2019 ANNUAL REPORT2 COLOR PATCHENERGY INFRASTRUCTURE POWERING AMERICA FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share amounts)
Revenue:
Contract operations
Aftermarket services
Total revenue
Gross margin(1):
Contract operations
Aftermarket services
Total gross margin
Gross margin percentage:
Contract operations
Aftermarket services
Adjusted EBITDA (2)
Total assets
Long-term debt
Total Archrock stockholders' equity
Net income
Net income attributable to Archrock stockholders
Net income from continuing operations attributable to Archrock
common stockholders per share
Dividends declared and paid per common share
Year ended December 31,
2019
2018
2017
$771,539
193,946
$965,485
$474,279
34,968
$509,247
$672,536
231,905
$904,441
$399,523
40,551
$440,074
$610,921
183,734
$794,655
$347,916
27,817
$375,733
61%
18%
59%
17%
57%
15%
$416,505
$352,256
$280,377
3,109,975
1,842,549
1,085,963
2,552,515
1,529,501
841,574
2,408,007
1,417,053
777,049
97,330
97,330
.70
0.554
29,160
21,063
0.19
0.504
18,410
18,953
0.26
0.480
(1) See “Non-GAAP Financial Measures” in Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” of our accompanying 2019 Form 10-K for information on gross margin.
(2) See “Reconciliation of Net Income to Adjusted EBITDA” below.
RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA
(In thousands)
Net income
Loss from discontinued operations, net of tax
Income from continuing operations
Depreciation and amortization
Long-lived asset impairment
Restatement and other charges
Restructuring and other charges
Corporate office relocation costs
Interest expense
Debt extinguishment loss
Transaction-related costs
Stock-based compensation expense
Indemnification expense, net
Provision for (benefit from) income taxes
Adjusted EBITDA(1)
Year ended December 31,
2019
$97,330
273
97,603
2018
$29,160
-
29,160
2017
$18,410
54
18,464
188,084
44,663
445
-
-
104,681
3,653
8,213
8,105
203
(39,145)
$416,505
174,946
28,127
19
-
-
93,328
2,450
10,162
7,388
526
6,150
$352,256
188,563
29,142
4,370
1,386
1,318
88,760
291
275
8,461
430
(61,083)
$280,377
(1) Adjusted EBITDA, a non-GAAP measure, is defined as net income excluding loss from discontinued operations, net of tax,
interest expense, income taxes, depreciation and amortization, long-lived asset impairment, restatement and other charges,
restructuring and other charges, corporate office relocation costs, debt extinguishment loss, transaction-related costs,
non-cash stock-based compensation expense, indemnification expense, net and other items.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
For the fiscal year ended December 31, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file no. 001-33666
Archrock, Inc.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Delaware
74-3204509
9807 Katy Freeway, Suite 100, Houston, Texas 77024
(Address of principal executive offices, zip code)
(281) 836-8000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value per share
Trading Symbol
AROC
Name of exchange on which registered
New York Stock Exchange
Securities registered pursuant to 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Aggregate market value of the common stock of the registrant held by non-affiliates as of June 30, 2019: $1,357,045,157.
Number of shares of the common stock of the registrant outstanding as of February 13, 2020: 152,879,266 shares.
No
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the 2019 Meeting of Stockholders, which is expected to be filed with the Securities
and Exchange Commission within 120 days after December 31, 2019, are incorporated by reference into Part III of this Form 10-K.
______________________________________________________
TABLE OF CONTENTS
Glossary
Forward-Looking Statements
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
SIGNATURES
Page
3
5
6
16
27
28
28
28
29
30
31
49
50
50
50
52
52
52
52
52
52
53
59
2
The following terms and abbreviations appearing in the text of this report have the meanings indicated below.
GLOSSARY
2006 Partnership LTIP
Archrock Partners, L.P. Long Term Incentive Plan, adopted in October 2006
2007 Plan
2013 Plan
Archrock, Inc. 2007 Stock Incentive Plan
Archrock, Inc. 2013 Stock Incentive Plan
2017 Partnership LTIP
Archrock Partners, L.P. Long Term Incentive Plan, adopted in April 2017
2019 Form 10-K
Archrock, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2019
2021 Notes
2022 Notes
2027 Notes
2028 Notes
Amendment No. 1
Amendment No. 2
AMNAX
Anadarko
$350.0 million of 6% senior notes due April 2021, issued in March 2013
$350.0 million of 6% senior notes due October 2022, issued in April 2014
$500.0 million of 6.875% senior notes due April 2027, issued in March 2019
$500.0 million of 6.25% senior notes due April 2028, issued in December 2019
Amendment No. 1 to Credit Agreement, dated February 23, 2018, which amended that Credit
Agreement, dated as of March 30, 2017, which governs the Credit Facility
Amendment No. 2 to Credit Agreement, dated November 8, 2019, which amended that Credit
Agreement, dated as of March 30, 2017, which governs the Credit Facility
Alerian Midstream Energy Index
Anadarko Petroleum Company
Archrock, our, we, us
Archrock, Inc., individually and together with its wholly-owned subsidiaries
Archrock Credit Facility
Archrock’s $350 million revolving credit facility terminated in April 2018 in connection with the
Merger and Amendment No.1
ASC 606 Revenue
Accounting Standards Codification Topic 606 Revenue from Contracts with Customers
ASC 840 Leases
ASC 842 Leases
ASU 2016-09
ASU 2016-13
ASU 2017-04
ASU 2017-12
ASU 2018-02
ASU 2018-13
ASU 2019-12
BBA
Bcf/d
BLM
CAA
CERCLA
Code
Accounting Standards Codification Topic 840 Leases
Accounting Standards Codification Topic 842 Leases
Accounting Standards Update No. 2016-09—Compensation—Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting
Accounting Standards Update No. 2016-13—Financial Instruments—Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments
Accounting Standards Update No. 2017-04—Intangibles—Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment
Accounting Standards Update No. 2017-12—Derivatives and Hedging (Topic 815): Targeted
Improvements to Accounting for Hedging Activities
Accounting Standards Update No. 2018-02—Income Statement—Reporting Comprehensive
Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income
Accounting Standards Update No. 2018-13—Fair Value Measurement (Topic 820): Disclosure
Framework—Changes to the Disclosure Requirements for Fair Value Measurement
Accounting Standards Update No. 2019-12—Income Taxes (Topic 740)—Simplifying the
Accounting for Income Taxes
British Bankers’ Association
Billion cubic feet per day
U.S. Department of the Interior’s Bureau of Land Management
Clean Air Act
Comprehensive Environmental Response, Compensation, and Liability Act
Internal Revenue Code of 1986, as amended
Credit Facility
$1.25 billion asset-based revolving credit facility, as amended by Amendment No. 2
CWA
EBITDA
EIA
Clean Water Act
Earnings before interest, taxes, depreciation and amortization
U.S. Energy Information Administration
3
Elite Acquisition
Transaction completed on August 1, 2019 pursuant to the Asset Purchase Agreement entered into
with Elite Compression on June 23, 2019
Elite Compression
Elite Compression Services, LLC
EPA
ERP
ESPP
Exchange Act
FASB
U.S. Environmental Protection Agency
Enterprise Resource Planning
2017 Archrock, Inc. Employee Stock Purchase Plan
Securities Exchange Act of 1934, as amended
Financial Accounting Standards Board
Financial Statements
Consolidated financial statements included in Part IV, Item 15 of this 2019 Form 10-K
Former Credit Facility
Partnership’s $825.0 million revolving credit facility and $150.0 million term loan, terminated
in March 2017
GAAP
General Partner
Harvest
Harvest Sale
Hilcorp
IRS
JDH Capital
LIBOR
Merger
MMb/d
NAAQS
NOL
NSPS
OSHA
OTC
U.S. generally accepted accounting principles
Archrock General Partner, L.P., a wholly owned subsidiary of Archrock and the Partnership’s
general partner
Harvest Four Corners, LLC
Transaction completed on August 1, 2019 pursuant to the Asset Purchase Agreement entered into
with Harvest on June 23, 2019
Hilcorp Energy Company
Internal Revenue Service
JDH Capital Holdings, L.P.
London Interbank Offered Rate
Transaction completed on April 26, 2018 in which Archrock acquired all of the Partnership’s
outstanding common units not already owned by Archrock pursuant to the Agreement and Plan
of Merger, dated as of January 1, 2018, among Archrock and the Partnership, which was amended
by Amendment No. 1 to Agreement and Plan of Merger on January 11, 2018
Million barrels per day
National Ambient Air Quality Standards
Net operating loss
New Source Performance Standards
Occupational Safety and Health Act
Over-the-counter, as related to aftermarket services parts and components
Paris Agreement
Resulting agreement of the 21st Conference of the Parties of the United Nations Framework
Convention on Climate Change held in Paris, France
Partnership
Archrock Partners, L.P., together with its subsidiaries
Partnership Debt Agreements Partnership Credit Facility, 2022 Notes, 2027 Notes and 2028 Notes, collectively
ppb
RCRA
ROU
S&P 500
SEC
SG&A
Spin-off
Parts per billion
Resource Conservation and Recovery Act
Right-of-use, as related to the lease model under ASC Topic 842 Leases
S&P 500 Composite Stock Price Index
U.S. Securities and Exchange Commission
Selling, general and administrative
Spin-off completed in November 2015 of our international contract operations, international
aftermarket services and global fabrication businesses into a standalone public company operating
as Exterran Corporation
Tax Cuts and Jobs Act, TCJA Public Law No. 115-97, a comprehensive tax reform bill signed into law on December 22, 2017
TCEQ
U.S.
VOC
Texas Commission on Environmental Quality
United States of America
Volatile organic compounds
Williams Partners
Williams Partners, L.P.
4
FORWARD-LOOKING STATEMENTS
This 2019 Form 10-K contains “forward-looking statements” intended to qualify for the safe harbors from liability established by
the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this 2019
Form 10-K are forward-looking statements within the meaning of Section 21E of the Exchange Act, including, without limitation,
statements regarding our business growth strategy and projected costs; future financial position; the sufficiency of available cash
flows to fund continuing operations and pay dividends; the expected amount of our capital expenditures; anticipated cost savings;
future revenue, gross margin and other financial or operational measures related to our business; the future value of our equipment;
and plans and objectives of our management for our future operations. You can identify many of these statements by words such
as “believe,” “expect,” “intend,” “project,” “anticipate,” “estimate,” “will continue” or similar words or the negative thereof.
Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially
from those anticipated as of the date of this 2019 Form 10-K. Although we believe that the expectations reflected in these forward-
looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct.
Known material factors that could cause our actual results to differ materially from those in these forward-looking statements are
described in Part I Item 1A “Risk Factors” and Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” of this 2019 Form 10-K.
All forward-looking statements included in this 2019 Form 10-K are based on information available to us on the date of this 2019
Form 10-K. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement,
whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained
throughout this 2019 Form 10-K.
5
PART I
Item 1. Business
We were incorporated in February 2007 as a wholly-owned subsidiary of Universal Compression Holdings, Inc. In August 2007,
Universal Compression Holdings, Inc. and Hanover Compressor Company merged into our wholly-owned subsidiaries and we
became the parent entity of Universal Compression Holdings, Inc. and Hanover Compressor Company, named “Exterran Holdings,
Inc.” In November 2015, we completed the Spin-off of our international contract operations, international aftermarket services
and global fabrication business into a standalone public company operating as Exterran Corporation, and we were renamed
“Archrock, Inc.”
We are an energy infrastructure company with a pure-play focus on midstream natural gas compression. We are the leading provider
of natural gas compression services to customers in the oil and natural gas industry throughout the U.S. and a leading supplier of
aftermarket services to customers that own compression equipment in the U.S. Our business supports a must-run service that is
essential to the production, processing, transportation and storage of natural gas. 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.
We operate in two business segments:
• Contract Operations. Our contract operations business is comprised of our owned fleet of natural gas compression
equipment that we use to provide operations services to our customers.
• Aftermarket Services. Our aftermarket services business provides a full range of services to support the compression
needs of our customers that own compression equipment, including operations, maintenance, overhaul and reconfiguration
services and sales of parts and components.
Recent Business Developments
2028 Notes Offering
On December 20, 2019, we completed a private offering of $500.0 million aggregate principal amount of 6.25% senior notes due
April 2028. We received net proceeds of $491.8 million after issuance costs, which were used to repay borrowings outstanding
under our Credit Facility. See Note 13 (“Long-Term Debt”) to our Financial Statements for further details of this transaction.
Amendment to the Credit Facility
On November 8, 2019, we entered into Amendment No. 2, which extended the maturity date of, and changed the applicable margins
for borrowings under, our Credit Facility. See Part II Item 7 “Liquidity and Capital Resources — Financial Resources” and Note 13
(“Long-Term Debt”) to our Financial Statements for further details of this amendment.
Elite Acquisition
On August 1, 2019, we completed the Elite Acquisition whereby we acquired from Elite Compression substantially all of its assets,
including a fleet of predominantly large compressors comprising approximately 430,000 horsepower, vehicles, real property and
inventory, and certain liabilities for aggregate consideration consisting of $214.0 million in cash and 21.7 million shares of common
stock with an acquisition date fair value of $225.9 million. The cash portion of the acquisition was funded with borrowings on the
Credit Facility.
Harvest Sale
On August 1, 2019, we completed an asset sale in which Harvest acquired from us approximately 80,000 active and idle compression
horsepower, vehicles and parts inventory for cash consideration of $30.0 million. We recorded a $6.6 million gain on the sale of
these assets in the third quarter of 2019.
See Note 4 (“Business Transactions”) to our Financial Statements for further details of the Elite Acquisition and the Harvest Sale.
6
2027 Notes Offering and 2021 Notes Extinguishment
On March 21, 2019, we completed a private offering of $500.0 million aggregate principal amount of 6.875% senior notes due
April 2027. We received net proceeds of $491.2 million after issuance costs, which were used to repay borrowings outstanding
under our Credit Facility.
On April 5, 2019, we repaid the 2021 Notes with borrowings from our Credit Facility.
See Note 13 (“Long-Term Debt”) to our Financial Statements for further details of these transactions.
Contract Operations Services Overview
We provide comprehensive contract operations services including the personnel, equipment, tools, materials and supplies to meet
our customers’ natural gas compression needs. Based on the operating specifications at the customer location and each customer’s
unique needs, these services include designing, sourcing, owning, installing, operating, servicing, repairing and maintaining the
equipment. We repackage or reconfigure our existing fleet to adapt to our customers’ compression needs and work closely with
our customers’ field service personnel so that the compression services can be adjusted to efficiently match changing characteristics
of the reservoir and the natural gas produced. We primarily utilize reciprocating compressors driven by natural gas-powered
engines.
Our equipment is maintained in accordance with our established maintenance schedules, standards and procedures. These
maintenance practices are updated as technology changes and as our operations group develops new techniques and procedures
to better service our equipment. In addition, because our field technicians provide maintenance on our contract operations
equipment, they are familiar with the condition of our equipment and can readily identify potential problems. In our experience,
these maintenance practices maximize equipment life and unit availability, minimize avoidable downtime and lower the overall
maintenance expenditures over the equipment life. On average, our compression packages undergo a major overhaul once every
seven years depending on the type, size and utilization of the compressor.
We generate revenue for our services pursuant to fee-based agreements with our customers, which limit our direct exposure to
commodity price fluctuations. Our customers typically contract for our services on a site-by-site basis for a specific monthly
service rate that is generally reduced if we fail to operate in accordance with the contract requirements. Following the initial
minimum term, which generally ranges from 12 to 60 months, contract operations services generally continue on a month-to-
month basis until terminated by either party with 30 days’ advance notice. Our customers generally are required to pay our monthly
service fee even during periods of limited or disrupted natural gas flows, which enhances the stability and predictability of our
cash flows. Additionally, the natural gas we use as fuel for our compression packages is supplied by our customers, which further
limits our exposure to commodity price fluctuations. See “General Terms of our Contract Operations Customer Service Agreements”
below for further details on our service agreements.
We maintain field service locations from which we can service and overhaul our compression fleet to provide contract operations
services to our customers. We also use many of these locations to provide aftermarket services to our customers, as described
below. As of December 31, 2019, our contract operations segment provided contract operations services using a fleet of 6,430
natural gas compressors with an aggregate capacity of 4.4 million horsepower. During the years ended December 31, 2019, 2018
and 2017, we generated 80%, 74% and 77%, respectively, of our total revenue and 93%, 91% and 93%, respectively, of our total
gross margin from contract operations. Gross margin, a non-GAAP financial measure, is reconciled, in total, to net income (loss),
its most directly comparable financial measure calculated and presented in accordance with GAAP, in Part II Item 7 “Non-
GAAP Financial Measures.”
Compression Fleet
The following table summarizes the size of our natural gas compression fleet as of December 31, 2019:
0 — 1,000 horsepower per unit
1,001 — 1,500 horsepower per unit
Over 1,500 horsepower per unit
Total
Number
of Units
Aggregate
Horsepower
(in thousands)
% of
Horsepower
4,299
1,549
582
6,430
1,155
2,083
1,157
4,395
26%
48%
26%
100%
7
We continue efforts to standardize our compression fleet around major components and key suppliers. The standardization of our
fleet:
•
•
•
•
enables us to minimize our fleet operating costs and maintenance capital requirements;
reduces inventory costs;
facilitates low-cost compressor resizing; and
allows us to develop improved technical proficiency in our maintenance and overhaul operations, which enables us
to achieve higher uptime while maintaining lower operating costs.
Aftermarket Services Overview
Our aftermarket services business sells parts and components and provides operations, maintenance, overhaul and reconfiguration
services to customers who own compression equipment. We believe that we are particularly well-qualified to provide these services
because our highly experienced operating personnel have access to the full range of our compression services and facilities. In
addition, our aftermarket services business provides opportunities to cross-sell our contract operations services. During the years
ended December 31, 2019, 2018 and 2017, we generated 20%, 26% and 23%, respectively, of our total revenue and 7%, 9% and
7%, respectively, of our total gross margin from aftermarket services.
Competitive Strengths
We believe we have the following key competitive strengths:
• Large horsepower. We have the largest fleet of large horsepower equipment among all outsourced compression service
providers in the U.S. As of December 31, 2019, 74% of our fleet, as measured by operating horsepower, was comprised
of units that exceed 1,000 horsepower per unit. We believe the trends driving demand for large horsepower units will
continue. These trends include (i) high levels of associated gas production from shale wells, which is generally produced
at a lower initial pressure than dry gas wells, (ii) pad drilling, which brings multiple wells to a single well site with
larger volumes of gas, (iii) increasing well lateral lengths, which increase natural gas flow through gas gathering systems
and (iv) high probability drilling programs that allow for efficient infrastructure planning.
•
Superior customer service. We operate in a relationship-driven, service-intensive industry and therefore need to provide
superior customer service. We believe that our regionally-based network, local presence, experience and in-depth
knowledge of our customers’ operating needs and growth plans enable us to respond to our customers’ needs and meet
their evolving demands on a timely basis. In addition, we focus on achieving a high level of reliability for the services
we provide in order to maximize uptime and our customers’ production levels. Our sales efforts concentrate on
demonstrating our commitment to enhancing our customers’ cash flows through superior customer service and after-
market support.
• Large and stable customer base. We have strong relationships with a deep base of oil and gas producers and midstream
companies. Our contract operations revenue base is sourced from approximately 600 customers operating throughout
all major U.S. oil and natural gas producing regions.
• Fee-based cash flows. We charge a fixed monthly fee for our contract operations services that our customers are
generally required to pay regardless of the volume of natural gas we compress in any given month. Our compression
packages, on average, operate at a customer location for approximately three years. We believe this fee structure and
the longevity of our operations reduces volatility and enhances the stability and predictability of our cash flows.
• Large fleet in substantially all major U.S. producing regions. We operate in substantially all major oil and natural
gas producing regions in the U.S. Our large fleet and numerous operating locations throughout the U.S., combined
with our ability to efficiently move equipment among producing regions, mean that we are not dependent on production
activity in any particular region. We believe our size, geographic scope and broad customer base provide us with
improved operating expertise and business development opportunities.
8
• Long operating history. We have a long, sustained history of operating in the compression industry that provides an
advantage compared to our younger competitors. We have extensive experience working with our customers to meet
their evolving needs, a deep database of fleet financial and operating metrics and a proven ability to safely manage our
business in a variety of commodity and economic environments.
• Financial resilience and flexibility. We have historically shown and are committed to maintaining capital discipline
and financial strength, which is critical in a cyclical business such as ours. Maintaining ample liquidity and a prudent
balance sheet supports our ability to continue to deliver on our long-term strategies and positions us to take advantage
of future growth opportunities as they arise.
Business Strategies
We intend to continue to capitalize on our competitive strengths to meet our customers’ needs through the following key strategies:
• Capitalize on the long-term fundamentals for the U.S. natural gas compression industry. We believe our ability to
efficiently meet our customers’ evolving compression needs, our long-standing customer relationships and our large
compression fleet will enable us to capitalize on what we believe are favorable long-term fundamentals for the U.S.
natural gas compression industry. These fundamentals include significant natural gas resources in the U.S., increased
unconventional oil and natural gas production, decreasing natural reservoir pressures and expected increased natural
gas demand in the U.S. from the growth of liquified natural gas exports, exports of natural gas via pipeline to Mexico,
power generation and industrial uses.
•
Improve profitability. We are focused on increasing productivity and optimizing our processes. In the fourth quarter
of 2018 we began a process and technology transformation project that will, among other things, upgrade or replace
our existing ERP, supply chain and inventory management systems and expand the remote monitoring capabilities of
our compression fleet. By using technology to make our systems and processes more efficient, we intend to lower our
internal costs and improve our profitability over time. Additionally, strong continued demand for our services should
allow us to maintain utilization and pricing.
• Grow our business to generate attractive returns. We plan to continue to invest in strategically growing our business
both organically and through third-party acquisitions. Our contract operations business is our primary business segment
and represented 93% of our gross margin during 2019. We see opportunities to grow this business over the long term
by putting idle units back to work and adding new horsepower in key growth areas. In addition, because a large amount
of compression equipment is owned by oil and gas producers, processors, gatherers, transporters and storage providers,
we believe there will be additional opportunities for our aftermarket services business, which represented 7% of our
gross margin during 2019, to provide services and parts to support the operation of this equipment.
Natural Gas Compression Industry Overview
Natural gas compression is a mechanical process whereby the pressure of a given volume of natural gas is increased to a desired
higher pressure for transportation from one point to another. It is essential to the production and transportation of natural gas.
Compression is typically required several times during the natural gas production and transportation cycle including (i) at the
wellhead, (ii) throughout gathering and distribution systems, (iii) into and out of processing and storage facilities and (iv) along
intrastate and interstate pipelines. Our service offerings focus primarily on the following cycle stages:
• Wellhead and Gathering Systems — Natural gas compression is used to transport natural gas from the wellhead through
the gathering system. At some point during the life of natural gas wells, reservoir pressures typically fall below the
line pressure of the natural gas gathering or pipeline system used to transport the natural gas to market. At that point,
natural gas no longer naturally flows into the pipeline. Compression equipment is applied in both field and gathering
systems to boost the pressure levels of the natural gas flowing from the well, allowing it to be transported to market.
Changes in pressure levels in natural gas fields require periodic changes to the size and/or type of on-site compression
equipment. Additionally, compression is used to reinject natural gas into producing oil wells to maintain reservoir
pressure and help lift liquids to the surface, which is known as secondary oil recovery or natural gas lift operations.
These applications utilize low- to mid-range horsepower compression equipment located at or near the wellhead or
large horsepower compression equipment of 1,000 horsepower and higher for a centralized gas lift system servicing
multiple wells. Compression equipment is also used to increase the efficiency of a low-capacity natural gas field by
providing a central compression point from which the natural gas can be produced and injected into a pipeline for
transmission to facilities for further processing.
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• Processing Applications — Compressors may also be used in combination with natural gas production and processing
equipment to process natural gas into other marketable energy sources. In addition, compression services are used for
compression applications in refineries and petrochemical plants. Processing applications typically utilize multiple large
horsepower compressors.
• Pipeline Transportation Systems — Natural gas compression is used during the transportation of natural gas from the
gathering systems to storage or the end user. Natural gas transported through a pipeline loses pressure over the length
of the pipeline. Compression is staged along the pipeline to increase capacity and boost pressure to overcome the
friction and hydrostatic losses inherent in normal operations. These pipeline applications generally require large
horsepower compression equipment of 1,000 horsepower and higher.
Many oil and natural gas producers, transporters and processors outsource their compression services due to the benefits and
flexibility of contract compression. Changing well and pipeline pressures and conditions over the life of a well often require
producers to reconfigure or replace their compression packages to optimize the well production or gathering system efficiency.
We believe outsourcing compression operations to compression service providers such as us offers customers:
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the ability to efficiently meet their changing compression needs over time while limiting the underutilization of their
owned compression equipment;
access to the compression service provider’s specialized personnel and technical skills, including engineers and field
service and maintenance employees, which we believe generally leads to improved production rates and/or increased
throughput;
the ability to increase their profitability by transporting or producing a higher volume of oil and natural gas through
decreased compression downtime and reduced operating, maintenance and equipment costs by allowing the
compression service provider to efficiently manage their compression needs; and
the flexibility to deploy their capital on projects more directly related to their primary business by reducing their
compression equipment and maintenance capital requirements.
We believe the U.S. natural gas compression services industry continues to have growth potential over time due to, among other
things, increased natural gas production in the U.S. from unconventional sources and aging producing natural gas fields that will
require more compression to continue producing the same volume of natural gas and expected increased demand for natural gas
in the U.S. for power generation, industrial uses and exports including liquified natural gas exports and exports of natural gas via
pipeline to Mexico.
Oil and Natural Gas Industry Cyclicality and Volatility
Demand for our products and services is correlated to natural gas production. Fluctuations in energy prices can affect the levels
of expenditures by our customers, production volumes and ultimately, demand for our products and services; however, we believe
our contract operations business is typically less impacted by commodity prices for the following reasons:
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fee-based contracts minimize our direct commodity price exposure;
the natural gas we use as fuel for our compression packages is supplied by our customers, further reducing our direct
exposure to commodity price risk;
compression services are a necessary part of midstream energy infrastructure that facilitate the transportation of natural
gas through gathering systems;
our contract operations business is tied primarily to oil and natural gas production, transportation and consumption,
which are generally less cyclical in nature than exploration and new well drilling and completion activities;
the need for compression services and equipment has grown over time due to the increased production of natural gas,
the natural pressure decline of natural gas producing basins and the increased percentage of natural gas production
from unconventional sources; and
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our compression packages operate at a customer location for an average of approximately three years during which
time our customers are generally required to pay a fixed monthly fee regardless of the volume of natural gas we compress
in any given month.
Seasonal Fluctuations
Our results of operations have not historically reflected any material seasonal tendencies and we do not believe that seasonal
fluctuations will have a material impact on us in the foreseeable future.
Market, Suppliers and Customers
We conduct our contract operations activities in substantially all major oil and natural gas producing areas throughout the U.S.
and have supply agreements with multiple suppliers to meet our compression equipment needs.
Our customer base consists primarily of companies engaged in all aspects of the oil and natural gas industry including large
integrated and independent oil and natural gas producers, processors, gatherers and transporters.
We have entered into preferred vendor arrangements with some of our customers that give us preferential consideration for their
compression needs. In exchange, we provide these customers with enhanced product availability, product support and favorable
pricing.
During the years ended December 31, 2019, 2018 and 2017, Williams Partners accounted for 8%, 11% and 13%, respectively, of
our contract operations and aftermarket services revenue. No other customer accounted for 10% or more of our revenue during
these years.
Sales and Marketing
Our marketing and client service functions are coordinated and performed by our sales and field service personnel. Sales and field
service personnel regularly visit our customers to ensure customer satisfaction, determine customer needs as to services currently
being provided and ascertain potential future compression services requirements. This ongoing communication allows us to respond
swiftly to customer requests.
General Terms of our Contract Operations Customer Service Agreements
We typically enter into a master service agreement with each customer that sets forth the general terms and conditions of our
services, and then enter into a separate supplemental service agreement for each distinct site at which we will provide contract
operations services. The following describes select material terms common to our standard contract operations service agreements.
Term and Termination. Our customers typically contract for our contract operations services on a site-by-site basis. Following the
initial minimum term for our contract operations services, which generally ranges from 12 to 60 months, contract operations
services generally continue until terminated by either party with 30 days’ advance notice.
Fees and Expenses. Our customers pay a fixed monthly fee for our contract operations services, which generally is based on
expected natural gas volumes and pressures associated with a specific application. Our customers generally are required to pay
our monthly fee even during periods of limited or disrupted natural gas flows. We are typically responsible for the costs and
expenses associated with our compression equipment used to provide the contract operations services except for fuel gas, which
is provided by our customers.
Service Standards and Specifications. We provide contract operations services according to the particular specifications of each
job, as set forth in the applicable contract. These are typically turn-key service contracts under which we supply all services and
support and use our compression equipment to provide the contract operations services necessary for a particular application. In
certain circumstances, if the availability of our services does not meet certain percentages specified in our contracts, our customers
are generally entitled, upon request, to specified credits against our service fees.
Title and Risk of Loss. We own and retain title to or have an exclusive possessory interest in all compression equipment used to
provide contract operations services and we generally bear risk of loss for such equipment to the extent the loss is not caused by
gas conditions, our customers’ acts or omissions or the failure or collapse of the customer’s over-water job site upon which we
provide the contract operations services.
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Insurance. Typically, both we and our customers are required to carry general liability, workers’ compensation, employer’s liability,
automobile and excess liability insurance. Our insurance coverage includes property damage, general liability and commercial
automobile liability and other coverage we believe is appropriate. 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. We are also self-insured for property damage to our offshore assets.
Competition
The natural gas compression services business is highly competitive. Overall, we experience considerable competition from
companies that may be able to more quickly adapt to technological changes within our industry and changes in economic conditions
as a whole, more readily take advantage of acquisitions and other opportunities and adopt more aggressive pricing policies. We
believe we are competitive with respect to price, equipment availability, customer service, flexibility in meeting customer needs,
technical expertise and quality and reliability of our compression packages and related services.
Increased size and geographic density offer compression services providers operating and cost advantages. As the number of
compression locations and size of the compression fleet increases, the number of required sales, administrative and maintenance
personnel increases at a lesser rate, resulting in operational efficiencies and potential cost advantages. Additionally, broad
geographic scope allows compression service providers to more efficiently provide services to all customers, particularly those
with compression applications in remote locations. We believe our large fleet of compression equipment and broad geographic
base of operations and related operational personnel give us more flexibility in meeting our customers’ needs than many of our
competitors.
Environmental and Other Regulations
Our operations are subject to stringent and complex U.S. federal, state and local laws and regulations governing the discharge of
materials into the environment or otherwise relating to protection of the environment and to occupational safety and health.
Compliance with these environmental laws and regulations may expose us to significant costs and liabilities and cause us to incur
significant capital expenditures in our operations. Failure to comply with these laws and regulations may result in the assessment
of administrative, civil and criminal penalties, imposition of investigatory and remedial obligations and the issuance of injunctions
delaying or prohibiting operations. We believe that our operations are in substantial compliance with applicable environmental
and safety and health laws and regulations and that continued compliance with currently applicable requirements would not have
a material adverse effect on us. However, the trend in environmental regulation has been to place more restrictions on activities
that may affect the environment, and thus, any changes in these laws and regulations that result in more stringent and costly waste
handling, storage, transport, disposal, emission or remediation requirements could have a material adverse effect on our results
of operations and financial position.
The primary U.S. federal environmental laws to which our operations are subject include the CAA and regulations thereunder,
which regulate air emissions; the CWA and regulations thereunder, which regulate the discharge of pollutants in industrial
wastewater and storm water runoff; the RCRA and regulations thereunder, which regulate the management and disposal of hazardous
and non-hazardous solid wastes; and the CERCLA and regulations thereunder, known more commonly as “Superfund,” which
impose liability for the remediation of releases of hazardous substances in the environment. We are also subject to regulation under
the OSHA and regulations thereunder, which regulate the protection of the safety and health of workers. Analogous state and local
laws and regulations may also apply.
Air Emissions
The CAA and analogous state laws and their implementing regulations regulate emissions of air pollutants from various sources,
including natural gas compressors, and also impose various monitoring and reporting requirements. Such laws and regulations
may require a facility to obtain pre-approval for the construction or modification of certain projects or facilities expected to produce
air emissions or result in the increase of existing air emissions, obtain and strictly comply with air permits containing various
emissions and operational limitations, or utilize specific emission control technologies to limit emissions. Our standard contract
operations agreement typically provides that the customer will assume permitting responsibilities and certain environmental risks
related to site operations.
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New Source Performance Standards
On June 3, 2016, the EPA issued final regulations amending the NSPS for the oil and natural gas source category and applying to
sources of emissions of methane and VOC from certain processes, activities and equipment that is constructed, modified or
reconstructed after September 18, 2015. Specifically, the regulation contains both methane and VOC standards for several emission
sources not previously covered by the NSPS, such as fugitive emissions from compressor stations and pneumatic pumps and
methane standards for certain emission sources that are already regulated for VOC, such as equipment leaks at natural gas processing
plants. The amendments also establish methane standards for a subset of equipment that the current NSPS regulates, including
reciprocating compressors and pneumatic controllers, and extend the current VOC standards to the remaining unregulated
equipment. In June 2017, the EPA proposed and took public comment on a two-year stay of the fugitive emissions requirements,
well site pneumatic standards and closed vent certification. The EPA sought additional comment in November 2017 in support of
the proposed rule, but has not finalized the two-year stay. In October 2018 and August 2019, the EPA proposed deregulatory
amendments to the 2016 rule intended to streamline implementation, reduce duplicative EPA and state requirements and decrease
the burden of compliance. The EPA has not yet issued a final rule based on either proposal. At this time, we do not believe that if
finalized these rules will have a material adverse impact on our business, financial condition, results of operations or cash flows.
Venting and Flaring on Federal Lands
On November 18, 2016, the BLM published final rules to reduce venting and flaring on federal and tribal lands. The rules set forth
some novel requirements regarding leak detection inspections at compressor stations and imposed requirements to reduce emissions
from pneumatic controllers and pumps, among other things. In December 2017, the BLM finalized suspension of certain
requirements of the November 2016 final rule until January 2019. In September 2018, the BLM finalized a rule rescinding the
novel requirements pertaining to waste-minimization plans, gas-capture percentages, well drilling, well completion and related
operations, pneumatic controllers, pneumatic diaphragm pumps, storage vessels and leak detection and repair. The BLM also
revised other provisions related to venting and flaring. California, New Mexico and various environmental groups filed a lawsuit
challenging the September 2018 final rule, which is still pending.
