
NOTE 14. LONG–TERM DEBT
Long–term debt is comprised of the following:
December 31,
2022
2021
Credit facility
$
251,250
$
234,500
6.25 % senior notes due April 2028:
Principal outstanding
800,000
800,000
Unamortized debt premium
10,530
12,536
Unamortized debt issuance costs
( 8,744 )
( 10,406 )
801,786
802,130
6.875 % senior notes due April 2027:
Principal outstanding
500,000
500,000
Unamortized debt issuance costs
( 4,702 )
( 5,805 )
495,298
494,195
Long-term debt
$
1,548,334
$
1,530,825
Credit Facility
As of December 31, 2022, our Credit Facility has an aggregate borrowing commitment of $ 750.0 million and will expire in November 2024 unless renewed or amended prior to that date. 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. We may use up to $ 50.0 million for swing line loans and an additional $ 50.0 million for letters of credit. As of December 31, 2022, there were $ 5.7 million letters of credit outstanding under the Credit Facility.
The Credit Facility borrowing base consists of eligible accounts receivable, inventory and compressors, the largest of which is compressors. Borrowings under the Credit Facility are secured by substantially all of our personal property assets and certain of our subsidiaries.
Borrowings under the Credit Facility bear interest at, based on our election, either a base rate or LIBOR, plus an applicable margin. The base rate is the highest of (i) the prime rate announced by JPMorgan Chase Bank, (ii) the Federal Funds Effective Rate plus 0.50 % and (iii) one-month LIBOR plus 1.00 %. Depending on our leverage ratio, the applicable margin varies (i) in the case of base rate loans, from 1.00 % to 1.75 % and (ii) in the case of LIBOR loans, from 2.00 % to 2.75 %. The weighted average annual interest rate on the outstanding balance under our Credit Facility, excluding the effect of interest rate swaps, was 6.9 % and 2.6 % at December 31, 2022 and 2021, respectively.
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 $ 1.9 million, $ 2.0 million and $ 2.0 million in commitment fees during 2022, 2021 and 2020, respectively.
F-19
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
As a result of the facility’s ratio requirements, $ 487.6 million of the $ 493.0 million of undrawn capacity was available for additional borrowings as of December 31, 2022.
As of December 31, 2022, the following consolidated financial ratios, as defined in our Credit Facility agreement, were required:
EBITDA to Interest Expense
2.5 to 1.0
Senior Secured Debt to EBITDA
3.0 to 1.0
Total Debt to EBITDA
January 1, 2023 through September 30, 2023
5.50 to 1.0
Thereafter (1)
5.25 to 1.0
(1) Subject to a temporary increase to 5.50 to 1.0 for any quarter during which an acquisition satisfying certain thresholds is completed and for the two quarters immediately following such quarter.
In addition to the financial covenants discussed above, the Credit Facility agreement contains various covenants including, but not limited to, restrictions on the use of proceeds from borrowings and limitations on our ability to incur additional indebtedness, engage in transactions with affiliates, merge or consolidate, sell assets, make certain investments and acquisitions, make loans, grant liens, repurchase equity and pay distributions. The Credit Facility agreement also contains various covenants requiring mandatory prepayments from the net cash proceeds of certain asset transfers. As of December 31, 2022, we were in compliance with all covenants under our Credit Facility agreement.
2027 Notes and 2028 Notes
Our 2027 Notes were issued under an indenture dated March 21, 2019 and mature on April 1, 2027. The notes were issued in a private offering at 100 % of their face value and have an effective interest rate of 7.9 % . We received net proceeds of $ 491.2 million after deducting issuance costs of $ 8.8 million.
Our 2028 Notes were issued under an indenture dated December 20, 2019 and mature on April 1, 2028. The 2028 Notes were issued in two private offerings of $ 500.0 million and $ 300.0 million in December 2019 and December 2020, respectively. 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 $ 491.8 million after deducting issuance costs of $ 8.2 million from our December 2019 offering and net proceeds of $ 309.9 million after deducting issuance costs of $ 4.7 million from our December 2020 offering.
The net proceeds from the 2027 Notes and 2028 Notes were used to repay borrowings outstanding under our Credit Facility. Issuance costs related to the 2027 Notes and 2028 Notes are considered deferred financing costs, and together with the issue premium of the December 2020 offering of 2028 Notes, are recorded within long-term debt in our consolidated balance sheets and are being amortized to interest expense in our consolidated statements of operations over the terms of the notes.
The 2027 Notes and 2028 Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by us and all of our existing subsidiaries, other than Archrock Partners, L.P. and 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.
F-20
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
Maturities of Long–Term Debt
As of December 31, 2022, the maturities of our long–term debt, excluding interest to be accrued, are as follows:
2023
$
—
2024
251,250
2025
—
2026
—
2027
495,298
Thereafter
801,786
NOTE 15. COMMITMENTS AND CONTINGENCIES
Insurance Matters
Our business can be hazardous, involving unforeseen circumstances such as uncontrollable flows of natural gas or well fluids and fires or explosions. As is customary in our industry, we review our safety equipment and procedures and carry insurance against some, but not all, risks of our business. Our insurance coverage includes property damage, general liability and commercial automobile liability and other coverage we believe is appropriate. We believe that our insurance coverage is customary for the industry and adequate for our business, however, losses and liabilities not covered by insurance would increase our costs.
