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 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 Form 10–K.
This section primarily discusses 2024 and 2023 items and comparisons between these years. For a discussion of changes from 2022 to 2023 and other financial information related to 2023, refer to Part II, Item 7. “Manag Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10–K for the year ended December 31, 2023 filed with the SEC on February 21, 2024.
Overview
We are an energy infrastructure company with a primary focus on midstream natural gas compression and a commitment to helping our customers produce, compress and transport natural gas in a safe and environmentally responsible way. We are a premier provider of natural gas compression services to customers in the energy 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 contract operations services primarily include 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.
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Significant 2024 Transactions
TOPS Acquisition
On August 30, 2024, we completed the TOPS Acquisition whereby we acquired all of the issued and outstanding equity interests in TOPS, including a fleet of approximately 580,000 horsepower for aggregate consideration consisting of $868.7 million in cash and approximately 6.9 million shares of common stock with an acquisition date fair value of $139.1 million. The cash portion of the purchase price was funded with proceeds from the July 2024 Equity Offering, the 2032 Notes offering and borrowings under the Credit Facility. See Note 4 (“Business Transactions”) for further details.
2032 Notes
On August 26, 2024, we completed a private offering of $700.0 million aggregate principal amount of 6.625% senior notes due September 2032 and received net proceeds of $690.0 million after deducting issuance costs. The $10.0 million of issuance costs 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 statement of operations over the term of the notes. A portion of the net proceeds was used to fund a portion of the cash consideration for the TOPS Acquisition, the 2027 Notes Tender Offer and to repay borrowings outstanding under our Credit Facility. See Note 16 (“Long-Term Debt”) for further details.
2027 Notes Tender Offer
In connection with the TOPS Acquisition and offering of the 2032 Notes, we completed a concurrent cash tender offer of $202.0 million, which reflects approximately 101% of the aggregate principal amount of the tendered 2027 Notes and $0.2 million of agent and legal fees. On the date of tender, the net carrying value of the tendered 2027 Notes was $198.8 million and we recorded a debt extinguishment loss of $3.2 million in our consolidated statements of operations. See Note 16 (“Long-Term Debt”) for further details.
July 2024 Equity Offering
On July 24, 2024, Archrock sold, pursuant to a public underwriting offering, approximately 12.7 million shares of common stock, including approximately 1.7 million shares of common stock pursuant to an over-allotment option. Archrock received net proceeds of $255.7 million, after deducting underwriting discounts, commissions and offering expenses. Proceeds from this equity offering were used to fund a portion of the TOPS Acquisition. See Note 18 (“Stockholders’ Equity”) for further details.
Trends and Outlook
The key driver of our business is the production of U.S. oil and natural gas. Approximately 64% of our operating fleet is deployed for midstream natural gas gathering applications, with the remaining fleet being used in gas lift applications to enhance oil production. As our business is so closely aligned with production and is typically less directly impacted by commodity prices, we are not as exposed to the volatility often faced in shorter–cycle oil field service businesses.
Domestic natural gas production generally occurs either in basins where natural gas is produced alongside oil, also known as “associated” gas, such as the Permian and Delaware Basins, the Eagle Ford and the Mid–Continent or in natural gas basins, such as the Marcellus, Utica and Haynesville Shales. Significant investment in domestic exploration and production and midstream infrastructure across the energy industry has been made over much of the past decade, particularly in the low–cost basins characterized by oil and associated natural gas production. The development of these basins producing both commodities has created additional incremental demand for natural gas compression over the recent past as it is a critical method to transport associated gas volumes or enhance oil production through gas lift.
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Current Trends
According to the EIA Outlook, average U.S. oil and dry natural gas and production were as follows:
Year Ended December 31,
Average dry natural gas production (Bcf/d) 103.0 103.8 98.0
During 2024, U.S. natural gas and oil production grew to record levels, resulting in strong demand for our compression services. In response, we increased our investment in new large horsepower fleet units and expanded our fleet through the TOPS Acquisition. Our contract operations revenue and total operating horsepower increased 21% and 17%, respectively in 2024.
Outlook
The EIA Outlook forecasts the following year–over–year changes:
Year Ended December 31,
U.S. dry natural gas production 2 % 2 %
U.S. oil production 3 % 1 %
U.S. natural gas domestic consumption 1 % (1) %
Liquefied natural gas exports 17 % 16 %
The EIA Outlook expects natural gas production to continue to increase to all-time highs in 2025 and 2026. Natural gas consumption is expected to be largely consistent with 2024, reflecting consistent usage of natural gas in the electric power generation and residential sectors, as well as increased LNG exports and exports of natural gas via pipeline to Mexico.