National Ambient Air Quality Standards
On October 1, 2015, the EPA issued a new NAAQS ozone standard of 70 ppb, which is a reduction from the 75 ppb standard set
in 2008. This new standard became effective on December 28, 2015, and the EPA completed designating attainment/non-attainment
regions under the revised ozone standard in 2018. In November 2016, the EPA proposed an implementation rule for the 2015
NAAQS ozone standard, but the agency has yet to issue a final implementation rule. State implementation of the revised NAAQS
could result in stricter permitting requirements, delay or prohibit our customers’ ability to obtain such permits and result in increased
expenditures for pollution control equipment, the costs of which could be significant. By law, the EPA must review each NAAQS
every five years. In December 2018, the EPA announced that it was retaining without significant revision the 2015 NAAQS ozone
standard. The EPA has asked for information related to adverse effects that may result from various strategies for attainment and
maintenance of NAAQS and is considering re-evaluating the extent to which the EPA can or should consider levels of background
ozone when choosing a standard. The EPA expects to conclude the review by October 2020 as required by law. At this time,
however, we cannot predict whether state implementation of the 2015 NAAQS ozone standard or the 2020 NAAQS ozone standard
would have a material adverse impact on our business, financial condition, results of operations or cash flows.
Texas Commission on Environmental Quality
In January 2011, the TCEQ finalized revisions to certain air permit programs that significantly increase air emissions-related
requirements for new and certain existing oil and gas production and gathering sites in the Barnett Shale production area. The
final rule established new emissions standards for engines, which could impact the operation of specific categories of engines by
requiring the use of alternative engines, compressor packages or the installation of aftermarket emissions control equipment. The
rule became effective for the Barnett Shale production area in April 2011, and the lower emissions standards will become applicable
between 2020 and 2030 depending on the type of engine and the permitting requirements. A number of other states where our
engines are operated have adopted or are considering adopting additional regulations that could impose new air permitting or
pollution control requirements for engines, some of which could entail material costs to comply. At this time, however, we cannot
predict whether any such rules would require us to incur material costs.
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General
New environmental regulations and proposals similar to these, when finalized, and any other new regulations requiring the
installation of more sophisticated pollution control equipment or the adoption of other environmental protection measures, could
have a material adverse impact on our business, financial condition, results of operations and cash flows.
Climate Change Legislation and Regulatory Initiatives
The U.S. Congress has previously considered legislation to restrict or regulate emissions of greenhouse gases, such as carbon
dioxide and methane. It presently appears unlikely that comprehensive federal climate legislation will become law in the near
future, although energy legislation and other initiatives continue to be proposed that may be relevant to greenhouse gas emissions
issues. Almost half of the states, either individually or through multi-state regional initiatives, have begun to address greenhouse
gas emissions, primarily through the planned development of emission inventories or regional greenhouse gas cap and trade
programs. Although most of the state-level initiatives have to date been focused on large sources of greenhouse gas emissions,
such as electric power plants, it is possible that smaller sources such as our gas-fired compressors could become subject to
greenhouse gas-related regulation. Depending on the particular program, we could be required to control emissions or to purchase
and surrender allowances for greenhouse gas emissions resulting from our operations.
Independent of Congress, the EPA has promulgated regulations controlling greenhouse gas emissions under its existing CAA
authority. The EPA has adopted rules requiring many facilities, including petroleum and natural gas systems, to inventory and
report their greenhouse gas emissions. These reporting obligations were triggered for one site we operated in 2019.
In addition, the EPA rules provide air permitting requirements for certain large sources of greenhouse gas emissions.
The requirement for large sources of greenhouse gas emissions to obtain and comply with permits will affect some of our and our
customers’ largest new or modified facilities going forward, but is not expected to cause us to incur material costs.
At the international level, the U.S. joined the international community at the 21st Conference of the Parties of the United Nations
Framework Convention on Climate Change in Paris, France, which resulted in an agreement intended to nationally determine
their contributions and set greenhouse gas emission reduction goals beginning in 2020. While the Agreement did not impose direct
requirements on emitters, national plans to meet its pledge could have resulted in new regulatory requirements. In November 2019,
however, President Trump formally announced plans for the U.S. to withdraw from the Paris Agreement with an effective exit
date expected in November 2020. The U.S.’s adherence to the exit process is uncertain and the terms on which the U.S. may reenter
the Paris Agreement or a separately negotiated agreement are unclear at this time.
Although it is not currently possible to predict how any proposed or future greenhouse gas legislation or regulation promulgated
by Congress, the states or multi-state regions will impact our business, any regulation of greenhouse gas emissions that may be
imposed in areas in which we conduct business could result in increased compliance costs or additional operating restrictions or
reduced demand for our services, and could have a material adverse effect on our business, financial condition, results of operations
and cash flows.
Finally, it should be noted that some scientists have concluded that increasing concentrations of greenhouse gases in the Earth’s
atmosphere can change the climate in a manner that results in significant weather-related effects, such as increased frequency and
severity of storms, droughts, floods, and other such events. If any of those results occur, it could have an adverse effect on our
assets and operations and cause us to incur costs in preparing for and responding to them.
Water Discharges
The CWA and analogous state laws and their implementing regulations impose restrictions and strict controls with respect to the
discharge of pollutants into state waters or waters of the U.S. The discharge of pollutants into regulated waters is prohibited, except
in accordance with the terms of a permit issued by the EPA or an analogous state agency. In addition, the CWA regulates storm
water discharges associated with industrial activities depending on a facility’s primary standard industrial classification. Four of
our facilities have applied for and obtained industrial wastewater discharge permits and/or have sought coverage under local
wastewater ordinances. U.S. federal laws also require development and implementation of spill prevention, controls and
countermeasure plans, including appropriate containment berms and similar structures to help prevent the contamination of
navigable waters in the event of a petroleum hydrocarbon tank spill, rupture or leak at such facilities.
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Waste Management and Disposal
RCRA and analogous state laws and their implementing regulations govern the generation, transportation, treatment, storage and
disposal of hazardous and non-hazardous solid wastes. During the course of our operations, we generate wastes (including, but
not limited to, used oil, antifreeze, used oil filters, sludges, paints, solvents and abrasive blasting materials) in quantities regulated
under RCRA. The EPA and various state agencies have limited the approved methods of disposal for these types of wastes.
CERCLA and analogous state laws and their implementing regulations impose strict, and under certain conditions, joint and several
liability without regard to fault or the legality of the original conduct on classes of persons who are considered to be responsible
for the release of a hazardous substance into the environment. These persons include current and past owners and operators of the
facility or disposal site where the release occurred and any company that transported, disposed of, or arranged for the transport
or disposal of the hazardous substances released at the site. Under CERCLA, such persons may be subject to joint and several
liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural
resources and for the costs of certain health studies. In addition, where contamination may be present, it is not uncommon for
neighboring landowners and other third parties to file claims for personal injury, property damage and recovery of response costs
allegedly caused by hazardous substances or other pollutants released into the environment.
We currently own or lease, and in the past have owned or leased, a number of properties that have been used in support of our
operations for a number of years. Although we have utilized operating and disposal practices that were standard in the industry at
the time, hydrocarbons, hazardous substances, or other regulated wastes may have been disposed of or released on or under the
properties owned or leased by us or on or under other locations where such materials have been taken for disposal by companies
sub-contracted by us. In addition, many of these properties have been previously owned or operated by third parties whose treatment
and disposal or release of hydrocarbons, hazardous substances or other regulated wastes was not under our control. These properties
and the materials released or disposed thereon may be subject to CERCLA, RCRA and analogous state laws. Under such laws,
we could be required to remove or remediate historical property contamination, or to perform certain operations to prevent future
contamination. At certain of such sites, we are currently working with the prior owners who have undertaken to monitor and clean
up contamination that occurred prior to our acquisition of these sites. We are not currently under any order requiring that we
undertake or pay for any cleanup activities. However, we cannot provide any assurance that we will not receive any such order in
the future.
Occupational Safety and Health
We are subject to the requirements of the OSHA and comparable state statutes. These laws and the implementing regulations
strictly govern the protection of the safety and health of employees. The OSHA’s hazard communication standard, the EPA’s
community right-to-know regulations under Title III of CERCLA and similar state statutes require that we organize and/or disclose
information about hazardous materials used or produced in our operations.
Employees
As of December 31, 2019, we had approximately 1,700 employees. We believe that our relations with our employees are good.
Available Information
Our website address is www.archrock.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and any amendments to those reports are available on our website, without charge, as soon as reasonably practicable
after they are filed electronically with the SEC. Information on our website is not incorporated by reference in this 2019 Form 10-
K or any of our other securities filings. Paper copies of our filings are also available, without charge, from Archrock, Inc., 9807
Katy Freeway, Suite 100, Houston, Texas 77024, Attention: Investor Relations. The SEC also maintains a website that contains
reports, proxy and information statements and other information regarding issuers who file electronically with the SEC. The SEC’s
website address is www.sec.gov.
Additionally, we make available free of charge on our website:
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our Code of Business Conduct;
our Corporate Governance Principles; and
the charters of our audit, compensation and nominating and corporate governance committees.
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Item 1A. Risk Factors
As described in “Forward-Looking Statements,” this 2019 Form 10-K contains forward-looking statements regarding us, our
business and our industry. The risk factors described below, among others, could cause our actual results to differ materially from
the expectations reflected in the forward-looking statements. If any of the following risks actually occur, our business, financial
condition, results of operations and cash flows could be negatively impacted.
We may not achieve the intended benefits of the Elite Acquisition as and when expected, or at all, which could have an adverse
effect on our business.
On August 1, 2019, we completed the Elite Acquisition whereby we acquired from Elite Compression substantially all of its assets,
liabilities and workforce for aggregate consideration of $214.0 million cash and 21.7 million shares of Archrock common stock.
See Note 4 (“Business Transactions”) to our Financial Statements for further details of this transaction.
We now operate a larger combined organization and the difficulties associated with integrating the acquired assets, infrastructure
and personnel into our existing operations may require additional time or expense. Our and Elite Compression’s employees may
also be uncertain about their future roles within Archrock subsequent to the completion of the Elite Acquisition, which could lead
to departures and increased expenses related to hiring and training new employees. Further, we may not realize the benefits we
expect to realize from the Elite Acquisition. Any such difficulties could have an adverse effect on our business, results of operations
and financial condition.
Further, the acquired business or assets may perform at levels below the levels we anticipated at the time of acquiring such business
or assets due to factors beyond our control. As a result, there can be no assurance that the Elite Acquisition will deliver the benefits
anticipated by us, and any failure to create such benefits may result in a negative impact to, or material adverse effect on, our
business, results of operations, financial condition and cash flows.
The Elite Acquisition resulted in our dependence on Hilcorp for a significant portion of our revenue. The loss of business with
Hilcorp or the inability or failure of Hilcorp to meet its payment obligations may adversely affect our financial results.
In connection with the Elite Acquisition, Elite Compression’s contract operations services agreements transferred to us and we
expect that Hilcorp, the primary customer of Elite Compression, will account for a significant portion of our future revenue.
During the years ended December 31, 2019, 2018 and 2017, Hilcorp accounted for 3%, 1% and 1% of our revenue, respectively.
With the closing of the Elite Acquisition, we estimate that Hilcorp will become one of our most significant customers. Any loss
of business from Hilcorp, unless offset by additional contract compression services revenue from other customers, or the inability
or failure of Hilcorp to meet its payment obligations could have a material adverse effect on our business, results of operations
and financial condition.
Following the closing of the Elite Acquisition, an affiliate of Hilcorp now holds a significant portion of our common stock,
and Hilcorp’s interest as an equity holder may conflict with the interests of our other shareholders or our noteholders.
In connection with the closing of the Elite Acquisition, JDH Capital, an affiliate of Hilcorp, received 21.7 million shares of our
common stock, representing 14.3% of our outstanding common stock as of December 31, 2019. As long as JDH Capital, together
with affiliates of Hilcorp, owns at least 7.5% of our outstanding common stock, it will have the right to nominate one director to
our Board of Directors. Given its ownership level and board representation, JDH Capital may have some influence over our
operations and strategic direction and may have interests that conflict with the interests of other equity and debt holders.
Tax legislation and administrative initiatives or challenges to our tax positions could adversely affect our results of operations
and financial condition.
We operate in locations throughout the U.S. and, as a result, we are subject to the tax laws and regulations of U.S. federal, state
and local governments. From time to time, various legislative or administrative initiatives may be proposed that could adversely
affect our tax positions. There can be no assurance that our tax provision or tax payments will not be adversely affected by these
initiatives. In addition, U.S. federal, state and local tax laws and regulations are extremely complex and subject to varying
interpretations. There can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would
be successful in any such challenge.
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Our ability to use NOLs to offset future income may be limited.
Our ability to use any NOLs generated by us could be substantially limited if we were to experience an “ownership change” as
defined under Section 382 of the Code. In general, an “ownership change” would occur if our “5-percent stockholders,” as defined
under Section 382 of the Code, including certain groups of persons treated as “5-percent stockholders,” collectively increased
their ownership in us by more than 50 percentage points over a rolling three-year period. An ownership change can occur as a
result of a public offering of our common stock, as well as through secondary market purchases of our common stock and certain
types of reorganization transactions. We have experienced ownership changes, which may result in an annual limitation on the
use of its pre-ownership change NOLs (and certain other losses and/or credits) equal to the equity value of our stock immediately
before the ownership change, multiplied by the long-term tax-exempt rate for the month in which the ownership change occurs.
Such a limitation could, for any given year, have the effect of increasing the amount of our U.S. federal income tax liability, which
would negatively impact the amount of after-tax cash available for distribution to our stockholders and our financial condition.
While we paid quarterly dividends of $0.132 per share of common stock with respect to the first and second quarters of 2019
and $0.145 per share with respect to the third and fourth quarters of 2019, there can be no assurance that we will pay dividends
in the future.
We paid quarterly cash dividends of $0.132 per share of common stock with respect to the first and second quarters of 2019 and
$0.145 per share with respect to the third and fourth quarters of 2019. We cannot provide assurance that we will, at any time in
the future, again generate sufficient surplus cash that would be available for distribution to the holders of our common stock as a
dividend or that our Board of Directors would determine to use any such surplus or our net profits to pay a dividend.
Future dividends may be affected by, among other factors:
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the availability of surplus or net profits, which in turn depend on the performance of our business and operating
subsidiaries, including the Partnership;
the amount of cash distributions we receive from the Partnership;
our debt service requirements and other liabilities;
our ability to refinance our debt in the future or borrow funds and access capital markets;
restrictions contained in our debt agreements;
our future capital requirements, including to fund our operating expenses and other working capital needs;
the rates we charge for our services;
the level of demand for our services;
the creditworthiness of our customers;
our level of operating expenses; and
changes in U.S. federal, state and local income tax laws or corporate laws.
We cannot provide assurance that we will declare or pay dividends in any particular amounts or at all in the future. A decision not
to pay dividends or a reduction in our dividend payments in the future could have a negative effect on our stock price.
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We depend on distributions from the Partnership to meet our capital needs and pay dividends to our stockholders.
To generate the funds necessary to meet our obligations, fund our business and pay dividends, we depend heavily on cash
distributions from the Partnership. As our wholly-owned subsidiary, the Partnership is a significant cash-generating asset for us.
As a result, our cash flow is heavily dependent upon the ability of the Partnership to make distributions. Applicable law and
contractual restrictions, including restrictions in the Partnership’s debt instruments and partnership agreement and the rights of
the creditors of the Partnership that would often be superior to our interests in the Partnership, may negatively impact our ability
to obtain such distributions from our subsidiaries. A decline in the Partnership’s business or revenues or increases in its expenses,
principal and interest payments under existing and future debt instruments, working capital requirements or other cash needs could
impair the Partnership’s ability to make cash distributions at the Partnership’s current distribution rate. A reduction in the amount
of cash distributions we receive from the Partnership would reduce the amount of cash available to us for payment of dividends,
which could limit our ability to pay cash dividends at our current rate or at all, and would also reduce the amount of cash available
to us for the payment of debt we may incur in the future and for the funding of our business requirements, which could have a
material adverse effect on our business, financial condition and results of operations.
The Partnership has a substantial amount of debt that could limit our and the Partnership’s ability to fund future growth and
operations and increase our exposure to risk during adverse economic conditions.
At December 31, 2019 the Partnership had $1.8 billion in outstanding debt obligations, net of unamortized debt discounts and
unamortized deferred financing costs. Many factors, including factors beyond our and the Partnership’s control, may affect our
ability to make payments on the Partnership’s outstanding indebtedness. These factors include those discussed elsewhere in these
Risk Factors.
The Partnership’s substantial debt and associated commitments could have important adverse consequences. For example, these
commitments could:
• make it more difficult for us to satisfy our contractual obligations;
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increase our vulnerability to general adverse economic and industry conditions;
limit our ability to fund future working capital, capital expenditures, acquisitions or other corporate requirements;
increase our vulnerability to interest rate fluctuations because the interest payments on a portion of our debt are based
upon variable interest rates and a portion can adjust based on our and the Partnership’s credit statistics;
limit our flexibility in planning for, or reacting to, changes in our business and our industry;
place us at a disadvantage compared to our competitors that have less debt or less restrictive covenants in such debt; and
limit our ability to incur indebtedness in the future.
Covenants in the Partnership Debt Agreements may impair our and the Partnership’s ability to operate our respective businesses.
The Partnership Debt Agreements, including the indenture dated as of March 21, 2019 and the indenture dated as of December
20, 2019, pursuant to which we guarantee the 2027 Notes and 2028 Notes on a senior unsecured basis, contain various covenants
with which we or certain of our subsidiaries or the Partnership must comply, including, but not limited to, restrictions on the use
of proceeds from borrowings, limitations on the incurrence of indebtedness, investments, acquisitions, making loans, liens on
assets, repurchasing equity, making dividends or distributions, transactions with affiliates, mergers, consolidations, dispositions
of assets and other provisions customary in similar types of agreements. The Partnership Debt Agreements also contain various
covenants requiring mandatory prepayments from the net cash proceeds of certain asset transfers. In addition, if as of any date the
Partnership has cash and cash equivalents (other than proceeds from a debt or equity issuance in the 30 days prior to such date
reasonably expected to be used to fund an acquisition permitted under the Credit Facility) in excess of $50 million, then such
excess amount will be used to pay down outstanding borrowings of a corresponding amount under the Credit Facility.
18
The Credit Facility is also subject to financial covenants, including the following ratios, as defined in its agreement:
EBITDA to Interest Expense
Senior Secured Debt to EBITDA
Total Debt to EBITDA
Through fiscal year 2019
Through second quarter of 2020
Thereafter (1)
2.5 to 1.0
3.5 to 1.0
5.75 to 1.0
5.50 to 1.0
5.25 to 1.0
——————
(1)
Subject to a temporary increase to 5.5 to 1.0 for any quarter during which an acquisition satisfying certain thresholds is completed and for the two quarters
immediately following such quarter.
If the Partnership was to anticipate non-compliance with these financial ratios, the Partnership may take actions to maintain
compliance with them. These actions include reductions in its general and administrative expenses, capital expenditures or the
payment of cash distributions. Any of these measures, including a reduction in the amount of cash distributions we receive from
the Partnership, may reduce the amount of cash available for payment of dividends and the funding of our business requirements,
which could have an adverse effect on our business, operations, cash flows or the price of our common stock.
The breach of any of the covenants under the Partnership Debt Agreements, including the Partnership’s financial covenants, could
result in a default under the Partnership Debt Agreements, which could cause indebtedness under the Partnership Debt Agreements
to become due and payable. If the repayment obligations under the Partnership Debt Agreements were to be accelerated, the
Partnership may not be able to repay the debt or refinance the debt on acceptable terms and the Partnership’s financial position
would be materially adversely affected. A material adverse effect on the Partnership’s assets, liabilities, financial condition, business
or operations, that, taken as a whole, impacts the Partnership’s ability to perform the obligations under the Partnership Debt
Agreements could lead to a default under those agreements. Further, a default under one or more of the Partnership Debt Agreements
would trigger cross-default provisions under the other Partnership Debt Agreements, which would accelerate the Partnership’s
obligation to repay the indebtedness under those agreements.
As of December 31, 2019, the Partnership was in compliance with all covenants under the Partnership Debt Agreements.
Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021 may adversely affect
the market value of our current or future debt obligations, including the Partnership’s senior notes and the Credit Facility.
Regulators and law enforcement agencies in the United Kingdom and elsewhere are conducting civil and criminal investigations
into whether the banks that contributed to the BBA in connection with the calculation of daily LIBOR may have been under-
reporting or otherwise manipulating or attempting to manipulate LIBOR. A number of BBA member banks have entered into
settlements with their regulators and law enforcement agencies with respect to this alleged manipulation of LIBOR. Actions by
the BBA or any other administrator of LIBOR, regulators or law enforcement agencies may result in changes to the manner in
which LIBOR is determined, the phasing out of LIBOR or the establishment of alternative reference rates. For example, on July
27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR
rates after 2021. As a result, LIBOR may be discontinued by 2021. Furthermore, in the U.S., efforts to identify a set of alternative
U.S. dollar reference interest rates that could replace LIBOR include proposals by the Alternative Reference Rates Committee of
the Federal Reserve Board and the Federal Reserve Bank of New York. At this time, it is not possible to predict whether any such
changes will occur, whether LIBOR will be phased out or any such alternative reference rates or other reforms to LIBOR will be
enacted in the United Kingdom, the U.S. or elsewhere or the effect that any such changes, phase out, alternative reference rates
or other reforms, if they occur, would have on the amount of interest paid on, or the market value of, our current or future debt
obligations, including the Partnership’s senior notes and the Credit Facility. Uncertainty as to the nature of such potential changes,
phase out, alternative reference rates or other reforms may materially adversely affect the trading market for LIBOR-based
securities, including the Partnership’s senior notes, as well as the terms of the Credit Facility and any interest rate swaps or other
derivative agreements to which we are a party. Reform of, or the replacement or phasing out of, LIBOR and proposed regulation
of LIBOR and other “benchmarks” may materially adversely affect the market value of, the applicable interest rate on and the
amount of interest paid on our current or future debt obligations, including the Partnership’s senior notes and the Credit Facility.
In addition, even if we have entered into interest rate swaps or other derivative instruments for purposes of managing our interest
rate exposure, our hedging strategies may not be effective as a result of the replacement or phasing out of LIBOR and other
“benchmarks” and we may incur substantial losses as a result.
19
We may be unable to access the capital and credit markets or borrow on affordable terms to obtain additional capital that we
may require.
Historically, we have financed acquisitions, operating expenditures and capital expenditures with a combination of cash provided
by operating and financing activities. However, to the extent we are unable to finance our operating expenditures, capital
expenditures, scheduled interest and debt repayments and any future dividends with net cash provided by operating activities and
borrowings under the Credit Facility, we may require additional capital. Periods of instability in the capital and credit markets
(both generally and in the oil and gas industry in particular) could limit our ability to access these markets to raise debt or equity
capital on affordable terms or to obtain additional financing. Among other things, our lenders may seek to increase interest rates,
enact tighter lending standards, refuse to refinance existing debt at maturity at favorable terms or at all and may reduce or cease
to provide funding to us. If we are unable to access the capital and credit markets on favorable terms, or if we are not successful
in raising capital within the time period required or at all, we may not be able to grow or maintain our business, which could have
a material adverse effect on our business, results of operations and financial condition.
Our ability to manage and grow our business effectively may be adversely affected if we lose management or operational
personnel.
We believe that our ability to hire, train and retain qualified personnel will continue to be challenging and important. The supply
of experienced operational and field personnel, in particular, decreases as other energy companies’ needs for the same personnel
increase. Our ability to grow and to continue our current level of service to our customers will be adversely impacted if we are
unable to successfully hire, train and retain these important personnel.
The erosion of the financial condition of our customers could adversely affect our business.
Many of our customers finance their exploration and production activities through cash flow from operations, the incurrence of
debt or the issuance of equity. During times when the oil or natural gas markets weaken, our customers are more likely to experience
a downturn in their financial condition. Additionally, some of our midstream customers may provide their gathering, transportation
and related services to a limited number of companies in the oil and gas production business. A reduction in borrowing bases under
reserve-based credit facilities, the lack of availability of debt or equity financing or other factors that negatively impact our
customers’ financial condition could result in a reduction in our customers’ spending for our products and services, which may
result in their cancellation of contracts, the cancellation or delay of scheduled maintenance of their existing natural gas compression
equipment, their determination not to enter into new natural gas compression service contracts or their determination to cancel or
delay orders for our services. Furthermore, the loss by our midstream customers of their key customers could reduce demand for
their services and result in a deterioration of their financial condition, which would in turn decrease their demand for our services.
Any such action by our customers would reduce demand for our services. Reduced demand for our services could adversely affect
our business, results of operations, financial condition and cash flows. In addition, in the event of the financial failure of a customer,
we could experience a loss on all or a portion of our outstanding accounts receivable associated with that customer.
The loss of our business with Williams Partners or the inability or failure of Williams Partners to meet its payment obligations
may adversely affect our and the Partnership’s financial results, which could limit the amount of cash the Partnership has
available for distribution to us.
During the years ended December 31, 2019, 2018 and 2017, Williams Partners accounted for 8%, 11% and 13%, respectively, of
our revenue. No other customer accounted for 10% or more of our revenue during these years.
There is no guarantee that, upon the expiration of the Partnership’s existing services agreements with Williams Partners, Williams
Partners will choose to renew these existing services agreements or enter into similar agreements with the Partnership. The loss
of business with Williams Partners, unless offset by additional contract compression services revenue from other customers, or
the inability or failure of Williams Partners to meet its payment obligations under contractual arrangements, could have a material
adverse effect on the Partnership’s business, results of operations, financial condition and ability to make cash distributions to us,
and on our business, results of operations, financial condition and ability to pay cash dividends.
20
The loss of any of our most significant customers would result in a decline in our revenue and cash available to pay dividends
to our common stockholders.
Our five most significant customers collectively accounted for approximately 25%, 26% and 29% of our revenue for the years
ended December 31, 2019, 2018 and 2017, respectively. Our services are provided to these customers pursuant to contract
compression services agreements, which typically have an initial term of 12 to 60 months and continue thereafter until terminated
by either party with 30 days’ advance notice. The loss of all or even a portion of the services we provide to these customers, as a
result of competition or otherwise, could have a material adverse effect on our business, results of operations and financial condition.
We are subject to continuing contingent tax liabilities following the Spin-off.
In connection with the Spin-off, we entered into a tax matters agreement with Exterran Corporation that allocates the responsibility
for prior period taxes of the Exterran Holdings consolidated U.S. federal and state tax reporting group between us and Exterran
Corporation. If Exterran Corporation is unable to pay any prior period taxes related to these consolidated U.S. federal and state
tax filings for which it is responsible, we would be required to pay the entire amount of such taxes.
We might not be able to engage in desirable strategic transactions and equity issuances because of certain restrictions relating
to requirements for tax-free distributions.
Our ability to engage in significant equity transactions could be limited or restricted in order to preserve, for U.S. federal income
tax purposes, the tax-free nature of the Spin-off. Even if the Spin-off otherwise qualifies for tax-free treatment under Section 355
of the Code, it may result in corporate-level taxable gain to us under Section 355(e) of the Code if there is a 50% or greater change
in ownership, by vote or value, of shares of our stock, Exterran Corporation’s stock or the stock of a successor either occurring
as part of a plan or series of related transactions that includes the Spin-off.
Under the tax matters agreement that we entered into with Exterran Corporation, we are prohibited from taking or failing to take
any action that prevents the Spin-off from being tax-free.
These restrictions may limit our ability to pursue strategic transactions or engage in new business or other transactions that may
maximize the value of our business. Moreover, the tax matters agreement also may provide that we are responsible for any taxes
imposed on us or any of our affiliates as a result of the failure of the Spin-off to qualify for favorable treatment under the Code if
such failure is attributable to certain actions taken after the Spin-off by or in respect of us, any of our affiliates or our shareholders.
Many of our contract operations services contracts have short initial terms and are cancelable on short notice after the initial
term, and we cannot be sure that such contracts will be extended or renewed after the end of the initial contractual term. Any
such nonrenewals, or renewals at reduced rates or the loss of contracts with any significant customer could adversely impact
our results of operations.
The length of our contract operations services contracts with customers varies based on operating conditions and customer needs.
Our initial contract terms typically are not long enough to enable us to recoup the cost of the equipment we utilize to provide
contract operations services and these contracts are typically cancelable on short notice after the initial term. We cannot be sure
that a substantial number of these contracts will be extended or renewed by our customers or that any of our customers will continue
to contract with us. The inability to negotiate extensions or renew a substantial portion of our contract operations services contracts,
the renewal of such contracts at reduced rates, the inability to contract for additional services with our customers or the loss of all
or a significant portion of our services contracts with any significant customer could lead to a reduction in revenue and net income
and could require us to record asset impairments. This could have a material adverse effect upon our business, results of operations,
financial condition and cash flows.
21
We depend on particular suppliers and are vulnerable to product shortages and price increases. With respect to our suppliers
of newly-fabricated compression equipment specifically, we occasionally experience long lead times, and therefore may at times
make purchases in anticipation of future business. If we are unable to purchase compression equipment (or other integral
equipment, materials and services) from third party suppliers, we may be unable to retain existing customers or compete for
new customers, which could have a material adverse effect on our business, results of operations and financial condition.
Some equipment, materials and services used in our business are obtained from a limited group of suppliers. Our reliance on these
suppliers involves several risks, including price increases, inferior quality and a potential inability to obtain an adequate supply
of such equipment, materials and services in a timely manner. Additionally, we occasionally experience long lead times from our
suppliers of newly-fabricated compression equipment and may at times make purchases in anticipation of future business. We do
not have long-term contracts with some of these suppliers, and the partial or complete loss of certain of these suppliers could have
a negative impact on our results of operations and could damage our customer relationships. Further, a significant increase in the
price of such equipment, materials and services could have a negative impact on our results of operations.
If we are unable to purchase compression equipment in particular on a timely basis to meet the demands of our customers, our
existing customers may terminate their contractual relationships with us, or we may not be able to compete for business from new
or existing customers, which, in each case, could have a material adverse effect on our business, results of operations and financial
condition.
Our inability to fund purchases of additional compression equipment could adversely impact our financial results.
We may not be able to maintain or grow our asset and customer base unless we have access to sufficient capital to purchase
additional compression equipment. Cash flow from our operations and availability under our Credit Facility may not provide us
with sufficient cash to fund our capital expenditure requirements, including any funding requirements related to acquisitions. Our
ability to grow our asset and customer base could be impacted by limits on our ability to access additional capital.
If we do not make acquisitions on economically acceptable terms, our future growth could be limited.
Our ability to grow depends, in part, on our ability to make accretive acquisitions. If we are unable to make accretive acquisitions
either because we are (i) unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts with them,
(ii) unable to obtain financing for these acquisitions on economically acceptable terms or (iii) outbid by competitors, then our
future growth and ability to maintain distributions could be limited. Furthermore, even if we make acquisitions that we believe
will be accretive, these acquisitions may nevertheless result in a decrease in the cash generated from operations per unit.
Any acquisition involves potential risks, including, among other things:
•
•
•
an inability to integrate successfully the businesses we acquire;
the assumption of unknown liabilities;
limitations on rights to indemnity from the seller;
• mistaken assumptions about the cash generated or anticipated to be generated by the business acquired or the overall
costs of equity or debt;
•
•
•
the diversion of management’s attention from other business concerns;
unforeseen operating difficulties; and
customer or key employee losses at the acquired businesses.
If we consummate any future acquisitions, our capitalization and results of operations may change significantly and we will not
have the opportunity to evaluate the economic, financial and other relevant information that we will consider in determining the
application of our future funds and other resources. In addition, competition from other buyers could reduce our acquisition
opportunities or cause us to pay a higher price than we might otherwise pay.
22
From time to time, we are subject to various claims, tax audits, litigation and other proceedings that could ultimately be resolved
against us and require material future cash payments or charges, which could impair our financial condition or results of
operations.
The size, nature and complexity of our business make us susceptible to various claims, tax audits, litigation and binding arbitration
proceedings. We are currently, and may in the future become, subject to various claims, which, if not resolved within amounts we
have accrued, could have a material adverse effect on our financial position, results of operations or cash flows, including our
ability to pay dividends. Similarly, any claims, even if fully indemnified or insured, could negatively impact our reputation among
our customers and the public, and make it more difficult for us to compete effectively or obtain adequate insurance in the future.
See Part I Item 3 “Legal Proceedings” and Note 26 (“Commitments and Contingencies”) to our Financial Statements for additional
information regarding certain legal proceedings to which we are a party.
We face significant competitive pressures that may cause us to lose market share and harm our financial performance.
Our business is highly competitive and there are low barriers to entry. Our competitors may be able to more quickly adapt to
technological changes within our industry and changes in economic and market conditions as a whole, more readily take advantage
of acquisitions and other opportunities and adopt more aggressive pricing policies. Our ability to renew or replace existing contract
operations service contracts with our customers at rates sufficient to maintain current revenue and cash flows could be adversely
affected by the activities of our competitors. If our competitors substantially increase the resources they devote to the development
and marketing of competitive products, equipment or services or substantially decrease the price at which they offer their products,
equipment or services, we may not be able to compete effectively.
In addition, we could face significant competition from new entrants into the compression services business. Some of our existing
competitors or new entrants may expand or fabricate new compressors that would create additional competition for the services
we provide to our customers. In addition, our customers may purchase and operate their own compression fleets in lieu of using
our natural gas compression services. We also may not be able to take advantage of certain opportunities or make certain investments
because of our debt levels and our other obligations. Any of these competitive pressures could have a material adverse effect on
our business, results of operations and financial condition.
We may be vulnerable to interest rate increases due to our variable rate debt obligations.
As of December 31, 2019, after taking into consideration interest rate swaps, we had $113.0 million of outstanding indebtedness
that was effectively subject to variable interest rates. Changes in economic conditions outside of our control could result in higher
interest rates, thereby increasing our interest expense and reducing the funds available for capital investment, operations or other
purposes. A 1% increase in the effective interest rate on our outstanding debt subject to variable interest rates at December 31,
2019 would result in an annual increase in our interest expense of $1.1 million. In addition, a substantial portion of the Partnership’s
cash flow must be used to service its debt obligations. Any increase in the Partnership’s interest expense could reduce the amount
of cash the Partnership has available for distribution to us and as a result negatively impact our results of operations and cash
flows, including our ability to pay dividends in the future.
