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Item 7. Management’s Discussion and Analysis

2024-02-21 compared with 2023-02-22 · 97 added, 86 removed, 240 unchanged (43% of the section changed)

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“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10–K for the year ended December 31, 2022 filed with the SEC on February 23, 2023.

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We are an energy infrastructure company with a pure–play focus on midstream natural gas compression.

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Our geographic diversity, technically experienced personnel and large fleet of natural gas compression equipment enable us to provide reliable contract operations services to our customers.

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We operate in two business segments:

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Significant 2023 Transactions

During the year ended December 31, 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 recorded an aggregate gain on the sales of $28.1 million.

See Note 3 to our Financial Statements for additional information about these dispositions.

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.

As of December 31, 2022, we own 22.7% of ECOTEC.

We acquired the remaining equity interest of 2.3% in January 2023.

See Note 11 to our Financial Statements for additional information about this investment.

In November 2023, we agreed to serve as the lead investor in a series A financing round for Ionada, a global carbon capture technology company committed to reducing GHG emissions and creating a sustainable future.

Ionada has developed a post-combustion carbon capture solution to reduce carbon dioxide emissions from various small to mid-sized industrial emitters in the energy, marine and e-fuels industries, among others.

See Note 12 (“Investments in Unconsolidated Affiliates”) to our Financial Statements for additional information about this investment.

Trends and Outlook

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As our business is so closely aligned with production and is typically less directly impacted by commodity prices, we are not exposed to the volatility often faced in shorter–cycle oil field service businesses.

Domestic natural gas production generally occurs in either primarily natural gas basins, such as the Marcellus, Utica and Haynesville Shales, or in basins where natural gas is produced alongside oil, also known as “associated” gas, such as the Permian and Delaware Basins, Eagle Ford and the Mid–Continent.

Relative stability in commodity prices over much of the past decade encouraged investment in domestic exploration and production and midstream infrastructure across the energy industry, particularly in the low–cost basins characterized by oil and associated natural gas production.

Domestic natural gas production generally occurs in either basins where natural gas is produced alongside oil, also known as “associated” gas, such as the Permian and Delaware Basins, the Eagle Ford and the Mid–Continent or in natural gas basins, such as the Marcellus, Utica and Haynesville Shales.

Significant investment in domestic exploration and production and midstream infrastructure across the energy industry has been made over much of the past decade, particularly in the low–cost basins characterized by oil and associated natural gas production.

The development of these basins producing both commodities has created additional incremental demand for natural gas compression over the recent past as it is a critical method to transport associated gas volumes or enhance oil production through gas lift.

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Current Trends

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Average oil production (MMb/d)

Looking back to 2021, the economic recovery from the effects of the COVID–19 pandemic brought a rebound in energy demand around the globe;

however, producers limited drilling and completion activity to achieve maintenance levels of production and cash flows in the course of the pandemic.

In 2022, the rebound in energy demand triggered supply constraints and price spikes for multiple commodities.

That, coupled with the conflict in Ukraine, increased market uncertainty and price spikes as the market and consumers balance supply security and affordability.

Even given this uncertainty in the market, oil and natural gas production in 2022 continued to rebound, particularly natural gas production.

The increases in production in 2022 resulted in strong demand for our compression services and we increased our investment in new fleet units.

During 2023, U.S.

natural gas and oil production grew to record levels, resulting in strong demand for our compression services and we increased our investment in new fleet units.

Our contract operations revenue and total operating horsepower increased 19% and 5%, respectively in 2023.

Similar increases in demand in 2022 were seen in our aftermarket services business, where we experienced an increase of 26% in aftermarket services revenue in 2022.

Similar increases in demand in 2023 were seen in our aftermarket services business, where we experienced an increase of 8% in aftermarket services revenue.

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The EIA Outlook forecasts the following year–over–year changes:

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Liquefied natural gas exports

The events of 2022 drove broad realization that a more diverse energy mix is needed to satisfy global energy demand and preserve energy security, making it a rewarding time to be in the business of transporting U.S.