We believe the outlook for the energy industry in the U.S. is positive. While we anticipate that the combination of commodity prices and demand may likely have a positive impact on activity levels in both the upstream and midstream sectors, we cannot predict the ultimate magnitude of that impact on our business and expect it to be varied across our operations, depending on the region, customer, nature of our services, contract term and other factors. However, we continue to believe that overall the long–term demand for our compression services will continue given the necessity of compression in facilitating the transportation and processing of natural gas.
Regarding our aftermarket services business, 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.
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 the key challenges and uncertainties we will face in the future.
Labor. We believe that our ability to hire, train and retain qualified personnel will continue to be important. Although we have been able to historically satisfy our personnel needs, 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. Further, the cost of labor has increased and may continue to increase in the future with increases in demand, which will require us to incur additional costs.
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Cost Management. In order to improve our operations and further reduce operating expenses, we invested and continue to invest significant resources into a process and technology transformation project that has, among other things, replaced our former ERP, supply chain and inventory management systems and expanded the remote monitoring capabilities of our compression fleet. Cost management continues to be challenging, however, and there is no guarantee that our efforts will result in a reduction in our operating expenses. Natural gas production growth and resulting demand for our services could cause us to experience increased operating expenses as we hire employees and incur additional expenses needed to support the rebound in market demand.
Further, we depend on suppliers for the materials, parts, equipment and lube oil necessary to our operations, which exposes us to volatility in prices. Significant price increases for these inputs could adversely affect our operating profits. Supply chain disruptions could also adversely affect our ability to obtain, or increase the cost of, such items. While we generally attempt to mitigate the impact of increased prices through strategic purchasing decisions, diversification of our supplier base, where possible, and the passing along of increased costs to customers, there may be a time delay between the increased commodity prices and the ability to increase the price of our services.
Capital Requirements and the Availability of External Sources of Capital. We funded a significant portion of our capital expenditures and the TOPS Acquisition with proceeds from the July 2024 Equity Offering and the 2032 Notes offering and borrowings under the Credit Facility. Current conditions could limit our ability to access the debt and equity markets to raise capital on affordable terms in 2025 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 or acquisitions, which could impair our ability to grow or maintain our business.
Demand for natural gas-powered compression. Demand for our services is dependent on the demand for natural gas in the markets we serve. Although the EIA currently forecasts natural gas demand will grow through 2050, technological advances and accelerated adoption of renewable sources of energy could reduce demand for natural gas in our markets and have an adverse effect on our business. In addition, increased focus of our customers on reducing emissions from, or the use of, combustion engines in compression could increase demand for electric motor-driven compressors or require us to make modifications to our existing natural gas-powered units.
Operating Highlights
Year Ended December 31,
Horsepower utilization:
Spot (at period end) 96 % 96 % 93 %
(1) Defined as idle and operating horsepower. Includes new compressors completed by third party manufacturers that have been delivered to us.
(2) Defined as horsepower that is operating under contract and horsepower that is idle but under contract and generating revenue such as standby revenue.
(3) Defined as average of period end horsepower that is operating under contract and horsepower that is idle but under contract and generating revenue such as standby revenue, including operating horsepower as of September 30, 2024 through December 31, 2024 for compressors acquired in the TOPS Acquisition.
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 adjusted gross margin.
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We define adjusted gross margin as total revenue less cost of sales, exclusive of depreciation and amortization. Adjusted 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, exclusive of depreciation and amortization, which are key components of our operations. We believe adjusted 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, adjusted gross margin should not be considered an alternative to, or more meaningful than, gross margin, net income (loss) or any other measure presented in accordance with GAAP. Our adjusted gross margin may not be comparable to a similarly titled measure of other entities because other entities may not calculate adjusted gross margin in the same manner.
Adjusted gross margin has certain material limitations associated with its use as compared to net income. These limitations are primarily due to the exclusion of SG&A, depreciation and amortization, long-lived and other asset impairments, restructuring charges, debt extinguishment loss, interest expense, transaction-related costs, gain on sale of assets, net, other expense (income), net and provision for income taxes. 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.