Our operations entail inherent risks that may result in substantial liability. We do not insure against all potential losses and
could be seriously harmed by unexpected liabilities.
Our operations entail inherent risks, including equipment defects, malfunctions and failures and natural disasters, which could
result in uncontrollable flows of natural gas or well fluids, fires and explosions. These risks may expose us, as an equipment
operator, to liability for personal injury, wrongful death, property damage, pollution and other environmental damage. The insurance
we carry against many of these risks may not be adequate to cover our claims or losses. Our insurance coverage includes property
damage, general liability and commercial automobile liability and other coverage we believe is appropriate. 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. We are also self-insured for property damage to our
offshore assets. Further, insurance covering the risks we expect to face or in the amounts we desire may not be available in the
future or, if available, the premiums may not be commercially justifiable. If we were to incur substantial liability and such damages
were not covered by insurance or were in excess of policy limits, or if we were to incur liability at a time when we are not able to
obtain liability insurance, our business, results of operations and financial condition could be negatively impacted.
23
We may not realize the intended benefits of our recent technology transformation project, which could have an adverse effect
on our business.
In the fourth quarter of 2018, we began a process and technology transformation project that will, among other things, upgrade
or replace our existing ERP, supply chain and inventory management systems and expand the remote monitoring capabilities of
our compression fleet. By using technology to make our systems and processes more efficient, we intend to lower our internal
costs and improve our profitability over time. However, the implementation of the technology transformation project requires
capital and other resources. We expensed $6.3 million in 2019 related to this project, and we anticipate that the project will continue
to require significant resources and will result in increased SG&A expense and capital expenditures for the implementation of
new technologies in 2020. Further, we may not realize the benefits we expect to realize from the technology transformation project.
Any such difficulties could have an adverse effect on our business, results of operations and financial condition.
Threats of cyber-attacks or terrorism could affect our business.
We may be threatened by problems such as cyber-attacks, computer viruses or terrorism that may disrupt our operations and harm
our operating results. Our industry requires the continued operation of sophisticated information technology systems and network
infrastructure. Despite our implementation of security measures, our technology systems are vulnerable to disability or failures
due to hacking, viruses, acts of war or terrorism and other causes. If our information technology systems were to fail and we were
unable to recover in a timely way, we might be unable to fulfill critical business functions, which could have a material adverse
effect on our business, results of operations and financial condition.
In addition, our assets may be targets of terrorist activities that could disrupt our ability to service our customers. We may be
required by our regulators or by the future terrorist threat environment to make investments in security that we cannot currently
predict. The implementation of security guidelines and measures and maintenance of insurance, to the extent available, addressing
such activities could increase costs. These types of events could materially adversely affect our business and results of operations.
In addition, these types of events could require significant management attention and resources and could adversely affect our
reputation among customers and the public.
U.S. federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing as well as governmental reviews
of such activities could result in increased costs and additional operating restrictions or delays in the completion of oil and
natural gas wells and adversely affect demand for our contract operations services.
Hydraulic fracturing is an important and common practice that is used to stimulate production of natural gas and/or oil from dense
subsurface rock formations. We do not perform hydraulic fracturing, but many of our customers do. Hydraulic fracturing involves
the injection of water, sand or alternative proppant and chemicals under pressure into target geological formations to fracture the
surrounding rock and stimulate production. Hydraulic fracturing is typically regulated by state agencies, but recently, there has
been increased public concern regarding an alleged potential for hydraulic fracturing to adversely affect drinking water supplies,
and proposals have been made to enact separate U.S. federal, state and local legislation that would increase the regulatory burden
imposed on hydraulic fracturing.
For example, at the U.S. federal level, the EPA issued an Advance Notice of Proposed Rulemaking to collect data on chemicals
used in hydraulic fracturing operations under Section 8 of the Toxic Substances Control Act and proposed regulations under the
CWA governing wastewater discharges from hydraulic fracturing and certain other natural gas operations. On March 26, 2015,
the BLM released a final rule that updates existing regulation of hydraulic fracturing activities on U.S. federal lands, including
requirements for chemical disclosure, wellbore integrity and handling of flowback water. The final rule never went into effect due
to pending litigation and on December 28, 2017, the BLM announced that it had rescinded the 2015 final rule, in part citing a
review that found that 32 of the 32 states with federal oil and gas leases have regulations that already address hydraulic fracturing.
At the state level, several states have adopted or are considering legal requirements that could impose more stringent permitting,
disclosure and well construction requirements on hydraulic fracturing activities. For example, in May 2013, the Texas Railroad
Commission adopted new rules governing well casing, cementing and other standards for ensuring that hydraulic fracturing
operations do not contaminate nearby water resources. Local governments may also seek to adopt ordinances within their
jurisdictions regulating the time, place and manner of drilling activities in general or hydraulic fracturing activities in particular
or prohibit the performance of well drilling in general or hydraulic fracturing in particular. If new or more stringent U.S. federal,
state or local legal restrictions relating to the hydraulic fracturing process are adopted in areas where our natural gas exploration
and production customers operate, those customers could incur potentially significant added costs to comply with such
requirements, experience delays or curtailment in the pursuit of exploration, development or production activities and perhaps
even be precluded from drilling wells. Any such restrictions could reduce demand for our contract operations services, and as a
result could have a material adverse effect on our business, financial condition, results of operations and cash flows.
24
New regulations, proposed regulations and proposed modifications to existing regulations under the CAA, if implemented,
could result in increased compliance costs.
On June 3, 2016, the EPA issued final regulations amending the NSPS for the oil and natural gas source category and applying to
sources of emissions of methane and VOC from certain processes, activities and equipment that is constructed, modified or
reconstructed after September 18, 2015. Specifically, the regulation contains both methane and VOC standards for several emission
sources not previously covered by the NSPS, such as fugitive emissions from compressor stations and pneumatic pumps and
methane standards for certain emission sources that are already regulated for VOC, such as equipment leaks at natural gas processing
plants. The amendments also establish methane standards for a subset of equipment that the current NSPS regulates, including
reciprocating compressors and pneumatic controllers, and extend the current VOC standards to the remaining unregulated
equipment. In June 2017, the EPA proposed and took public comment on a two-year stay of the fugitive emissions requirements,
well site pneumatic standards and closed vent certification. The EPA sought additional comment in November 2017 in support of
the proposed rule, but has not finalized the two-year stay. In October 2018 and August 2019, the EPA proposed deregulatory
amendments to the 2016 rule intended to streamline implementation, reduce duplicative EPA and state requirements and decrease
the burden of compliance. The EPA has not yet issued a final rule based on either proposal. At this time, we do not believe that if
finalized these rules will have a material adverse impact on our business, financial condition, results of operations or cash flows.
On November 18, 2016, the BLM published final rules to reduce venting and flaring on federal and tribal lands. The rules set forth
some novel requirements regarding leak detection inspections at compressor stations and imposed requirements to reduce emissions
from pneumatic controllers and pumps, among other things. In December 2017, the BLM finalized suspension of certain
requirements of the November 2016 final rule until January 2019. In September 2018, the BLM finalized a rule rescinding the
novel requirements pertaining to waste-minimization plans, gas-capture percentages, well drilling, well completion and related
operations, pneumatic controllers, pneumatic diaphragm pumps, storage vessels and leak detection and repair. The BLM also
revised other provisions related to venting and flaring. California, New Mexico and various environmental groups filed a lawsuit
challenging the September 2018 final rule, which is still pending.
On October 1, 2015, the EPA issued a new NAAQS ozone standard of 70 ppb, which is a reduction from the 75 ppb standard set
in 2008. This new standard became effective on December 28, 2015, and the EPA completed designating attainment/non-attainment
regions under the revised ozone standard in 2018. In November 2016, the EPA proposed an implementation rule for the 2015
NAAQS ozone standard, but the agency has yet to issue a final implementation rule. State implementation of the revised NAAQS
could result in stricter permitting requirements, delay or prohibit our customers’ ability to obtain such permits and result in increased
expenditures for pollution control equipment, the costs of which could be significant. By law, the EPA must review each NAAQS
every five years. In December 2018, the EPA announced that it was retaining without significant revision the 2015 NAAQS ozone
standard. The EPA has asked for information related to adverse effects that may result from various strategies for attainment and
maintenance of NAAQS and is considering re-evaluating the extent to which the EPA can or should consider levels of background
ozone when choosing a standard. The EPA expects to conclude the review by October 2020 as required by law. At this time,
however, we cannot predict whether state implementation of the 2015 NAAQS ozone standard or the 2020 NAAQS ozone standard
would have a material adverse impact on our business, financial condition, results of operations or cash flows.
In January 2011, the TCEQ finalized revisions to certain air permit programs that significantly increase air emissions-related
requirements for new and certain existing oil and gas production and gathering sites in the Barnett Shale production area. The
final rule established new emissions standards for engines, which could impact the operation of specific categories of engines by
requiring the use of alternative engines, compressor packages or the installation of aftermarket emissions control equipment. The
rule became effective for the Barnett Shale production area in April 2011, and the lower emissions standards will become applicable
between 2020 and 2030 depending on the type of engine and the permitting requirements. A number of other states where our
engines are operated have adopted or are considering adopting additional regulations that could impose new air permitting or
pollution control requirements for engines, some of which could entail material costs to comply. At this time, however, we cannot
predict whether any such rules would require us to incur material costs.
New environmental regulations and proposals similar to these, when finalized, and any other new regulations requiring the
installation of more sophisticated pollution control equipment or the adoption of other environmental protection measures, could
have a material adverse impact on our business, financial condition, results of operations and cash flows.
25
We are subject to a variety of governmental regulations; failure to comply with these regulations may result in administrative,
civil and criminal enforcement measures and changes in these regulations could increase our costs or liabilities.
We are subject to a variety of U.S. federal, state and local laws and regulations, including relating to the environment, health and
safety, labor and employment and taxation. Many of these laws and regulations are complex, change frequently, are becoming
increasingly stringent, and the cost of compliance with these requirements can be expected to increase over time. Failure to comply
with these laws and regulations may result in a variety of administrative, civil and criminal enforcement measures, including
assessment of monetary penalties, imposition of remedial requirements and issuance of injunctions as to future compliance. From
time to time, as part of our operations, including newly acquired operations, we may be subject to compliance audits by regulatory
authorities in the various states in which we operate.
Environmental laws and regulations may, in certain circumstances, impose strict liability for environmental contamination, which
may render us liable for remediation costs, natural resource damages and other damages as a result of our conduct that was lawful
at the time it occurred or the conduct of, or conditions caused by, prior owners or operators or other third parties. In addition,
where contamination may be present, it is not uncommon for neighboring land owners and other third parties to file claims for
personal injury, property damage and recovery of response costs. Remediation costs and other damages arising as a result of
environmental laws and regulations, and costs associated with new information, changes in existing environmental laws and
regulations or the adoption of new environmental laws and regulations could be substantial and could negatively impact our
financial condition, profitability and results of operations. Moreover, failure to comply with these environmental laws and
regulations may result in the imposition of administrative, civil and criminal penalties and the issuance of injunctions delaying or
prohibiting operations.
We may need to apply for or amend facility permits or licenses from time to time with respect to storm water or wastewater
discharges, waste handling, or air emissions relating to manufacturing activities or equipment operations, which subjects us to
new or revised permitting conditions that may be onerous or costly to comply with. In addition, certain of our customer service
arrangements may require us to operate, on behalf of a specific customer, petroleum storage units such as underground tanks or
pipelines and other regulated units, all of which may impose additional compliance and permitting obligations.
We conduct operations at numerous facilities in a wide variety of locations across the continental U.S. The operations at many of
these facilities require environmental permits or other authorizations. Additionally, natural gas compressors at many of our
customers’ facilities require individual air permits or general authorizations to operate under various air regulatory programs
established by rule or regulation. These permits and authorizations frequently contain numerous compliance requirements,
including monitoring and reporting obligations and operational restrictions, such as emission limits. Given the large number of
facilities in which we operate, and the numerous environmental permits and other authorizations that are applicable to our operations,
we may occasionally identify or be notified of technical violations of certain requirements existing in various permits or other
authorizations. Occasionally, we have been assessed penalties for our non-compliance, and we could be subject to such penalties
in the future.
We routinely deal with natural gas, oil and other petroleum products. Hydrocarbons or other hazardous substances or wastes may
have been disposed or released on, under or from properties used by us to provide contract operations services or inactive
compression storage or on or under other locations where such substances or wastes have been taken for disposal. These properties
may be subject to investigatory, remediation and monitoring requirements under environmental laws and regulations.
The modification or interpretation of existing environmental laws or regulations, the more vigorous enforcement of existing
environmental laws or regulations, or the adoption of new environmental laws or regulations may also negatively impact oil and
natural gas exploration and production, gathering and pipeline companies, including our customers, which in turn could have a
negative impact on us.
Climate change legislation and regulatory initiatives could result in increased compliance costs.
The U.S. Congress has previously considered legislation to restrict or regulate emissions of greenhouse gases, such as carbon
dioxide and methane. It presently appears unlikely that comprehensive federal climate legislation will become law in the near
future, although energy legislation and other initiatives continue to be proposed that may be relevant to greenhouse gas emissions
issues. Almost half of the states, either individually or through multi-state regional initiatives, have begun to address greenhouse
gas emissions, primarily through the planned development of emission inventories or regional greenhouse gas cap and trade
programs. Although most of the state-level initiatives have to date been focused on large sources of greenhouse gas emissions,
such as electric power plants, it is possible that smaller sources such as our gas-fired compressors could become subject to
greenhouse gas-related regulation. Depending on the particular program, we could be required to control emissions or to purchase
and surrender allowances for greenhouse gas emissions resulting from our operations.
26
Independent of Congress, the EPA has promulgated regulations controlling greenhouse gas emissions under its existing CAA
authority. The EPA has adopted rules requiring many facilities, including petroleum and natural gas systems, to inventory and
report their greenhouse gas emissions. These reporting obligations were triggered for one site we operated in 2019.
In addition, the EPA rules provide air permitting requirements for certain large sources of greenhouse gas emissions.
The requirement for large sources of greenhouse gas emissions to obtain and comply with permits will affect some of our and our
customers’ largest new or modified facilities going forward, but is not expected to cause us to incur material costs.
At the international level, the U.S. joined the international community at the 21st Conference of the Parties of the United Nations
Framework Convention on Climate Change in Paris, France, which resulted in an agreement intended to nationally determine
their contributions and set greenhouse gas emission reduction goals every five years beginning in 2020. While the Agreement did
not impose direct requirements on emitters, national plans to meet its pledge could have resulted in new regulatory requirements.
In November 2019, however, President Trump formally announced plans to withdraw from the Paris Agreement with an effective
exit date expected in November 2020. The U.S.’s adherence to the exit process is uncertain and the terms on which the U.S. may
reenter the Paris Agreement or a separately negotiated agreement are unclear at this time.
Although it is not currently possible to predict how any proposed or future greenhouse gas legislation or regulation promulgated
by Congress, the states or multi-state regions will impact our business, any regulation of greenhouse gas emissions that may be
imposed in areas in which we conduct business could result in increased compliance costs or additional operating restrictions or
reduced demand for our services, and could have a material adverse effect on our business, financial condition, results of operations
and cash flows.
Finally, it should be noted that some scientists have concluded that increasing concentrations of greenhouse gases in the Earth’s
atmosphere can change the climate in a manner that results in significant weather-related effects, such as increased frequency and
severity of storms, droughts, floods, and other such events. If any of those results occur, it could have an adverse effect on our
assets and operations and cause us to incur costs in preparing for and responding to them.
Item 1B. Unresolved Staff Comments
None.
27
Item 2. Properties
The following table describes the material facilities we owned or leased at December 31, 2019:
Location
Houston, Texas
Nunn, Colorado
Rifle, Colorado
McPherson, Kansas
Broussard, Louisiana
Houma, Louisiana
Gaylord, Michigan
Farmington, New Mexico
Oklahoma City, Oklahoma
Yukon, Oklahoma
Asherton, Texas
Brenham, Texas
Cotulla, Texas
Fort Worth, Texas
Karnes City, Texas
Marshall, Texas
Midland, Texas
Pecos, Texas
Victoria, Texas
Victoria, Texas
Bridgeport, West Virginia
Evansville, Wyoming
Rock Springs, Wyoming
Status
Leased
Leased
Leased
Owned
Owned
Owned
Leased
Owned
Leased
Owned
Leased
Owned
Leased
Leased
Leased
Leased
Owned
Leased
Owned
Owned
Leased
Leased
Leased
Square Feet
77,000
Use by Segment
Corporate office - Contract Operations and Aftermarket Services
5,000
10,000
28,000
89,000
60,000
13,000
62,000
41,000
85,000
9,000
10,000
10,000
49,000
4,000
11,000
51,000
10,000
23,000
66,000
17,000
15,000
9,000
Contract Operations and Aftermarket Services
Contract Operations and Aftermarket Services
Aftermarket Services
Contract Operations and Aftermarket Services
Contract Operations and Aftermarket Services
Contract Operations and Aftermarket Services
Contract Operations and Aftermarket Services
Contract Operations and Aftermarket Services
Contract Operations and Aftermarket Services
Contract Operations and Aftermarket Services
Contract Operations and Aftermarket Services
Contract Operations and Aftermarket Services
Contract Operations and Aftermarket Services
Contract Operations and Aftermarket Services
Contract Operations and Aftermarket Services
Contract Operations and Aftermarket Services
Contract Operations and Aftermarket Services
Contract Operations and Aftermarket Services
Contract Operations and Aftermarket Services
Contract Operations and Aftermarket Services
Contract Operations and Aftermarket Services
Contract Operations and Aftermarket Services
Our executive office is located at 9807 Katy Freeway, Suite 100, Houston, Texas 77024 and our telephone number is 281-836-8000.
Item 3. Legal Proceedings
In the ordinary course of business, we are involved in various pending or threatened legal actions. While we are unable to predict
the ultimate outcome of these actions, we believe that any ultimate liability arising from any of these actions will not have a
material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay
dividends. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance
that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our
consolidated financial position, results of operations or cash flows, including our ability to pay dividends.
Item 4. Mine Safety Disclosures
Not applicable.
28
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
Our common stock is traded on the New York Stock Exchange under the symbol “AROC.”
The performance graph below shows the cumulative total stockholder return on our common stock compared with the S&P 500
and AMNAX indices over the five-year period beginning on December 31, 2014. The results are based on an investment of $100
in each of our common stock, the S&P 500 and the AMNAX. The graph assumes reinvestment of dividends and adjusts all closing
prices and dividends for stock splits.
Comparison of Five Year Cumulative Total Return
The performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this
2019 Form 10-K into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that
we specifically incorporate this information by reference, and shall not otherwise be deemed filed under those Acts.
Holders
On February 13, 2020, the closing price of our common stock was $8.40 per share. As of February 13, 2020, there were approximately
1,053 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders
and includes stockholders who are beneficial owners but whose shares are held in street name by banks, brokers and other nominees.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
29
Repurchase of Equity Securities
None.
Item 6. Selected Financial Data
The table below shows selected financial data for Archrock for each of the five years in the period ended December 31, 2019,
which has been derived from our audited Financial Statements. The following information should be read together with
Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Financial Statements contained
in this 2019 Form 10-K (in thousands, except per share data).
2019 (1)(2)
Year Ended December 31,
2017
2018 (1)
2016
2015
Statement of Operations Data:
Revenue
Income (loss) from continuing operations (3)
Income (loss) from discontinued operations, net of tax (4)
Net income (loss) attributable to the noncontrolling interest
Net income (loss) attributable to Archrock stockholders (3)
Net income (loss) from continuing operations attributable
to Archrock stockholders per common share: basic and
diluted
$ 965,485
$ 904,441
$ 794,655
97,603
(273)
—
97,330
29,160
—
8,097
21,063
18,464
(54)
(543)
18,953
$ 807,069
(64,817)
(426)
(10,688)
(54,555)
$ 998,108
(159,374)
33,677
6,852
(132,549)
0.70
0.19
0.26
(0.79)
(2.44)
Balance Sheet Data:
Working capital (5)
Total assets
Long-term debt
$
93,460
$ 105,454
$
90,307
$ 109,157
$ 150,199
3,109,975
2,552,515
2,408,007
2,414,779
2,695,180
1,842,549
1,529,501
1,417,053
1,441,724
1,576,882
Total Archrock stockholders’ equity
1,085,963
841,574
777,049
718,966
733,910
Other Financial Data:
Capital expenditures
$ 385,198
$ 319,102
$ 221,693
$ 117,572
$ 256,142
Dividends declared and paid per common share
0.5540
0.5040
0.4800
0.4975
0.6000
——————
(1)
Amounts reported for 2019 and 2018 are per our adoption of ASC 606 Revenue on January 1, 2018. Comparative information has not been restated and
continues to be reported under the accounting standards in effect for those periods.
Amounts reported for 2019 are per our adoption of ASC 842 Leases on January 1, 2019. Comparative information has not been restated and continues to
be reported under the accounting standards in effect for those periods.
In 2019, included a $50.8 million one-time benefit from the release of a deferred tax asset valuation allowance, a $44.7 million long-lived asset impairment
charge and a $16.0 million gain on sale of assets. In 2018, included a $28.1 million long-lived asset impairment charge. In 2017, included a $53.4 million
tax benefit as the result of the TCJA and a $29.1 million long-lived asset impairment charge. In 2016, included an $87.4 million long-lived asset impairment
charge and $16.9 million of restatement and other charges. In 2015, included a $125.0 million long-lived asset impairment charge and $86.0 million of
valuation allowances and foreign tax credit write-offs as the result of the Spin-off.
Income from discontinued operations in 2015 was the result of the Spin-off.
Defined as current assets minus current liabilities.
(2)
(3)
(4)
(5)
30
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
Financial Statements, the notes thereto, and the other financial information appearing elsewhere in this 2019 Form 10-K. The
following discussion includes forward-looking statements that involve certain risks and uncertainties. See “Forward-Looking
Statements” and Part I, Item 1A “Risk Factors” in this 2019 Form 10-K.
Overview
We are an energy infrastructure company with a pure-play focus on midstream natural gas compression. We are the leading provider
of natural gas compression services to customers in the oil and natural gas industry throughout the U.S. and a leading supplier of
aftermarket services to customers that own compression equipment in the U.S. Our business supports a must-run service that is
essential to the production, processing, transportation and storage of natural gas. 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.
We operate in two business segments:
• Contract Operations. Our contract operations business is comprised of our owned fleet of natural gas compression
equipment that we use to provide operations services to our customers.
• Aftermarket Services. Our aftermarket services business provides a full range of services to support the compression
needs of our customers that own compression equipment, including operations, maintenance, overhaul and reconfiguration
services and sales of parts and components.
Recent Business Developments
2028 Notes Offering
On December 20, 2019, we completed a private offering of $500.0 million aggregate principal amount of 6.25% senior notes due
April 2028. We received net proceeds of $491.8 million after issuance costs, which were used to repay borrowings outstanding
under our Credit Facility. See Note 13 (“Long-Term Debt”) to our Financial Statements for further details of this transaction.
Amendment to the Credit Facility
On November 8, 2019, we entered into Amendment No. 2, which extended the maturity date of, and changed the applicable margins
for borrowings under, our Credit Facility. See Part II Item 7 “Liquidity and Capital Resources — Financial Resources” and Note 13
(“Long-Term Debt”) to our Financial Statements for further details of this amendment.
Elite Acquisition
On August 1, 2019, we completed the Elite Acquisition whereby we acquired from Elite Compression substantially all of its assets,
including a fleet of predominantly large compressors comprising approximately 430,000 horsepower, vehicles, real property and
inventory, and certain liabilities for aggregate consideration consisting of $214.0 million in cash and 21.7 million shares of common
stock with an acquisition date fair value of $225.9 million. The cash portion of the acquisition was funded with borrowings on the
Credit Facility.
Harvest Sale
On August 1, 2019, we completed an asset sale in which Harvest acquired from us approximately 80,000 active and idle compression
horsepower, vehicles and parts inventory for cash consideration of $30.0 million. We recorded a $6.6 million gain on the sale of
these assets during 2019.
See Note 4 (“Business Transactions”) to our Financial Statements for further details of the Elite Acquisition and the Harvest Sale.
31
2027 Notes Offering and 2021 Notes Extinguishment
On March 21, 2019, we completed a private offering of $500.0 million aggregate principal amount of 6.875% senior notes due
April 2027. We received net proceeds of $491.2 million after issuance costs, which were used to repay borrowings outstanding
under our Credit Facility.
On April 5, 2019, we repaid the 2021 Notes with borrowings from our Credit Facility.
See Note 13 (“Long-Term Debt”) to our Financial Statements for further details of these transactions.
Trends and Outlook
The key driver of our business is the production of U.S. crude oil and natural gas. Approximately 70% of our operating fleet is
deployed for midstream applications with the remaining fleet being used in wellhead and gas lift applications to enhance oil
production. Changes in oil and natural gas production spending therefore typically result in changes in demand for our services.
Spending on oil and natural gas exploration and production typically declines when there is a significant and prolonged reduction
in oil and natural gas prices or significant instability in energy markets and increases during periods of rising prices and market
stability. 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.
Increased global demand for U.S. oil and natural gas production in recent years has contributed to increased production for both
resources and record U.S. natural gas production in 2018 and 2019. According to the EIA, average U.S. dry natural gas and crude
oil production in 2019, 2018 and 2017 were as follows:
Average dry natural gas production (Bcf/d)
Average crude oil production (MMb/d)
Year Ended December 31,
2019
2018
2017
92.0
12.2
83.8
11.0
74.8
9.4
These increases in production resulted in strong demand for our compression services in 2019 and 2018. Additionally, we increased
our investment in new fleet units in each of 2019, 2018 and 2017 to take advantage of improved market conditions. As a result of
this increased demand and investment, our contract operations revenue and average operating horsepower increased 15% and 10%,
respectively, in 2019 compared to 2018 and 10% and 7%, respectively, in 2018 compared to 2017.
The EIA forecasts the following year-over-year changes in its January 2020 Short-Term Energy Outlook report:
Dry natural gas production
Liquefied natural gas exports
Crude oil production
2020
2021
3%
30%
9%
(1)%
19 %
3 %
Long term, the EIA expects dry natural gas production to increase 10% through 2024. We believe that the abundance and economics
of U.S. shale and relative price stability of natural gas in the U.S. will continue to drive demand for U.S. natural gas for liquefied
natural gas exports, natural gas exports via pipeline to Mexico and natural gas use in power generation and as a petrochemical
feedstock. We expect that such an increase in demand for U.S. natural gas will in turn lead to continued strong demand for
compression services.
We anticipate that the horsepower acquired in the Elite Acquisition, together with continued strong demand for compression
services, will help to maintain our high utilization and result in an increase in revenue in 2020 as compared to 2019 and 2018 in
our contract operations business. In our aftermarket services business, though activity levels decreased in 2019, the base of owned
compression in the U.S. has increased over the past several years, which we believe will help sustain our aftermarket services
business over the long term.
32
Certain Key Challenges and Uncertainties
In addition to general market conditions in the oil and natural gas industry and competition in the natural gas compression industry,
we believe the following represent some of the key challenges and uncertainties we will face in the future.
Capital Requirements and the Availability of External Sources of Capital. We funded a significant portion of our capital expenditures
and the cash portion of the Elite Acquisition through borrowings under the Credit Facility and issued additional debt such that we
now have a substantial amount of debt, which could limit our ability to fund future planned capital expenditures. Current conditions
could limit our ability to access the debt and equity markets to raise capital on affordable terms in 2020 and beyond. If we are not
successful in raising capital within the time period required or at all, we may not be able to fund these capital expenditures, which
could impair our ability to grow or maintain our business.
Cost Management. In 2020, we will likely face rising costs due to manufacturer price increases and higher labor costs due to low
unemployment rates in many of our operating areas. To address rising costs, we are actively working to retain employees, negotiating
sourcing agreements with vendors and passing cost increases through to customers where appropriate.
In addition, in order to improve our operations, in the fourth quarter of 2018 we began a process and technology transformation
project that will, among other things, upgrade or replace our existing ERP, supply chain and inventory management systems and
expand the remote monitoring capabilities of our compression fleet. We believe these improvements will reduce our operating
costs and increase our uptime. We expensed $6.3 million in 2019 related to this project, and we anticipate that the project will
continue to require significant resources and result in increased SG&A expense and capital expenditures for the implementation
of new technologies in 2020.
Cost management continues to be challenging and there is no guarantee that our efforts will result in a reduction in our operating
expenses. Continued natural gas production growth and resulting demand for our services could also cause us to experience
increased operating expenses as we hire employees and incur additional expenses needed to support the market demand.
Labor. We believe that our ability to hire, train and retain qualified personnel will continue to be important. Although we have
been able to satisfy our personnel needs thus far, retaining employees in our industry continues to be a challenge. Our ability to
grow and to continue our current level of service to our customers will depend in part on our success in hiring, training and retaining
our employees.
Later-Cycle Market Participant. Compression service providers have traditionally been a later-cycle participant as energy markets
fluctuate. As such, we anticipate that any significant change in the demand for our contract operations services will generally lag
a change in drilling activity. Increased oil and natural gas production in 2017, 2018 and 2019 contributed to increased new orders
for our compression services in 2017 and 2018. Despite these new orders, revenue gains were not realized until 2018 and 2019 as
the operating horsepower declines and pricing pressure experienced prior to 2017 resulted in a decline in our revenue in 2017.
Dry natural gas production, one of the key drivers of our business, increased 12% in 2018 and 10% in 2019 and is expected to
increase 10% in 2020 through 2024. We believe this production growth will continue to increase demand for compression services,
which we expect will result in continued increases in revenue and gross margin, though on a lag of several quarters or more.
Customer deferrals. Our aftermarket services revenue decreased in 2019 as customers deferred near-term maintenance activities.
We believe the large installed base of owned compression supports the long-term fundamentals of the aftermarket services business:
however, the timing of a recovery is difficult to predict. We remain focused on cost management and the higher margin business
within our aftermarket services operations.
Increasing customer focus on free cash flow. Many of our customers are transitioning their business model to focus on sustainable
free cash flow generation rather than growth. 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 can expect this transition to result in a deceleration in the natural gas production growth rate, to which demand
for our products and services is closely aligned.
33
Operating Highlights
The following table summarizes our available and operating horsepower and horsepower utilization (in thousands, except
percentages):
Year Ended December 31,
2018
2017
2019
Total available horsepower (at period end) (1)
Total operating horsepower (at period end) (2)
Average operating horsepower
Horsepower utilization:
Spot (at period end)
Average
4,395
3,926
3,708
3,963
3,530
3,386
3,847
3,253
3,152
89%
88%
89%
87%
85%
82%
——————
(1)
Defined as idle and operating horsepower. New compressors completed by a third party manufacturer that have been delivered to us are included in the
fleet.
Defined as horsepower that is operating under contract and horsepower that is idle but under contract and generating revenue such as standby revenue.
(2)
Non-GAAP Financial Measures
Management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors
in assessing our operating results and profitability and include the non-GAAP financial measure of gross margin.
We define gross margin as total revenue less cost of sales (excluding depreciation and amortization). Gross margin is included as
a supplemental disclosure because it is a primary measure used by our management to evaluate the results of revenue and cost of
sales (excluding depreciation and amortization), which are key components of our operations. We believe gross margin is important
because it focuses on the current operating performance of our operations and excludes the impact of the prior historical costs of
the assets acquired or constructed that are utilized in those operations, the indirect costs associated with our SG&A activities, our
financing methods and income taxes. In addition, depreciation and amortization may not accurately reflect the costs required to
maintain and replenish the operational usage of our assets and therefore may not portray the costs of current operating activity.
As an indicator of our operating performance, gross margin should not be considered an alternative to, or more meaningful than,
net income (loss) as determined in accordance with GAAP. Our gross margin may not be comparable to a similarly-titled measure
of other entities because other entities may not calculate gross margin in the same manner.
Gross margin has certain material limitations associated with its use as compared to net income (loss). These limitations are
primarily due to the exclusion of SG&A, depreciation and amortization, impairments, restatement and other charges, restructuring
and other charges, interest expense, debt extinguishment loss, transaction-related costs, gain (loss) on sale of assets, net, other
income (loss), net, provision for (benefit from) income taxes and loss from discontinued operations, net of tax. Because we intend
to finance a portion of our operations through borrowings, interest expense is a necessary element of our costs and our ability to
generate revenue. Additionally, because we use capital assets, depreciation expense is a necessary element of our costs and our
ability to generate revenue and SG&A is necessary to support our operations and required corporate activities. To compensate for
these limitations, management uses this non-GAAP measure as a supplemental measure to other GAAP results to provide a more
complete understanding of our performance.
34
The following table reconciles net income to gross margin (in thousands):
Net income
Selling, general and administrative
Depreciation and amortization
Long-lived asset impairment
Restatement and other charges
Restructuring and other charges
Interest expense
Debt extinguishment loss
Transaction-related costs
Gain on sale of assets, net
Other income, net
Provision for (benefit from) income taxes
Loss from discontinued operations, net of tax
Gross margin
Financial Results of Operations
Summary of Results
Year Ended December 31,
2018
2017
2019
$
97,330
$
29,160
$
18,410
117,727
188,084
44,663
445
—
104,681
3,653
8,213
(16,016)
(661)
(39,145)
273
509,247
$
101,563
174,946
28,127
19
—
93,328
2,450
10,162
(5,674)
(157)
6,150
—
440,074
$
$
111,483
188,563
29,142
4,370
1,386
88,760
291
275
(5,675)
(243)
(61,083)
54
375,733
Revenue. Revenue was $965.5 million, $904.4 million and $794.7 million during the years ended December 31, 2019, 2018 and
2017, respectively.
The increase in revenue during the year ended December 31, 2019 compared to the year ended December 31, 2018 was due to an
increase in revenue from our contract operations business, partially offset by a decrease in revenue from our aftermarket services
business. The increase in revenue during the year ended December 31, 2018 compared to the year ended December 31, 2017 was
due to increases in revenue from our contract operations and aftermarket services businesses.
See “Contract Operations” and “Aftermarket Services” below for further details.