The EIA Outlook expects natural gas production to continue to increase primarily in the Permian region in West Texas and Southeast New Mexico and in the Haynesville region in Louisiana and East Texas due to the expected completion of new pipeline infrastructure expansions in 2023 and 2024.

Although the EIA expects natural gas production to increase, natural gas consumption is expected to decrease slightly, reflecting a decrease in the usage of natural gas in the electric power generation sector, as a result of increased power generation from renewables, partially offset by increased LNG exports and exports of natural gas via pipeline to Mexico.

The EIA Outlook expects natural gas production to continue to increase to all-time highs in 2024 and 2025.

Natural gas consumption is also expected to increase, reflecting consistent usage of natural gas in the electric power generation and residential sectors, as well as increased LNG exports and exports of natural gas via pipeline to Mexico.

We believe the outlook for the energy industry in the U.S.

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has increased over the past several years, which we believe will help sustain our aftermarket services business over the long term.

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Key Challenges and Uncertainties

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While we generally attempt to mitigate the impact of increased prices through strategic purchasing decisions, diversification of our supplier base, where possible, and the passing along of increased costs to customers, there may be a time delay between the increased commodity prices and the ability to increase the price of our services.

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We believe that our ability to hire, train and retain qualified personnel will continue to be important.

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Further, the cost of labor has increased and may continue to increase in the future with increases in demand, which will require us to incur additional costs.

Increasing customer focus on free cash flow .

Many of our customers have begun transitioning their business model to focus on sustainable free cash flow generation rather than growth, and the COVID–19 pandemic further fueled this change in focus.

We expect this transition to have a positive impact on the industry in the long term, as we anticipate the change will reduce volatility through cycles and improve the financial strength of our customers.

In the near term, however, we expect this transition to result in a modest natural gas production growth rate, to which demand for our products and services is closely aligned.

Demand for natural gas-powered compression.

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In addition, increased focus of our customers on reducing emissions from, or the use of, combustion engines in compression could increase demand for electric motor-driven compressors or require us to make modifications to our existing natural gas-powered units.

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Operating Highlights

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The reconciliation of net income (loss) to gross margin is as follows:

The reconciliation of net income to gross margin is as follows:

Year Ended December 31,

(in thousands)

Net income (loss)

Selling, general and administrative

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Long-lived and other asset impairment

Goodwill impairment

Restructuring charges

Interest expense

Debt extinguishment loss

Gain on sale of assets, net

Other expense (income), net

Provision for (benefit from) income taxes

Provision for income taxes

RESULTS OF OPERATIONS

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Net income was $105.0 million and $44.3 million during the years ended December 31, 2023 and 2022, respectively.

The increase was primarily driven by a higher gross margin from our aftermarket services business, decreased depreciation and amortization expense and interest expense and an increased gain on sale of assets, net, partially offset by higher SG&A expenses and lower gross margin from our contract operations business and higher SG&A.

The increase was primarily driven by a higher gross margin from both our contract operations business and aftermarket services business and decreases in long-lived asset impairment expense and SG&A.

These changes were partially offset by a decrease in the gain on sale of assets and the unrealized change in fair value of our investment in an unconsolidated affiliate and increases in our provision for income taxes, interest expense, depreciation and amortization and restructuring charges.

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

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(1) Defined as gross margin divided by revenue.

Revenue in our contract operations business increased primarily due to higher rates and an increase in average operating horsepower in response to improving market conditions, partially offset by the impact of the strategic dispositions in 2022 and 2021.

Revenue in our contract operations business increased primarily due to higher rates for contract compression in response to market conditions and an increase in average operating horsepower, partially offset by the impact of strategic dispositions of horsepower in 2022.

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Despite the increase in revenues, the decrease in gross margin in our contract operations business reflects the impact of a larger increase in cost of sales.