The reconciliation of net income to adjusted gross margin is as follows:
Year Ended December 31,
Restructuring charges — 1,775 —
Debt extinguishment loss 3,181 — —
Transaction-related costs 13,249 — —
The following table reconciles adjusted gross margin to gross margin, its most directly comparable to GAAP measure:
Year Ended December 31,
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RESULTS OF OPERATIONS
Summary of Results
Revenue was $1,157.6 million and $990.3 million during the years ended December 31, 2024 and 2023, respectively. The increase in revenue was primarily due to increased revenue from our contract operations business. See “Contract Operations” below for further details.
Net income was $172.2 million and $105.0 million during the years ended December 31, 2024 and 2023, respectively. The increase was primarily driven by higher adjusted gross margin from our contract operations business and higher gain on sale of assets, net. These increases were partially offset by increases in depreciation and amortization, provision for income taxes, SG&A, transaction-related costs, interest expense and debt extinguishment loss.
Year Ended December 31, 2024 Compared to Year Ended December 31, 2023
Contract Operations
Year Ended December 31, Increase
(dollars in thousands) 2024 2023 (Decrease)
Adjusted gross margin percentage (1) 67 % 62 % 5 %
(1) Defined as adjusted gross margin divided by revenue.
Revenue in our contract operations business increased approximately $105.6 million due to higher rates and an increase in average operating horsepower, as well as an increase of $65.5 million due to the compression units acquired in the TOPS Acquisition.
The increase in cost of sales, exclusive of depreciation and amortization, was primarily due to a $17.9 million increase in employee compensation, including the addition of headcount from the TOPS Acquisition, a $4.1 million increase in parts expense, a $1.4 million increase in auto expense and a $1.3 million increase in local and miscellaneous taxes. This increase was partially offset by a decrease of $6.6 million in startup expenses resulting from average horsepower utilization for the fleet at record levels as well as fewer unit stops and a decrease of $2.9 million in lube oil expenses mainly due to lower prices.
The increases in adjusted gross margin and adjusted gross margin percentage were mainly driven by revenue growth that outpaced the increase in cost of sales, exclusive of depreciation and amortization.
Aftermarket Services
Year Ended December 31, Increase
(dollars in thousands) 2024 2023 (Decrease)
Adjusted gross margin percentage (1) 24 % 21 % 3 %
(1) Defined as adjusted gross margin divided by revenue.
Revenue in our aftermarket services business decreased primarily due to lower parts sales, which was partially offset by increased service activity driven by higher customer demand, and an increase in maintenance service contracts.
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The increases in adjusted gross margin and adjusted gross margin percentage were mainly due to a reduction in cost of sales, exclusive of depreciation and amortization, due to a difference in the scope, timing and type of services performed, including additional work associated with maintenance service contracts, which outpaced the decline in overall revenue.
Costs and Expenses
Year Ended December 31,
Long-lived and other asset impairment 10,681 12,041
Restructuring charges — 1,775
Debt extinguishment loss 3,181 —
Transaction-related costs 13,249 —
Gain on sale of assets, net (17,887) (10,199)
Selling, general and administrative. The increase in SG&A was primarily driven by a $17.2 million increase in employee incentive and other compensation expense, a $2.4 million increase in professional and consulting fees, a $0.8 million increase in network and computer-related costs and a $0.7 million increase in insurance expense.
Depreciation and amortization. The increase in depreciation and amortization was primarily due to fixed assets additions, including $15.8 million depreciation and amortization associated with the compression units and intangible assets acquired in the TOPS Acquisition, and accelerated depreciation associated with certain assets. The increase was partially offset by a decrease in depreciation associated with assets reaching the end of their depreciable lives, the impact of compression and other asset sales, and long-lived asset impairments.
Long–lived and other asset impairment. We periodically review the future deployment of our idle compressors for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. We also evaluate for impairment our idle units that have been culled from our compression fleet in prior years and are available for sale. During the years ended December 31, 2024 and 2023, we recognized $10.7 million and $12.0 million, respectively, of impairment charges to write down these compressors to their fair value. The decrease in impairment charges on compressors is due to an increase in customer demand and as a result, higher utilization of our equipment. See Note 22 (“Long-Lived Asset and Other Impairments”) for further details on these impairment charges. The following table presents the results of our compression fleet impairment review, as recorded in our contract operations segment:
Year Ended December 31,
Idle compressors retired from the active fleet 95 105
Horsepower of idle compressors retired from the active fleet 66,000 53,000
Restructuring charges. Restructuring charges of $1.8 million during the year ended December 31, 2023 consisted of severance and consulting costs related to our restructuring activities. See Note 23 (“Restructuring Charges”) for further details on these restructuring charges.