Net income attributable to Archrock stockholders. We generated net income attributable to Archrock stockholders of $97.3 million,
$21.1 million and $19.0 million during the years ended December 31, 2019, 2018 and 2017, respectively.
The increase in net income attributable to Archrock stockholders during the year ended December 31, 2019 compared to the year
ended December 31, 2018 was primarily driven by an increase in gross margin from our contract operations business, the change
in provision for (benefit from) income taxes, an increase in gain on sale of assets, net and the decrease in net income attributable
to the noncontrolling interest, partially offset by increases in long-lived asset impairment, SG&A, depreciation and amortization
and interest expense.
The increase in net income attributable to Archrock stockholders during the year ended December 31, 2018 compared to the year
ended December 31, 2017 was primarily driven by the increase in gross margin from our contract operations and aftermarket
services businesses and decreases in depreciation and amortization, SG&A and restatement and other charges, partially offset by
the change in provision for (benefit from) income taxes, transaction-related costs, the change in net income (loss) attributable to
the noncontrolling interest and an increase in interest expense.
35
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Contract Operations
(dollars in thousands)
Revenue
Cost of sales (excluding depreciation and amortization)
Gross margin
Gross margin percentage(1)
——————
(1)
Defined as gross margin divided by revenue.
Year Ended December 31,
2019
771,539
297,260
474,279
$
$
2018
672,536
273,013
399,523
$
$
61%
59%
Increase
(Decrease)
15%
9%
19%
2%
The increase in revenue during the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily
due to an increase in contract operations rates driven by an increase in customer demand, an increase in average operating horsepower
(excluding the horsepower acquired in the Elite Acquisition) and $33.2 million of revenue associated with the compression assets
acquired in the Elite Acquisition.
Gross margin increased during the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily 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 maintenance, freight and lube oil expense associated with the increase in average operating
horsepower and the horsepower acquired in the Elite Acquisition. These increases in cost of sales were partially offset by a decrease
in cost associated with the start-up of compression packages, as the majority of the increase in average operating horsepower was
comprised of newly-built compressors.
Gross margin percentage increased during the year ended December 31, 2019 compared to the year ended December 31, 2018
primarily due to the increase in contract operations rates mentioned above.
Aftermarket Services
(dollars in thousands)
Revenue
Cost of sales (excluding depreciation and amortization)
Gross margin
Gross margin percentage
Year Ended December 31,
2019
193,946
158,978
34,968
2018
231,905
191,354
40,551
$
$
$
$
18%
17%
Increase
(Decrease)
(16)%
(17)%
(14)%
1 %
The decrease in revenue during the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily
due to decreases in parts sales and service activities as customers deferred maintenance activities.
Gross margin decreased during the year ended December 31, 2019 compared to the year ended December 31, 2018 due to the
decrease in revenue mentioned above, partially offset by a smaller decrease in cost of sales. The decrease in cost of sales was
primarily driven by the decrease in parts sales and service activities.
36
Selling, general and administrative
Depreciation and amortization
Long-lived asset impairment
Restatement and other charges
Interest expense
Debt extinguishment loss
Transaction-related costs
Gain on sale of assets, net
Other income, net
Costs and Expenses
(dollars in thousands)
Year Ended December 31,
2019
2018
$
117,727
$
188,084
44,663
445
104,681
3,653
8,213
(16,016)
(661)
101,563
174,946
28,127
19
93,328
2,450
10,162
(5,674)
(157)
Selling, general and administrative. The increase in SG&A expense during the year ended December 31, 2019 compared to the
year ended December 31, 2018 was primarily due to a $9.2 million increase in sales and use tax expense primarily resulting from
the settlement of audits in 2018, a $4.1 million increase in costs related to our process and technology transformation project and
a $2.7 million increase in compensation and benefits.
Depreciation and amortization. The increase in depreciation and amortization expense during the year ended December 31, 2019
compared to the year ended December 31, 2018 was primarily due to an increase in depreciation expense associated with fixed
asset additions, which was partially offset by a decrease in expense from assets reaching the end of their useful lives, asset
retirements and the impact of asset impairments during 2018 and 2019. The increase in depreciation expense was partially offset
by a decrease in amortization expense that primarily resulted from certain intangible assets reaching the end of their useful lives,
partially offset by amortization expense related to the intangible assets acquired in the Elite Acquisition.
Long-lived asset impairment. During the years ended December 31, 2019 and 2018, we reviewed the future deployment of our
idle compressors for units that were not of the type, configuration, condition, make or model that are cost efficient to maintain
and operate. In addition, we evaluated for impairment idle units that had been culled from our fleet in prior years and were available
for sale. See Note 17 (“Long-Lived Asset Impairment”) to our Financial Statements for further details.
The following table presents the results of our impairment review, as recorded to our contract operations segment (dollars in
thousands):
Idle compressors retired from the active fleet
Horsepower of idle compressors retired from the active fleet
Year Ended December 31,
2019
2018
975
310
170,000
115,000
Impairment recorded on idle compressors retired from the active fleet
$
44,663
$
28,127
Restatement and other charges. During the years ended December 31, 2019 and 2018, we recorded expense of $0.4 million and
$1.3 million, respectively, for our share of professional and legal fees related to the restatement of prior period financial statements
and disclosures and related matters. We recorded $1.3 million for the expected recovery of shared fees incurred during the year
ended December 31, 2018.
Interest expense. The increase in interest expense during the year ended December 31, 2019 compared to the year ended
December 31, 2018 was primarily due to an increase in the average outstanding balance of long-term debt, partially offset by a
decrease in the weighted average effective interest rate.
Debt extinguishment loss. We recorded a debt extinguishment loss of $3.7 million during the year ended December 31, 2019 as a
result of the redemption of the 2021 Notes. We recorded a debt extinguishment loss of $2.5 million during the year ended December
31, 2018 as a result of the termination of the Archrock Credit Facility. See Note 13 (“Long-Term Debt”) to our Financial Statements
for further details.
37
Transaction-related costs. We incurred $8.2 million and $10.2 million of financial advisory, legal and other professional fees
during the years ended December 31, 2019 and 2018, respectively. The $8.2 million of fees incurred during the year ended
December 31, 2019 related primarily to the Elite Acquisition. The $10.2 million of fees incurred during the year ended December 31,
2018 related to the Merger. See Note 4 (“Business Transactions”) and Note 15 (“Equity”) to our Financial Statements for further
details of these transactions.
Gain on sale of assets, net. The increase in gain on sale of assets, net was primarily due to a $6.6 million gain related to the Harvest
Sale during the year ended December 31, 2019 and a $3.2 million increase in gains recognized on other compression equipment
sales during the year ended December 31, 2019 compared to the year ended December 31, 2018. See Note 4 (“Business
Transactions”) for further details of the Harvest Sale.
Other income, net. The increase in other income, net during the year ended December 31, 2019 compared to the year ended
December 31, 2018 was primarily due to a $0.9 million decrease in indemnification expense incurred pursuant to our tax matters
agreement with Exterran Corporation and income of $0.3 million related to equipment damaged at a customer site during 2019,
partially offset by $0.5 million in indemnification income earned pursuant to that same tax matters agreement during 2018 and a
$0.3 million decrease in interest income earned related to tax refunds and settlements.
Provision for (Benefit from) Income Taxes
(dollars in thousands)
Provision for (benefit from) income taxes
Effective tax rate
Year Ended December 31,
2019
2018
Increase
(Decrease)
$
(39,145)
$
6,150
(67)%
17%
(737)%
(84)%
The change in provision for (benefit from) income taxes was primarily due to the release of a valuation allowance in the year
ended December 31, 2019, as well as a higher release of an unrecognized tax benefit due to the settlement of a tax audit in the
year ended December 31, 2019 compared to the year ended December 31, 2018. See Note 20 (“Income Taxes”) to our Financial
Statements for further details.
Net Income Attributable to the Noncontrolling Interest
(dollars in thousands)
Year Ended December 31,
2019
2018
Increase
(Decrease)
Net income attributable to the noncontrolling interest
$
— $
(8,097)
(100)%
Net income attributable to the noncontrolling interest was the portion of the Partnership’s earnings that were applicable to the
Partnership’s publicly-held common unitholder interest through the completion of the Merger. Immediately prior to the Merger,
public unitholders held a 57% ownership interest in the Partnership. Subsequent to the Merger, the Partnership is a wholly-owned
subsidiary. See Note 15 (“Equity”) to our Financial Statements for further details of the Merger.
38
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Contract Operations
(dollars in thousands)
Revenue
Cost of sales (excluding depreciation and amortization)
Gross margin
Gross margin percentage
Year Ended December 31,
2018
672,536
273,013
399,523
2017
610,921
263,005
347,916
$
$
$
$
59%
57%
Increase
(Decrease)
10%
4%
15%
2%
The increase in revenue during the year ended December 31, 2018 compared to the year ended December 31, 2017 was primarily
due to a 7% increase in average operating horsepower and an increase in contract operations rates driven by an increase in customer
demand. The increase in revenue was partially offset by the deferral of rebillable freight revenue as a result of the adoption of the
Revenue Recognition Update.
Gross margin increased during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily 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 maintenance expense and lube oil expense associated with the increase in average operating
horsepower. These increases were partially offset by decreases in freight expense and expense associated with the mobilization
of compression packages as a result of the capitalization and amortization of the portion of these costs that were incurred prior to
the transfer of service in accordance with the adoption of the Revenue Recognition Update.
Gross margin percentage increased during the year ended December 31, 2018 compared to the year ended December 31, 2017
primarily due to the increase in rates and the capitalization of costs incurred to fulfill contracts prior to the transfer of service as
a result of the adoption of the Revenue Recognition Update.
Aftermarket Services
(dollars in thousands)
Revenue
Cost of sales (excluding depreciation and amortization)
Gross margin
Gross margin percentage
Year Ended December 31,
2018
231,905
191,354
40,551
2017
183,734
155,917
27,817
$
$
$
$
17%
15%
Increase
(Decrease)
26%
23%
46%
2%
The increase in revenue during the year ended December 31, 2018 compared to the year ended December 31, 2017 was primarily
due to increases in service activities and part sales driven by increased customer demand as well as the change to recognize revenue
for service activities over time as a result of the adoption of the Revenue Recognition Update.
Gross margin increased during the year ended December 31, 2018 compared to the year ended December 31, 2017 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 the increase in service activities and part sales as well as the change to recognize costs associated with service activities
over time as a result of the adoption of the Revenue Recognition Update.
Gross margin percentage increased during the year ended December 31, 2018 compared to the year ended December 31, 2017
primarily due to higher billable labor utilization as a result of the increase in activity mentioned above.
39
Costs and Expenses
(dollars in thousands)
Year Ended December 31,
2018
2017
$
101,563
$
174,946
28,127
19
—
93,328
2,450
10,162
(5,674)
(157)
111,483
188,563
29,142
4,370
1,386
88,760
291
275
(5,675)
(243)
Selling, general and administrative
Depreciation and amortization
Long-lived asset impairment
Restatement and other charges
Restructuring and other charges
Interest expense
Debt extinguishment loss
Transaction-related costs
Gain on sale of assets, net
Other income, net
Selling, general and administrative. The decrease in SG&A expense during the year ended December 31, 2018 compared to the
year ended December 31, 2017 was primarily due to a $6.9 million decrease in sales and use tax primarily resulting from the
settlement of audits in the fourth quarter of 2018, a $3.5 million decrease in bad debt expense, a $1.4 million decrease in facility
rent expense and a $1.3 million decrease in corporate office relocation costs (see Note 19 (“Corporate Office Relocation”) to our
Financial Statements), partially offset by a $2.9 million increase in professional expenses.
Depreciation and amortization. The decrease in depreciation and amortization expense during the year ended December 31, 2018
compared to the year ended December 31, 2017 was primarily due to a decrease in depreciation expense resulting from certain
assets reaching the end of their depreciable lives as well as the impact of asset impairments during 2017 and 2018, partially offset
by an increase in depreciation expense associated with fixed asset additions.
Long-lived asset impairment. During the years ended December 31, 2018 and 2017, we reviewed the future deployment of our
idle compression assets for units that were not of the type, configuration, condition, make or model that are cost efficient to maintain
and operate. In addition, we evaluated for impairment idle units that had been culled from our fleet in prior years and were available
for sale. See Note 17 (“Long-Lived Asset Impairment”) to our Financial Statements for further details.
The following table presents the results of our impairment review, as recorded in our contract operations segment (dollars in
thousands):
Idle compressors retired from the active fleet
Horsepower of idle compressors retired from the active fleet
Year Ended December 31,
2018
2017
310
325
115,000
100,000
Impairment recorded on idle compressors retired from the active fleet
$
28,127
$
26,287
In addition to the impairment discussed above, $2.9 million of property, plant and equipment was impaired during the year ended
December 31, 2017 as the result of physical asset observations and other events that indicated the carrying values of the assets,
which were comprised of approximately 7,000 horsepower of idle compressors, were not recoverable and $0.8 million of leasehold
improvements and furniture and fixtures that were impaired in connection with the relocation of our corporate office. See Note 19
(“Corporate Office Relocation”) to our Financial Statements for further details.
Restatement and other charges. During the year ended December 31, 2018 we recorded $1.3 million for the expected recovery of
shared professional and legal fees incurred related to the restatement of prior period financial statements and disclosures and
related matters. We were billed $1.3 million and $4.4 million for our share of these fees during 2018 and 2017, respectively.
Restructuring and other charges. During the year ended December 31, 2017, we incurred $1.4 million, of costs associated with
the Spin-off, which were directly attributable to Archrock. No such costs were incurred subsequent to December 31, 2017.
40
Interest expense. The increase in interest expense during the year ended December 31, 2018 compared to the year ended
December 31, 2017 was primarily due to increases in the average outstanding balance of long-term debt and the weighted average
effective interest rate partially offset by a $0.6 million write-off of deferred financing costs associated with the termination of the
Former Credit Facility in 2017.
Debt extinguishment loss. We recorded a debt extinguishment loss of $2.5 million during the year ended December 31, 2018 as a
result of the termination of the Archrock Credit Facility. We recorded a debt extinguishment loss of $0.3 million during the year
ended December 31, 2017 as a result of the termination of the Former Credit Facility. See Note 13 (“Long-Term Debt”) to our
Financial Statements for further details.
Transaction-related costs. We incurred $10.2 million and $0.3 million of costs related to the Merger consisting of financial advisory,
legal and other professional fees during the years ended December 31, 2018 and 2017, respectively. See Note 15 (“Equity”) to
our Financial Statements for further details of this transaction.
Gain on sale of assets, net. Included in gain on sale, net of assets during the year ended December 31, 2018 compared to the year
ended December 31, 2017 was a $1.9 million decrease in gains recognized on land and building sales, offset by a $1.3 million
increase in gains recognized on the sale of compression equipment and a $0.5 million decrease in losses recognized on the sale
of other assets.
Other income, net. The decrease in other income, net during the year ended December 31, 2018 compared to the year ended
December 31, 2017 was primarily due to a $0.6 million increase in indemnification expense incurred pursuant to our tax matters
agreement with Exterran Corporation partially offset by a $0.5 million increase in indemnification income earned pursuant to the
same agreement and $0.3 million in interest income earned related to a tax refund.
Income Taxes
(dollars in thousands)
Provision for (benefit from) income taxes
Effective tax rate
Year Ended December 31,
2018
$
6,150
$
17%
2017
(61,083)
143%
Increase
(Decrease)
(110)%
(126)%
The change in provision for (benefit from) income taxes during the year ended December 31, 2018 compared to the year ended
December 31, 2017 was primarily due to the tax benefit from remeasuring our deferred tax liabilities and assets due to the corporate
income tax rate reduction from the TCJA (see Note 20 (“Income Taxes”) to our Financial Statements) recorded in 2017 compared
to 2018 and an increase in book income tax effected at the lower corporate income tax rate in 2018 as the result of the TCJA,
partially offset by a lower unrecognized tax benefit recorded in 2018 compared to 2017 and benefits recorded in 2018 for the
settlement of a tax audit and the release of an unrecognized tax benefit due to the expiration of a statute of limitations.
Net (Income) Loss Attributable to the Noncontrolling Interest
(dollars in thousands)
Year Ended December 31,
2018
2017
Increase
(Decrease)
Net (income) loss attributable to the noncontrolling interest
$
(8,097) $
543
(1,591)%
The noncontrolling interest comprises the portion of the Partnership’s earnings that are applicable to the Partnership’s publicly-
held common unitholder interest through the completion of the Merger. Immediately prior to the Merger and as of December 31,
2017, public unitholders held an ownership interest in the Partnership of 57%. The change in net (income) loss attributable to the
noncontrolling interest was primarily due to the change in net income (loss) of the Partnership partially offset by Archrock’s
acquisition of all of the outstanding common units of the Partnership in conjunction with the Merger. The change in net income
(loss) of the Partnership was primarily due to the increase in revenue and decreases in SG&A, depreciation and amortization, long-
lived asset impairment and provision for income taxes, partially offset by increases in cost of sales (excluding depreciation and
amortization), interest expense, net and transaction-related costs.
41
Liquidity and Capital Resources
Overview
Our ability to fund operations, finance capital expenditures and pay dividends depends on the levels of our operating cash flows
and access to the capital and credit markets. Our primary sources of liquidity are cash flows generated from our operations and
our borrowing availability under the Credit Facility. Our cash flow is affected by numerous factors including prices and demand
for our services, oil and natural gas exploration and production spending, conditions in the financial markets and other factors.
We believe that our operating cash flows and borrowings under the Credit Facility will be sufficient to meet our liquidity needs
through at least December 31, 2020.
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.
Capital Requirements
Our contract operations business is capital intensive, requiring significant investment to maintain and upgrade existing operations.
Our capital spending is primarily dependent on the demand for our contract operations services and the availability of the type of
compression equipment required for us to render those contract operations services to our customers. Our capital requirements
have consisted primarily of, and we anticipate will continue to consist of, the following:
•
growth capital expenditures, which are made to expand or to replace partially or fully depreciated assets or to expand the
operating capacity or revenue generating capabilities of existing or new assets; and
• maintenance capital expenditures, which are made to maintain the existing operating capacity of our assets and related
cash flows further extending the useful lives of the assets.
The majority of our growth capital expenditures are related to the acquisition cost of new compressors that we add to our fleet. In
addition to the cost of newly acquired compressors, growth capital expenditures can also include the upgrading of major components
on an existing compression package where the current configuration of the compression package is no longer in demand and the
compressor is not likely to return to an operating status without the capital expenditures. These latter expenditures substantially
modify the operating parameters of the compression package such that it can be used in applications for which it previously was
not suited. Maintenance capital expenditures 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 applications
for which the compression package was designed.
Growth capital expenditures were $300.5 million, $251.6 million and $172.5 million during the years ended December 31, 2019,
2018 and 2017, respectively. The increase in growth capital expenditures in 2019 compared to 2018 and also in 2018 compared
to 2017 was primarily due to increased investment in new compression equipment as a result of increased customer demand to
support higher U.S natural gas production levels. We anticipate decreased 2020 growth capital expenditures due to an expected
deceleration in the growth rate of natural gas production in 2020 as compared to 2019.
Maintenance capital expenditures were $58.6 million, $49.7 million and $35.7 million during the years ended December 31, 2019,
2018 and 2017, respectively. The increase in maintenance capital expenditures in 2019 compared to 2018 was due to an increase
in scheduled maintenance activities in 2019 due to maintenance cycle requirements as well as the increase in horsepower as the
result of the Elite Acquisition. The increase in 2018 compared to 2017 was primarily due to the increase in idle horsepower returning
to operation and the increase in scheduled maintenance activities in 2018 due to maintenance cycle requirements. We intend to
grow our business both organically and through third-party acquisitions. If we are successful in growing our business in the future,
we would expect our maintenance capital expenditures to increase over the long term.
We generally invest funds necessary to purchase fleet additions when our idle equipment cannot be reconfigured to economically
fulfill a project’s requirements and the new equipment expenditure is expected to generate economic returns over its expected
useful life that exceed our cost of capital. We currently plan to spend approximately $165 million to $195 million in capital
expenditures during 2020, primarily consisting of approximately $80 million to $100 million for growth capital expenditures
and approximately $57 million to $63 million for maintenance capital expenditures.
42
Financial Resources
Revolving Credit Facilities
Credit Facility. During the years ended December 31, 2019 and 2018, the Credit Facility had an average daily balance of $855.3
million and $768.5 million, respectively. The weighted average annual interest rate on the outstanding balance under the Credit
Facility, excluding the effect of interest rate swaps, was 4.3% and 5.4% at December 31, 2019 and 2018, respectively.
On November 8, 2019, we amended the Credit Facility to, among other things, extend the maturity date of the Credit Facility from
March 30, 2022 to November 8, 2024 (or June 3, 2022, if any portion of the 2022 notes remains outstanding at such date) and
change the applicable margin for borrowings under the Credit Facility such that (i) the applicable margin for Eurodollar loans, as
defined in the Credit Facility agreement, ranges from 2.00% to 2.75% and (ii) the applicable margin for Alternative Base Rate
loans ranges from 1.00% to 1.75%, in each case determined based on a total leverage ratio pricing grid.
On February 23, 2018, we amended the Credit Facility to, among other things:
•
increase the maximum Total Debt to EBITDA ratios, as defined in the Credit Facility agreement (see below for the revised
ratios), effective as of the execution of Amendment No. 1 in February 2018; and
•
effective upon completion of the Merger in April 2018:
*
increase the aggregate revolving commitment from $1.1 billion to $1.25 billion; and
*
increase the amount available for the issuance of letters of credit from $25.0 million to $50.0 million.
See Note 13 (“Long-Term Debt”) to the Financial Statements for further details of these amendments.
Portions of the Credit Facility up to $50.0 million are available for the issuance of swing line loans. Subject to certain conditions,
including the approval by the lenders, we are able to increase the aggregate commitments under the Credit Facility by up to an
additional $250.0 million. The Credit Facility borrowing base consists of eligible accounts receivable, inventory and compressors.
We must maintain the following consolidated financial ratios, as defined in the Credit Facility agreement:
EBITDA to Interest Expense
Senior Secured Debt to EBITDA
Total Debt to EBITDA
Through fiscal year 2019
Through second quarter of 2020
Thereafter (1)
2.5 to 1.0
3.5 to 1.0
5.75 to 1.0
5.50 to 1.0
5.25 to 1.0
——————
(1)
Subject to a temporary increase to 5.5 to 1.0 for any quarter during which an acquisition satisfying certain thresholds is completed and for the two quarters
immediately following such quarter.
As a result of the ratio requirements above, $669.7 million of the $723.3 million of undrawn capacity was available for additional
borrowings as of December 31, 2019.
The Credit Facility agreement 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. In addition, if as of any date we have cash and
cash equivalents (other than proceeds from a debt or equity issuance received in the 30 days prior to such date reasonably expected
to be used to fund an acquisition permitted under the Credit Facility agreement) in excess of $50.0 million, then such excess
amount will be used to pay down outstanding borrowings of a corresponding amount under the Credit Facility.
As of December 31, 2019, we were in compliance with all covenants under the Credit Facility.
43
Archrock Credit Facility. In April 2018, in connection with the Merger, we terminated the Archrock Credit Facility and borrowed
on the Credit Facility to repay $63.2 million in borrowings and accrued and unpaid interest and fees outstanding. All commitments
under the Archrock Credit Facility were terminated and the $15.4 million of letters of credit outstanding under the Archrock Credit
Facility were converted to letters of credit under the Credit Facility. Prior to its termination, the Archrock Credit Facility required
us to maintain various financial ratios and other covenants, all of which we were in compliance with through its closing. The
average daily debt balance under the Archrock Credit Facility in 2018, through its closing in April 2018, was $51.7 million.
Senior Notes Transactions
On December 20, 2019, we completed a private offering of $500.0 million aggregate principal amount of 6.25% senior notes due
April 2028 and received net proceeds of $491.8 million after deducting issuance costs. The net proceeds were used to partially
repay borrowings outstanding under the Credit Facility.
On March 21, 2019, we completed a private offering of $500.0 million aggregate principal amount of 6.875% senior notes due
April 2027 and received net proceeds of $491.2 million after deducting issuance costs. The net proceeds were used to repay
borrowings outstanding under the Credit Facility.
On April 5, 2019, we repaid the 2021 Notes with borrowings from our Credit Facility.
See Note 13 (“Long-Term Debt”) to our Financial Statements for further details of these transactions.
2022 Notes
The 2022 Notes are guaranteed on a senior unsecured basis by all of the Partnership’s existing subsidiaries (other than Archrock
Partners Finance Corp., which is a co-issuer of the 2022 Notes) and certain of the Partnership’s future subsidiaries. The 2022 Notes
and the guarantees, respectively, are the Partnership’s and the guarantors’ general unsecured senior obligations, rank equally in
right of payment with all of the Partnership’s and the guarantors’ other senior obligations and are effectively subordinated to all
of the Partnership’s and the guarantors’ existing and future secured debt to the extent of the value of the collateral securing such
indebtedness. In addition, the 2022 Notes and guarantees are effectively subordinated to all existing and future indebtedness and
other liabilities of any future non-guarantor subsidiaries. Guarantees by the Partnership’s subsidiaries are full and unconditional,
subject to customary release provisions, and constitute joint and several obligations. The Partnership has no assets or operations
independent of its subsidiaries and there are no significant restrictions upon its subsidiaries’ ability to distribute funds to the
Partnership.
Partnership Capital Offering
In August 2017, the Partnership sold, pursuant to a public underwritten offering, 4,600,000 common units, including 600,000
common units pursuant to an over-allotment option. The Partnership received net proceeds of $60.3 million after deducting
underwriting discounts, commissions and offering expenses, which it used to repay borrowings outstanding under the Credit
Facility. In connection with this sale and as permitted under its partnership agreement, the Partnership sold 93,163 general partner
units to its General Partner for a contribution of $1.3 million to maintain the General Partner’s approximate 2% general partner
interest in the Partnership.
Cash Flows
Our cash flows from operating, investing and financing activities, as reflected in the consolidated statements of cash flows, are
summarized in the table below (in thousands):
Year Ended December 31,
2018
2017
2019
Net cash provided by (used in) operations:
Operating activities
Investing activities
Financing activities
Net change in cash and cash equivalents
$
$
$
290,147
(514,560)
222,488
(1,925) $
$
225,947
(284,923)
54,050
(4,926) $
201,664
(174,487)
(19,775)
7,402
44
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Operating Activities. The increase in net cash provided by operating activities during the year ended December 31, 2019 compared
to the year ended December 31, 2018 was primarily due to an increase in revenue from our contract operations business, the receipt
of cash proceeds in 2019 pursuant to a settlement of certain sales and use tax audits and decreases in accounts receivable and cost
of sales (excluding depreciation and amortization). These cash inflows were partially offset by increases in cash SG&A expenses
and interest paid on our long-term debt and a decrease in accounts payable and other liabilities.
Investing Activities. The increase in net cash used in investing activities during the year ended December 31, 2019 compared to
the year ended December 31, 2018 was primarily due to $214.0 million of cash paid in the Elite Acquisition during the year ended
December 31, 2019 and a $66.1 million increase in capital expenditures, partially offset by a $47.0 million increase in proceeds
from the sale of property, plant and equipment and other assets, including $30.0 million in proceeds from the Harvest Sale.
Financing Activities. The increase in net cash provided by financing activities during the year ended December 31, 2019 compared
to the year ended December 31, 2018 was primarily due to a $214.3 million net increase in borrowings of long-term debt and an
$11.8 million decrease in distributions paid to noncontrolling partners in the Partnership. These cash flows were partially offset
by a $20.2 million increase in dividends paid to Archrock shareholders, a $19.1 million increase in payments for debt issuance
costs and an $18.7 million decrease in contributions from Exterran Corporation.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Operating Activities. The increase in net cash provided by operating activities during the year ended December 31, 2018 compared
to the year ended December 31, 2017 was primarily due to an increase in revenue in our contract operations and aftermarket
services segments primarily driven by an increase in customer demand, partially offset by an increase in cost of sales, including
freight and mobilization costs incurred to fulfill contracts prior to the transfer of service, an increase in accounts receivable, trade
as a result of the timing of payments received from our customers, an increase in transaction-related costs and an increase in
interest paid.
Investing Activities. The increase in net cash used in investing activities during the year ended December 31, 2018 compared to
the year ended December 31, 2017 was primarily due to a $97.4 million increase in capital expenditures and a $13.0 million
decrease in proceeds from sale of property, plant and equipment.
Financing Activities. The change in net cash provided by (used in) financing activities during the year ended December 31, 2018
compared to the year ended December 31, 2017 was primarily due to $109.2 million of net borrowings of long-term debt during
2018 compared to $28.2 million in net repayments of long term-debt during 2017, a $32.7 million decrease in distributions to
noncontrolling partners in the Partnership and a $11.5 million decrease in payments for debt issuance costs. These changes were
partially offset by $60.3 million of proceeds received from a public offering by the Partnership of its common units during 2017,
a $26.0 million decrease in contributions from Exterran Corporation (see Note 5 (“Discontinued Operations”)) and a $24.2 million
increase in dividends to Archrock stockholders.
Dividends
On January 23, 2020, our Board of Directors declared a quarterly dividend of $0.145 per share of common stock, or approximately
$22.2 million, that was paid on February 14, 2020 to stockholders of record at the close of business on February 7, 2020. 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 and results of operations, credit and loan agreements in effect at that time and other factors
deemed relevant by our Board of Directors.
45
Contractual Obligations
The following table summarizes our cash contractual obligations as of December 31, 2019 (in thousands):
Long-term debt (1):
Credit Facility (2)
2022 Notes (3)
2027 Notes (3)
2028 Notes (3)
Total long-term debt
Interest on long-term debt (4)
Purchase commitments (5)
Operating leases
Total contractual obligations
2020
2021-2022
2023-2024 Thereafter
Total
$
— $
— $ 513,000
$
— $ 513,000
—
—
—
—
111,499
84,929
3,651
$ 200,079
350,000
—
—
—
—
—
—
500,000
500,000
350,000
500,000
500,000
350,000
217,748
513,000
1,000,000
1,863,000
177,386
178,906
685,539
5,724
6,330
$ 579,802
3,531
4,229
$ 698,146
565
9,611
$1,189,082
94,749
23,821
$2,667,109
——————
(1)
(2)
(3)
(4)
(5)
See Note 13 (“Long-Term Debt”) to our Financial Statements for further details on our long-term debt.
The Credit Facility will mature on November 8, 2024 except that if any portion of the 2022 Notes are outstanding as of June 3, 2022, it will instead mature
on June 3, 2022.
Represents the full face value of the senior notes, not reduced by unamortized discount and unamortized deferred financing costs.
Calculated using interest rates in effect as of December 31, 2019, including the effect of interest rate swaps.
Includes commitments to purchase fleet and non-fleet assets and costs associated with the cloud migration of our ERP system and other information
technology-related costs.
At December 31, 2019, $18.5 million of unrecognized tax benefits (including discontinued operations) have been recorded as
liabilities in accordance with the accounting standard for income taxes related to uncertain tax positions and we are uncertain as
to if or when such amounts may be settled. Related to these unrecognized tax benefits, we have also recorded a liability for potential
penalties and interest of $2.1 million (including discontinued operations).
Off-Balance Sheet Arrangements
For information on our obligations with respect to letters of credit and performance bonds, see Note 13 (“Long-Term Debt”) and
Note 26 (“Commitments and Contingencies”), respectively, to our Financial Statements.
Critical Accounting Estimates
This discussion and analysis of our financial condition and results of operations is based upon the Financial Statements, which
have been prepared in accordance with GAAP. The preparation of the Financial Statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, expenses and related disclosures of contingent assets and liabilities.
We evaluate our estimates and accounting policies on an ongoing basis and base our estimates on historical experience and other
assumptions that we believe are reasonable under the circumstances. The results of this process form the basis of our judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. 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 liquidity. We describe our significant accounting policies more fully in Note 2 (“Basis of Presentation and
Significant Accounting Policies”) to our Financial Statements.
Allowances
Outstanding accounts receivable are reviewed regularly for non-payment indicators and allowances for doubtful accounts are
recorded based on management’s estimate of collectibility at each balance sheet date. During the years ended December 31, 2019,
2018 and 2017, we recorded bad debt expense of $2.6 million, $1.7 million and $5.1 million, respectively. A five percent change
in bad debt expense would have impacted income before income taxes by approximately $0.1 million during the year ended
December 31, 2019.
46
Inventory
Inventory is a significant component of current assets and is stated at the lower of cost and net realizable value using the average
cost method. This requires us to regularly review inventory quantities on hand and compare them to estimates of future product
demand and market conditions. These estimates and forecasts inherently include uncertainties and require us to make judgments
regarding potential outcomes. During the years ended December 31, 2019, 2018 and 2017, we recorded write-downs to inventory
of $0.9 million, $1.6 million and $2.4 million, respectively, for inventory considered to be excess, obsolete or carried at an amount
in excess of net realizable value. Significant or unanticipated changes to our estimates and forecasts could require additional write-
downs in a future period. Given the nature of these evaluations and their application to specific inventories, it is not possible to
reasonably quantify the impact of changes in these estimates and forecasts.
Depreciation
Property, plant and equipment are carried at cost. Depreciation is computed on a straight-line basis using useful lives and salvage
values that are estimated based on assumptions and judgments that reflect both historical experience and expectations regarding
future use of our assets. The use of different assumptions and judgments in the calculation of depreciation, especially those involving
useful lives, would likely result in significantly different net book values of our assets and results of operations.
Fair Value Estimates
Impairment Assessments of Property, Plant and Equipment and Identifiable Intangible 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 may exist when the estimated undiscounted cash
flows expected from the use of the asset and its eventual disposition are less than its carrying amount. Determining whether the
carrying amount of an asset is recoverable requires us to make judgments regarding long-term forecasts of future revenue and
costs related to the asset subject to review. These forecasts are uncertain as they require significant assumptions about future market
conditions. Significant and unanticipated changes to these assumptions could require a provision for impairment in a future period.
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.
Impairment Assessment of Goodwill
We review the carrying amount of our goodwill in the fourth quarter of every year, or whenever indicators of potential impairment
exist, to determine if the carrying amount of a reporting unit exceeds its fair value, including the applicable goodwill. We perform
a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is impaired. If the
fair value is more likely than not impaired, we perform a quantitative impairment test to identify impairment and measure the
amount of impairment loss to be recognized, if any.