Start–up, maintenance, lube oil and other operating expenses increased, driven by higher pricing throughout our supply chain, as well as increased volumes associated with unit redeployment as customer activity accelerated.

Partially offsetting these cost increases was the decrease in expense attributable to the horsepower sold in 2022 and 2021.

The increase in cost of sales was primarily due to a $10.8 million increase in parts expense as a result of an increase in maintenance activities and a $1.9 million increase in lube oil expenses which were both driven by higher pricing throughout our supply chain, as well as increased volumes associated with unit redeployment as customer activity accelerated.

The increase in cost of sales was also due to an increase of $8.1 million in total employee compensation expense.

Further, cost of sales for the year ended December 31, 2023 includes an increase of $9.1 million for sales tax as a result of a change in tax compliance for sales tax associated with contract operations cost of sales.

Prior to 2023, contract operations sales tax amounts were recognized in SG&A.

Partially offsetting these cost increases was the decrease in expense attributable to the horsepower sold in 2022.

Gross margin percentage increased primarily due to an increase in revenue which exceeded the increase in cost of sales.

Aftermarket Services

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Gross margin percentage

Revenue in our aftermarket services business increased due to the increase in both service activities and sales of parts and components driven by increased customer demand during 2022 compared to 2021.

Gross margin increased due to the increase in revenue mentioned above, partially offset by the increase in cost of sales.

The increase in cost of sales was primarily driven by increases in the cost associated with parts and labor.

Revenue in our aftermarket services business increased primarily due to higher service activities and parts sales from the continuation of the market recovery which began in the prior year and continues to drive an increase in customer demand.

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

The increase in cost of sales resulted from an increase in cost of service activities of $5.0 million attributable to increased labor and parts costs, which was partially offset by a reduction in the use of parts and labor from third party providers, which resulted in savings of $3.2 million.

Costs and Expenses

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Selling, general and administrative.

The increase in SG&A was primarily due to a $4.7 million increase in employee compensation costs, a $1.7 million increase in information technology expenses related to increased amortization expense of capitalized implementation costs and service agreements related to the substantial completion of our process and technology transformation project at the end of 2021, a $1.6 million increase in sales and use tax related to audit settlements and a $1.1 million increase in travel and meeting expenses.

The decrease in SG&A was primarily due to a decrease of $8.0 million for sales tax as a result of a change in tax compliance for sales tax associated with contract operations cost of sales.

Beginning in 2023, contract operations sales tax amounts are recognized in contract operations cost of sales.

Further, SG&A for the year ended December 31, 2023 includes a $2.2 million decrease in professional expense and a $1.3 million decrease in accrued expenses, partially offset by a $5.4 million increase in long-term performance-based incentive compensation expense, a $4.0 million increase in short-term incentive expense and a $1.6 million increase in software and maintenance expense.

Depreciation and amortization.

The decrease in depreciation and amortization was primarily due the impact of assets reaching the end of their depreciable lives, compression and other asset sales and impairments and certain intangible assets reaching the end of their useful lives, partially offset by the increased depreciation and amortization expenses associated with fixed asset additions.

The increase in depreciation and amortization expense was primarily due to an increase in depreciation expense associated with fixed asset additions and accelerated depreciation associated with certain assets.

These increases were partially offset by a decrease in depreciation expense resulting from assets reaching the end of their depreciable lives, the impact of compression and other asset sales, and long-lived asset impairments.

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Long–lived and other asset impairment.

We periodically review the future deployment of our idle compressors for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate.

In addition, we evaluate for impairment idle units that have been culled from our compression fleet in prior years and are available for sale.

See Note 20 to our Financial Statements for further details.

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We also evaluate for impairment our idle units that have been culled from our compression fleet in prior years and are available for sale.

During the years ended December 31, 2023 and 2022, we recognized $12.0 million and $21.4 million, respectively, of impairment charges to write down these compressors to their fair value.