Additionally, we are substantially self–insured for workers’ compensation and employee group health claims in view of the relatively high per–incident deductibles we absorb under our insurance arrangements for these risks. Losses up to the deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages. We are also self–insured for property damage to our offshore assets.
In August 2021, Hurricane Ida made landfall in Louisiana, causing operational disruptions, damage to compressors and a temporary shutdown of facilities in Louisiana that negatively impacted our financial performance in the quarter. As of December 31, 2021, we had an insurance recovery of $ 2.8 million related to the facility and compressor damages, which we received in cash during the three months ended March 31, 2022. In September 2022, we received an additional $ 0.4 million related to business interruption insurance recovery proceeds.
Tax Matters
We are subject to a number of state and local taxes that are not income–based. As many of these taxes are subject to audit by the taxing authorities, it is possible that an audit could result in additional taxes due. We accrue for such additional taxes when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the liability. As of December 31, 2022 and 2021, we accrued $ 3.9 million and $ 5.8 million, respectively, for the outcomes of non–income–based tax audits. We do not expect that the ultimate resolutions of these audits will result in a material variance from the amounts accrued. We do not accrue for unasserted claims for tax audits unless we believe the assertion of a claim is probable, it is probable that it will be determined that the claim is owed and we can reasonably estimate the claim or range of the claim. We believe the likelihood is remote that the impact of potential unasserted claims from non–income–based tax audits could be material to our consolidated financial position, but it is possible that the resolution of future audits could be material to our consolidated results of operations or cash flows.
During the years ended December 31, 2022 and 2021, certain of our sales and use tax audits advanced from the audit review phase to the contested hearing phase. As of both December 31, 2022 and 2021, we accrued $ 0.6 million for these audits.
F-21
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
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, 2022, which is included in our accrual for non–income–based tax audits discussed above.
Litigation and Claims
In the ordinary course of business, we are involved in various pending or threatened legal actions. While we are unable to predict the ultimate outcome of these actions, we believe that any ultimate liability arising from any of these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends.
NOTE 16. STOCKHOLDERS’ EQUITY
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 years ended December 31, 2022 and 2021, we sold 447,020 and 357,148 shares of common stock, respectively, for net proceeds of $ 4.2 million and $ 3.4 million, respectively, pursuant to the ATM Agreement.
F-22
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
Cash Dividends
The following table summarizes our dividends declared and paid in each of the quarterly periods of 2022, 2021 and 2020:
Dividends per
Common Share
Dividends Paid
2022
Q4
$
0.145
$
22,589
Q3
0.145
22,559
Q2
0.145
22,494
Q1
0.145
22,673
2021
Q4
$
0.145
$
22,351
Q3
0.145
22,506
Q2
0.145
22,331
Q1
0.145
22,155
2020
Q4
$
0.145
$
22,177
Q3
0.145
22,308
Q2
0.145
22,176
Q1
0.145
22,171
On January 26, 2023, our Board of Directors declared a quarterly dividend of $ 0.15 per share of common stock, or approximately $ 23.6 million, which was paid on February 14, 2023 to stockholders of record at the close of business on February 7, 2023.
Accumulated Other Comprehensive Loss
Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with owners. Our accumulated other comprehensive loss consists of changes in the fair value of our interest rate swap derivative instruments, net of tax. See Note 24 for further details on our interest rate swap derivative instruments.
The following table presents the changes in accumulated other comprehensive loss, net of tax:
Year Ended December 31,
2022
2021
2020
Beginning accumulated other comprehensive loss
$
( 984 )
$
( 5,006 )
$
( 1,387 )
Other comprehensive income (loss), net of tax:
Loss recognized in other comprehensive income
( 405 )
( 962 )
( 6,683 )
Loss reclassified from accumulated other comprehensive loss to interest expense
1,389
4,984
3,064
Total other comprehensive income (loss)
984
4,022
( 3,619 )
Ending accumulated other comprehensive loss
$
—
$
( 984 )
$
( 5,006 )
F-23
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE 17. REVENUE FROM CONTRACTS WITH CUSTOMERS
The following table presents our revenue from contracts with customers by segment (see Note 28) and disaggregated by revenue source:
Year Ended December 31,
2022
2021
2020
Contract operations:
0 ― 1,000 horsepower per unit
$
159,140
$
175,457
$
224,702
1,001 ― 1,500 horsepower per unit
285,758
267,191
305,185
Over 1,500 horsepower per unit
231,923
204,893
206,749
Other (1)
980
770
2,282
Total contract operations revenue (2)
677,801
648,311
738,918
Aftermarket services:
Services
88,728
69,876
79,012
OTC parts and components sales
79,039
63,274
57,040
Total aftermarket services revenue (3)
167,767
133,150
136,052
Total revenue
$
845,568
$
781,461
$
874,970
(1) Primarily relates to fees associated with owned non–compression equipment.
(2) Includes $ 3.2 million, $ 4.0 million and $ 5.6 million during the years ended December 31, 2022, 2021 and 2020, respectively, related to billable maintenance on owned compressors that was recognized at a point in time. All other contract operations revenue is recognized over time.
(3) Services revenue within aftermarket services is recognized over time. OTC parts and components sales revenue is recognized at a point in time.