Our qualitative assessment includes consideration of various events and circumstances and their potential impact to a reporting
unit’s fair value, including macroeconomic and industry conditions such as a deterioration in our operating environment and
limitations on access to capital and other developments in the equity and credit markets, cost factors that could have a negative
effect on earnings and cash flows, relevant entity-specific and reporting unit-specific events and overall financial performance
such as declining earnings or cash flows or a sustained decrease in share price. If indicated, a quantitative impairment test would
compare the carrying amount of our reporting units to their fair value, and any excess of carrying amount over fair value would
be recorded as an impairment loss. The fair value calculation would require us to make significant estimates to determine future
cash flows, including future revenues, costs and capital requirements and the appropriate risk-adjusted discount rate by which to
discount the estimated future cash flows.
Our goodwill is allocated to our contract operations reporting unit. Our fourth quarter qualitative assessment determined that it
was not more likely than not that the fair value of the contract operations reporting unit was less than its carrying amount as of
December 31, 2019, and as such, no quantitative impairment test of our goodwill was warranted.
47
Acquisitions
We account for business combinations using the acquisition method which requires assets acquired and liabilities assumed to be
recorded at their fair value on the acquisition date. The excess of the consideration transferred over those fair values is recorded
as goodwill. Significant judgment is used in determining the individual fair values of acquired assets and liabilities. We use all
available information to make these fair value determinations and, for certain acquisitions, engage third-party consultants for
valuation assistance.
For the Elite Acquisition, we used the cost approach to value the acquired property, plant and equipment, whereby we estimated
the replacement cost of the assets by evaluating recent purchases of similar assets or published data, and then adjusted replacement
cost for physical deterioration and functional and economic obsolescence, as applicable. We estimated the fair value of the acquired
identifiable intangible assets using the multi-period excess earnings method, which is a specific application of the discounted cash
flow method, an income approach, whereby we estimated and then discounted the future cash flows of the intangible asset by
adjusting overall business revenue for attrition, obsolescence, cost of sales, operating expenses, taxes and the required returns
attributable to other contributory assets acquired. Significant estimates made in arriving at expected future cash flows included
our expected customer attrition rate and the amount of earnings attributable to the assets. To discount the estimated future cash
flows, we utilized a discount rate that was at a premium to our weighted average cost of capital to reflect the less liquid nature of
the customer relationships relative to the tangible assets acquired.
The estimates used in determining the fair value of the asset and liabilities acquired in the Elite Acquisition are based on assumptions
believed to be reasonable but which are inherently uncertain. Accordingly, actual results may differ materially from the projected
results used to determine fair value. See Note 4 (“Business Transactions”) to our Financial Statements for further details of the
Elite Acquisition.
Income Taxes
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. only and, as a result, are subject to income
taxes in the U.S. only. Significant judgments and estimates are required in determining consolidated income tax expense.
Deferred income taxes arise from temporary differences between the financial statements and the tax basis of assets and liabilities.
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 the results of discontinued operations
and 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.
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.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware
of any such changes that would have a material effect on our financial position, results of operations or cash flows. 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.
The TCJA included a provision which lowered the corporate income tax rate from 35% to 21%. This reduced rate required us to
remeasure our reported deferred tax assets and liabilities in 2017. See Note 20 (“Income Taxes”) to our Financial Statements for
more discussion on this topic.
The accounting standard for income taxes 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. We adjust these liabilities when our judgment changes as a result of the evaluation
of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution
may result in a payment that is materially different from our current estimate of the liabilities. Such differences are reflected as
increases or decreases to income tax expense in the period in which the new information becomes available.
48
Contingencies and Litigation
Insurance
Our insurance coverage includes property damage, general liability and commercial automobile liability and other coverage we
believe is appropriate. Additionally, we are self-insured for property damage to our offshore assets and 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 deductible amounts are estimated and accrued based upon known
facts, historical trends and industry averages. We review these estimates quarterly and believe such accruals to be adequate.
However, insurance liabilities are difficult to estimate due to unknown factors, including the severity of an injury, the determination
of our liability in proportion to other parties, the timeliness of reporting of occurrences, ongoing treatment or loss mitigation,
general trends in litigation recovery outcomes and the effectiveness of safety and risk management programs. If our actual
experience differs from the assumptions and estimates used for recording the liabilities, adjustments may be required and would
be recorded in the period in which the difference becomes known. At December 31, 2019 and 2018, we had $3.0 million and $4.0
million, respectively, in insurance claim reserves on our consolidated balance sheets.
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, the accounting standard for contingencies requires management to make judgments about
future events that are inherently uncertain. We are required to record a loss during any period in which we believe a contingency
is probable and can be reasonably estimated. In making determinations of likely outcomes of pending or threatened legal matters,
we consider the evaluation of counsel knowledgeable about each matter.
The impact of an uncertain tax position taken or expected to be taken on an income tax return must be recognized in the financial
statements at the largest amount that is more likely than not to be sustained upon examination by the relevant taxing authority. We
regularly assess and, if required, establish accruals for income and non-income based tax contingencies pursuant to the applicable
accounting standards that could result from assessments of additional tax by taxing jurisdictions where we operate. Tax
contingencies are subject to a significant amount of judgment and are reviewed and adjusted on a quarterly basis in light of changing
facts and circumstances considering the outcome expected by management. As of December 31, 2019 and 2018, we recorded
$23.1 million and $26.3 million (including penalties and interest and discontinued operations), respectively, of accruals for tax
contingencies. Of these amounts, $20.6 million and $21.8 million, respectively, were accrued for income taxes and $2.5 million
and $4.5 million, respectively, were accrued for non-income based taxes. If our actual experience differs from the assumptions
and estimates used for recording the liabilities, adjustments may be required and would be recorded in the period in which the
difference becomes known.
Subject to the provisions of the tax matters agreement between Exterran Corporation and us, both parties agreed to indemnify the
primary obligor of any return for tax periods beginning before and ending before or after the Spin-off (including any ongoing or
future amendments and audits for these returns) for the portion of the tax liability (including interest and penalties) that relates to
their respective operations reported in the filing. The tax contingencies mentioned above relate to tax matters for which we are
responsible in managing the tax audit. As of December 31, 2019 and 2018, we had an offsetting indemnification asset (including
penalties and interest) related to our income tax contingencies of $8.5 million and $7.1 million, respectively. Additionally, we had
an indemnification liability of $2.8 million and $2.6 million as of December 31, 2019 and 2018, respectively, for our share of non-
income based tax contingencies related to audits being managed by Exterran Corporation.
Recent Accounting Developments
See Note 3 (“Recent Accounting Developments”) to our Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk associated with changes in the variable interest rate of our Credit Facility. We use derivative
instruments to manage our exposure to fluctuations in this variable interest rate and thereby minimize the risks and costs associated
with financial activities. We do not use derivative instruments for trading or other speculative purposes.
As of December 31, 2019 and 2018, after taking into consideration interest rate swaps, we had $113.0 million and $339.5 million,
respectively, of outstanding indebtedness that was effectively subject to variable interest rates. A 1% increase in the effective
interest rate on our outstanding debt subject to variable interest rates at December 31, 2019 and 2018 would have resulted in an
annual increase in our interest expense of $1.1 million and $3.4 million, respectively.
49
See Note 22 (“Derivatives”) to our Financial Statements for further information regarding our use of interest rate swaps in managing
our exposure to interest rate fluctuations.
Item 8. Financial Statements and Supplementary Data
The information specified by this Item is presented in Part IV, Item 15 of this 2019 Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this 2019 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, 2019, 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, 2019.
The effectiveness of internal control over financial reporting as of December 31, 2019 was audited by Deloitte & Touche LLP, an
independent registered public accounting firm, as stated in its report found within this 2019 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.
50
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, 2019, based on the 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, 2019, based on criteria established in Internal Control —
Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2019,
of the Company and our report dated February 21, 2020, expressed an unqualified opinion on those financial statements and
financial statement schedule.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 21, 2020
51
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required in Part III, Item 10 of this 2019 Form 10-K is incorporated by reference to the sections entitled “Election
of Directors,” “Corporate Governance,” “Executive Officers” and “Beneficial Ownership of Common Stock” in our definitive
proxy statement to be filed with the SEC within 120 days of the end of our fiscal year.
Item 11. Executive Compensation
The information required in Part III, Item 11 of this 2019 Form 10-K is incorporated by reference to the sections entitled
“Compensation Discussion and Analysis” and “Information Regarding Executive Compensation” in our definitive proxy statement
to be filed with the SEC within 120 days of the end of our fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required in Part III, Item 12 of this 2019 Form 10-K is incorporated by reference to the section entitled “Stock
Ownership - Equity Plan Information” in our definitive proxy statement, to be filed with the SEC within 120 days of the end of
our fiscal year.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required in Part III, Item 13 of this 2019 Form 10-K is incorporated by reference to the sections entitled “Certain
Relationships and Related Transactions” and “Corporate Governance” in our definitive proxy statement to be filed with the SEC
within 120 days of the end of our fiscal year.
Item 14. Principal Accountant Fees and Services
The information required in Part III, Item 14 of this 2019 Form 10-K is incorporated by reference to the section entitled “Ratification
of the Appointment of Independent Registered Public Accounting Firm” in our definitive proxy statement to be filed with the SEC
within 120 days of the end of our fiscal year.
52
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as a part of this 2019 Form 10-K
1. Financial Statements. The following financial statements are filed as a part of this 2019 Form 10-K.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
Schedule II — Valuation and Qualifying Accounts
F-1
F-4
F-5
F-6
F-7
F-9
F-11
F-48
All other schedules have been omitted as they are not required under the relevant instructions.
3. Exhibits
Exhibit
No.
2.1
2.2
2.3
2.4
2.5
2.6
3.1
3.2
4.1
Description
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
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
Agreement and Plan of Merger, dated as of January 1, 2018, by and among Archrock, Inc., Archrock GP LLC,
Archrock General Partner, L.P. and Archrock Partners, L.P., incorporated by reference to Exhibit 2.1 of Archrock’s
Current Report on Form 8-K filed on January 2, 2018
Amendment No. 1 to Agreement and Plan of Merger, dated as of January 11, 2018, by and among Archrock, Inc.,
Archrock GP LLC, Archrock General Partner, L.P., Archrock Partners, L.P. and Amethyst Merger Sub LLC,
incorporated by reference to Exhibit 2.2 of Archrock’s Current Report on Form 8-K filed on January 16, 2018
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
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
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
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
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
53
4.2
4.3*
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
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
Description of Common Stock
Credit Agreement, dated as of July 10, 2015, by and among Exterran Holdings, Inc. (now Archrock, Inc.), Archrock
Services, L.P., the lenders from time to time party thereto and Wells Fargo Bank, National Association, as
administrative agent, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
on July 16, 2015
First Amendment to Credit Agreement, dated as of October 5, 2015, by and among Exterran Holdings, Inc. (now
Archrock, Inc.), Archrock Services, L.P., the lenders signatory thereto and Wells Fargo Bank, National Association,
as administrative agent, incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K
filed on October 6, 2015
Amended and Restated Senior Secured Credit Agreement, dated as of November 3, 2010, by and among EXLP
Operating LLC, as Borrower, Exterran Partners, L.P., as Guarantor, Wells Fargo Bank, National Association, as
Administrative Agent, Bank of America, N.A. and JPMorgan Chase Bank, N.A., as Co-Syndication Agents, Barclays
Bank plc and The Royal Bank of Scotland plc, as Co-Documentation Agents, and the lenders signatory thereto,
incorporated by reference to Exhibit 10.1 to Exterran Partners L.P.’s Current Report on Form 8-K filed on
November 9, 2010
First Amendment to Amended and Restated Senior Secured Credit Agreement, dated March 7, 2012, among EXLP
Operating LLC, as Borrower, Exterran Partners, L.P., as Guarantor, Wells Fargo Bank, National Association, as
Administrative Agent and Swingline Lender, and the other lenders signatory thereto, incorporated by reference to
Exhibit 10.1 to Exterran Partners, L.P.’s Current Report on Form 8-K filed on March 13, 2012
Third Amendment to Amended and Restated Senior Secured Credit Agreement, dated March 27, 2013, among EXLP
Operating LLC, as Borrower, Exterran Partners, L.P., as Guarantor, Wells Fargo Bank, National Association, as
Administrative Agent, and the other lenders signatory thereto, incorporated by reference to Exhibit 10.1 to Exterran
Partners, L.P.’s Current Report on Form 8-K filed on March 28, 2013
Fourth Amendment to Amended and Restated Senior Secured Credit Agreement, dated February 4, 2015, among
EXLP Operating LLC, as Borrower, Exterran Partners, L.P., as Guarantor, Wells Fargo Bank, National Association,
as Administrative Agent, and the other lenders signatory thereto, incorporated by reference to Exhibit 10.1 to Exterran
Partners, L.P.’s Current Report on Form 8-K filed on February 5, 2015
Fifth Amendment to Amended and Restated Senior Secured Credit Agreement and First Amendment to Amended
and Restated Collateral Agreement, dated May 2, 2016, among Archrock Partners Operating LLC, as Borrower,
Archrock Partners, L.P., as Guarantor, Wells Fargo Bank, National Association, as Administrative Agent, and the
other lenders party thereto, incorporated by reference to Exhibit 10.1 to Archrock Partners, L.P.’s Current Report
on Form 8-K filed on May 6, 2016
Amended and Restated Guaranty Agreement, dated as of November 3, 2010, made by Exterran Partners, L.P. and
EXLP Leasing LLC in favor of Wells Fargo Bank, National Association, as Administrative Agent, incorporated by
reference to Exhibit 10.2 to Archrock Partner’s L.P.’s Current Report on Form 8-K filed on November 9, 2010
Amended and Restated Collateral Agreement, dated as of November 3, 2010, made by EXLP Operating LLC,
Exterran Partners, L.P. and EXLP Leasing LLC in favor of Wells Fargo Bank, National Association, as Administrative
Agent, incorporated by reference to Exhibit 10.3 to Archrock Partner’s L.P.’s Current Report on Form 8-K filed on
November 9, 2010
Second Amendment, Consent and Waiver to Credit Agreement, dated as of May 10, 2016, among Archrock Services,
L.P., as Borrower, Archrock, Inc., as Guarantor, Wells Fargo Bank, National Association, as Administrative Agent,
and the other lenders party thereto, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K filed on May 11, 2016
Third Amendment, Consent and Waiver to Credit Agreement, dated as of July 21, 2016, among Archrock Services,
L.P., as Borrower, Archrock, Inc., as Guarantor, Wells Fargo Bank, National Association, as Administrative Agent,
and the other lenders party thereto, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K filed on July 26, 2016
Fourth Amendment, Consent and Waiver to Credit Agreement, dated as of September 21, 2016, among Archrock
Services, L.P., as Borrower, Archrock, Inc., as Guarantor, Wells Fargo Bank, National Association, as Administrative
Agent, and the other lenders party thereto, incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed on September 22, 2016
Fifth Amendment, Consent and Waiver to Credit Agreement, dated as of December 9, 2016, among Archrock
Services, L.P., as Borrower, Archrock, Inc., as Guarantor, Wells Fargo Bank, National Association, as Administrative
Agent, and the other lenders party thereto. incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed on December 12, 2016
54
10.14
10.15
10.16†
10.17†
10.18†
10.19†
10.20†
10.21†
10.22†
10.23†
10.24†
10.25†
10.26†
10.27†
10.28†
10.29†
10.30†
10.31†
10.32†
10.33†
10.34†
Fourth Amended and Restated Omnibus Agreement, dated November 3, 2015, by and among Archrock, Inc. (formerly
named Exterran Holdings, Inc.), Archrock Services, L.P. (formerly named Exterran US Services OpCo, L.P.),
Archrock GP LLC (formerly named Exterran GP, LLC), Archrock General Partner, L.P. (formerly named Exterran
General Partner, L.P.), Archrock Partners, L. P. (formerly named Exterran Partners, L.P.) and Archrock Partners
Operating LLC, incorporated by reference to Exhibit 10.16 to the Registrant’s Annual Report on Form 10-K for the
year ended December 31, 2015 (portions of this exhibit have been omitted by redacting a portion of the text (indicated
by asterisks in the text) and filed separately with the Securities and Exchange Commission pursuant to a request for
confidential treatment)
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)
Exterran Holdings, Inc. (now Archrock, Inc.) 2013 Stock Incentive Plan, incorporated by reference to Annex A to
the Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 19, 2013
First Amendment to the Exterran Holdings, Inc. (now Archrock, Inc.) 2013 Stock Incentive Plan, incorporated by
reference to Exhibit 10.13 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
Exterran Holdings, Inc. (now Archrock, Inc.) Amended and Restated 2007 Stock Incentive Plan, incorporated by
reference to Annex B to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 26, 2009
Amendment No. 1 to Exterran Holdings, Inc. (now Archrock, Inc.) Amended and Restated 2007 Stock Incentive
Plan, incorporated by reference to Annex A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed
on March 26, 2009
Amendment No. 2 to Exterran Holdings, Inc. (now Archrock, Inc.) Amended and Restated 2007 Stock Incentive
Plan, incorporated by reference to Exhibit 10.10 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2009
Amendment No. 3 to the Exterran Holdings, Inc. (now Archrock, Inc.) Amended and Restated 2007 Stock Incentive
Plan, incorporated by reference to Annex A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed
on March 29, 2010
Amendment No. 4 to the Exterran Holdings, Inc. (now Archrock, Inc.) Amended and Restated 2007 Stock Incentive
Plan, incorporated by reference to Annex A to the Registrant’s Definitive Proxy Statement on Schedule 14A, filed
March 29, 2011
Amendment No. 5 to the Exterran Holdings, Inc. (now Archrock, Inc.) Amended and Restated 2007 Stock Incentive
Plan, incorporated by reference to Exhibit 10.14 to the Registrant’s Current Report on Form 8-K filed on November
5, 2015
Exterran Holdings, Inc. 2011 (now Archrock, Inc.) Employment Inducement Long-Term Equity Plan, incorporated
by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-8, filed November 4, 2011
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
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
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
Exterran Holdings, Inc. (now Archrock, Inc.) Employee Stock Purchase Plan, incorporated by reference to
Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on August 23, 2007
Amendment No. 1 to the Exterran Holdings, Inc. (now Archrock, Inc.) Employee Stock Purchase Plan, incorporated
by reference to Annex D to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 29, 2011
Amendment No. 2 to the Exterran Holdings, Inc. (now Archrock, Inc.) Employee Stock Purchase Plan, incorporated
by reference to Annex C to the Registrant’s Definitive Proxy Statement on Schedule 14A, filed on March 29, 2011
Amendment No. 3 to the Exterran Holdings, Inc. (now Archrock, Inc.) Employee Stock Purchase Plan, incorporated
by reference to Exhibit 10.15 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
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
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
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice for Time-Vested Incentive Stock Option,
incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2009
55
10.35†
10.36†
10.37†
10.38†
10.39†
10.40†
10.41†
10.42†
10.43†
10.44†
10.45†
10.46†
10.47†
10.48†
10.49†
10.50†
10.51†
10.52†
10.53†
10.54†
10.55†
10.56†
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice for Time-Vested Non-Qualified Stock Option,
incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2009
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice for Time-Vested Stock Option for Officers,
incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2010
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice for Time-Vested Non-Qualified Stock Option,
incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2010
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice for Time-Vested Stock Option for Officers,
incorporated by reference to Exhibit 10.63 to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2010
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice for Time-Vested Non-Qualified Stock Option,
incorporated by reference to Exhibit 10.64 to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2010
Form of Indemnification Agreement, incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report
on Form 8-K filed on August 23, 2007
Form of Amendment to Indemnification Agreement, incorporated by reference to Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2016
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice and Agreement for Time-Vested Incentive Stock
Option for Officers, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed
on March 10, 2014
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice and Agreement for Time-Vested Non-Qualified
Stock Option, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on
March 10, 2014
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice and Agreement for Time-Vested Restricted
Stock, incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on March 10,
2014
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice and Agreement for Time-Vested Cash-Settled
Restricted Stock Units, incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K
filed on March 10, 2014
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice and Agreement for Time-Vested Stock-Settled
Restricted Stock Units, incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K
filed on March 10, 2014
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice and Agreement for Performance Units,
incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K filed on March 10, 2014
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice and Agreement for Common Stock Award for
Non-Employee Directors, incorporated by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-
K filed on March 10, 2014
Form of Exterran Holdings, Inc. (now Archrock, Inc.) Award Notice and Agreement for Performance Units
incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 25, 2015
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
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
Form of Compensation Letter applicable to Messrs. Childers, Miller, Rice and Wayne, incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 4, 2016.
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
Form of Employment Letter applicable to Messrs. Childers, Miller, Rice, Wayne and Ingersoll, incorporated by
reference to Exhibit 10.8 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
Form of Severance Benefit Agreement applicable to Messrs. Childers, Miller, Rice, Wayne and Ingersoll,
incorporated by reference to Exhibit 10.9 to the Registrant’s Current Report on Form 8-K filed on November 5,
2015
Form of Change of Control Agreement applicable to Messrs. Childers, Miller, Rice, Wayne and Ingersoll,
incorporated by reference to Exhibit 10.10 to the Registrant’s Current Report on Form 8-K filed on November 5,
2015
56
10.57†
10.58†
10.59†
10.60†
10.61†
10.62†
10.63
10.64
10.65
10.66
10.67†
10.68†
10.69†
10.70
10.71
10.72†
10.73†
10.74†
10.75†
10.76†
10.77†
10.78†
10.79†
10.80
Form of Award Notice and Agreement for Restricted Stock pursuant to the 2013 Stock Incentive Plan, incorporated
by reference to Exhibit 10.11 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
Form of Award Notice and Agreement for Common Stock Award for Non-Employee Directors pursuant to the 2013
Stock Incentive Plan, incorporated by reference to Exhibit 10.12 to the Registrant’s Current Report on Form 8-K
filed on November 5, 2015
Form of Archrock, Inc. Award Notice and Agreement for Performance Units, incorporated by reference to Exhibit
10.1 to the Registrant’s Current Report on Form 8-K filed on February 24, 2016
Form of Archrock, Inc. Award Notice and Agreement for Time-Vested Restricted Stock, incorporated by reference
to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 24, 2016
Form of Archrock, Inc. Award Notice and Agreement for Time-Vested Stock-Settled Restricted Stock Units,
incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on February 24, 2016
Form of Archrock, Inc. Award Notice and Agreement for Common Stock Award for Non-Employee Directors,
incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on February 24, 2016
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
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
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
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
Form of Archrock, Inc. Award Notice and Agreement for Performance Units, incorporated by reference to Exhibit
10.1 to the Registrant’s Current Report on Form 8-K filed on February 23, 2017
Form of Archrock, Inc. Award Notice and Agreement for Restricted Stock for Non-Employee Directors, incorporated
by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 23, 2017
Archrock, Inc. 2017 Employee Stock Purchase Plan, incorporated by reference to Annex A to Archrock’s Definitive
Proxy Statement filed March 16, 2017
Sixth Amendment and Consent to Credit Agreement and Second Amendment to Guaranty and Collateral Agreement,
dated as of March 30, 2017, by and among Archrock Services, L.P., Archrock, Inc., the Guarantors party thereto,
the Lenders party thereto and Wells Fargo Bank, National Association, as administrative agent for the Lenders
incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2017
Consulting Agreement between Archrock, Inc. and Donald C. Wayne dated May 11, 2017 incorporated by reference
to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017
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
Form of Second Amendment to Severance Benefit Agreement
Form of Archrock, Inc. Award Notice and Agreement for Performance Units (Cash-Settled), incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 21, 2018
Form of Archrock, Inc. Award Notice and Agreement for Performance Units (Stock-Settled), incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 21, 2018
Form of Archrock, Inc. Award Notice and Agreement for Restricted Stock Units, incorporated by reference to Exhibit
10.3 to the Registrant’s Current Report on Form 8-K filed on February 21, 2018
Form of Letter Agreement Amending the Award Notice and Agreement for 2017 Performance Units, incorporated
by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on February 21, 2018
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
Form of Letter Agreement, dated as of March 19, 2018, incorporated by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K filed on March 21, 2018
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.
57
10.81
10.82
10.83†
10.84†
10.85†
10.86†
10.87†
10.88†
10.89
10.90
10.91
10.92
10.93
10.94
21.1*
23.1*
31.1*
31.2*
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
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
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
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
Form of Archrock, Inc. Award Notice and Agreement for Restricted Stock, incorporated by reference to Exhibit
10.85 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2018
Form of Archrock, Inc. Award Notice and Agreement for Restricted Stock for Non-Employee Directors, incorporated
by reference to Exhibit 10.86 to the Registrant’s Annual Report on Form 10-K for the year ended December 31,
2018
Form of Archrock, Inc. Award Notice and Agreement for Performance Units (Cash-Settled), incorporated by
reference to Exhibit 10.87 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2018
Form of Archrock, Inc. Award Notice and Agreement for Performance Units (Stock-Settled), incorporated by
reference to Exhibit 10.88 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2018
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
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
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
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
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
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
List of Subsidiaries of Archrock, Inc.
Consent of Deloitte & Touche LLP
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.2**
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
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
Interactive data files pursuant to Rule 405 of Regulation S-T
101.1*
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.
58
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.
SIGNATURES
Archrock, Inc.
/s/ D. BRADLEY CHILDERS
D. Bradley Childers
President and Chief Executive Officer
February 21, 2020
59
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 21, 2020.
Signature
Title
/s/ D. BRADLEY CHILDERS
D. Bradley Childers
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ DOUGLAS S. ARON
Douglas S. Aron
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ DONNA A. HENDERSON
Donna A. Henderson
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
/s/ ANNE-MARIE N. AINSWORTH
Anne-Marie N. Ainsworth
/s/ WENDELL R. BROOKS
Wendell R. Brooks
/s/ GORDON T. HALL
Gordon T. Hall
/s/ FRANCES POWELL HAWES
Frances Powell Hawes
/s/ JEFFERY D. HILDEBRAND
Jeffery D. Hildebrand
/s/ J.W.G. HONEYBOURNE
J.W.G. Honeybourne
/s/ JAMES H. LYTAL
James H. Lytal
/s/ EDMUND P. SEGNER, III
Edmund P. Segner, III
60
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, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2019, and the related notes and the schedule listed in the Index
at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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 21, 2020, 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 Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that
were communicated or required to be communicated to the audit committee and that (1) relate 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 matters below, providing separate opinions on the critical audit matters or on the
accounts or disclosures to which they relate.
Accounting for Elite Acquisition - Refer to Note 4 to the financial statements
Critical Audit Matter Description
The Company completed the Elite Acquisition for consideration of $439.9 million consisting of cash and common stock on
August 1, 2019. The Company accounted for this transaction under the acquisition method of accounting for business combinations.
Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values,
including $286.2 million in property, plant and equipment and customer relationships of $40.2 million, resulting in goodwill of
$100.6 million. Of the identified fixed assets acquired, the most significant was compressor units. The method for determining
the fair value of the compressor units was the cost method and involved management making estimates of the replacement cost.
The method for determining the fair value of the customer relationships was the multi-period excess earnings method and involved
management making estimates of the attrition rate, discount rate, and contributory asset charges. Changes in these assumptions
could have a significant impact on the fair values allocated to the compressor units, customer relationships, or the resulting goodwill.
F-1
We identified the valuation of compressor units and identified intangible assets arising out of the acquisition as a critical audit
matter because of the significant estimates and assumptions management makes related to the replacement cost, attrition rate,
discount rate, and contributory asset charges. These assumptions required a high degree of auditor judgment and an increased
extent of effort, including involving specialists, when performing audit procedures to evaluate the reasonableness of management’s
estimates.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the replacement cost, attrition rate, discount rate, and contributory asset charges used by management
to estimate the fair values of the compressor units and customer relationships included the following, among others:
• We tested the operating effectiveness of internal controls over the valuation of the compressor units and intangible assets,
including management’s controls over the valuation methodology, determination of replacement cost, attrition rate, discount
rate, and contributory asset charges.
• With the assistance of our fair value specialists, we evaluated the reasonableness of (1) the valuation methodology; (2) the
source information underlying the determination of the discount rates, replacement cost, attrition rate, and contributory asset
charges and tested the mathematical accuracy of the calculations; and (3) developing a range of independent estimates of the
discount rates and comparing the discount rates selected by management to the range of independent estimates of the discount
rates.
Long-Lived Asset Impairment - Refer to Note 17 to the financial statements
Critical Audit Matter Description
The Company’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,
2019, the Company retired 975 units from the active fleet resulting in an asset impairment charge of $44.7 million.
Auditing the decisions on when compressor units are retired from the active fleet required a high degree of auditor judgment and
an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s assumptions.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s determination of whether to retire compressor unit from the Company’s active fleet
included the following, among others:
• We tested the operating effectiveness of internal controls over long-lived asset impairment process, including those over
the identification of units to be retired and assessed for impairment, which includes the type, configuration, condition,
make, or model that are cost efficient to maintain or operate.
• We tested the completeness and accuracy of the compressor units identified for retirement by performing the following
procedures:
– Comparing the final listing of retired compressor units to the list evaluated and approved by management.
– For a sample of compressor units, determining whether those units were (1) properly segregated from the active
fleet, (2) identified appropriately in the system, and (3) no longer operating.
F-2
• We evaluated the reasonableness of management’s identification of the compressor units for removal, including(cid:1)
assessments of type, configuration, condition, make, or model that are cost efficient to maintain or operate, by performing(cid:1)
the following procedures:
– Comparing the rationale for compression units identified with historical rationales made for compression units(cid:1)
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(cid:1)
with knowledge of the type, configuration, condition, make, or model and operating costs of the specific(cid:1)
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(cid:1)
Directors.
– Reading available peer company data and other external sources for information supporting or contradicting(cid:1)
management’s conclusions.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 21, 2020
We have served as the Company’s auditor since 2007.
F-3
ARCHROCK, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share amounts)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, trade, net of allowance of $2,210 and $1,452, respectively
Inventory
Tax refund receivable
Other current assets
Current assets associated with discontinued operations
Total current assets
Property, plant and equipment, net
Operating lease ROU assets
Goodwill
Intangible assets, net
Contract costs, net
Deferred tax assets
Other assets
Noncurrent assets associated with discontinued operations
Total assets
Liabilities and Equity
Current liabilities:
Accounts payable, trade
Accrued liabilities
Deferred revenue
Current liabilities associated with discontinued operations
Total current liabilities
Long-term debt
Operating lease liabilities
Deferred tax liabilities
Other liabilities
Noncurrent liabilities associated with discontinued operations
Total liabilities
Commitments and contingencies (Note 26)
Equity:
Preferred stock: $0.01 par value per share, 50,000,000 shares authorized, zero issued
Common stock: $0.01 par value per share, 250,000,000 shares authorized,
158,636,918 and 135,787,509 shares issued, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Treasury stock: 6,702,602 and 6,381,605 common shares, at cost, respectively
Total equity
Total liabilities and equity
December 31,
2019
2018
$
3,685
$
144,865
74,467
—
9,186
—
232,203
2,559,398
17,901
100,598
77,471
42,927
36,642
29,934
12,901
5,610
147,985
76,333
15,262
10,706
300
256,196
2,171,038
—
—
52,370
39,020
4,256
22,572
7,063
$
$
3,109,975
$
2,552,515
60,215
$
67,845
10,683
—
138,743
1,842,549
16,094
1,289
16,829
8,508
54,939
78,997
16,509
297
150,742
1,529,501
—
2,842
20,793
7,063
2,024,012
1,710,941
—
1,587
3,412,509
(1,387)
(2,244,877)
(81,869)
1,085,963
—
1,358
3,177,982
5,773
(2,263,677)
(79,862)
841,574
$
3,109,975
$
2,552,515
The accompanying notes are an integral part of these consolidated financial statements.
F-4
ARCHROCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Revenue:
Contract operations
Aftermarket services
Total revenue
Cost of sales (excluding depreciation and amortization):
Contract operations
Aftermarket services
Total cost of sales (excluding depreciation and amortization)
Selling, general and administrative
Depreciation and amortization
Long-lived asset impairment
Restatement and other charges
Restructuring and other charges
Interest expense
Debt extinguishment loss
Transaction-related costs
Gain on sale of assets, net
Other income, net
Income (loss) before income taxes
Provision for (benefit from) income taxes
Income from continuing operations
Loss from discontinued operations, net of tax
Net income
Less: Net (income) loss attributable to the noncontrolling interest
Net income attributable to Archrock stockholders
Basic and diluted net income per common share attributable to Archrock
common stockholders
$
$
Weighted average common shares outstanding:
Basic
Diluted
Year Ended December 31,
2018
2017
2019
$
771,539
$
672,536
$
610,921
193,946
965,485
231,905
904,441
183,734
794,655
297,260
158,978
456,238
117,727
188,084
44,663
445
—
104,681
3,653
8,213
(16,016)
(661)
58,458
(39,145)
97,603
(273)
97,330
—
97,330
$
273,013
191,354
464,367
101,563
174,946
28,127
19
—
93,328
2,450
10,162
(5,674)
(157)
35,310
6,150
29,160
—
29,160
(8,097)
21,063
263,005
155,917
418,922
111,483
188,563
29,142
4,370
1,386
88,760
291
275
(5,675)
(243)
(42,619)
(61,083)
18,464
(54)
18,410
543
$
18,953
0.70
$
0.19
$
0.26
137,492
137,528
109,305
109,421
69,552
69,664
The accompanying notes are an integral part of these consolidated financial statements.
F-5
ARCHROCK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year Ended December 31,
2018
2017
2019
Net income
$
97,330
$
29,160
$
18,410
Other comprehensive income (loss), net of tax:
Interest rate swap gain (loss), net of reclassifications to earnings
Amortization of terminated interest rate swaps
Merger-related adjustments
Adjustments from other changes in ownership of Partnership
Total other comprehensive income (loss), net of tax
Comprehensive income
Less: Comprehensive income attributable to the noncontrolling interest
(7,160)
—
—
—
(7,160)
90,170
—
Comprehensive income attributable to Archrock stockholders
$
90,170
$
2,681
230
5,670
—
8,581
37,741
(12,360)
25,381
$
7,107
359
—
32
7,498
25,908
(4,080)
21,828
The accompanying notes are an integral part of these consolidated financial statements.