The decrease in impairment charges on compressors is due to an increase in customer demand and as a result, higher utilization of our equipment.

See Note 21 (“Long-Lived Asset and Other Impairments”) for further details on these impairment charges.

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

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Restructuring charges .

Restructuring charges recorded in 2021 primarily related to reductions in headcount and costs to exit a facility no longer deemed economical for our business.

We recorded no such restructuring charges during 2022.

See Note 19 to our Financial Statements for further details .

Restructuring charges of $1.8 million during the year ended December 31, 2023 consisted of severance and consulting costs related to our restructuring activities.

See Note 22 (“Restructuring Charges”) for further details on these restructuring charges.

Interest expense.

The decrease in interest expense was primarily due to a decrease in the average outstanding balance of long–term debt and the $4.9 million write–off of unamortized deferred financing costs related to an amendment to our Credit Facility in 2021, which were partially offset by an increase in the weighted average effective interest rate.

The increase in interest expense was due to an increase in interest rates, a higher average outstanding balance of long–term debt and the write-off of $1.0 million of unamortized deferred financing costs as a result of the Amended and Restated Credit Agreement, partially offset by an increase in capitalized interest.

Gain on sale of assets, net.

The net gain on sales of assets during 2022 was the result of $28.1 million of gains recognized on sales of certain contract operations customer service agreements and approximately 770 compressors and $12.4 million of gains recognized on other compression and transportation asset sales.

The net gain on the sales of assets during 2021 was primarily the result of $19.0 million of gains recognized on sales of certain contract operations customer service agreements and approximately 875 compressors, $9.3 million of gains recognized on other compression asset sales and $3.3 million of gains recognized on other transportation and shop asset sales during the period.

The decrease in gain on sale of assets was primarily due to gains of $7.6 million on compression asset sales during the year ended December 31, 2023 compared to gains of $38.5 million on compression asset sales during the year ended December 31, 2022.

The net gain on the sales of assets during 2022 was primarily the result of $28.1 million of gains recognized on sales of certain contract operations customer service agreements and approximately 770 compressors and $12.4 million of gains recognized on other compression asset sales and transportation and shop asset sales during the period.

Other expense (income), net.

The change in other expense (income), net was primarily due to a $2.4 million decrease in insurance proceeds related to damages to facilities and compressors caused by Hurricane Ida, a $1.9 million unrealized change in the fair value of our investment in an unconsolidated affiliate and a $0.9 million decrease in indemnification expense remitted pursuant to our tax matters agreement with Exterran Corporation.

The decrease in other expense (income), net was primarily due to a $0.9 million decrease in the unrealized change in the fair value of our investment in an unconsolidated affiliate during the year ended December 31, 2023 compared to the year ended December 31, 2022.

Provision for Income Taxes

The increase in provision for income taxes was primarily due to the tax effect of the increase in book income during the year ended December 31, 2023, compared to the year ended December 31, 2022.

Year Ended December 31,

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Effective tax rate

The increase in the provision for income taxes is primarily due to the tax effect of the increase in book income during the year ended December 31, 2022 compared to the year ended December 31, 2021.

See Note 22 to our Financial Statements for additional details.

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LIQUIDITY AND CAPITAL RESOURCES

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We have no near-term maturities and believe that our operating cash flows and borrowings under the Credit Facility will be sufficient to meet our future liquidity needs.

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We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities in open market purchases, privately negotiated transactions or otherwise.

Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or debt securities in open market purchases, privately negotiated transactions or otherwise.

Such repurchases or exchanges, if any, may be material, will be upon terms and prices as we may determine and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

Cash Requirements

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Maintenance capital expenditures are related to major overhauls of significant components of a compression package, such as the engine, compressor and cooler, which return the components to a like–new condition, but do not modify the application for which the compression package was designed.

Maintenance capital expenditures were $84.2 million and $47.3 million during the years ended December 31, 2022 and 2021, respectively.