Debt extinguishment loss. We incurred $3.2 million of debt extinguishment loss during the year ended December 31, 2024 as a result of the 2027 Notes Tender Offer.
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Interest expense. The increase in interest expense was primarily due to a higher average outstanding balance of long-term debt due to the 2032 Notes offering, an increase in the outstanding balance on the Credit Facility and higher interest rates. These increases were partially offset by the 2027 Notes Tender Offer and the write-off of $1.0 million of unamortized deferred financing costs as a result of the Amended and Restated Credit Agreement during the year ended December 31, 2023.
Transaction-related costs. We incurred $13.2 million of professional fees, compensation-related and other costs during the year ended December 31, 2024 related to the TOPS Acquisition. See Note 4 (“Business Transactions”) for further details on these transaction-related costs.
Gain on sale of assets, net. The increase in gain on sale of assets, net was primarily due to gains of $17.6 million on compression asset sales during the year ended December 31, 2024 compared to gains of $7.6 million on compression asset sales during the year ended December 31, 2023.
Other expense, net. The increase in other expense, net was primarily due to a $0.5 million increase in unrealized change in the fair value of our investment in an unconsolidated affiliate recognized during the year ended December 31, 2024, compared to the year ended December 31, 2023.
Provision for Income Taxes
The increase in provision for income taxes was primarily due to the tax effect of the increase in book income and the limitation on executive compensation offset by the benefit from equity-settled long-term incentive compensation during the year ended December 31, 2024, compared to the year ended December 31, 2023.
Year Ended December 31, Increase
(dollars in thousands) 2024 2023 (Decrease)
Effective tax rate 26 % 26 % - %
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 our 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 have no near-term maturities and believe that our operating cash flows and borrowings under the Credit Facility will be sufficient to meet our future liquidity needs.
We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or debt securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, may be material, will be upon terms and prices as we may determine and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
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Cash 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 provide 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;
• maintenance capital expenditures;
• interest on our outstanding debt obligations;
• dividend payments to our stockholders; and
Capital Expenditures
Growth Capital Expenditures. The majority of our growth capital expenditures are related to the acquisition cost of new compressors when our idle equipment cannot be reconfigured to economically fulfill a project’s requirements, and the new compressor is expected to generate economic returns that exceed our cost of capital over the compressor’s expected useful life. In addition to newly–acquired compressors, growth capital expenditures 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 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.
Growth capital expenditures for the year ended December 31, 2024 were $250.9 million, including TOPS’ specific growth capital expenditures of $69.4 million. Growth capital expenditures for the year ended December 31, 2023 were $190.3 million.
Maintenance Capital Expenditures. Maintenance capital expenditures are related to major overhauls of significant components of a compression package, such as the engine, electric motor, compressor and cooler, which return the components to a like–new condition, but do not modify the application for which the compression package was designed.
Maintenance capital expenditures were $87.8 million and $92.2 million during the years ended December 31, 2024 and 2023, respectively. The decrease in maintenance capital expenditures from 2023 to 2024 was primarily due to lower make–ready investment, as our fleet’s average horsepower utilization reached record levels, and we experienced fewer stops in 2024 compared to 2023. This decrease was partially offset by an increase in scheduled and unscheduled maintenance activities due to maintenance cycle requirements.
Projected Capital Expenditures. We currently plan to spend approximately $470 million to $535 million on capital expenditures during 2025, primarily consisting of approximately $330 million to $370 million for growth capital expenditures and approximately $105 million to $115 million for maintenance capital expenditures.
Dividends
On January 30, 2025, our Board of Directors declared a quarterly dividend of $0.19 per share of common stock, or approximately $33.5 million, which was paid on February 19, 2025 to stockholders of record at the close of business on February 12, 2025. Any future determinations to pay cash dividends to our stockholders will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, and credit and loan agreements in effect at that time and other factors deemed relevant by our Board of Directors.
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Contractual Obligations
Our material contractual obligations as of December 31, 2024 consisted of the following:
• Long–term debt of $2.2 billion, all of which is due in 2027, 2028 and 2032;
In addition, we had $19.5 million of unrecognized tax benefits (including discontinued operations) recorded as liabilities related to uncertain tax positions at December 31, 2024, which are uncertain as to if or when such amounts may be settled. We had a liability of $2.7 million recorded for potential penalties and interest (including discontinued operations) related to these unrecognized tax benefits at December 31, 2024, which we are uncertain as to if or when such amounts may be settled.