F-6
ARCHROCK, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share data)
Archrock Stockholders
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Treasury Stock
Shares
Amount
Accumulated
Deficit
Noncontrolling
Interest
Total
Balance at January 1, 2017
76,162,279
$
762
$ 3,021,040
$
(1,678)
(5,626,074)
$ (73,944)
$
(2,227,214)
$
(34,038)
$ 684,928
35,180
616,799
66,604
6
1
356
8,115
991
44,709
17,638
209
Treasury stock purchased
Cash dividends ($0.4800 per
common share)
Shares issued in employee
stock purchase plan
Stock-based compensation, net
of forfeitures
Stock options exercised
Contribution from Exterran
Corporation
Net proceeds from the sale of
Partnership units, net of tax
Cash distribution to
noncontrolling unitholders
of the Partnership
Impact of adoption of ASU
2016-09
Comprehensive income
Net income (loss)
Interest rate swap gain, net of
reclassifications to earnings
Amortization of terminated
interest rate swaps
Adjustment for changes in
ownership of the Partnership
(225,237)
(2,788)
(34,063)
(79,069)
888
(2,788)
(34,063)
356
9,009
992
44,709
32,088
49,726
(44,449)
(44,449)
1,081
1,290
18,953
(543)
18,410
4,623
7,107
359
32
2,484
359
32
Balance at December 31, 2017
76,880,862
$
769
$ 3,093,058
$
1,197
(5,930,380)
$ (76,732)
$
(2,241,243)
$
(41,431)
$ 735,618
93,617
960,028
218,997
1
10
2
802
7,192
1,341
18,744
(167,382)
(1,759)
(58,288)
(141,121)
(142,722)
(1,371)
(64)
(1,759)
(58,288)
803
7,138
(28)
18,744
Treasury stock purchased
Cash dividends ($0.5040 per
common share)
Shares issued in employee
stock purchase plan
Stock-based compensation, net
of forfeitures
Stock options exercised
Contribution from Exterran
Corporation
Cash distribution to
noncontrolling unitholders
of the Partnership
Impact of adoption of ASC 606
Revenue
Impact of adoption of ASU
2017-12
Impact of adoption of ASU
2018-02
Merger-related adjustments
57,634,005
576
56,845
Comprehensive income
Net income
Interest rate swap gain (loss),
net of reclassifications to
earnings
Amortization of terminated
interest rate swaps
Merger-related adjustments
Balance at December 31, 2018
135,787,509
$
1,358
$ 3,177,982
$
Treasury stock purchased
Cash dividends ($0.554 per
common share)
14,666
383
(258)
(11,766)
(11,766)
14,666
383
—
40,901
98,322
21,063
8,097
29,160
4,263
2,681
230
5,670
(6,381,605)
$ (79,862)
$
(2,263,677)
$
— $ 841,574
(212,080)
(2,007)
(78,530)
(2,007)
(78,530)
258
(1,582)
230
5,670
5,773
F-7
Shares issued in employee
stock purchase plan
Stock-based compensation, net
of forfeitures
87,933
1,104,793
1
11
770
8,094
(108,917)
21,656,683
217
225,663
Shares issued for Elite
Acquisition
Comprehensive income
Net income
Interest rate swap loss , net
of reclassifications to
earnings
97,330
(7,160)
771
8,105
225,880
97,330
(7,160)
Balance at December 31, 2019
158,636,918
$
1,587
$ 3,412,509
$
(1,387)
(6,702,602)
$ (81,869)
$
(2,244,877)
$
— $1,085,963
The accompanying notes are an integral part of these consolidated financial statements.
F-8
ARCHROCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to cash provided by operating activities:
Loss from discontinued operations, net of tax
Depreciation and amortization
Long-lived asset impairment
Inventory write-downs
Amortization of operating lease ROU assets
Amortization of deferred financing costs
Amortization of debt discount
Amortization of terminated interest rate swaps
Debt extinguishment loss
Interest rate swaps
Stock-based compensation expense
Non-cash restructuring charges
Provision for doubtful accounts
Gain on sale of assets, net
Deferred income tax provision (benefit)
Amortization of contract costs
Deferred revenue recognized in earnings
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, trade
Inventory
Other assets
Contract costs, net
Accounts payable and other liabilities
Deferred revenue
Other
Net cash provided by continuing operations
Net cash used in discontinued operations
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Proceeds from sale of property, plant and equipment and other assets
Proceeds from insurance and other settlements
Cash paid in Elite Acquisition
Net cash used in investing activities
Cash flows from financing activities:
Borrowings of long-term debt
Repayments of long-term debt
Payments for debt issuance costs
Proceeds from (payments for) settlement of interest rate swaps that include financing
elements
Dividends paid to Archrock stockholders
Distributions paid to noncontrolling partners in the Partnership
F-9
Year Ended December 31,
2019
2018
2017
$
97,330
$
29,160
$
18,410
273
188,084
44,663
944
2,931
6,211
910
—
3,653
(1,071)
8,105
—
2,567
(16,016)
(39,597)
23,330
(42,268)
3,248
6,036
4,458
(27,237)
(12,728)
36,578
12
290,416
(269)
290,147
—
174,946
28,127
1,614
—
6,113
1,410
291
2,450
(131)
7,388
—
1,677
(5,674)
5,238
14,939
(28,428)
(21,028)
4,210
(15,249)
(32,435)
14,964
36,571
(206)
54
188,563
29,142
2,397
—
6,976
1,325
552
291
2,183
8,461
997
5,144
(5,675)
(59,760)
—
—
(6,889)
(236)
(721)
—
9,616
730
104
225,947
201,664
—
—
225,947
201,664
(385,198)
(319,102)
(221,693)
80,961
3,696
(214,019)
(514,560)
33,927
46,954
252
—
252
—
(284,923)
(174,487)
2,395,250
714,830
1,242,000
(2,071,750)
(605,636)
(1,270,194)
(22,426)
(3,332)
(14,855)
1,180
(78,530)
—
190
(58,288)
(11,766)
(1,785)
(34,063)
(44,449)
Net proceeds from sale of Partnership units
Proceeds from stock options exercised
Proceeds from stock issued under employee stock purchase plan
Purchases of treasury stock
Contribution from Exterran Corporation
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of cash flow information:
Interest paid
Income taxes refunded, net
Supplemental disclosure of non-cash transactions:
Accrued capital expenditures
Issuance of Archrock common stock pursuant to Merger, net of tax
Issuance of Archrock common stock pursuant to Elite Acquisition, net of tax
—
—
771
(2,007)
—
222,488
(1,925)
5,610
—
264
803
(1,759)
18,744
54,050
(4,926)
10,536
3,685
$
5,610
$
60,291
992
356
(2,788)
44,720
(19,775)
7,402
3,134
10,536
(97,451) $
(86,758) $
(78,891)
1,973
2,131
695
11,767
$
17,491
$
22,490
—
225,880
57,421
—
—
—
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-10
ARCHROCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
We are an energy infrastructure company with a pure-play focus on midstream natural gas compression. We are the leading provider
of natural gas compression services to customers in the oil and natural gas industry throughout the U.S. and a leading supplier of
aftermarket services to customers that own compression equipment in the U.S. We operate in two business segments: contract
operations and aftermarket services. Our predominant segment, contract operations, primarily includes designing, sourcing,
owning, installing, operating, servicing, repairing and maintaining our owned fleet of natural gas compression equipment to provide
natural gas compression services to our customers. In our aftermarket services business, we sell parts and components and provide
operations, maintenance, overhaul and reconfiguration services to customers who own compression equipment.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
Our Financial Statements include Archrock and its subsidiaries, all of which are wholly owned. All intercompany accounts and
transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current
year presentation.
We consolidate the financial statements of the Partnership and reflect its operations in our contract operations segment. We control
the Partnership through our ownership of its General Partner. Public ownership of the Partnership’s net assets and earnings prior
to the Merger is reflected within noncontrolling interest in our Financial Statements.
Our Financial Statements are prepared in accordance with GAAP and the rules and regulations of the SEC. The preparation of
consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amount of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. Because of the
inherent uncertainties in this process, actual future results could differ from those expected as of the reporting date. Management
believes that the estimates and assumptions used are reasonable.
Significant Accounting Policies
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Revenue Recognition
As a result of our adoption of ASC 606 Revenue on January 1, 2018, revenue is recognized 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.
In our contract operations business, natural gas compression service revenue is recognized over time and revenue associated with
billable maintenance on our natural gas compression equipment is recognized at a point in time. The timing of revenue recognition
is impacted by contractual provisions for service availability guarantees of our compression assets and re-billable costs associated
with moving our compression assets to a customer site. Under previous guidance, contract operations revenue was recognized
when earned, which generally occurs monthly when the service is provided under our customer contracts.
In our aftermarket services business, maintenance, overhaul and reconfiguration services revenue is recognized over time using
output or input methods to measure the progress toward complete satisfaction of the performance obligation and revenue from
the sale of OTC parts is recognized at a point in time. Under previous guidance, revenue was recognized on a completed contract
basis as products were delivered and title was transferred or services were performed for the customer.
F-11
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. We believe that the credit risk of our temporary cash investments is minimal because we maintain minimal
balances in our cash investment accounts. Trade accounts receivable are due from companies of varying size engaged principally
in oil and natural gas activities throughout the U.S. We review the financial condition of customers prior to extending credit and
generally do not obtain collateral for trade receivables. Payment terms are on a short-term basis and in accordance with industry
practice. We consider this credit risk to be limited due to these companies’ financial resources, the nature of the products and
services we provide and the terms of our contract operations customer service agreements.
No customer accounted for more than 10% of our trade accounts receivable balance at December 31, 2019. At December 31, 2018,
Anadarko and Williams Partners accounted for 13% and 11%, respectively, of our trade accounts receivable balance.
Outstanding accounts receivable are reviewed regularly for non-payment indicators and allowances for doubtful accounts are
recorded based upon management’s estimate of collectibility at each balance sheet date. During the years ended December 31,
2019, 2018 and 2017, we recorded bad debt expense of $2.6 million, $1.7 million and $5.1 million, respectively.
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
Buildings
Transportation and shop equipment
Computer hardware and software
Other
3 to 30 years
20 to 35 years
3 to 10 years
3 to 5 years
3 to 10 years
Major improvements that extend the useful life of an asset are capitalized and depreciated over the estimated useful life of the
major improvement, up to seven years. Repairs and maintenance are expensed as incurred.
Long-Lived Assets
We review long-lived assets, including property, plant and equipment and identifiable intangibles that are being amortized, for
impairment whenever events or changes in circumstances, including the removal of compressors from our active fleet, indicate
that the carrying amount of an asset may not be recoverable. An impairment loss exists when estimated undiscounted cash flows
expected from the use of the asset and its eventual disposition are less than its carrying amount. Impairment losses are recognized
in the period in which the impairment occurs and represent the excess of the asset carrying value over its fair value. Identifiable
intangibles are amortized over the estimated useful life of the asset.
Leases
As a result of our adoption of ASC 842 Leases on January 1, 2019, we recorded an operating lease ROU asset and an operating
lease liability on our consolidated balance sheet. Under previous guidance, operating leases were not recorded to the balance sheet.
We determine if an arrangement is a lease at inception and determine lease classification and recognize ROU assets and liabilities
on the lease commencement date based on the present value of lease payments over the lease term. As the discount rate implicit
in the lease is rarely readily determinable, we estimate our incremental borrowing rate using information available at commencement
date in determining the present value of the lease payments. The lease term includes options to extend when we are reasonably
certain to exercise the option. Short-term leases, those with an initial term of 12 months or less, are not recorded on the balance
sheet. Variable costs such as our proportionate share of actual costs for utilities, common area maintenance, property taxes and
insurance are not included in the lease liability and are recognized in the period in which they are incurred. Operating lease expense
for lease payments is recognized on a straight-line basis over the term of the lease.
F-12
Our facility leases, of which we are the lessee, contain lease and nonlease components for which we have elected to account for
as a single lease component, as the nonlease components are not significant to the total consideration of the contract and separating
the nonlease component would have no effect on lease classification. As it relates to our contract operations service agreements,
in which we are a lessor, the services nonlease component is predominant over the compression package lease component and
therefore recognition of these agreements will continue to follow the ASC 606 Revenue guidance. Under previous guidance, no
separation of lease and nonlease component is required, for either lessee or lessor.
Goodwill
The goodwill acquired in connection with the Elite Acquisition represents the excess of consideration transferred over the fair
value of the assets and liabilities acquired. We review the carrying amount of our goodwill in the fourth quarter of every year, or
whenever indicators of potential impairment exist, to determine if the carrying amount of a reporting unit exceeds its fair value,
including the applicable goodwill. We perform a qualitative assessment to determine whether it is more likely than not that the
fair value of a reporting unit is impaired. If the fair value is more likely than not impaired, we perform a quantitative impairment
test to identify impairment and measure the amount of impairment loss to be recognized, if any.
Our qualitative assessment includes consideration of various events and circumstances and their potential impact to a reporting
unit’s fair value, including macroeconomic and industry conditions such as a deterioration in our operating environment and
limitations on access to capital and other developments in the equity and credit markets, cost factors that could have a negative
effect on earnings and cash flows, relevant entity-specific and reporting unit-specific events and overall financial performance
such as declining earnings or cash flows or a sustained decrease in share price.
The quantitative impairment test (i) allocates goodwill and our other assets and liabilities to our reporting units, contract operations
and aftermarket services, (ii) calculates the fair value of the reporting units and (iii) determines the impairment loss, if any, as the
amount by which the carrying amount of the reporting unit exceeds its fair value (limited to the total amount of goodwill allocated
to that reporting unit). All of the goodwill recognized in the Elite Acquisition was allocated to our contract operations reporting
unit. The fair value of the contract operations reporting unit is calculated using the expected present value of future cash flows
method. Significant estimates are made to determine future cash flows including future revenues, costs and capital requirements
and the appropriate risk-adjusted discount rate by which to discount the estimated future cash flows.
Our fourth quarter qualitative assessment determined that it was not more likely than not that the fair value of the contract operations
reporting unit was less than its carrying amount as of December 31, 2019, and as such, no quantitative impairment test of our
goodwill was warranted.
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. 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. Amortization begins for each
component of the hosting arrangement when the component becomes ready for its intended use.
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.
F-13
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such a
determination, we consider all available positive and negative evidence including future reversals of existing taxable temporary
differences, projected future taxable income, tax-planning strategies and results of recent operations. If a valuation allowance was
previously recorded and we subsequently determined we would be able to realize our deferred tax assets in the future in excess
of their net recorded amount, we would make an adjustment to the deferred tax assets’ valuation allowance, which would reduce
the provision for income taxes.
We record uncertain tax positions in accordance with the accounting standard on income taxes under a two-step process whereby
(1) we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of the
position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount
of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
Hedging and Use of Derivative Instruments
We use derivative instruments to manage our exposure to fluctuations in the variable interest rate of the Credit Facility and thereby
minimize the risks and costs associated with financial activities. We do not use derivative instruments for trading or other speculative
purposes. We record interest rate swaps on the balance sheet as either derivative assets or derivative liabilities measured at their
fair value. The fair value of our derivatives is based on the income approach (discounted cash flow) using market observable
inputs, including LIBOR forward curves. Changes in the fair value of the derivatives designated as cash flow hedges are recognized
as a component of other comprehensive income (loss) until the hedged transaction affects earnings. At that time, amounts are
reclassified into earnings to interest expense, the same statement of operations line item to which the earnings effect of the hedged
item is recorded. To qualify for hedge accounting treatment, we must formally document, designate and assess the effectiveness
of the transactions. If the necessary correlation ceases to exist or if the anticipated transaction is no longer probable, we would
discontinue hedge accounting and apply mark-to-market accounting. Amounts paid or received from interest rate swap agreements
are recorded in interest expense and matched with the cash flows and interest expense of the debt being hedged, resulting in an
adjustment to the effective interest rate.
3. Recent Accounting Developments
Accounting Standards Updates Implemented
Goodwill
On October 1, 2019, we prospectively adopted ASU 2017-04, which simplifies the test for goodwill impairment by eliminating
Step 2 in the test for goodwill impairment, which required an entity to calculate the implied fair value of goodwill. Under this
amendment, an entity should perform its goodwill impairment test on at least an annual basis by comparing the fair value of a
reporting unit, including any income tax effects from any tax deductible goodwill, with its carrying amount and recognizing an
impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the
option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
Leases
ASC 842 Leases establishes a ROU model that requires a lessee to record a ROU asset and a lease liability on the balance sheet.
Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income
statement. Under the new guidance, lessor accounting is largely unchanged. We adopted ASC 842 Leases on January 1, 2019 using
the modified retrospective transition method and elected the practical expedient package to not reassess (i) whether any expired
or existing contracts are or contain leases, (ii) lease classification of any expired or existing leases and (iii) initial direct costs for
any existing leases. We did not elect the practical expedient to use hindsight in determining the lease term. Adoption of ASC 842
Leases resulted in recognition of an operating lease ROU asset of $18.6 million and an operating lease liability of $20.0 million
in our consolidated balance sheet at January 1, 2019. The difference of $1.4 million related to accrued rent and prepaid lease
payments recorded to our consolidated balance sheet as of December 31, 2018. We did not recognize any finance lease ROU assets
or liabilities upon adoption of ASC 842 Leases. There was no impact to our consolidated statements of operations, equity or cash
flows upon adoption. Comparative information has not been recast and continues to be reported under the accounting standards
in effect for those periods.
F-14
ASC 842 Leases also provides a practical expedient, elected by class of underlying asset, to not separate lease and nonlease
components and instead account for those components as a single component if certain conditions are met. ASC 842 Leases also
provides clarification for lessors on whether ASC 842 Leases or ASC 606 Revenue is applicable to the combined component based
on determination of the predominant component. We have concluded that for our contract operations services agreements, in which
we are a lessor, the services nonlease component is predominant over the compression unit lease component and therefore ongoing
recognition of these agreements will continue to follow the ASC 606 Revenue guidance. We have also elected, as a lessee, to not
separate lease and nonlease components as it relates to our facility leases.
In addition, we have made an accounting policy election, as permitted by ASC 842 Leases, to not apply the recognition requirements
of ASC 842 Leases to leases with an initial term of 12 months or less.
Accounting Standards Updates Not Yet Implemented
Income Taxes
In December 2019, the FASB issued ASU 2019-12, which simplifies the accounting for income taxes by removing certain exceptions
to various tax accounting principles and clarifies other existing guidance in order to improve consistency of application. These
amendments are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2020. Early adoption is permitted and requires that an entity early adopt all of the amendments within this update in the same
period. We are currently evaluating the impact of ASU 2019-12 on our consolidated financial statements and footnote disclosures.
Fair Value Measurements
In August 2018, the FASB issued ASU 2018-13, which amends the required fair value measurements disclosures related to valuation
techniques and inputs used, uncertainty in measurement and changes in measurements applied. These amendments are effective
for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments
on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop
Level 3 fair value measurements and the narrative description of measurement uncertainty are to be applied prospectively for only
the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments are to be applied
retrospectively to all periods presented upon their effective date. We will adopt ASU 2018-13 effective January 1, 2020. These
amendments will impact our disclosures related to our fair value measurements of our idle and previously-culled compressors and
borrowings outstanding under our Credit Facility. We currently anticipate that the adoption will have no impact on our consolidated
financial statements and are developing the new disclosures required by the new standard for inclusion in our first quarterly filing
of 2020.
Credit Losses
In June 2016, the FASB issued ASU 2016-13, which changes the impairment model for financial assets measured at amortized
cost and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires
entities to use a new current expected credit loss model that will result in earlier recognition of allowance for losses. For public
entities that meet the definition of an SEC filer, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019.
Entities will apply ASU 2016-13 provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first
reporting period in which the guidance is adopted. We will adopt ASU 2016-13 effective January 1, 2020 and do not currently
anticipate that the adoption will have a material impact on our consolidated financial statements.
Our financial assets measured at amortized cost consist primarily of receivables from revenue transactions within the scope of
ASC 606 Revenue. We are currently updating our accounting policies, documenting operational procedures and finalizing changes
to our systems and internal control structure as necessary to implement the new standard and address the risks associated with
estimating current expected credit losses.
4. Business Transactions
Elite Acquisition
On August 1, 2019, we completed the Elite Acquisition whereby we acquired from Elite Compression substantially all of its assets,
including a fleet of predominantly large compressors comprising approximately 430,000 horsepower, vehicles, real property and
inventory, and certain liabilities for aggregate consideration consisting of $214.0 million in cash and 21.7 million shares of common
stock with an acquisition date fair value of $225.9 million. The cash portion of the acquisition was funded with borrowings on the
Credit Facility.
F-15
The Elite Acquisition was accounted for using the acquisition method, which requires, among other things, assets acquired and
liabilities assumed to be recorded at their fair value on the acquisition date. The excess of the consideration transferred over those
fair values is recorded as goodwill. The following table summarizes the purchase price allocation based on the estimated fair values
of the acquired assets and liabilities as of the acquisition date (in thousands):
Accounts receivable
Inventory
Other current assets
Property, plant and equipment
Operating lease ROU assets
Goodwill
Intangible assets
Accounts payable, trade
Accrued liabilities
Operating lease liabilities
Purchase price
$
$
9,007
7,987
608
286,158
682
100,598
40,237
(2,079)
(2,973)
(326)
439,899
Our valuation methodology and significant inputs for fair value measurements are detailed by asset class below. The fair value
measurements for property, plant and equipment and intangible assets are based on significant inputs that are not observable in
the market and therefore represent Level 3 measurements.
Goodwill
The goodwill resulting from the acquisition is attributable to the expansion of our services in various regions in which we currently
operate and was allocated to our contract operations segment. The goodwill is considered to have an indefinite life and will be
reviewed annually for impairment or more frequently if indicators of potential impairment exist. All of the goodwill recorded for
this acquisition is expected to be deductible for U.S. federal income tax purposes.
Property, Plant and Equipment
The property, plant and equipment is primarily comprised of compression equipment that will be depreciated on a straight-line
basis over an estimated average remaining useful life of 15 years. The fair value of the property, plant and equipment was determined
using the cost approach, whereby we estimated the replacement cost of the assets by evaluating recent purchases of similar assets
or published data, and then adjusted replacement cost for physical deterioration and functional and economic obsolescence, as
applicable.
Intangible Assets
The intangible assets consist of customer relationships that have an estimated useful life of 15 years. The amount of intangible
assets and their associated useful life were determined based on the period over which the assets are expected to contribute directly
or indirectly to our future cash flows. The fair value of the identifiable intangible assets was determined using the multi-period
excess earnings method, which is a specific application of the discounted cash flow method, an income approach, whereby we
estimated and then discounted the future cash flows of the intangible asset by adjusting overall business revenue for attrition,
obsolescence, cost of sales, operating expenses, taxes and the required returns attributable to other contributory assets acquired.
Significant estimates made in arriving at expected future cash flows included our expected customer attrition rate and the amount
of earnings attributable to the assets. To discount the estimated future cash flows, we utilized a discount rate that was at a premium
to our weighted average cost of capital to reflect the less liquid nature of the customer relationships relative to the tangible assets
acquired.
F-16
Elite Compression Revenue and Earnings
The results of operations attributable to the assets and liabilities acquired in the Elite Acquisition have been included in our
consolidated financial statements as part of our contract operations segment since the date of acquisition. Revenue attributable to
the assets acquired from the date of acquisition, August 1, 2019, through December 31, 2019 was $33.2 million. We are unable
to provide earnings attributable to the assets and liabilities acquired since the date of acquisition as we do not prepare full stand-
alone earnings reports for those assets and liabilities.
Unaudited Pro Forma Financial Information
Unaudited pro forma financial information for the years ended December 31, 2019 and 2018 was derived by adjusting our historical
financial statements in order to give effect to the assets and liabilities acquired in the Elite Acquisition. The Elite Acquisition is
presented in this unaudited pro forma financial information as though the acquisition occurred as of January 1, 2018, and reflects
the following:
•
•
•
the acquisition of substantially all of Elite Compression’s assets, including a compression fleet of approximately 430,000
horsepower, vehicles, real property and inventory, and certain liabilities;
borrowings of $214.0 million under the Credit Facility for cash consideration exchanged in the acquisition; and
the exclusion of $7.8 million of financial advisory, legal and other professional fees incurred related to the acquisition
and recorded to transaction-related costs in our consolidated statements of operations during the year ended
December 31, 2019.
The unaudited pro forma financial information below is presented (in thousands) for informational purposes only and is not
necessarily indicative of our results of operations that would have occurred had the transaction been consummated at the beginning
of the period presented, nor is it necessarily indicative of future results.
Revenue
Net income attributable to Archrock stockholders
Harvest Sale
Year Ended December 31,
2019
2018
$
1,009,763
$
106,521
977,929
24,566
On August 1, 2019, we completed an asset sale in which Harvest acquired from us approximately 80,000 active and idle compression
horsepower, vehicles and parts inventory for cash consideration of $30.0 million. We recorded a $6.6 million gain on this sale to
gain on sale of assets, net in our consolidated statements of operations during the year ended December 31, 2019. The assets were
previously reported under our contract operations segment.
5. Discontinued Operations
Spin-off of Exterran Corporation
In 2015 we completed the Spin-off. In order to effect the Spin-off and govern our relationship with Exterran Corporation after the
Spin-off, we entered into several agreements with Exterran Corporation, which include, but are not limited to, the separation and
distribution agreement, the tax matters agreement and the supply agreement. Certain terms of these agreements follow:
• The separation and distribution agreement specifies our right to promptly receive payments from Exterran Corporation
based on a notional amount corresponding to payments received by Exterran Corporation from PDVSA Gas, S.A., a
subsidiary of Petroleos de Venezuela, S.A., in respect of the sale of Exterran Corporation’s and joint ventures’ previously
nationalized assets after such amounts are collected by Exterran Corporation. During the years ended December 31, 2018
and 2017, we received $18.7 million and $19.7 million, respectively, from Exterran Corporation pursuant to this term of
the separation and distribution agreement. The separation and distribution agreement also specifies our right to receive
a $25.0 million cash payment from Exterran Corporation promptly following the occurrence of a qualified capital raise
as defined in the Exterran Corporation credit agreement. Such a qualified capital raise occurred in April 2017 and we
received a cash payment of $25.0 million later that month.
F-17
Generally, the separation and distribution agreement provides for cross-indemnities principally designed to place financial
responsibility for the obligations and liabilities of our business with us and financial responsibility for the obligations
and liabilities of Exterran Corporation’s business with Exterran Corporation. Pursuant to the separation and distribution
agreement, we and Exterran Corporation generally release the other party from all claims arising prior to the Spin-off
that relate to the other party’s business.
• The tax matters agreement governs the respective rights, responsibilities and obligations of Exterran Corporation and us
with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits
and other tax proceedings and certain other matters regarding taxes. Subject to the provisions of this agreement Exterran
Corporation and we agreed to indemnify the primary obligor of any return for tax periods beginning before and ending
before or after the Spin-off (including any ongoing or future amendments and audits for these returns) for the portion of
the tax liability (including interest and penalties) that relates to their respective operations reported in the filing. As of
December 31, 2019, we classified $8.5 million of unrecognized tax benefits (including interest and penalties) as noncurrent
liabilities associated with discontinued operations since it relates to operations of Exterran Corporation prior to the Spin-
off. We have also recorded an offsetting $8.5 million indemnification asset related to this reserve as noncurrent assets
associated with discontinued operations.
• The supply agreement, which expired November 2017, set forth the terms under which Exterran Corporation provided
manufactured equipment, including the design, engineering, manufacturing and sale of natural gas compression
equipment, on an exclusive basis to us and the Partnership, subject to certain exceptions. During the year ended
December 31, 2017, we purchased $150.2 million of newly-manufactured compression equipment from Exterran
Corporation.
The following table summarizes the balance sheet for discontinued operations (in thousands):
Other current assets
Other assets
Deferred tax assets (1)
Total assets associated with discontinued operations
Other current liabilities
Deferred tax liabilities
Total liabilities associated with discontinued operations
December 31,
2019
2018
$
$
$
$
— $
8,508
4,393
12,901
$
— $
8,508
8,508
$
300
7,063
—
7,363
297
7,063
7,360
——————
(1)
As of December 31, 2018, the $5.6 million net deferred tax asset was fully offset by a valuation allowance. As of December 31, 2019, the $5.6 million
valuation allowance was released and the net deferred tax asset decreased by $1.2 million due to current period tax amortization. See Note 20 (“Income
Taxes”) for further details.
The following table summarizes the statements of operations for discontinued operations (in thousands):
Year Ended December 31,
2018
2019
2017
Other (income) loss, net
Provision for (benefit from) income taxes
Loss from discontinued operations, net of tax
$
$
(1,473) $
1,746
(273) $
(654) $
654
— $
154
(100)
(54)
F-18
6. Inventory
Inventory consisted of the following (in thousands):
Parts and supplies
Work in progress
Inventory
December 31,
2019
2018
$
$
66,121
8,346
74,467
$
$
65,645
10,688
76,333
During the years ended December 31, 2019, 2018 and 2017 we recorded write-downs to inventory of $0.9 million, $1.6 million
and $2.4 million, respectively, for inventory considered to be excess, obsolete or carried at an amount in excess of net realizable
value.
7. Property, Plant and Equipment, net
Property, plant and equipment, net, consisted of the following (in thousands):
Compression equipment, facilities and other fleet assets
Land and buildings
Transportation and shop equipment
Computer hardware and software
Other
Property, plant and equipment
Accumulated depreciation
Property, plant and equipment, net
December 31,
2019
2018
$
3,653,930
$
3,323,465
50,743
116,057
93,695
15,308
47,067
103,766
92,174
11,880
3,929,733
(1,370,335)
2,559,398
$
3,578,352
(1,407,314)
2,171,038
$
Depreciation expense was $172.8 million, $158.4 million and $170.8 million during the years ended December 31, 2019, 2018
and 2017, respectively. Assets under construction of $51.0 million and $55.4 million at December 31, 2019 and 2018, respectively,
were primarily included in compression equipment.
8. Leases
We have operating leases and subleases for office space, temporary housing, storage and shops. Our leases have remaining lease
terms of less than 1 year to 11 years and most include options to extend the lease term, at our discretion, for an additional three
to five years. We are not, however, reasonably certain that we will exercise any of the options to extend and as such, they have
not been included in the remaining lease terms.
Balance sheet information related to our operating leases was as follows (in thousands):
ROU assets
Lease liabilities
Current
Noncurrent
Total lease liabilities
Classification
December 31, 2019
Operating lease ROU assets
$
17,901
Accrued liabilities
Operating lease liabilities
$
$
3,037
16,094
19,131
F-19
The components of lease cost were as follows (in thousands):
Operating lease cost
Short-term lease cost
Variable lease cost
Total lease cost
Cash flow and noncash information related to our operating leases were as follows (in thousands):
Operating cash flows - cash paid for amounts included in the measurement of operating lease
liabilities
Operating lease ROU assets obtained in exchange for new lease liabilities
Other supplemental information related to our operating leases was as follows:
Weighted average remaining lease term (in years)
Weighted average discount rate
$
$
$
Year Ended
December 31, 2019
3,966
348
1,607
5,921
Year Ended
December 31, 2019
5,420
2,247
December 31, 2019
8.2
5.3%
Remaining maturities of lease liabilities governed under ASC 842 Leases as of December 31, 2019 were as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: Interest
Total lease liabilities under ASC 842 Leases
$
$
Maturities of lease liabilities governed under ASC 840 Leases as of December 31, 2018 were as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total lease liabilities under ASC 840 Leases
$
$
3,651
3,715
2,615
2,310
1,919
9,611
23,821
(4,690)
19,131
4,317
3,980
3,562
2,433
2,170
11,935
28,397
F-20
9. Intangible Assets, net
Intangible assets include customer relationships and contracts associated with various business and asset acquisitions. These
acquired intangible assets were recorded at fair value determined as of the acquisition date and are being amortized over the period
we expect to benefit from the assets. Intangible assets, net consisted of the following (in thousands):
December 31, 2019
December 31, 2018
Customer-related (10-25 year life)
Contract-based (5-7 year life)
Intangible assets
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
$
$
147,244
37,773
185,017
$
$
(76,176) $
(31,370)
(107,546) $
107,008
64,556
171,564
$
Accumulated
Amortization
(69,678)
(49,516)
(119,194)
$
Amortization expense of these intangible assets totaled $15.3 million, $16.5 million and $17.8 million during the years ended
December 31, 2019, 2018 and 2017, respectively.
Estimated future intangible assets amortization expense is as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
Total
10. Contract Costs
$
$
15,675
11,416
9,078
7,225
6,136
27,941
77,471
We capitalize incremental costs to obtain a contract with a customer if we expect to recover those costs. Capitalized costs include
commissions paid to our sales force to obtain contract operations contracts. We expense commissions paid for sales of service
contracts and OTC parts and components within our aftermarket services segment, as the amortization period is less than one year.
We had contract costs of $4.8 million and $4.2 million associated with sales commissions recorded in our consolidated balance
sheets at December 31, 2019 and 2018, respectively.
We capitalize costs incurred to fulfill a contract if those costs relate directly to a contract, enhance resources that we will use in
satisfying performance obligations and if we expect to recover those costs. Capitalized costs incurred to fulfill our customer
contracts include freight charges to transport compression assets before transferring services to the customer and mobilization
activities associated with our contract operations services. We had contract costs of $38.1 million and $34.8 million associated
with freight and mobilization recorded in our consolidated balance sheets at December 31, 2019 and 2018, respectively.
Contract operations costs are amortized based on the transfer of service to which the assets relate, which is estimated to be 38
months based on average contract term, including anticipated renewals. We assess periodically whether the 38-month estimate
fairly represents the average contract term and adjust as appropriate. Aftermarket services fulfillment costs are recognized based
on the percentage-of-completion method applicable to the customer contract. Contract costs associated with commissions are
amortized to SG&A. Contract costs associated with freight and mobilization are amortized to cost of sales (excluding depreciation
and amortization). During the years ended December 31, 2019 and 2018, we amortized $2.6 million and $1.5 million, respectively,
related to sales commissions and $20.7 million and $13.4 million, respectively, related to freight and mobilization. No impairment
losses were recorded related to our capitalized contract costs during the years ended December 31, 2019 and 2018.
F-21
11. Hosting Arrangements
In the fourth quarter of 2018 we began a process and technology transformation project that will, among other things, upgrade or
replace our existing ERP, supply chain and inventory management systems and expand the remote monitoring capabilities of our
compression fleet. Included in this project are hosting arrangements that are service contracts related to the cloud migration of
our ERP system and cloud services for our new mobile workforce, telematics and inventory management tools.