Performance Obligations
As of December 31, 2022, we had $ 310.5 million of remaining performance obligations related to our contract operations segment, which will be recognized through 2027 as follows:
2023
2024
2025
2026
2027
Total
Remaining performance obligations
$
205,999
$
67,137
$
32,096
$
4,067
$
1,151
$
310,450
We do not disclose the aggregate transaction price for the remaining performance obligations for aftermarket services as there are no contracts with customers with an original contract term that is greater than one year.
NOTE 18. STOCK–BASED COMPENSATION
The 2020 Plan and the 2013 Plan both provide for the granting of stock options, restricted stock, restricted stock units, stock appreciation rights, performance awards, other stock–based awards and dividend equivalent rights to our employees, directors and consultants. No additional grants may be made under the 2013 Plan following the adoption of the 2020 Plan. Previous grants made under the 2013 Plan continue to be governed by that plan and the applicable award agreements.
As of December 31, 2022, the maximum number of shares of common stock available for issuance under the 2020 Plan is 8,500,000 , and 5.9 million shares remain available for grant. Each stock–settled award granted under the 2020 Plan reduces the number of shares available for issuance by one share. Cash–settled awards are not counted against the aggregate share limit. Shares subject to awards granted under the 2020 Plan that are subsequently canceled, terminated, settled in cash or forfeited, excluding shares withheld to satisfy tax withholding obligations or to pay the exercise price of an option, are available for future grant under the 2020 Plan. Our policy is to issue new shares when restricted stock units and performance–based restricted stock units are vested. We account for forfeitures as they occur.
F-24
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
Both the 2020 Plan and the 2013 Plan allow us to withhold shares upon vesting of restricted stock at the then–current market price to cover taxes required to be withheld on the vesting date. During the years ended December 31, 2022, 2021 and 2020, we withheld 283,024 shares valued at $ 2.4 million, 283,972 shares valued at $ 2.5 million and 236,752 shares valued at $ 1.8 million, respectively, to cover tax withholding.
Restricted Stock Awards and Performance–Based Restricted Stock Units
Grants of restricted stock are subject to forfeiture, restrictions on transfer and certain other conditions until vesting, which generally occurs in three equal installments following the date of grant. Compensation expense is recognized 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.
Grants of performance–based restricted stock units are three –year equity settled awards linked to the performance of our common stock. The awards also include dividend equivalent rights that accumulate during the vesting period.
The vesting of the performance–based restricted stock units is dependent of the satisfaction of a combination of certain service–related conditions and 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 the date specified in the award agreement following the conclusion of the performance period. The final number of shares of common stock issuable upon vesting can range from 0 % to 200 % of the initial grant depending on the level of achievement as determined by the Compensation Committee of our Board of Directors.
The fair value of the performance–based restricted stock units, incorporating the market condition, is estimated on the grant date using a Monte Carlo simulation model. Expected volatilities for us and each peer company utilized in the model are estimated using a historical period consistent with the awards’ remaining performance period as of the grant date. The risk–free interest rate is based on the yield on U.S. Treasury Separate Trading of Registered Interest and Principal Securities for a term consistent with the remaining performance period. The dividend yield used is 0.0 % to approximate accumulation of earnings.
The assumptions that were used to estimate the fair value of our performance–based stock units are as follows:
Year Ended December 31,
2022
2021
2020
Remaining performance period as of grant date (in years)
2.9
2.8
2.9
Risk-free interest rate used
1.4
%
0.3
%
1.4
%
Grant-date fair value
$
11.96
$
14.30
$
11.33
F-25
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
Activity related to our restricted stock and performance–based restricted stock units is as follows:
Weighted
Average
Grant Date
Fair Value
Shares
Per Share
Non-vested restricted stock and performance-based restricted stock units, December 31, 2021
2,055
$
10.38
Granted
1,599
8.97
Vested
( 1,071 )
9.78
Canceled
( 110 )
9.09
Non-vested restricted stock and performance-based restricted stock units, December 31, 2022
2,473
$
9.79
The grant date fair value of the restricted stock and performance–based restricted stock units granted during the years ended December 31, 2022, 2021 and 2020 was $ 14.3 million, $ 12.1 million and $ 11.9 million, respectively. The fair value of the restricted stock and performance–based restricted stock units vested during the years ended December 31, 2022, 2021 and 2020 was $ 9.3 million, $ 8.5 million and $ 6.6 million, respectively.
As of December 31, 2022, we expect $ 12.7 million of unrecognized compensation cost related to our non–vested restricted stock and performance–based restricted stock units to be recognized over the weighted–average period of 1.8 years.
Cash Settled Performance Units
Grants of cash–settled performance units vest at the end of the three year vesting period and are payable in an amount of cash equivalent to the value of our common stock at the vesting date for each unit vested. These awards are subject to one of more performance conditions and are accounted for as liability awards with expense based on the fair value measured at the end of each reporting period. These awards also include dividend equivalent rights that accumulated during the vesting period. At the end of each reporting period, the Compensation Committee of our Board of Directors approves the determination of achievement for each performance measure, which can range from 0 % to 200 % .