Maintenance capital expenditures were $92.2 million and $84.2 million during the years ended years ended December 31, 2023 and 2022, respectively.

The increase in maintenance capital expenditures from 2022 to 2023 was the result of an increase in scheduled maintenance activities due to maintenance cycle requirements as well as additional make–ready investment as we return idle equipment to work to meet customer demand.

Projected Capital Expenditures.

We currently plan to spend approximately $270.0 million to $295.0 million in capital expenditures during the year ended December 31, 2023, primarily consisting of approximately $180.0 million to $200.0 million for growth capital expenditures and approximately $75.0 million to $80.0 million for maintenance capital expenditures.

We anticipate increased 2023 capital expenditures, particularly growth capital expenditures, as compared to 2022 due to increased investment in new compression equipment as a result of higher customer demand.

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Projected Capital Expenditures.

While market activity continues to be strong, we currently anticipate reducing capital expenditures in 2024 compared to 2023 to support free cash flow generation after dividends, and plan to spend approximately $275.0 million to $290.0 million in capital expenditures during the year ended December 31, 2024, primarily consisting of approximately $175.0 million to $180.0 million for growth capital expenditures and approximately $80.0 million to $85.0 million for maintenance capital expenditures.

On January 25, 2024, our Board of Directors declared a quarterly dividend of $0.165 per share of common stock, or approximately $25.9 million, which was paid on February 13, 2024 to stockholders of record at the close of business on February 6, 2024.

Any future determinations to pay cash dividends to our stockholders will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, and credit and loan agreements in effect at that time and other factors deemed relevant by our Board of Directors.

Share Repurchase Program

On April 27, 2023, our Board of Directors authorized the 2023 Share Repurchase Program which allows us to repurchase up to $50.0 million of outstanding common stock.

Under the 2023 Share Repurchase Program, shares of our common stock may be repurchased periodically, including in the open market, privately negotiated transactions, or otherwise in accordance with applicable federal securities laws, at any time until April 27, 2024.

The actual timing, manner, number, and value of shares repurchased under the program will be determined by us at our discretion.

The following table summarizes shares repurchased under the 2023 Share Repurchase Program during the year ended December 31, 2023:

(dollars in thousands, except per share amounts)

December 31, 2023

Total cost of shares repurchased

Average price per share

Total number of shares repurchased

Contractual Obligations

Our material contractual obligations as of December 31, 2023 consisted of the following:

• Long–term debt of $1.5 billion, of which $1.3 billion is due in 2027 and 2028, with the remainder due in 2024;

• Estimated interest on our long–term debt of $444.0 million, consisting of annual payments of approximately $103.5 million in 2023, approximately $100.7 million in 2024, and approximately $84.4 million or less in 2025 through 2028;

• Long–term debt of $1.6 billion, all of which is due in 2027 and 2028;

• Estimated interest on our long–term debt of $428.8 million, consisting of annual payments of approximately $108.3 million in 2024 through 2026, approximately $82.5 million in 2027, and approximately $21.4 million in 2028;

• Purchase commitments of $192.7 million, of which $151.6 million is due in 2024, that primarily consist of commitments to purchase fleet assets and information technology–related costs;

• Operating lease payments of $18.0 million that are spread relatively evenly in 2024 through 2032.

In addition, we had $19.7 million of unrecognized tax benefits (including discontinued operations) recorded as liabilities related to uncertain tax positions and a liability of $2.1 million recorded for potential penalties and interest (including discontinued operations) related to these unrecognized tax benefits at December 31, 2022, which we are uncertain as to if or when such amounts may be settled.

In addition, we had $19.5 million of unrecognized tax benefits (including discontinued operations) recorded as liabilities related to uncertain tax positions at December 31, 2023, which are uncertain as to if or when such amounts may be settled.