Certain costs incurred for the implementation of our hosting arrangements that are service contracts are being capitalized and will
be amortized on a straight-line basis over the term of the respective contract. As of December 31, 2019 and 2018, we had $5.5
million and $0.4 million, respectively, of implementation costs related to our hosting arrangements that are service contracts
capitalized to other assets in our consolidated balance sheets. Amortization of the capitalized implementation costs will be recorded
to SG&A in our consolidated statements of operations and is expected to begin in future periods as the individual components
become ready for their intended use.
12. Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
Accrued salaries and other benefits
Accrued income and other taxes
Accrued interest
Derivative liability - current
Other accrued liabilities
Accrued liabilities
December 31,
2019
2018
$
19,300
$
11,019
16,462
593
20,471
$
67,845
$
24,252
11,820
11,999
—
30,926
78,997
F-22
13. Long-Term Debt
Long-term debt consisted of the following (in thousands):
Credit Facility
2028 Notes
Less: Deferred financing costs, net of amortization
2027 Notes
Less: Deferred financing costs, net of amortization
2022 Notes
Less: Debt discount, net of amortization
Less: Deferred financing costs, net of amortization
2021 Notes
Less: Debt discount, net of amortization
Less: Deferred financing costs, net of amortization
Long-term debt
Credit Facility
December 31,
2019
2018
$
513,000
$
839,500
500,000
(8,090)
491,910
500,000
(7,999)
492,001
350,000
(2,046)
(2,316)
345,638
—
—
—
—
—
—
—
—
—
—
350,000
(2,766)
(3,133)
344,101
350,000
(1,789)
(2,311)
345,900
$
1,842,549
$
1,529,501
The Credit Facility is a $1.25 billion asset-based revolving credit facility that will mature on November 8, 2024, except that if any
portion of the 2022 Notes are outstanding as of June 3, 2022, it will instead mature on June 3, 2022.
As of December 31, 2019, there were $13.7 million outstanding letters of credit under the Credit Facility and the applicable margin
on borrowings outstanding was 2.5%. The weighted average annual interest rate on the outstanding balance under the Credit
Facility, excluding the effect of interest rate swaps, was 4.3% and 5.4% at December 31, 2019 and 2018, respectively. As a result
of the facility’s ratio requirements (see below), $669.7 million of the $723.3 million of undrawn capacity was available for additional
borrowings as of December 31, 2019.
Amendment No. 2
On November 8, 2019, we amended the Credit Facility to, among other things:
•
extend the maturity date of the Credit Facility from March 30, 2022 to November 8, 2024 (or June 3, 2022, if any portion
of the 2022 Notes remains outstanding at such date), effective as of the execution of Amendment No. 2; and
•
change the applicable margin for borrowings under the Credit Facility to those discussed in “Other Facility Terms” below.
We incurred $6.4 million in transaction costs related to Amendment No. 2, which were included in other assets in our consolidated
balance sheet and are being amortized over the term of the Credit Facility.
F-23
Amendment No. 1
In February 2018, we amended the Credit Facility to, among other things:
•
increase the maximum Total Debt to EBITDA ratios, as defined in the Credit Facility agreement (see below for the revised
ratios), effective as of the execution of Amendment No. 1 in February 2018; and
•
effective upon completion of the Merger in April 2018:
–
increase the aggregate revolving commitment from $1.1 billion to $1.25 billion;
–
increase the amount available for the issuance of letters of credit from $25.0 million to $50.0 million;
–
–
increase the basket sizes under certain covenants including covenants limiting our ability to make investments,
incur debt, make restricted payments, incur liens and make asset dispositions;
name Archrock Services, L.P., one of our subsidiaries, as a borrower under the Credit Facility and certain of our
other subsidiaries as loan guarantors; and
–
amend the definition of “Borrowing Base” to include certain assets of ours and our subsidiaries.
We incurred $3.3 million in transaction costs related to Amendment No. 1, which were included in other assets in our consolidated
balance sheet and are being amortized over the term of the Credit Facility.
Other Facility Terms
Subject to certain conditions, including the approval by the lenders, we are able to increase the aggregate commitments under the
Credit Facility by up to an additional $250.0 million. Portions of the Credit Facility up to $50.0 million will be available for the
issuance of swing line loans.
The Credit Facility bears interest at a base rate or LIBOR, at our option, plus an applicable margin. Depending on our leverage
ratio, the applicable margin varies (i) in the case of LIBOR loans, from 2.00% to 2.75% and (ii) in the case of base rate loans,
from 1.00% to 1.75%. The base rate is the highest of (i) the prime rate announced by JPMorgan Chase Bank, (ii) the Federal Funds
Effective Rate plus 0.50% and (iii) one-month LIBOR plus 1.00%.
Additionally, we are required to pay commitment fees based on the daily unused amount of the Credit Facility at a rate of 0.375%.
We incurred $1.9 million, $2.1 million and $2.1 million in commitment fees on the daily unused amount of our facilities during
the years ended December 31, 2019, 2018 and 2017, respectively.
The Credit Facility borrowing base consists of eligible accounts receivable, inventory and compressors, the largest of which is
compressors. Borrowings under the Credit Facility are secured by substantially all of our personal property assets and our Significant
Domestic Subsidiaries (as defined in the Credit Facility agreement), including all of the membership interests of our Domestic
Subsidiaries (as defined in the Credit Facility agreement).
The Credit Facility agreement contains various covenants including, but not limited to, restrictions on the use of proceeds from
borrowings and limitations on our ability to incur additional indebtedness, engage in transactions with affiliates, merge or
consolidate, sell assets, make certain investments and acquisitions, make loans, grant liens, repurchase equity and pay distributions.
The Credit Facility agreement also contains various covenants requiring mandatory prepayments from the net cash proceeds of
certain asset transfers. In addition, if as of any date we have cash and cash equivalents (other than proceeds from a debt or equity
issuance received in the 30 days prior to such date reasonably expected to be used to fund an acquisition permitted under the Credit
Facility agreement) in excess of $50.0 million, then such excess amount will be used to pay down outstanding borrowings of a
corresponding amount under the Credit Facility.
F-24
We must maintain the following consolidated financial ratios, as defined in the Credit Facility agreement:
EBITDA to Interest Expense
Senior Secured Debt to EBITDA
Total Debt to EBITDA
Through fiscal year 2019
Through second quarter of 2020
Thereafter (1)
2.5 to 1.0
3.5 to 1.0
5.75 to 1.0
5.50 to 1.0
5.25 to 1.0
——————
(1)
Subject to a temporary increase to 5.5 to 1.0 for any quarter during which an acquisition satisfying certain thresholds is completed and for the two quarters
immediately following such quarter.
A material adverse effect on our assets, liabilities, financial condition, business or operations that, taken as a whole, impacts our
ability to perform our obligations under the Credit Facility agreement, could lead to a default under that agreement. A default
under one of our debt agreements would trigger cross-default provisions under our other debt agreements, which would accelerate
our obligation to repay our indebtedness under those agreements.
As of December 31, 2019, we were in compliance with all covenants under the Credit Facility agreement.
Formation of the Credit Facility
In March 2017, we incurred $14.9 million in transaction costs related to the formation of the Credit Facility, which were included
in other assets in our consolidated balance sheets and are being amortized over the term of the Credit Facility. Concurrent with
entering into the Credit Facility, we terminated our Former Credit Facility, and all commitments under the facility, and repaid
$648.4 million in borrowings and accrued and unpaid interest and fees outstanding. As a result of the termination, we expensed
$0.6 million of unamortized deferred financing costs, which were included in interest expense in our consolidated statements of
operations, and recorded a debt extinguishment loss of $0.3 million.
Archrock Credit Facility
In April 2018, in connection with the Merger, the Archrock Credit Facility was terminated. Upon termination, we repaid $63.2
million in borrowings and accrued and unpaid interest and fees outstanding. All commitments under the Archrock Credit Facility
were terminated and the $15.4 million of letters of credit outstanding under the Archrock Credit Facility were converted to letters
of credit under the Credit Facility. As a result of the termination, we recorded a debt extinguishment loss of $2.5 million.
We incurred commitment fees on the daily unused amount of the Archrock Credit Facility of $0.2 million in 2018 prior to the
facility’s termination and $0.7 million during the year ended December 31, 2017. We were in compliance with all covenants under
the Archrock Credit Facility through its closing.
2028 Notes and 2027 Notes
On December 20, 2019, we completed a private offering of $500.0 million aggregate principal amount of 6.25% senior notes due
April 2028 and received net proceeds of $491.8 million after deducting issuance costs. The net proceeds were used to repay
borrowings outstanding under our Credit Facility.
On March 21, 2019, we completed a private offering of $500.0 million aggregate principal amount of 6.875% senior notes due
April 2027 and received net proceeds of $491.2 million after deducting issuance costs. The net proceeds were used to repay
borrowings outstanding under our Credit Facility.
Issuance costs of $8.2 million and $8.8 million related to the 2028 Notes and 2027 Notes, respectively, were recorded as deferred
financing costs 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.
F-25
The 2027 Notes and 2028 Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by
us and all of our existing subsidiaries, other than Archrock Partners, L.P. and APLP Finance Corp., which are co-issuers of both
offerings, and certain of our future subsidiaries. The 2027 Notes and 2028 Notes and the guarantees rank equally in right of payment
with all of our and the guarantors’ existing and future senior indebtedness.
The 2027 Notes and 2028 Notes may be redeemed at any time, in whole or in part, at specified redemption prices and make-whole
premiums, plus any accrued and unpaid interest.
2022 Notes
In April 2014, we issued $350.0 million aggregate principal amount of 6% senior notes due October 2022. These notes were issued
at an original issuance discount of $5.7 million, which is being amortized at an effective interest rate of 6.25% over their term. In
February 2015, holders of these notes exchanged their notes for registered notes with the same terms.
We may redeem all or a portion of these notes at redemption prices (expressed as percentages of principal amount) equal to 101.5%
for the 12-month period beginning on April 1, 2019 and 100.0% for the 12-month period beginning on April 1, 2020 and at any
time thereafter, plus accrued and unpaid interest, if any, to the applicable redemption date.
The 2022 Notes are guaranteed on a senior unsecured basis by all of the Partnership’s existing subsidiaries (other than Archrock
Partners Finance Corp., which is a co-issuer of the 2022 Notes) and certain of the Partnership’s future subsidiaries. The 2022 Notes
and the guarantees, respectively, are the Partnership’s and the guarantors’ general unsecured senior obligations, rank equally in
right of payment with all of the Partnership’s and the guarantors’ other senior obligations and are effectively subordinated to all
of the Partnership’s and the guarantors’ existing and future secured debt to the extent of the value of the collateral securing such
indebtedness. In addition, the 2022 Notes and guarantees are effectively subordinated to all existing and future indebtedness and
other liabilities of any future non-guarantor subsidiaries. Guarantees by the Partnership’s subsidiaries are full and unconditional,
subject to customary release provisions, and constitute joint and several obligations. The Partnership has no assets or operations
independent of its subsidiaries and there are no significant restrictions upon its subsidiaries’ ability to distribute funds to the
Partnership.
2021 Notes
On April 5, 2019, the 2021 Notes were redeemed at 100% of their $350.0 million aggregate principal amount plus accrued and
unpaid interest of $0.2 million with borrowings from the Credit Facility. We recorded a debt extinguishment loss of $3.7 million
related to the redemption during the year ended December 31, 2019.
Long-Term Debt Maturity
Contractual maturities of long-term debt over the next five years, excluding interest to be accrued, at December 31, 2019 were as
follows (in thousands):
2020
2021
2022 (1)
2023
2024
Long-term debt maturities through 2024 (1)
$
$
—
—
350,000
—
513,000
863,000
——————
(1)
Includes the full face value of the 2022 Notes and has not been reduced by the aggregate unamortized discount of $2.0 million and the aggregate unamortized
deferred financing costs of $2.3 million as of December 31, 2019.
F-26
14. Accumulated Other Comprehensive Income (Loss)
Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting
from transactions with owners. Our accumulated other comprehensive income (loss) consists of changes in the fair value of our
interest rate swap derivative instruments, net of tax, which are designated as cash flow hedges, amortization of terminated interest
rate swaps and adjustments related to changes in our ownership of the Partnership.
The following table presents the changes in accumulated other comprehensive income (loss) of our derivative cash flow hedges,
net of tax and excluding noncontrolling interest, during the years ended December 31, 2019, 2018 and 2017 (in thousands):
Year Ended December 31,
2019
2018
2017
Beginning accumulated other comprehensive income (loss)
$
5,773
$
1,197
$
(1,678)
Gain (loss) recognized in other comprehensive income (loss), net of tax provision
(benefit) of $(1,425), $169 and $793, respectively
(Gain) loss reclassified from accumulated other comprehensive income (loss) to
interest expense, net of tax provision (benefit) of $478, $185 and $(520),
respectively (1)
Merger-related adjustments (2)
Other comprehensive income (loss) attributable to Archrock stockholders
Ending accumulated other comprehensive income (loss)
(5,360)
(659)
1,910
(1,800)
—
(7,160)
(1,387) $
(435)
5,670
4,576
5,773
$
965
—
2,875
1,197
$
——————
(1)
(2)
Included stranded tax effects resulting from the TCJA of $0.3 million reclassified to accumulated deficit during the year ended December 31, 2018.
Pursuant to the Merger, we reclassified a gain of $5.7 million from noncontrolling interest to accumulated other comprehensive income (loss) related to
the fair value of our derivative instruments that was previously attributed to public ownership of the Partnership.
See Note 22 (“Derivatives”) for further details on our interest rate swap derivative instruments.
15. Equity
Elite Acquisition
On August 1, 2019, we completed the Elite Acquisition. A portion of the acquisition’s purchase price was funded through the
issuance of 21.7 million shares of common stock with an acquisition date fair value of $225.9 million, which was recorded to
common stock and additional paid-in capital in our consolidated statements of equity. See Note 4 (“Business Transactions”) for
further details of this acquisition.
Merger Transaction
In April 2018, we completed the Merger and issued 57.6 million shares of our common stock to acquire the 41.2 million common
units of the Partnership not owned by us prior to the Merger at a fixed exchange ratio of 1.40 shares of our common stock for each
Partnership common unit for total implied consideration of $625.3 million. Additionally, the incentive distribution rights in the
Partnership, all of which we owned prior to the Merger, were canceled and ceased to exist. As a result of the Merger, the Partnership’s
common units are no longer publicly traded.
As we controlled the Partnership prior to the Merger and continue to control the Partnership after the Merger, we accounted for
the change in our ownership interest in the Partnership as an equity transaction in the second quarter of 2018. No gain or loss was
recognized in our consolidated statements of operations as a result of the Merger.
Prior to the Merger, public unitholders held a 57% ownership interest in the Partnership and we owned the remaining 43% equity
interest. The equity interests in the Partnership that were owned by the public prior to the Merger are reflected in noncontrolling
interest in our consolidated statements of equity. The earnings of the Partnership that were attributed to its common units held by
the public prior to the Merger are reflected in net income (loss) attributable to the noncontrolling interest in our consolidated
statements of operations.
F-27
The tax effects of the Merger were reported as adjustments to other assets, noncurrent assets associated with discontinued operations,
deferred tax liabilities, additional paid-in capital and other comprehensive income. The change in ownership and tax step up from
the consideration given in the Merger caused us to record a $156.0 million deferred tax asset, which resulted in an overall $52.2
million net deferred tax asset. We evaluated the realizability of our resulting net deferred tax asset position by assessing the available
positive and negative evidence and concluded, based on the weight of the evidence, that a $50.8 million valuation allowance was
required. The $105.2 million net tax impact of the change in deferred tax assets and the valuation allowance was recorded as an
offsetting increase to additional paid-in capital.
We incurred $0.5 million, $10.2 million and $0.3 million of transaction costs directly attributable to the Merger during the years
ended December 31, 2019, 2018 and 2017 respectively, including financial advisory, legal service and other professional fees,
which were recorded to transaction-related costs on our consolidated statements of operations.
Other Transactions Related to the Partnership
In August 2017, the Partnership sold, pursuant to a public underwritten offering, 4.6 million common units, including 0.6 million
common units pursuant to an over-allotment option. The Partnership received net proceeds of $60.3 million after deducting
underwriting discounts, commissions and offering expenses, which it used to repay borrowings outstanding under the Credit
Facility. In connection with this sale and as permitted under its partnership agreement, the Partnership sold 93,163 general partner
units to its General Partner for a contribution of $1.3 million to maintain the General Partner’s approximate 2% general partner
interest in the Partnership. As a result of this transaction, adjustments were made to noncontrolling interest, accumulated other
comprehensive income (loss), deferred tax liabilities and additional paid-in capital to reflect our new ownership percentage in the
Partnership.
The following table presents the effects of changes in our ownership interest in the Partnership on the equity attributable to Archrock
stockholders during the years ended December 31, 2018 and 2017 (in thousands):
Net income attributable to Archrock stockholders
Increase in Archrock stockholders’ additional paid-in capital for change in ownership of
Partnership common units
Increase from net income attributable to Archrock stockholders and transfers from
noncontrolling interest
Year Ended December 31,
2018
2017
$
$
21,063
$
18,953
56,845
17,638
77,908
$
36,591
F-28
Cash Dividends
The following table summarizes our dividends declared and paid in each of the quarterly periods of 2019, 2018 and 2017:
Declared Dividends
per Common Share
Dividends Paid
(in thousands)
2017
Q1
Q2
Q3
Q4
2018
Q1
Q2
Q3
Q4
2019
Q1
Q2
Q3
Q4
$
$
$
0.120
$
0.120
0.120
0.120
0.120
$
0.120
0.132
0.132
0.132
$
0.132
0.145
0.145
8,458
8,534
8,536
8,536
8,532
15,486
17,114
17,156
17,231
17,206
22,062
22,031
On January 23, 2020, our Board of Directors declared a quarterly dividend of $0.145 per share of common stock, or approximately
$22.2 million, that was paid on February 14, 2020 to stockholders of record at the close of business on February 7, 2020.
F-29
16. Revenue from Contracts with Customers
Revenue is recognized 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.
The following table presents our revenue from contracts with customers disaggregated by revenue source (in thousands):
Contract operations (1):
0 - 1,000 horsepower per unit
1,001 - 1,500 horsepower per unit
Over 1,500 horsepower per unit
Other (2)
Total contract operations (3)
Aftermarket services (1):
Services (4)
OTC parts and components sales
Total aftermarket services (5)
Year Ended December 31,
2019
2018
$
259,985
$
316,082
191,510
3,962
771,539
122,076
71,870
193,946
241,810
276,775
149,783
4,168
672,536
142,476
89,429
231,905
Total revenue
$
965,485
$
904,441
——————
(1)
(2)
(3)
(4)
(5)
We operate in two segments: contract operations and aftermarket services. See Note 28 (“Segments”) for further details regarding our segments.
Primarily relates to fees associated with owned non-compression equipment.
Includes $7.9 million and $6.6 million for the years ended December 31, 2019 and 2018, respectively, related to billable maintenance on owned compressors
that was recognized at a point in time. All other contract operations revenue is recognized over time.
Includes a reversal of $0.9 million of revenue during the year ended December 31, 2019 related to changes in estimates of performance obligations partially
satisfied in prior periods.
All service revenue within aftermarket services is recognized over time. All OTC parts and components sales revenue is recognized at a point in time.
Contract Operations
We provide comprehensive contract operations services, including the personnel, equipment, tools, materials and supplies to meet
our customers’ natural gas compression needs.
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.
We also perform billable maintenance service on our natural gas compression equipment at the customer’s request on an as-needed
basis. The performance obligation is satisfied and revenue is recognized at the agreed-upon transaction price at the point in time
when service is complete and the customer has accepted the work performed and can obtain the remaining benefits of the service
that the unit will provide.
F-30
As of December 31, 2019, we had $469.6 million of remaining performance obligations related to our contract operations segment.
The remaining performance obligations will be recognized through 2024 as follows (in thousands):
Remaining performance obligations
$ 288,204
$ 131,816
$
43,808
$
4,941
$
813
$ 469,582
2020
2021
2022
2023
2024
Total
Aftermarket Services
We sell OTC parts and components and provide operations, maintenance, overhaul and reconfiguration services to customers who
own compression equipment.
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.
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 will be accounted for on a prospective basis. Changes to the scope
of service is recognized as an adjustment to the transaction price in the period in which the change occurs.
Service provided based on time and materials are generally short-term in nature and labor rates and parts pricing is agreed upon
prior to commencing the service. We have elected to use the right-to-invoice practical expedient using an estimated gross margin
percentage applied to actual costs incurred. The estimated gross margin percentage is fixed based on historical time and materials-
based service. We evaluate the estimated gross margin percentage at the end of each reporting period and adjust the transaction
price as appropriate.
We believe these fee-based and cost-based inputs fairly depict our efforts to provide aftermarket services and the amount of revenue
recognized is representative of the transfer of service and value that the customer will have received as of the reporting date. As
of December 31, 2019 we do not disclose the aggregate transaction price for the remaining performance obligations for aftermarket
services, as there are no contracts with customers with an original contract term that is greater than one year.
Contract Assets and Liabilities
Contract operations services are generally billed monthly at the beginning of the month in which service is being provided. For
aftermarket services, billings will typically occur when parts are delivered or when service is complete; however, milestone billings
may be used in longer-term projects. 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.
As of December 31, 2019 and 2018, our receivables from contracts with customers, net of allowance for doubtful accounts, were
$139.4 million and $142.1 million, respectively.
F-31
Freight billings to customers for the transport of compression assets, customer-specified modifications of compression assets and
milestone billings on aftermarket services often result in a contract liability. As of December 31, 2019 and 2018, our contract
liabilities were $11.4 million and $17.1 million, respectively, which were included in deferred revenue and other liabilities in our
consolidated balance sheets. The decrease in the contract liability balance during the year ended December 31, 2019 was due to
the deferral of $36.6 million, partially offset by $42.3 million recognized as revenue during the period, each primarily related to
freight billings and aftermarket services.
17. Long-Lived Asset Impairment
We review long-lived assets, including property, plant and equipment and identifiable intangibles that are being amortized, for
impairment whenever events or changes in circumstances, including the removal of compressors from our active fleet, indicate
that the carrying amount of an asset may not be recoverable.
We periodically review the future deployment of our idle compression assets for units that are not of the type, configuration,
condition, make or model that are cost efficient to maintain and operate. Based on these reviews, we determine that certain idle
compressors should be retired from the active fleet. The retirement of these units from the active fleet triggers a review of these
assets for impairment and as a result of our review, we may record an asset impairment to reduce the book value of each unit to
its estimated fair value. The fair value of each unit is estimated based on the expected net sale proceeds compared to other fleet
units we recently sold, a review of other units recently offered for sale by third parties or the estimated component value of the
equipment we plan to use.
In connection with our review of our idle compression assets, we evaluate for impairment idle units that were culled from our
fleet in prior years and are available for sale. Based on that review, we may reduce the expected proceeds from disposition and
record additional impairment to reduce the book value of each unit to its estimated fair value.
The following table presents the results of our impairment review as recorded to our contract operations segment (dollars in
thousands):
Year Ended December 31,
2019
2018
2017
Idle compressors retired from the active fleet
Horsepower of idle compressors retired from the active fleet
975
170,000
310
115,000
Impairment recorded on idle compressors retired from the active fleet
$
44,663
$
28,127
$
325
100,000
26,287
In addition to the impairment discussed above, $2.9 million of property, plant and equipment was impaired during the year ended
December 31, 2017 as the result of physical asset observations and other events that indicated the carrying values of the assets,
which were comprised of approximately 7,000 horsepower of idle compressors, were not recoverable and $0.8 million of leasehold
improvements and furniture and fixtures that were impaired in connection with the relocation of our corporate office. See Note 19
(“Corporate Office Relocation”) for further details.
18. Restructuring and Other Charges
As discussed in Note 5 (“Discontinued Operations”), we completed the Spin-off in 2015. During the year ended December 31,
2017, we incurred $1.4 million of costs for retention benefits associated with the Spin-off that were directly attributable to Archrock.
The restructuring charges associated with the Spin-off are not directly attributable to our reportable segments because they primarily
represent costs incurred within the corporate function. No such costs were incurred subsequent to December 31, 2017.
The following table summarizes the changes to our accrued liability balance related to restructuring and other charges for the year
ended December 31, 2017 (in thousands):
Balance at January 1, 2017
Additions for costs expensed
Less: non-cash expense(1)
Reductions for payments
Balance at December 31, 2017
F-32
$
$
712
1,386
(997)
(1,101)
—
——————
(1)
Included non-cash retention benefits associated with the Spin-off to be settled in Archrock stock.
19. Corporate Office Relocation
During the year ended December 31, 2017, we recorded $2.1 million in charges associated with the relocation of our corporate
headquarters during the third quarter of 2017. These charges were reflected in SG&A and included accelerated expense associated
with the contractual lease payments of our former corporate office, which were made through the end of the lease term in the first
quarter of 2018, and relocation costs to move our corporate office. Additionally, leasehold improvements and furniture and fixtures
were impaired in the third quarter of 2017 and are reflected in long-lived asset impairment in our consolidated statements of
operations (see Note 17 (“Long-Lived Asset Impairment”)). No costs were incurred as a result of the relocation subsequent to
September 30, 2017.
The following table summarizes the changes to our accrued liability balance related to our corporate office relocation (in thousands):
Beginning balance
Reductions for payments
Ending balance
The following table summarizes our corporate office relocation costs by category (in thousands):
Remaining lease costs
Impairment of leasehold improvements and furniture and fixtures
Relocation costs
Total corporate relocation costs
20. Income Taxes
Current and Deferred Tax Provision
The provision for (benefit from) income taxes consisted of the following (in thousands):
Year Ended
December 31, 2018
$
$
583
(583)
—
Year Ended
December 31, 2017
$
$
1,258
795
60
2,113
Year Ended December 31,
2018
2017
2019
Current tax provision (benefit):
U.S. federal
State
Total current
Deferred tax provision (benefit):
U.S. federal
State
Total deferred
Provision for (benefit from) income taxes
$
$
$
$
$
F-33
75
377
452
$
$
(35,597) $
(4,000)
(39,597) $
— $
912
912
6,197
(959)
5,238
$
$
$
$
(1,495)
172
(1,323)
(67,443)
7,683
(59,760)
(61,083)
(39,145) $
6,150
The provision for (benefit from) income taxes for the years ended December 31, 2019, 2018 and 2017 resulted in effective tax
rates on continuing operations of (67.0)%, 17.4% and 143.3%, respectively. The following table reconciles these effective tax
rates to the U.S. statutory rate of 21%, the rate in effect during 2019 and 2018, and 35%, the rate in effect during 2017 (in thousands):
Income taxes at U.S. federal statutory rate
Net state income taxes (1)
Tax credits
Tax Cuts and Jobs Act (2)
Noncontrolling interest
Unrecognized tax benefits (3)(4)
Valuation allowances and write off of tax attributes (5)
Indemnification revenue / expense
Executive compensation limitation
Stock
Other
Provision for (benefit from) income taxes
Year Ended December 31,
2018
2017
2019
$
12,276
$
7,415
$
1,172
(1,295)
—
—
(1,958)
(50,219)
42
1,102
66
(331)
(39,145) $
$
1,570
(244)
—
(1,793)
(1,443)
(58)
(44)
977
(455)
225
6,150
$
(14,917)
(4,693)
—
(53,442)
(1,091)
9,566
247
692
2,433
(858)
980
(61,083)
——————
(1)
(2)
Includes a deferred state release, net of federal benefit, of $3.7 million due to the remeasurement of our uncertain tax benefits in 2017.
See “Tax Cuts and Jobs Act” below for further details.
Reflects a decrease in our uncertain tax benefit, net of federal benefit, due to settlements of tax audits and expiration of statute of limitations in 2019 and
2018.
Reflects an increase in our uncertain tax benefit, net of federal benefit, due to appellate court decisions in 2017 which required us to remeasure certain of
our uncertain tax positions.
See “Tax Attributes and Valuation Allowances” below for further details.
(3)
(4)
(5)
Deferred income tax balances are the direct effect of temporary differences between the financial statement carrying amounts and
the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the taxes are actually paid or recovered.
The tax effects of temporary differences that gave rise to deferred tax assets and deferred tax liabilities were as follows (in
thousands):
Deferred tax assets:
Net operating loss carryforwards
Accrued liabilities
Other
Valuation allowances (1)
Total deferred tax assets
Deferred tax liabilities:
Property, plant and equipment
Basis difference in the Partnership
Other
Total deferred tax liabilities
Net deferred tax asset (2)
——————
(1)
December 31,
2019
2018
$
116,378
$
3,486
12,479
132,343
(822)
131,521
$
(6,440) $
(81,645)
(8,083)
(96,168)
35,353
$
$
$
$
82,259
5,726
9,407
97,392
(45,439)
51,953
(10,763)
(35,604)
(4,172)
(50,539)
1,414
(2)
See “Tax Attributes and Valuation Allowances” below for further details.
The 2019 and 2018 net deferred tax asset are reflected in our consolidated balance sheets as deferred tax assets of $36.6 million and $4.3 million, respectively,
and deferred tax liabilities of $1.3 million and $2.8 million, respectively.
F-34
Both the 2019 and 2018 balances are based on a U.S. federal tax rate of 21%.
Tax Attributes and Valuation Allowances
Pursuant to Sections 382 and 383 of the Code, utilization of loss and credit carryforwards are subject to annual limitations due to
any ownership changes of 5% owners. 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 percentage points
over a three-year period. The Hanover/Universal merger in 2007 resulted in such an ownership change but the Spin-off in 2015
did not result in such an ownership change for Archrock. In 2018, the common stock we issued in the Merger caused a new
ownership change to occur for Archrock. The limitations from this ownership change may cause us to pay U.S. federal income
taxes earlier; however, we do not currently expect that any loss carryforwards or credit carryforwards will expire as a result of any
382 or 383 limitations. Our ability to utilize loss carryforwards and credit carryforwards against future U.S. federal taxable income
and future U.S. federal income tax may be limited in the future if we have another 50% or more ownership change in our 5%
shareholders.
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.
In 2018, the change in ownership and tax step up from the consideration given in the Merger caused us to record a $156.0 million
deferred tax asset, which resulted in an overall $52.2 million net deferred tax asset, of which $46.6 million and $5.6 million related
to continuing operations and discontinued operations, respectively. As of December 31, 2018, we had incurred a three-year
cumulative book loss, which outweighed the positive evidence of projected future taxable income. Based on the weight of the
evidence, we concluded that a $50.8 million valuation allowance was required, of which $45.2 million and $5.6 million were
recorded to continuing operations and discontinued operations, respectively. The tax impact from the Merger was accounted for
as an equity transaction; therefore, the valuation allowance was recorded as a decrease to additional paid-in capital.
As of December 31, 2019, we achieved a three-year cumulative book income, and together with other positive and negative
evidence, we concluded that there is sufficient positive evidence of projected future taxable income to release the $50.8 million
valuation allowance previously required for our overall net deferred tax asset position. This release was offset by a $0.6 million
increase in the valuation allowance on our state NOL deferred tax asset. The overall impact of the change in the valuation allowance
was recorded as a $50.2 million benefit from income taxes in our consolidated statements of operations and a $50.2 million increase
in deferred tax assets in our consolidated balance sheets, of which $44.6 million and $5.6 million were recorded to continuing
operations and discontinued operations, respectively.
At December 31, 2019, we had U.S. federal and state NOL carryforwards of $506.7 million and $202.1 million, respectively,
included in our NOL deferred tax asset that are available to offset future taxable income. If not used, the federal and state NOL
carryforwards will begin to expire in 2025 and 2020, respectively, though $267.4 million of the U.S. federal and $54.3 million of
the state NOL carryforwards have no expiration date. In connection with the state NOL deferred tax asset, we recorded a valuation
allowance of $0.8 million and $0.2 million as of December 31, 2019 and 2018, respectively.
At December 31, 2019, we had U.S. federal tax credit carryforwards of $1.5 million. If not used, the federal tax credit carryforwards
will begin to expire in 2037.
F-35
Unrecognized Tax Benefits
A reconciliation of the unrecognized tax benefit (including discontinued operations) activity is shown below (in thousands):
Year Ended December 31,
2018
2017
2019
Beginning balance
$
19,560
$
21,400
$
Additions based on tax positions related to current year
Additions based on tax positions related to prior years(1)
Reductions based on settlement refunds from government authorities
Reductions based on tax positions related to prior years
Reductions based on lapse of statute of limitations
Ending balance
$
2,227
2,047
(4,414)
(51)
(916)
18,453
$
1,893
450
(3,461)
(20)
(702)
19,560
9,665
2,002
9,887
(154)
—
—
$
21,400
——————
(1)
Appellate court decisions during the year ended December 31, 2017 required us to remeasure certain of our uncertain tax positions and increase our
unrecognized tax benefit for these positions in 2017.
We had $18.5 million, $19.6 million and $21.4 million of unrecognized tax benefits at December 31, 2019, 2018 and 2017,
respectively, of which $3.2 million, $6.9 million and $8.0 million, respectively, would affect the effective tax rate if recognized
and $8.3 million, $6.9 million and $6.4 million, respectively, would be reflected in income from discontinued operations, net of
tax if recognized.
We recorded $2.1 million, $2.2 million and $1.6 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
December 31, 2019, 2018 and 2017, respectively. To the extent interest and penalties are not assessed with respect to uncertain
tax positions, amounts accrued will be reduced and reflected as reductions in income tax expense. During the year ended
December 31, 2019, we recorded a $0.1 million release of potential interest expense and penalties, and during the years ended
December 31, 2018 and 2017, we recorded $0.7 million and $1.4 million, respectively, of potential interest expense and penalties
in our consolidated statements of operations.
Subject to the provisions of the tax matters agreement between Exterran Corporation and us, both parties agreed to indemnify the
primary obligor of any return for tax periods beginning before and ending before or after the Spin-off (including any ongoing or
future amendments and audits for these returns) for the portion of the tax liability (including interest and penalties) that relates to
their respective operations reported in the filing. As of December 31, 2019 and 2018, we recorded an indemnification asset
(including penalties and interest) of $8.5 million and $7.1 million, respectively, related to unrecognized tax benefits in our
consolidated balance sheets.