Activity related to our cash–settled performance units is as follows:
Weighted
Average
Grant Date
Fair Value
Shares
Per Share
Non-vested cash-settled performance units, December 31, 2021
523
$
10.22
Granted
262
9.38
Vested
( 139 )
12.91
Canceled
( 137 )
9.42
Non-vested cash-settled performance units, December 31, 2022
509
$
9.27
The grant date fair value of the cash settled performance units granted during the years ended December 31, 2022, 2021 and 2020 was $ 2.5 million, $ 2.3 million and $ 1.8 million, respectively. Cash paid upon vesting of these cash settled performance units during the years ended December 31, 2022, 2021 and 2020 was $ 1.2 million, $ 0.6 million and $ 0.5 million, respectively.
F-26
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
As of December 31, 2022, we expect $ 3.0 million of unrecognized compensation cost related to our non–vested liability awards to be recognized over the weighted–average period of 1.9 years.
Employee Stock Purchase Plan
Our ESPP provides employees with an opportunity to participate in our long–term performance and success through the purchase of shares of common stock at a price that may be less than fair market value. Each quarter, eligible employees may elect to withhold a portion of their salary up to the lesser of $ 25,000 per year or 10 % of their eligible pay at a price equal to 85 % to 100 % of the fair market value of the stock as defined by the plan. 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 lesser. Our ESPP is compensatory and, as a result, we record an expense in our consolidated statements of operations related to the ESPP.
The ESPP will terminate on the date that all shares of common stock authorized for sale under the ESPP have been purchased, unless it is extended. The maximum number of shares of common stock available for purchase under the ESPP is 1.0 million. As of December 31, 2022, 429,250 shares remained available for purchase under the ESPP.
Directors’ Stock and Deferral Plan
Our DSDP provides non–employee members of the Board of Directors with an opportunity to elect to receive our common stock as payment for a portion or all of their retainer. The number of shares paid each quarter is determined by dividing the dollar amount of fees elected to be paid in common stock by the closing sales price per share of the common stock on the last day of the quarter. In addition, directors who elect to receive a portion or all of their fees in the form of common stock may also elect to defer, until a later date, the receipt of a portion or all of their fees to be received in common stock. In this case, we issue restricted stock units and the rights to receive dividends or dividend equivalents is accrued and paid when the shares are issued.
There are 100,000 shares reserved under the DSDP and, as of December 31, 2022, 37,771 shares remained available to be issued under the plan.
Stock–Based Compensation Expense
Stock–based compensation expense is as follows:
Year Ended December 31,
2022
2021
2020
Equity award expense
$
11,928
$
11,336
$
10,551
Liability award expense (1)
2,569
( 816 )
1,521
Total stock-based compensation expense
$
14,497
$
10,520
$
12,072
(1) In 2021, we reversed a prior period expense of $ 2.1 million as the result of revised estimates of performance achievement of our 2020 and 2019 cash–settled performance–based restricted stock units.
NOTE 19. RETIREMENT BENEFIT PLAN
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. We recorded matching contributions of $ 4.9 million, $ 4.4 million and $ 5.6 million during the years ended December 31, 2022, 2021 and 2020, respectively.
F-27
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE 20. LONG–LIVED AND OTHER ASSET IMPAIRMENT
Compression Fleet
We periodically review the future deployment of our idle compression assets for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. Based on these reviews, we determine that certain idle compressors should be retired from the active fleet. The retirement of these units from the active fleet triggers a review of these assets for impairment and as a result of our review, we may record an asset impairment to reduce the book value of each unit to its estimated fair value. The fair value of each unit is estimated based on the expected net sale proceeds compared to other fleet units we recently sold, a review of other units recently offered for sale by third parties or the estimated component value of the equipment we plan to use.
In connection with our review of our idle compression assets, we evaluate for impairment idle units that were culled from our fleet in prior years and are available for sale. Based on that review, we may reduce the expected proceeds from disposition and record additional impairment to reduce the book value of each unit to its estimated fair value.
The following table presents the results of our compression fleet impairment review as recorded to our contract operations segment:
Year Ended December 31,
2022
2021
2020
Idle compressors retired from the active fleet
145
230
730
Horsepower of idle compressors retired from the active fleet
100,000
85,000
261,000
Impairment recorded on idle compressors retired from the active fleet
$
21,431
$
21,208
$
77,590
Goodwill
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 goodwill impairment loss of $ 99.8 million during the first quarter of 2020.
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 process and technology transformation project was impaired. See Note 10 for further details.
NOTE 21. RESTRUCTURING CHARGES
In response to the decreased activity level of our customers that resulted from the COVID–19 pandemic, we recorded pandemic restructuring charges for severance costs of $ 1.7 million and $ 5.3 million during the years ended December 31, 2021 and 2020, respectively. We do not expect to incur additional material costs under this restructuring plan.
During the year ended December 31, 2021, management approved and initiated a plan to exit a facility no longer deemed economical for our business, and we incurred $ 0.9 million of costs to complete the exit of the facility. We do not expect to incur additional material costs under this restructuring plan.
F-28
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
During the year ended December 31, 2020, we completed restructuring activities to further streamline our organization and more fully align our teams to improve our customer service and profitability. We incurred severance costs of $ 1.7 million related to these activities during the first quarter of 2020. No additional costs will be incurred for this organizational restructuring. Management also approved a plan to dispose of certain non–core properties, and we incurred $ 1.5 million of costs as a result of these property disposals. No additional charges will be incurred under this restructuring plan.