We had a liability of $2.5 million recorded for potential penalties and interest (including discontinued operations) related to these unrecognized tax benefits at December 31, 2023, which we are uncertain as to if or when such amounts may be settled.

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Sources of Cash

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As of December 31, 2023, there were $4.5 million of letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.1%.

Our Credit Facility matures in November 2024 and has an aggregate revolving commitment of $750.0 million.

We amended and restated our Credit Facility on May 16, 2023;

see Note 15 (“Long-Term Debt”) to our Financial Statements for details on the Amended and Restated Credit Agreement.

Credit Facility Terms.

Our Credit Facility matures on May 16, 2028 (or December 2, 2026 or December 3, 2027, as applicable, if any portion of our 2027 Senior Notes and 2028 Senior Notes, respectively, remain outstanding at such date) and has an aggregate revolving commitment of $750.0 million.

Portions of the Credit Facility, up to $75.0 million, are available for the issuance of swing line loans and $50.0 million is available for the issuance of letters of credit.

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.

Our Credit Facility agreement requires that we meet certain financial ratios (see Note 14 to our Financial Statements) and contains various additional covenants including, but not limited to, mandatory prepayments from the net cash proceeds of certain asset transfers, 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.

As a result of the financial ratio requirements, $487.6 million of the $493.0 million of undrawn capacity was available for additional borrowings as of December 31, 2022.

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

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The Credit Facility borrowing base consists of eligible accounts receivable, inventory and compressors.

Our Credit Facility agreement requires that we meet certain financial ratios (see Note 15 (“Long-Term Debt”) and contains various additional covenants including, but not limited to, mandatory prepayments from the net cash proceeds of certain asset transfers, 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.

As of December 31, 2023, we were in compliance with all covenants under our Credit Facility agreement.

Additionally, all undrawn capacity on our Credit Facility was available for borrowings as of December 31, 2023.

As of both December 31, 2023 and 2022, we had a principal balance of $1.3 billion of outstanding senior notes that consisted of the following:

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• $500.0 million of 6.875% senior notes due in April 2027.

See Note 14 to our Financial Statements for further details of these notes.

See Note 15 (Long-term Debt”) to our Financial Statements for further details of these notes.

At–the–Market Continuous Equity Offering Program

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We used the net proceeds of these offerings for general corporate purposes.

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.

During the year ended December 2022, we sold 447,020 shares of common stock, respectively, for net proceeds of $4.2 million, pursuant to the ATM Agreement.

There were no shares of common stock sold during the year ended December 31, 2023.

Other Sources of Cash

Business Dispositions and Other Asset Sales.

We received proceeds of $72.2 million and $120.3 million from business dispositions and other asset sales during the years ended December 31, 2023 and 2022, respectively.

We typically use the proceeds from these sales to repay borrowings outstanding under our Credit Facility, however, we are not able to estimate the timing of asset sales nor the amount of proceeds to be received and as such, we do not rely on asset sale proceeds as a future source of capital.

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Cash flows provided by (used in) each type of activity were as follows:

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Financing activities

Net (decrease) increase in cash and cash equivalents

Net decrease in cash and cash equivalents

Operating Activities.

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

Partially offsetting these decreases in operating cash were increased cash inflow from revenue and deferred revenue.

The increase in net cash provided by operating activities was primarily due to increased cash inflows of $115.2 million from gross margin and changes of $15.4 million in deferred revenue, partially offset by changes of $24.3 million in contract costs, $12.2 million in accounts payable and other liabilities and decreased cash inflows of $9.1 million from accounts receivable.

Investing Activities.

The change in net cash used in investing activities was primarily due to a $142.0 million increase in capital expenditures and a $14.7 million increase in our investment in unconsolidated affiliates, partially offset by a $7.4 million increase in proceeds from the sale of business and other assets.

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The increase in net cash used in investing activities was primarily due to a $58.8 million increase in capital expenditures and a $99.6 million decrease in proceeds from the sale of business, partially offset by a $51.6 million increase in proceeds from sales of property, plant and equipment and a $7.4 million decrease in investments in non-consolidated affiliates.