We and our subsidiaries file consolidated and separate income tax returns in the U.S. federal jurisdiction and in numerous state
jurisdictions. U.S. federal income tax returns are generally subject to examination for up to three years after filing the returns. Due
to our NOL carryforwards, our U.S. federal income tax returns can be examined back to the inception of our NOL carryforwards;
therefore, expanding our examination period beyond 20 years. During the second quarter of 2017, the IRS commenced an
examination of our U.S. federal income tax return for the 2014 tax year. During the third quarter of 2018, the IRS expanded the
audit to include the 2015 tax year. Due to this audit being related to tax periods that commenced prior to the Spin-off, Exterran
Corporation is also involved in this audit. We do not expect any tax adjustments from this audit to have a material impact on our
consolidated financial position or consolidated results of operations.
State income tax returns are generally subject to examination for a period of three to five years after filing the returns. However,
the state impact of any U.S. federal audit adjustments and amendments remains subject to examination by various states for up to
one year after formal notification to the states. We are currently involved in several state audits. During the years ended December 31,
2019 and 2018, we settled certain state audits, which resulted in refunds of $2.4 million and $1.7 million, respectively, and reductions
in previously-accrued uncertain tax benefits of $4.4 million and $3.5 million, respectively. As of December 31, 2019, we did not
have any state audits underway that we believe would have a material impact on our consolidated financial position or consolidated
results of operations.
F-36
As of December 31, 2019, we believe it is reasonably possible that $2.6 million of our unrecognized tax benefits, including
penalties, interest and discontinued operations, will be reduced prior to December 31, 2020 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, which could materially differ from this estimate.
Tax Cuts and Jobs Act
In December 2017, the TCJA was enacted and significantly reformed the Code. The TCJA included a number of U.S. tax law
changes that impact us, most notably the reduction in the U.S. corporate income tax rate from 35% to 21% for tax years beginning
after December 31, 2017.
In connection with our analysis of the TCJA, we remeasured our deferred tax assets and liabilities based on the rates at which they
were expected to reverse in the future. At December 31, 2017, we recorded a $53.4 million tax benefit to our provision for income
taxes in our consolidated statements of operations, which consisted of a $57.7 million tax benefit due to reducing our continuing
operations net deferred tax liability, a $4.6 million tax detriment due to reducing our discontinued operations deferred tax asset
and a $0.3 million tax benefit due to reducing our other comprehensive income net deferred tax liability. Future guidance and
additional information and interpretations with respect to the TCJA could impact our tax provision in future years.
21. Earnings per Share
Basic net income (loss) attributable to Archrock common stockholders 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) attributable to Archrock common stockholders per common share is determined by dividing net income (loss)
attributable to Archrock common stockholders after deducting amounts allocated to participating securities, by the weighted
average number of common shares outstanding for the period. Participating securities include unvested restricted stock and stock-
settled restricted stock units that have nonforfeitable rights to receive dividends or dividend equivalents, whether paid or unpaid.
During periods of net loss, no effect is given to participating securities because they do not have a contractual obligation to
participate in our losses.
Diluted net income (loss) attributable to Archrock common stockholders 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 employee stock purchase plan unless their effect
would be anti-dilutive.
The following table summarizes net income attributable to Archrock common stockholders used in the calculation of basic and
diluted net income per common share (in thousands):
Net income from continuing operations attributable to Archrock
stockholders
Loss from discontinued operations, net of tax
Net income attributable to Archrock stockholders
Less: Net income attributable to participating securities
Net income attributable to Archrock common stockholders
Year Ended December 31,
2018
2017
2019
$
$
97,603
(273)
97,330
(1,348)
95,982
$
$
21,063
$
—
21,063
(815)
20,248
$
19,007
(54)
18,953
(681)
18,272
F-37
The following table shows the potential shares of common stock that were included in computing diluted net income attributable
to Archrock common stockholders per common share (in thousands):
Weighted average common shares outstanding including participating
securities
Less: Weighted average participating securities outstanding
Weighted average common shares outstanding used in basic net income per
common share
Net dilutive potential common shares issuable:
On exercise of options and vesting of performance-based restricted stock
units
On settlement of employee stock purchase plan shares
Weighted average common shares outstanding used in diluted net income
per common share
Year Ended December 31,
2018
2017
2019
139,317
(1,825)
110,843
(1,538)
70,860
(1,308)
137,492
109,305
69,552
34
2
111
5
112
—
137,528
109,421
69,664
The following table shows the potential shares of common stock issuable that were excluded from computing diluted net income
attributable to Archrock common stockholders per common share as their inclusion would have been anti-dilutive (in thousands):
On exercise of options where exercise price is greater than average market
value for the period
154
195
268
Year Ended December 31,
2018
2017
2019
22. Derivatives
We are exposed to market risks associated with changes in the variable interest rate of the Credit Facility. We use derivative
instruments to manage our exposure to fluctuations in this variable interest rate and thereby minimize the risks and costs associated
with financial activities. We do not use derivative instruments for trading or other speculative purposes.
The following interest rate swaps, entered into to offset changes in expected cash flows due to fluctuations in the associated variable
interest rates, were outstanding at December 31, 2019 (in millions):
Expiration Date
May 2020
March 2022
Notional Value
$
$
100
300
400
The counterparties to our derivative agreements are major financial institutions. We monitor the credit quality of these financial
institutions and do not expect non-performance by any counterparty, although such non-performance could have a material adverse
effect on us. We have no collateral posted for the derivative instruments.
We have designated these interest rate swaps as cash flow hedging instruments. Changes in the fair value of the interest rate swaps
are recognized as a component of other comprehensive income (loss) until the hedged transaction affects earnings. At that time,
amounts are reclassified into earnings to interest expense, the same statement of operations line item to which the earnings effect
of the hedged item is recorded. Cash flows from derivatives designated as hedges are classified in our consolidated statements of
cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions unless the
derivative contract contains a significant financing element; in this case, the cash settlements for these derivatives are classified
as cash flows from financing activities.
F-38
We expect the hedging relationship to be highly effective as the interest rate swap terms substantially coincide with the hedged
item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate. We perform quarterly
qualitative prospective and retrospective hedge effectiveness assessments unless facts and circumstances related to the hedging
relationships change such that we can no longer assert qualitatively that the cash flow hedge relationships were and continue to
be highly effective. We estimate that $0.6 million of the deferred pre-tax loss attributable to interest rate swaps included in
accumulated other comprehensive income (loss) at December 31, 2019 will be reclassified into earnings as interest expense at
then-current values during the next 12 months as the underlying hedged transactions occur.
As of December 31, 2019, the weighted average effective fixed interest rate on our interest rate swaps was 1.8%.
In August 2017, we amended the terms of $300.0 million of our interest rate swap agreements to adjust the fixed interest rate and
extend the maturity dates to March 2022. These amendments effectively created new derivative contracts and terminated the old
derivative contracts. As a result, as of the amendment date, we discontinued the original cash flow hedge relationships on a
prospective basis and designated the amended interest rate swaps under new cash flow hedge relationships based on the amended
terms. The fair value of the interest rate swaps immediately prior to the execution of the amendments was a liability of $0.7 million.
The associated amount in accumulated other comprehensive income (loss) was amortized into interest expense over the original
terms of the interest rate swaps through May 2018.
The following table presents the effect of our derivative instruments designated as cash flow hedging instruments on our
consolidated balance sheets (in thousands):
Other current assets
Other assets
Total derivative assets
Accrued liabilities
Other liabilities
Total derivative liabilities
December 31,
2019
2018
$
$
$
$
12
—
12
$
$
(593) $
(1,175)
(1,768) $
3,185
4,122
7,307
—
—
—
The following tables present the effect of our derivative instruments designated as cash flow hedging instruments on our
consolidated statements of operations (in thousands):
Year Ended December 31,
2018
2017
2019
Pre-tax gain (loss) recognized in other comprehensive income (loss)
$
(6,785) $
3,512
$
5,553
Pre-tax gain (loss) reclassified from accumulated other comprehensive income
(loss) into interest expense
2,278
617
(3,209)
Total amount of interest expense in which the effects of cash flow hedges are recorded
$
Pre-tax gain reclassified from accumulated other comprehensive income into interest expense
104,681
2,278
See Note 2 (“Basis of Presentation and Significant Accounting Policies”), Note 14 (“Accumulated Other Comprehensive Income
(Loss)”) and Note 23 (“Fair Value Measurements”) for further details on our derivative instruments.
Year Ended
December 31, 2019
F-39
23. Fair Value Measurements
The accounting standard for fair value measurements and disclosures establishes a fair value hierarchy that prioritizes the inputs
of valuation techniques used to measure fair value into the following three categories:
• Level 1 — Quoted unadjusted prices for identical instruments in active markets to which we have access at the date of
measurement.
• Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in
markets that are not active and model-derived valuations in which all significant inputs and significant value drivers are
observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not
current, little public information exists or prices vary substantially over time or among brokered market makers.
• Level 3 — Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable.
Unobservable inputs are those inputs that reflect our own assumptions regarding how market participants would price
the asset or liability based on the best available information.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
On a quarterly basis, our interest rate swap derivative instruments are valued based on the income approach (discounted cash flow)
using market observable inputs, including LIBOR forward curves. These fair value measurements are classified as Level 2. The
following table presents our derivative asset and liability measured at fair value on a recurring basis, with pricing levels as of the
date of valuation (in thousands):
Derivative asset
Derivative liability
December 31,
2019
2018
$
$
12
(1,768)
7,307
—
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
During the years ended December 31, 2019 and 2018, we recorded non-recurring fair value measurements related to our idle and
previously-culled compressors. Our estimate of the compressors’ fair value was primarily based on the expected net sale proceeds
compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties, or the
estimated component value of the equipment we plan to use. We discounted the expected proceeds, net of selling and other carrying
costs, using a weighted average disposal period of four years. These fair value measurements are classified as Level 3. The fair
value of our impaired compressors was $5.9 million and $2.3 million at December 31, 2019 and 2018, respectively. See Note 17
(“Long-Lived Asset Impairment”) for further details.
Other Financial Instruments
The carrying amounts of our cash, receivables and payables approximate fair value due to the short-term nature of those instruments.
The carrying amount of borrowings outstanding under our Credit Facility approximates fair value due to its variable interest rate.
The fair value of these outstanding borrowings was estimated using a discounted cash flow analysis based on interest rates offered
on loans with similar terms to borrowers of similar credit quality, which are Level 3 inputs.
The fair value of our fixed rate debt was estimated based on quoted prices in inactive markets and is considered a Level 2
measurement. The following table presents the carrying amount and fair value of our fixed rate debt (in thousands):
Carrying amount of fixed rate debt (1)
Fair value of fixed rate debt
December 31,
2019
2018
$
1,329,549
$
1,400,000
690,001
674,000
——————
(1)
Carrying amounts are shown net of unamortized debt discounts and unamortized deferred financing costs. See Note 13 (“Long-Term Debt”).
F-40
24. Stock-Based Compensation
We recognize stock-based compensation expense related to stock options, restricted stock units, performance units, phantom units
and the employee stock purchase plan. We account for forfeitures as they occur.
Stock-based compensation expense consisted of the following during the years ended December 31, 2019, 2018 and 2017 (in
thousands):
Equity awards
Liability awards
Total stock-based compensation expense
Stock Incentive Plan
Year Ended December 31,
2017
2018
2019
$
8,105
$ 7,388
$
8,460
2,336
1,096
1,580
$ 10,441
$ 8,484
$ 10,040
In April 2013, we adopted the 2013 Plan to provide for the granting of stock options, restricted stock, restricted stock units, stock
appreciation rights, performance units, other stock-based awards and dividend equivalent rights to employees, directors and
consultants of Archrock. The 2013 Plan is administered by the compensation committee of our Board of Directors. Under the 2013
Plan, the maximum number of shares of common stock available for issuance pursuant to awards is 10,100,000. An additional
2,832,994 shares were registered for issuance under the 2013 Plan pursuant to the terms of the Merger. Each option and stock
appreciation right granted counts as one share against the aggregate share limit, and any share subject to a stock-settled award
other than a stock option, stock appreciation right or other award for which the recipient pays intrinsic value counts as 1.75 shares
against the aggregate share limit. Shares subject to awards granted under the 2013 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, to the extent of such cancellation, termination, settlement or forfeiture, available for future grant under the 2013 Plan.
Cash-settled awards are not counted against the aggregate share limit. No additional grants have been or may be made under the
2007 Plan following the adoption of the 2013 Plan. Previous grants made under the 2007 Plan continue to be governed by that
plan and the applicable award agreements.
The 2013 Plan allows 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. We withheld 212,080 shares from participants valued at $2.0 million during the year ended
December 31, 2019 to cover tax withholding.
The compensation committee of our Board of Directors generally establishes its schedule for making annual long-term incentive
awards, consisting of a combination of restricted shares and performance units vesting over multiple years, to our named executive
officers several months in advance and does not make such awards based on knowledge of material nonpublic information. Although
the compensation committee of our Board of Directors has historically granted awards on a regular, predictable cycle, such awards
may be granted at other times during the year, as determined in the sole discretion of the compensation committee.
Stock Options
Stock options are granted at fair market value at the grant date, are exercisable according to the vesting schedule established by
the compensation committee of our Board of Directors in its sole discretion and expire no later than seven years after the grant
date. Stock options generally vest one-third per year on each of the first three anniversaries of the grant date, subject to continued
service through the applicable vesting date. During the years ended December 31, 2019, 2018, and 2017, we did not grant any
stock options, and there was no stock option activity during the year ended December 31, 2019:
Stock
Options
(in thousands)
Weighted
Average
Exercise Price
Per Share
Weighted
Average
Remaining
Life
(in years)
Aggregate
Intrinsic
Value
(in thousands)
Options outstanding and exercisable, January 1, 2019
Options outstanding and exercisable, December 31, 2019
$
154
154
19.40
19.40
0.6
$
—
F-41
Intrinsic value is the difference between the market value of our stock and the exercise price of each stock option multiplied by
the number of stock options outstanding for those stock options where the market value exceeds their exercise price. The total
intrinsic value of stock options exercised during the years ended December 31, 2018 and 2017 was $0.8 million and $0.3 million,
respectively. There were no stock options exercised during the year ended December 31, 2019. Stock options outstanding at
December 31, 2019 expire in March 2020 and March 2021.
Restricted Stock, Restricted Stock Units, Performance-Based Restricted Stock Units, Cash-Settled Restricted Stock Units and
Cash-Settled Performance Units
For grants of restricted stock and restricted stock units, we recognize compensation expense over the vesting period equal to the
fair value of our common stock at the grant date. Our restricted stock and restricted stock units include rights to receive dividends
or dividend equivalents. We remeasure the fair value of cash-settled restricted stock units and cash-settled performance units and
record a cumulative adjustment of the expense previously recognized. Our obligation related to the cash-settled restricted stock
units and cash-settled performance units is reflected as a liability in our consolidated balance sheets. Restricted stock, restricted
stock units, cash-settled restricted stock units and cash-settled performance units generally vest one-third per year on dates as
specified in the applicable award agreement, subject to continued service through the applicable vesting date.
We also grant performance-based restricted stock units, which in addition to service conditions, have a market-based condition,
which determines the number of restricted stock units and dividend equivalents earned. The market condition is based on our total
shareholder return ranked against that of a predetermined peer group over a three-year performance period. The awards vest in
their entirety on a date specified in the award agreement in the year following the conclusion of the performance period. The fair
value of the performance-based restricted stock units, incorporating the market condition, is estimated on the grant date using a
Monte Carlo simulation model. Expected volatilities for us and each peer company utilized in the model are estimated using a
historical period consistent with the awards’ remaining performance period as of the grant date. The risk-free interest rate is based
on the yield on U.S. Treasury Separate Trading of Registered Interest and Principal Securities for a term consistent with the
remaining performance period. The dividend yield used is 0.0% to approximate accumulation of earnings.
The following table presents the inputs used and the grant date fair value calculated in the Monte Carlo simulation model for the
performance-based restricted stock units awarded during the years ended December 31, 2019 and 2018.
Remaining performance period as of grant date (in years)
Risk-free interest rate used
Grant-date fair value
Year Ended December 31,
2019
2018
2.9
2.6%
2.8
2.4%
$
12.91
$
13.46
F-42
The following table presents restricted stock, restricted stock unit, performance-based restricted stock unit, cash-settled restricted
stock unit and cash-settled performance unit activity during the year ended December 31, 2019:
Non-vested awards, January 1, 2019
Granted (1)
Vested (2)
Canceled
Non-vested awards, December 31, 2019 (3)(4)
Weighted
Average
Grant Date
Fair Value
Per Share
Shares
(in thousands)
1,728
$
1,404
(957)
(153)
2,022
9.68
10.01
8.85
10.33
10.25
——————
(1)
(2)
(3)
(4)
The weighted average grant date fair value of shares granted during the years ended December 31, 2019, 2018 and 2017 was $10.01, $9.66 and $12.95,
respectively.
The total fair value of all awards vested during the years ended December 31, 2019, 2018 and 2017 was $9.0 million, $8.2 million and $10.8 million,
respectively.
Non-vested awards as of December 31, 2019 were comprised of 376,000 cash-settled restricted stock units and cash-settled performance units and 1,646,000
restricted stock, stock-settled restricted stock units and stock-settled performance-based restricted stock units.
During the year ended December 31, 2019, the settlement terms of 99,631 performance units, with grant dates in 2018 and 2019, were modified from
settlement in stock to cash. The change in award settlement from stock to cash was the only modification to these awards; the vesting, forfeiture and all
other terms and conditions were unchanged. The modification resulted in a $0.2 million reclassification from additional paid-in capital to other current
liabilities in our consolidated balance sheets and had an immaterial impact on our consolidated statements of operations.
As of December 31, 2019, we expect $13.7 million of unrecognized compensation cost related to unvested restricted stock, stock-
settled restricted stock units, performance units, cash-settled restricted stock units and cash-settled performance units to be
recognized over the weighted-average period of 1.8 years. Cash paid upon vesting of cash-settled restricted stock units during the
years ended December 31, 2019, 2018 and 2017 was $1.3 million, $1.1 million and $1.8 million, respectively.
Employee Stock Purchase Plan
Adopted in 2017, our ESPP provides employees with an opportunity to participate in our long-term performance and success
through the purchase of shares of common stock at a price that may be less than fair market value. Each quarter, eligible employees
may elect to withhold a portion of their salary up to the lesser of $25,000 per year or 10% of their eligible pay to purchase shares
of our common stock at a price equal to 85% to 100% of the fair market value of the stock as defined by the plan. The ESPP will
terminate on the date that all shares of common stock authorized for sale under the ESPP have been purchased, unless it is extended.
The maximum number of shares of common stock available for purchase under the ESPP is 1,000,000. As of December 31, 2019,
783,270 shares remained available for purchase under the ESPP. Our ESPP is compensatory and, as a result, we record an expense
in our consolidated statements of operations related to the ESPP. The purchase discount under the ESPP is 5% of the fair market
value of our common stock on the first trading day of the quarter or the last trading day of the quarter, whichever is lower.
Directors’ Stock and Deferral Plan
Adopted in 2007, the Archrock, Inc. Directors’ Stock and Deferral Plan provides non-employee members of the Board of Directors
with an opportunity to elect to receive our common stock as payment for a portion or all of their retainer. The number of shares
paid each quarter is determined by dividing the dollar amount of fees elected to be paid in common stock by the closing sales price
per share of the common stock on the last day of the quarter. In addition, directors who elect to receive a portion or all of their
fees in the form of common stock may also elect to defer, until a later date, the receipt of a portion or all of their fees to be received
in common stock. We have reserved 100,000 shares under the Directors’ Stock and Deferral Plan and, as of December 31, 2019,
48,022 shares remained available to be issued under the plan.
Partnership Long-Term Incentive Plans
Pursuant to the Merger, all outstanding phantom units previously granted under the 2017 and 2006 Partnership LTIP were converted
into comparable awards based on Archrock’s common shares. As such, all outstanding phantom units were converted, effective
as of the closing of the Merger, into Archrock restricted stock units. See Note 15 (“Equity”) for further details of the Merger. Each
Archrock restricted stock unit is subject to the same vesting, forfeiture and other terms and conditions applicable to the converted
Partnership phantom units. There was no additional compensation cost to record as the conversion of awards did not result in
incremental fair value.
F-43
Prior to the Merger, in April 2017, the Partnership adopted the 2017 Partnership LTIP to provide for the benefit of employees,
directors and consultants of the Partnership, us and our respective affiliates. The 2017 Partnership LTIP provided for the issuance
of unit options, unit appreciation rights, restricted units, phantom units, performance awards, bonus awards, distribution equivalent
rights, cash awards and other unit-based awards. Previous grants made under the 2006 Partnership LTIP continued to be governed
by that plan and the applicable award agreements. We recognized compensation expense over the vesting period equal to the fair
value of the Partnership’s common units at the grant date. Phantom units granted under the 2017 and 2006 LTIP may have included
nonforfeitable tandem distribution equivalent rights to receive cash distributions on unvested phantom units in the quarter in which
distributions were paid on common units. Phantom units generally vested one-third per year on dates specified in the applicable
award agreements subject to continued service through the applicable vesting date. During the year ended December 31, 2018,
53,091 phantom units vested with a weighted average grant date fair value per unit of $11.24.
25. Retirement Benefit Plan
Our 401(k) retirement plan provides for optional employee contributions up to the applicable Internal Revenue Service annual
limit and discretionary employer matching contributions. Through June 2017 we made discretionary matching contributions to
each participant’s account at a rate of (i) 100% of each participant’s first 1% of contributions plus (ii) 50% of each participant’s
contributions up to the next 5% of eligible compensation. Beginning July 2017, 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 $6.8 million, $6.5 million and $4.8 million during the years ended December 31, 2019, 2018 and 2017,
respectively.
26. Commitments and Contingencies
Performance Bonds
In the normal course of business we have issued performance bonds to various state authorities that ensure payment of certain
obligations. We have also issued a bond to protect our 401(k) retirement plan against losses caused by acts of fraud or dishonesty.
The bonds have expiration dates in 2020 through the fourth quarter of 2022 and maximum potential future payments of $2.3
million. As of December 31, 2019, we were in compliance with all obligations to which the performance bonds pertain.
Tax Matters
We are subject to a number of state and local taxes that are not income-based. As many of these taxes are subject to audit by the
taxing authorities, it is possible that an audit could result in additional taxes due. We accrue for such additional taxes when we
determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the liability. As of
December 31, 2019 and 2018, we accrued $2.5 million and $4.5 million, respectively, for the outcomes of non-income based tax
audits. We do not expect that the ultimate resolutions of these audits will result in a material variance from the amounts accrued.
We do not accrue for unasserted claims for tax audits unless we believe the assertion of a claim is probable, it is probable that it
will be determined that the claim is owed and we can reasonably estimate the claim or range of the claim. We believe the likelihood
is remote that the impact of potential unasserted claims from non-income based tax audits could be material to our consolidated
financial position, but it is possible that the resolution of future audits could be material to our consolidated results of operations
or cash flows.
Subject to the provisions of the tax matters agreement between Exterran Corporation and us, both parties agreed to indemnify the
primary obligor of any return for tax periods beginning before and ending before or after the Spin-off (including any ongoing or
future amendments and audits for these returns) for the portion of the tax liability (including interest and penalties) that relates to
their respective operations reported in the filing. The tax contingencies mentioned above relate to tax matters for which we are
responsible in managing the audit. As of December 31, 2019 and 2018, we recorded an indemnification liability (including penalties
and interest), in addition to the tax contingency above, of $2.8 million and $2.6 million, respectively, for our share of non-income
based tax contingencies related to audits being managed by Exterran Corporation.
During the fourth quarter of 2018, we settled certain sales and use tax audits, for which we recorded an $11.3 million net benefit
in our consolidated statement of operations. This net benefit was reflected as a decrease of $1.8 million, $8.9 million and $0.1
million to cost of sales (excluding depreciation and amortization), SG&A and interest expense, respectively, and an increase to
other income, net of $0.5 million. These settlements were reflected in our consolidated balance sheets as a $15.3 million tax refund
receivable offset by $4.0 million in accrued liabilities at December 31, 2018. We received the cash refund for this settlement in
the first quarter of 2019.
F-44
Insurance Matters
Our business can be hazardous, involving unforeseen circumstances such as uncontrollable flows of natural gas or well fluids and
fires or explosions. As is customary in our industry, we review our safety equipment and procedures and carry insurance against
some, but not all, risks of our business. Our insurance coverage includes property damage, general liability and commercial
automobile liability and other coverage we believe is appropriate. We believe that our insurance coverage is customary for the
industry and adequate for our business; however, losses and liabilities not covered by insurance would increase our costs.
Additionally, we are substantially self-insured for workers’ compensation and employee group health claims in view of the relatively
high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses up to the deductible amounts
are estimated and accrued based upon known facts, historical trends and industry averages. We are also self-insured for property
damage to our offshore assets.
Litigation and Claims
In the ordinary course of business, we are involved in various pending or threatened legal actions. While we are unable to predict
the ultimate outcome of these actions, we believe that any ultimate liability arising from any of these actions will not have a
material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay
dividends. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance
that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our
consolidated financial position, results of operations or cash flows, including our ability to pay dividends.
The SEC conducted an investigation in connection with certain previously disclosed errors and irregularities at one of our former
international operations. The SEC’s investigation related to the circumstances that gave rise to the restatement of prior period
consolidated and combined financial statements. On April 8, 2019, we received notice that the investigation had concluded with
no enforcement action.
27. Related Party Transactions
In connection with the closing of the Elite Acquisition, we issued 21.7 million shares of our common stock to JDH Capital, an
affiliate of our customer Hilcorp. As long as JDH Capital, together with affiliates of Hilcorp, owns at least 7.5% of our outstanding
common stock, it will have the right to designate one director to our Board of Directors. On August 1, 2019, Jeffery D. Hildebrand,
founder and executive chairman of Hilcorp, was elected to our Board of Directors. Mr. Hildebrand receives no compensation for
his role as a director. As of December 31, 2019, JDH Capital owned 14.3% of our outstanding common stock.
Revenue from Hilcorp and affiliates was $31.4 million, $12.0 million and $6.7 million during the years ended December 31, 2019,
2018 and 2017, respectively. Accounts receivable, net due from Hilcorp and affiliates were $5.1 million and $3.6 million as of
December 31, 2019 and 2018, respectively.
28. Segments
We manage our business segments primarily based on the type of product or service provided. We have two segments which we
operate within the U.S.: contract operations and aftermarket services. The contract operations segment primarily provides natural
gas compression services to meet specific customer requirements. The aftermarket services segment provides a full range of
services to support the compression needs of customers, from part sales and normal maintenance services to full operation of a
customer’s owned assets. We evaluate the performance of our segments based on gross margin for each segment. Revenue includes
only sales to external customers.
During the years ended December 31, 2019, 2018 and 2017, Williams Partners accounted for 8%, 11% and 13%, respectively, of
our contract operations and aftermarket services revenue. No other customer accounted for 10% or more of our revenue during
these years.
F-45
The following table presents revenue, gross margin and capital expenditures by segment during the years ended December 31,
2019, 2018 and 2017 (in thousands):
Contract
Operations
Aftermarket
Services
Segments
Total
Other (1)
Total (2)
2019:
Revenue
Gross margin
Capital expenditures
2018:
Revenue
Gross margin
Capital expenditures
2017:
Revenue
Gross margin
Capital expenditures
$
771,539
$
193,946
$
965,485
$
— $
474,279
374,650
34,968
8,714
509,247
383,364
—
1,834
$
672,536
$
231,905
$
904,441
$
— $
399,523
307,048
40,551
6,111
440,074
313,159
—
5,943
$
610,921
$
183,734
$
794,655
$
— $
347,916
211,651
27,817
3,429
375,733
215,080
—
6,613
965,485
509,247
385,198
904,441
440,074
319,102
794,655
375,733
221,693
——————
(1)
Includes corporate-related items.
(2)
Excludes capital expenditures and the operating results of discontinued operations.
The following table presents assets by segment reconciled to total assets per the consolidated balance sheets (in thousands):
Contract operations
Aftermarket services
Assets from segments
Other assets (1)
Assets associated with discontinued operations
Total assets
——————
(1)
Includes corporate-related items.
December 31,
2019
2,915,724
$
2018
2,383,381
$
67,832
79,383
2,983,556
2,462,764
113,518
12,901
82,388
7,363
$
3,109,975
$
2,552,515
F-46
The following table reconciles total gross margin to income (loss) before income taxes (in thousands):
Total gross margin
Less:
Selling, general and administrative
Depreciation and amortization
Long-lived asset impairment
Restatement and other charges
Restructuring and other charges
Interest expense
Debt extinguishment loss
Transaction-related costs
Gain on sale of assets, net
Other income, net
Year Ended December 31,
2018
2017
2019
$
509,247
$
440,074
$
375,733
117,727
188,084
44,663
445
—
104,681
3,653
8,213
(16,016)
(661)
58,458
$
101,563
174,946
28,127
19
—
93,328
2,450
10,162
(5,674)
(157)
35,310
$
111,483
188,563
29,142
4,370
1,386
88,760
291
275
(5,675)
(243)
(42,619)
Income (loss) before income taxes
$
29. Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data is presented below in thousands, except per share amounts:
March 31,
2019
June 30,
2019
September 30,
2019
December 31,
2019
Revenue
Gross profit (1)
Long-lived asset impairment
Debt extinguishment loss
Transaction-related costs
(Gain) loss on sale of assets, net
Net income (2)
Net income from continuing operations per
common share: basic and diluted
$
236,159
$
238,390
$
244,949
$
76,171
3,092
—
180
16
19,456
0.15
77,454
8,632
3,653
2,687
(1,801)
11,423
0.09
81,481
7,097
—
4,905
(7,859)
20,407
0.14
245,987
64,963
25,842
—
441
(6,372)
46,044
0.30
F-47
Revenue
Gross profit (1)
Long-lived asset impairment
Restatement and other charges
Debt extinguishment loss
Transaction-related costs
Gain on sale of assets, net
Net income
Net income (loss) attributable to Archrock
stockholders
Net income (loss) from continuing operations
attributable to Archrock common stockholders
per common share: basic and diluted
March 31,
2018
June 30,
2018
September 30,
2018
December 31,
2018
$
212,040
62,577
$
226,870
63,924
$
232,372
68,661
$
233,159
66,094
4,710
485
—
4,125
(1,195)
2,069
(3,816)
6,953
(1,076)
2,450
5,686
(994)
4,149
1,937
6,660
396
—
182
(719)
9,974
9,974
9,804
214
—
169
(2,766)
12,968
12,968
(0.06)
0.02
0.08
0.10
——————
(1)
(2)
Defined as revenue less cost of sales, direct depreciation and amortization and long-lived asset impairment charges.
Includes a $39.6 million one-time benefit from the release of a deferred tax asset valuation allowance in the fourth quarter of 2019.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Allowance for doubtful accounts applied to accounts
receivable in the balance sheet
December 31, 2019
December 31, 2018
December 31, 2017
——————
(1)
Uncollectible accounts written off.
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Deductions(1)
Balance at
End of
Period
$
1,452
$
2,567
$
1,809
$
1,794
1,864
1,677
5,144
2,019
5,214
2,210
1,452
1,794
F-48
BOARD OF DIRECTORS
Gordon T. Hall
Chairman of the Board
D. Bradley Childers
LEADERSHIP TEAM
D. Bradley Childers
President and Chief Executive Officer
Doug S. Aron
Senior Vice President and
Chief Financial Officer
CORPORATE INFORMATION
Annual Meeting
The 2020 Annual Meeting of Stockholders
will be held April 30, 2020, at 9:30 a.m. central
time, at Archrock’s Corporate Office.
Stock Trading
New York Stock Exchange symbol: AROC
Stockholder Information Website
Additional information on Archrock, including
securities filings, press releases, Code of
Business Conduct, Corporate Governance
Principles and Board Committee Charters, is
available on our website at www.archrock.com.
Transfer Agent-Registrar
American Stock Transfer and
Trust Company, LLC
6201 15th Avenue
Brooklyn, New York 11219 USA
(800) 937-5449 or (718) 921-8124
help@astfinancial.com
Independent Registered Public
Accounting Firm
Deloitte & Touche LLP, Houston, Texas USA
Anne-Marie N. Ainsworth
J.W.G. “Will” Honeybourne
Wendell R. Brooks
Frances Powell Hawes
Jeffery D. Hildebrand
James H. Lytal
Edmund P. Segner, III
Stephanie C. Hildebrandt
Senior Vice President, General Counsel
and Secretary
Elspeth A. Inglis
Senior Vice President and
Chief Human Resources Officer
Jason G. Ingersoll
Senior Vice President, Marketing and Sales
Eric W. Thode
Senior Vice President, Operations
Corporate Office
9807 Katy Freeway, Ste. 100
Houston, Texas 77024 USA
(281) 836-8000
10-K/Investor Contact
Stockholders may obtain a copy, without
charge, of Archrock’s 2019 Form 10-K, filed
with the Securities and Exchange Commission,
by visiting our website at www.archrock.com
or by requesting a copy in writing to
investor.relations@archrock.com or Archrock’s
Corporate Office, Attention: Investor Relations.
The certifications by our Chief Executive Officer
and Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 are filed
as exhibits to our 2019 Form 10-K. We have also
filed with the New York Stock Exchange the
written affirmation certifying that we are not
aware of any violations by Archrock of NYSE
Corporate Governance Listing Standards.
Contact Board of Directors
To report a concern about Archrock’s
accounting, internal controls or auditing matters,
or any other matter, to the Audit Committee or
non-management members of the Board of
Directors, send a detailed note, with relevant
documents, to Archrock’s Corporate Office,
Attention: Gordon T. Hall, Chairman of the
Board, or leave a message at 1-844-809-1630.
Forward-Looking Statements
Certain statements contained in this Annual
Report may constitute forward-looking
statements within the meaning of the Private
Securities Litigation Reform Act of 1995.
These statements involve a number of risks,
uncertainties and other factors that could
cause actual results to be materially different, as
discussed more fully elsewhere in this Annual
Report and in our filings with the Securities
and Exchange Commission, including our 2019
Form 10-K filed on February 21, 2020. Except
as required by law, we expressly disclaim any
intention or obligation to revise or update any
forward-looking statements whether as a result
of new information, future events or otherwise.
Archrock is an energy infrastructure company with a pure-play focus
on midstream natural gas compression. Archrock is 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. Archrock
is headquartered in Houston, Texas, with approximately 1,700 employees.
For more information, please visit www.archrock.com.
archrock.com9807 Katy Freeway, Ste. 100Houston, Texas 77024 © 2020 Archrock. All Rights Reserved.