The following table presents restructuring charges incurred by segment:
Contract
Aftermarket
Operations
Services
Other
Total
2021
Pandemic restructuring
$
616
$
145
$
956
$
1,717
2021 property restructuring
929
—
—
929
2020 property restructuring
—
—
35
35
Other restructuring
—
—
222
222
Total restructuring charges
$
1,545
$
145
$
1,213
$
2,903
2020
Organizational restructuring
$
458
$
625
$
612
$
1,695
Pandemic restructuring
2,505
1,218
1,534
5,257
2020 property restructuring
Loss on sale
—
—
915
915
Impairment loss
—
—
583
583
Total restructuring charges
$
2,963
$
1,843
$
3,644
$
8,450
The following table presents restructuring charges incurred by cost type:
Year Ended December 31,
2021
2020
Severance costs
Organizational restructuring
$
—
$
1,695
Pandemic restructuring
1,717
5,257
Total severance costs
1,717
6,952
Property disposal costs:
Loss on sale
—
915
Impairment loss
—
583
Other exit costs
964
—
Total property disposal costs
964
1,498
Other restructuring costs
222
—
Total restructuring charges
$
2,903
$
8,450
F-29
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE 22. INCOME TAXES
Current and Deferred Tax Provision
Our provision for (benefit from) income taxes consisted of the following:
Year Ended December 31,
2022
2021
2020
Current tax provision (benefit):
U.S. federal
$
—
$
( 1 )
$
( 99 )
State
1,064
366
326
Total current
1,064
365
227
Deferred tax provision (benefit):
U.S. federal
14,320
8,800
( 17,246 )
State
909
1,579
( 518 )
Total deferred
15,229
10,379
( 17,764 )
Provision for (benefit from) income taxes
$
16,293
$
10,744
$
( 17,537 )
The provision for (benefit from) income taxes for the years ended December 31, 2022, 2021 and 2020 resulted in effective tax rates of 27 %, 28 % and 20 % , respectively. The reconciliation of these effective tax rates to the U.S. statutory rate of 21 % is as follows:
Year Ended December 31,
2022
2021
2020
Income taxes at U.S. federal statutory rate
$
12,724
$
8,182
$
( 18,056 )
Net state income taxes
1,795
1,374
( 817 )
Tax credits
( 26 )
( 720 )
( 1,256 )
Unrecognized tax benefits (1)
17
598
772
Valuation allowances and write off of tax attributes (2)
( 68 )
( 167 )
236
Executive compensation limitation
1,901
1,559
1,159
Stock
152
162
538
Other
( 202 )
( 244 )
( 113 )
Provision for (benefit from) income taxes
$
16,293
$
10,744
$
( 17,537 )
(1) Includes the expiration of statute of limitations. See “Unrecognized Tax Benefits” below for further details.
(2) See “Tax Attributes and Valuation Allowances” below for further details.
F-30
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
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 our temporary differences that gave rise to deferred tax assets and deferred tax liabilities were as follows:
December 31,
2022
2021
Deferred tax assets:
Net operating loss carryforwards
$
191,916
$
196,654
Interest expense limitation carryforward
19,327
—
Accrued liabilities
4,979
4,527
Other
12,834
12,503
229,056
213,684
Valuation allowances (1)
( 607 )
( 735 )
Total deferred tax assets
228,449
212,949
Deferred tax liabilities:
Property, plant and equipment
( 8,386 )
( 7,762 )
Basis difference in the Partnership
( 181,377 )
( 151,469 )
Other
( 6,187 )
( 6,975 )
Total deferred tax liabilities
( 195,950 )
( 166,206 )
Net deferred tax asset (2)
$
32,499
$
46,743
(1) See “Tax Attributes and Valuation Allowances” below for further details.
(2) The 2022 net deferred tax assets are reflected in our consolidated balance sheets as deferred tax assets of $ 33.4 million and $ 47.9 million, respectively, and deferred tax liabilities of $ 0.9 million and $ 1.1 million, respectively.
Both the 2022 and 2021 balances are based on a U.S. federal tax rate of 21 %.
Tax Attributes and Valuation Allowances
Changes in our valuation allowance are as follows:
Year Ended December 31,
2022
2021
2020
Balance at beginning of period
$
( 735 )
$
( 1,027 )
$
( 822 )
Additions to valuation allowance
( 88 )
—
( 205 )
Reductions to valuation allowance
216
292
—
Balance at end of period
$
( 607 )
$
( 735 )
$
( 1,027 )
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. 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 a 50% or more ownership change in our 5% stockholders.
F-31
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
We record valuation allowances when it is more likely than not that some portion or all of our deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the appropriate taxing jurisdictions in the future. If we do not meet our expectations with respect to taxable income, we may not realize the full benefit from our deferred tax assets, which would require us to record a valuation allowance in our tax provision in future years. As of each reporting date, we consider new evidence to evaluate the realizability of our net deferred tax asset position by assessing the available positive and negative evidence. Changes to the valuation allowance are reflected in the statement of operations.
The amount of our deferred tax assets considered realizable could be adjusted if projections of future taxable income are reduced or objective negative evidence in the form of a three–year cumulative loss is present or both. Should we no longer have a level of sustained profitability, excluding nonrecurring charges, we will have to rely more on our future projections of taxable income to determine if we have an adequate source of taxable income for the realization of our deferred tax assets, namely NOL, interest expense limitation and tax credit carryforwards. This may result in the need to record a valuation allowance against all or a portion of our deferred tax assets.