Financing Activities.

The decrease in net cash used in financing activities was primarily due to $16.8 million of net borrowings of long–term debt during 2022 compared with $158.5 million of net repayments of long–term debt during 2021, and a $3.1 million decrease in payments for settlements of interest rate swaps that include financing elements.

The increase in net cash used in financing activities was primarily due to $8.9 million of common stock purchased under the 2023 Share Repurchase Program, a $6.0 million payment for debt issuance costs related to the Amended and Restated Credit Agreement, a $5.5 million increase in dividends paid to stockholders and a $4.2 million decrease in proceeds from the sale of shares under the ATM Agreement, partially offset by a $19.0 million increase in net borrowings of long-term debt.

Critical Accounting Estimates

We describe our significant accounting policies more fully in Note 2 to our Financial Statements.

We describe our significant accounting policies more fully in Note 2 (“Basis of Presentation and Significant Accounting Policies”) to our Financial Statements.

As disclosed in Note 2, the preparation of financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses and related disclosures of contingent assets and liabilities.

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Actual results may differ from these estimates under different assumptions or conditions and these differences can be material to our financial condition, results of operations and cash flows.

Property, plant and equipment, net, at December 31, 2023 was $2.3 billion and depreciation expense was $159.3 million for the year ended December 31, 2023.

Property, plant and equipment are carried at cost and depreciated using the straight–line basis over the estimated useful life of the asset.

As of December 31, 2022, property, plant and equipment, net was $2.2 billion and depreciation expense was $155.4 million for the year ended December 31, 2022.

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Our estimate of useful lives and salvage values are based on assumptions and judgments that reflect both historical experience and expectations regarding future use of our assets, including wear and tear, obsolescence, technical standards, market demand and geographic location.

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During the year ended December 31, 2023, we recorded long–lived and other asset impairments of $12.0 million.

Impairment Assessments of Property, Plant and Equipment and Identifiable Intangible Assets

We review long–lived assets, which include property, plant and equipment and intangibles assets 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.

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Given the nature of these evaluations and their application to specific assets and specific times, it is not possible to reasonably quantify the impact of changes in these assumptions.

For compressors that are removed from our active fleet, the fair value of a compressor 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.

See Note 20 and Note 25 to our Financial Statements for further details of our fleet asset impairments.

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Compression Fleet.

The fair value of a compressor is estimated on the expected net sale proceeds compared to 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.

See Note 21 (“Long-Lived and Other Asset Impairment”) and Note 26 (“Fair Value Measurements”) to our Financial Statements for further details of our fleet asset impairments.

Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid.

We operate in the U.S.

and have investments in unconsolidated affiliates that operate in the U.S.

and international locations.

Significant judgments and estimates are required in determining consolidated income tax expense.

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In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence including scheduled reversals of deferred tax liabilities, projected future taxable income, tax–planning strategies and results of recent operations.

In projecting future taxable income, we begin with historical results adjusted for changes in accounting policies and incorporate assumptions, including the amount of future U.S.

federal and state pretax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax–planning strategies.

In projecting future taxable income, we begin with historical results adjusted for results of discontinued operations and changes in accounting policies and incorporate assumptions, including the amount of future U.S.

federal, state, and international pretax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax–planning strategies.

These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage the underlying businesses.

In evaluating the objective evidence that historical results provide, we consider three years of cumulative income (loss) before income taxes.

Table Archrock, Contents

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future.

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The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various state and local jurisdictions.

GAAP provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.

The accounting standards for income taxes provide that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.

We adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available.

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Recent Accounting Developments

See Note 2 to our Financial Statements.

See Note 3 (“Recent Accounting Developments”) to our Financial Statements.

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What changed 10-K

Item 7. Management’s Discussion and Analysis