At December 31, 2022, we had U.S. federal and state NOL carryforwards of $ 848.5 million and $ 314.8 million, respectively, included in our NOL deferred tax asset that are available to offset future taxable income. If not used, the federal and state NOL carryforwards will begin to expire in 2029 and 2023, respectively, though $ 629.2 million of the U.S. federal and $ 169.9 million of the state NOL carryforwards have no expiration date. In connection with the state NOL deferred tax asset, we recorded a valuation allowance of $ 0.6 million and $ 0.7 million as of December 31, 2022 and 2021, respectively.
At December 31, 2022, we had a U.S. federal tax credit carryforward of $ 3.0 million. If not used, the federal tax credit carryforward will begin to expire in 2037.
As of December 31, 2022, we had U.S. federal and state interest expense limitation carryforwards of $ 86.4 million and $ 26.5 million, respectively, included in our interest expense limitation deferred tax asset that are available to offset future taxable income. These carryforwards have no expiration.
Unrecognized Tax Benefits
Changes in our unrecognized tax benefits (including discontinued operations) are as follows:
Year Ended December 31,
2022
2021
2020
Beginning balance
$
19,594
$
18,892
$
18,453
Additions based on tax positions related to current year
2,151
2,246
2,397
Additions based on tax positions related to prior years
6
632
—
Reductions based on tax positions related to prior years
( 105 )
( 138 )
( 73 )
Reductions based on lapse of statute of limitations
( 1,995 )
( 2,038 )
( 1,885 )
Ending balance
$
19,651
$
19,594
$
18,892
We had $ 19.7 million, $ 19.6 million and $ 18.9 million of unrecognized tax benefits at December 31, 2022, 2021 and 2020, respectively, of which $ 1.1 million, $ 2.1 million and $ 2.9 million, respectively, would affect the effective tax rate if recognized and $ 7.9 million, $ 7.9 million and $ 7.9 million, respectively, would be reflected in income from discontinued operations, net of tax if recognized.
F-32
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
We recorded $ 2.1 million, $ 2.2 million and $ 2.1 million of potential interest expense and penalties related to unrecognized tax benefits associated with uncertain tax positions (including discontinued operations) in our consolidated balance sheets as of the years ended December 31, 2022, 2021 and 2020, respectively. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as reductions in income tax expense. We recorded no potential expenses or releases of interest or penalties in our consolidated statements of operations during 2022, $ 0.1 million of potential interest expense and penalties during 2021, and releases of $ 0.1 million during 2020.
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 both December 31, 2022 and 2021, 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 (see Note 26).
We and our subsidiaries file consolidated and separate income tax returns in the U.S. federal jurisdiction and in numerous state jurisdictions. U.S. federal income tax returns are generally subject to examination for up to three years after filing the returns. Due to our NOL carryforwards, our U.S. federal income tax returns can be examined back to the inception of our NOL carryforwards; therefore, expanding our examination period beyond 20 years. In 2020, the IRS completed their examination of our 2014 and 2015 tax years. Due to this audit being related to tax periods that commenced prior to the Spin–off, Exterran Corporation was also involved in the audit. The tax adjustments recorded from this audit did not have a material impact on our consolidated financial position or results of operations.
State income tax returns are generally subject to examination for a period of three to five years after filing the returns. However, the state impact of any U.S. federal audit adjustments and amendments remains subject to examination by various states for up to one year after formal notification to the states. We are not currently involved in any state audits.
As of December 31, 2022, we believe it is reasonably possible that $ 2.7 million of our unrecognized tax benefits, including penalties, interest and discontinued operations, will be reduced prior to December 31, 2023 due to the settlement of audits or the expiration of statutes of limitations or both. However, due to the uncertain and complex application of the tax regulations, it is possible that the ultimate resolution of these matters may result in liabilities that could materially differ from this estimate.
Impact of New Legislation
On August 16, 2022, President Biden signed into law the Inflation Reduction Act (Public Law Number 117–169). The legislation is expected to have an immaterial impact to our effective tax rate.
NOTE 23. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is computed using the two–class method, which is an earnings allocation formula that determines net income (loss) per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Under the two–class method, basic net income (loss) per common share is determined by dividing net income (loss), after deducting amounts allocated to participating securities, by the weighted average number of common shares outstanding for the period. Participating securities include unvested restricted stock and stock–settled restricted stock units that have nonforfeitable rights to receive dividends or dividend equivalents, whether paid or unpaid. During periods of net loss, only distributed earnings (dividends) are allocated to participating securities, as participating securities do not have a contractual obligation to participate in our undistributed losses.
Diluted net income (loss) per common share is computed using the weighted average number of 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.
F-33
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
The following table shows the calculations for net income (loss) attributable to common stockholders and potential shares of common stock, which is used in the calculation of basic and diluted net income (loss) per common share:
Year Ended December 31,
2022
2021
2020
Net income (loss)
$
44,296
$
28,217
$
( 68,445 )
Allocation of earnings to participating securities
( 1,429 )
( 1,172 )
( 1,338 )
Net income (loss) attributable to common stockholders
$
42,867
$
27,045
$
( 69,783 )
Weighted average common shares outstanding used in basic income (loss) per common share
153,281
151,684
150,828
Effect of dilutive securities:
Performance-based restricted stock units
125
144
—
ESPP shares
4
2
—
Weighted average common shares outstanding used in diluted income (loss) per common share
153,410
151,830
150,828
Anti-dilutive shares excluded from diluted income (loss) per common share
Stock options
—
31
96
Performance-based restricted stock units
—
—
54
ESPP shares
—
—
17
Net dilutive potential common shares issuable
—
31
167
NOTE 24. DERIVATIVES AND HEDGING
Prior to the expiration of our interest rate swaps in March 2022, we used derivative instruments to manage our exposure to fluctuations in the variable interest rate of our Credit Facility. We do not use derivative instruments for trading or other speculative purposes.
We had entered into three interest rate swaps with an aggregate notional amount of $ 300.0 million to offset changes in the expected cash flows due to fluctuations in the associated variable interest rates and designated them as cash flow hedges.
In 2021, we dedesignated one of the interest rate swaps with a $ 125.0 million notional value. At the time of dedesignation, the fair value of this interest rate swap was a liability of $ 1.6 million. The associated amount in accumulated other comprehensive loss related to this interest rate swap was amortized into interest expense over the remaining term of the swap through its expiration in March 2022. Changes in the fair value of this interest rate swap subsequent to dedesignation and prior to expiration were recorded in interest expense, the same consolidated statement of operations line item to which the earnings effect of the hedged item was recorded.
The remaining interest rate swaps had a $ 175.0 million notional value and were designated as (highly effective) cash flow hedging instruments until their expiration. Changes in the fair value of these interest rate swaps were recognized as a component of other comprehensive income (loss) until the hedged transactions affected earnings. At that time, amounts were reclassified into earnings to interest expense, the same consolidated statement of operations line item to which the earnings effect of the hedged items were recorded.
F-34
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
The effect of our derivative instruments on our consolidated balance sheet is as follows:
December 31,
2022
2021
Interest rate swaps designated as cash flow hedging instruments
Accrued liabilities
$
—
$
727
Interest rate swaps not designated as hedging instruments
Accrued liabilities
—
523
Total derivative liabilities
$
—
$
1,250
The effect of our derivative instruments on our consolidated statements of operations is as follows:
Year Ended December 31,
2022
2021
2020
Total amount of interest expense in which the effects of cash flow hedges and undesignated interest rate swaps are recorded
$
101,259
$
108,135
$
105,716
Interest rate swaps designated as cash flow hedging instruments:
Pre-tax loss recognized in other comprehensive income
$
( 512 )
$
( 1,219 )
$
( 8,459 )
Pre-tax loss reclassified from accumulated other comprehensive loss into interest expense
( 1,758 )
( 6,308 )
( 3,878 )
Interest rate swaps not designated as hedging instruments:
Gain recognized in interest expense
$
523
$
1,088
$
—
See Note 16 and Note 25 for further details on our derivative instruments.
NOTE 25. FAIR VALUE MEASUREMENTS
The accounting standard for fair value measurements and disclosures establishes a fair value hierarchy that prioritizes the inputs of valuation techniques used to measure fair value into the following three categories:
● Level 1 – quoted unadjusted prices for identical markets in active markets to which we have access at the date of measurement.
● Level 2 – quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model–derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or prices vary substantially over time or among brokered markets makers.
● Level 3 – model–derived valuation in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those that reflect our own assumptions regarding how market participants would price the asset or liability based on the best available information.
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Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Investment in ECOTEC
As of December 31, 2022, we owned a 22.7 % equity interest in ECOTEC (see Note 11). We have elected the fair value option to account for this investment. The fair value determination of this investment primarily consisted of unobservable inputs, which creates uncertainty in the measurement of fair value as of the reporting date. The significant unobservable inputs used in the fair value measurement, which was valued through an average of an income approach (discounted cash flow method) and a market approach (guideline public company method), are the WACC and the revenue multiples. Significant increases (decreases) in these inputs in isolation would result in a significantly higher (lower) fair value measurement. As of December 31, 2022, the fair value of our investment in ECOTEC is $ 12.8 million.
This fair value measurement is classified as Level 3 . The significant unobservable inputs are as follows:
Significant Unobservable Inputs
Range
Median
Valuation technique:
Discounted cash flow
WACC
0 % - 22.1 %
11.3 %
Guideline public company
Revenue multiple
1.7 x - 8.0 x
3.9 x
The reconciliation of changes in the fair value of our investment in ECOTEC is as follows:
Year Ended December 31,
2022
Balance at January 1
$
—
Purchases of equity interests
14,667
Unrealized loss (1)
( 1,864 )
Balance at December 31
$
12,803
(1)
Included in other expense (income) in our consolidated statements of operations.
Interest Rate Swaps
As of December 31, 2021, the fair value of our interest rate swaps was a liability of $ 1.3 million. Prior to their expiration in the first quarter of 2022, our interest rate swaps were valued quarterly based on the income approach (discounted cash flows) using market observable inputs, including LIBOR forward curves. These fair value measurements were classified as Level 2 .
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Compressors
During the years ended December 31, 2022 and 2021, we recorded nonrecurring fair value measurements related to our idle compressors (see Note 20). Our estimate of the compressors’ fair value was primarily based on the expected net sale proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use. We discounted the expected proceeds, net of selling and other carrying costs, using a weighted average disposal period of four years. These fair value measurements are classified as Level 3.
F-36
Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
The fair value of our compressors impaired is as follows:
December 31,
2022
2021
Impaired compressors
$
1,961
$
4,380
The significant unobservable inputs used to develop the above fair value measurements were weighted by the relative fair value of the compressors being measured. Additional quantitative information related to our significant unobservable inputs follows:
Range
Weighted Average (1)
Estimated net sale proceeds:
As of December 31, 2022
$ 0 - $ 621 per horsepower
$ 47 per horsepower
As of December 31, 2021
$ 0 - $ 621 per horsepower
$ 35 per horsepower
(1) Calculated based on an estimated discount for market liquidity of 51 % and 64 % as of December 31, 2022 and 2021, respectively .
See Note 20 for further details.
Other Financial Instruments
The carrying amounts of our cash, receivables and payables approximate fair value due to the short–term nature of those instruments.
The carrying amount of borrowings outstanding under our Credit Facility approximates fair value due to its variable interest rate. The fair value of these outstanding borrowings is a Level 3 measurement.
The fair value of our fixed rate debt is estimated using yields observable in active markets, which are Level 2 inputs, and was as follows:
December 31,
2022
2021
Carrying amount of fixed rate debt (1)
$
1,297,084
$
1,296,325
Fair value of fixed rate debt
1,214,000
1,361,000
(1) Carrying amounts are shown net of unamortized debt premium and deferred financing costs. See Note 14.
NOTE 26. DISCONTINUED OPERATIONS
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, 2022 and 2021, 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 liabilities of 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 assets of discontinued operations as of both December 31, 2022 and 2021.
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Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
Assets and liabilities of discontinued operations are as follows:
December 31,
2022
2021
Other assets
$
7,868
$
7,868
Deferred tax assets
718
1,943
Assets of discontinued operations
$
8,586
$
9,811
Deferred tax liabilities
$
7,868
$
7,868
Liabilities of discontinued operations
$
7,868
$
7,868
The acquisition of Exterran Corporation by Enerflex, Ltd. in October 2022 had no impact on the Spin–off related agreements discussed above.
NOTE 27. RELATED PARTY TRANSACTIONS
Old Ocean Reserves, an affiliate of our customer Hilcorp, has the right to designate one director to serve on our board of directors as long as Old Ocean Reserves or its successors (together with its affiliates) owns at least 7.5 % of our outstanding common stock. As of December 31, 2022, Old Ocean Reserves owned 10.8 % of our outstanding common stock. Jason C. Rebrook, Chief Executive Officer and Director of Harvest Midstream Company, a Hilcorp affiliate, has served as Old Ocean Reserves’ representative director since July 2020.
Revenue from Hilcorp and affiliates was $ 36.2 million, $ 38.2 million and $ 40.3 million during the years ended December 31, 2022, 2021 and 2020, respectively. Accounts receivable, net due from Hilcorp and affiliates was $ 3.0 million and $ 3.7 million as of December 31, 2022 and 2021, respectively (see Note 4).
NOTE 28. SEGMENT INFORMATION
We manage our business segments primarily based on the type of product or service provided. We have two segments which we operate within the U.S.: contract operations and aftermarket services. The contract operations segment primarily provides natural gas compression services to meet specific customer requirements. The aftermarket services segment provides a full range of services to support the compression needs of customers, from parts sales and normal maintenance services to full operation of a customer’s owned assets.
We evaluate the performance of our segments based on gross margin, defined as revenue less cost of sales (excluding depreciation and amortization) for each segment. Segment revenue includes only sales to external customers.
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Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
Summarized financial information for our segments is shown below:
Contract
Aftermarket
Operations
Services
Other (1)
Total
2022
Revenue
$
677,801
$
167,767
$
—
$
845,568
Gross margin
398,903
27,181
—
426,084
Capital expenditures
237,246
1,964
657
239,867
2021
Revenue
$
648,311
$
133,150
$
—
$
781,461
Gross margin
403,825
18,719
—
422,544
Capital expenditures
94,863
2,675
347
97,885
2020
Revenue
$
738,918
$
136,052
$
—
$
874,970
Gross margin
477,831
19,946
—
497,777
Capital expenditures
133,492
5,308
1,502
140,302
(1) Corporate–related items.
The reconciliations of total assets by segment to total assets per the consolidated balance sheets are as follows:
December 31,
2022
2021
Contract operations assets
$
2,431,145
$
2,429,805
Aftermarket services assets
61,282
49,420
Segment assets
2,492,427
2,479,225
Other assets (1)
97,737
100,930
Assets of discontinued operations
8,586
9,811
Total assets
$
2,598,750
$
2,589,966
(1) Corporate–related items.
The reconciliations of total gross margin to income (loss) before income taxes are as follows:
Year Ended December 31,
2022
2021
2020
Total gross margin
$
426,084
$
422,544
$
497,777
Less:
Selling, general and administrative
117,184
107,167
105,100
Depreciation and amortization
164,259
178,946
193,138
Long-lived and other asset impairment
21,442
21,397
79,556
Goodwill impairment
—
—
99,830
Restructuring charges
—
2,903
8,450
Interest expense
101,259
108,135
105,716
Debt extinguishment loss
—
—
3,971
Gain on sale of assets, net
( 40,494 )
( 30,258 )
( 10,643 )
Other expense (income), net
1,845
( 4,707 )
( 1,359 )
Income (loss) before income taxes
$
60,589
$
38,961
$
( 85,982 )
F-39