Sources of Cash
Revolving Credit Facility
During the years ended December 31, 2024 and 2023, our Credit Facility had an average daily balance of $315.0 million and $298.8 million, respectively. The weighted average annual interest rate on the outstanding balance under the Credit Facility was 6.8% and 7.7% at December 31, 2024 and 2023, respectively. As of December 31, 2024, there were $4.0 million of letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.2%. We amended and restated our Credit Facility on May 16, 2023; see Note 16 (“Long-Term Debt”) to our Financial Statements for details on the Amended and Restated Credit Agreement.
Credit Facility Terms. Our Credit Facility matures on May 16, 2028 (or December 2, 2026 or December 3, 2027, as applicable, if any portion of our 2027 Senior Notes and 2028 Senior Notes, respectively, remain outstanding at such date) and has an aggregate revolving commitment of $1.1 billion. Portions of the Credit Facility, up to $110.0 million, are available for the issuance of swing line loans and $50.0 million is available for the issuance of letters of credit. Subject to certain conditions, including approval by the lenders, we are able to increase the aggregate commitments under the Credit Facility by up to an additional $750.0 million. The Credit Facility borrowing base consists of eligible accounts receivable, inventory and compressors.
Covenants. Our Amended and Restated Credit Agreement requires that we meet certain financial ratios (see Note 16 (“Long-Term Debt”)) and contains various additional covenants including, but not limited to, mandatory prepayments from the net cash proceeds of certain asset transfers, restrictions on the use of proceeds from borrowings and limitations on our ability to incur additional indebtedness, engage in transactions with affiliates, merge or consolidate, sell assets, make certain investments and acquisitions, make loans, grant liens, repurchase equity and pay distributions. As of December 31, 2024, we were in compliance with all covenants under our Amended and Restated Credit Agreement.
2032 Notes and 2027 Notes Tender Offer
On August 26, 2024, we completed a private offering of $700.0 million aggregate principal amount of 6.625% senior notes due September 2032 and received net proceeds of $690.0 million after deducting issuance costs. In connection with the offering of the 2032 Notes, we completed a concurrent cash tender offer of $202.0 million for our 2027 Notes. See Note 16 (“Long-Term Debt”) for further details.
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July 2024 Equity Offering
On July 24, 2024, Archrock sold, pursuant to a public underwriting offering, approximately 12.7 millionshares of common stock, including approximately 1.7 million shares of common stock pursuant to an over-allotment option. Archrock received net proceeds of $255.7 million, after deducting underwriting discounts, commissions and offering expenses. See Note 18 (“Stockholders’ Equity”) for further details.
Other Sources of Cash
Asset Sales. We received proceeds of $67.6 million and $72.2 million from asset sales during the years ended December 31, 2024 and 2023, respectively. We typically use the proceeds from these sales to repay borrowings outstanding under our Credit Facility; however, we are not able to estimate the timing of asset sales or the amount of proceeds to be received and as such, we do not rely on asset sale proceeds as a future source of capital.
Cash Flows
Cash flows provided by (used in) each type of activity were as follows:
Year Ended December 31,
Net cash provided by (used in):
Net increase (decrease) in cash and cash equivalents $ 3,082 $ (228)
Operating Activities.
The increase in net cash provided by operating activities was primarily due to increased cash inflows of $161.4 million from adjusted gross margin, excluding deferred revenue recognized in earnings and amortization of freight and mobilization charges, changes of $9.6 million in accounts receivable due to increased cash receipts from customers and of $2.7 million in deferred revenue. These increases were partially offset by changes of $6.1 million in inventory and of $3.7 million in accounts payable and accrued liabilities.
Investing Activities.
The increase in net cash used in investing activities was primarily due to $868.7 million of cash paid in the TOPS Acquisition and a $60.4 million increase in capital expenditures, partially offset by a decrease of $4.8 million in investment in non-consolidated affiliates and a $4.6 million decrease in proceeds from the sale of property, plant and equipment.
Financing Activities.
The change from net cash used in financing activities in 2023 to net cash provided by financing activities in 2024 was primarily due to $700.0 million of proceeds from the issuance of the 2032 Notes, $255.7 million of proceeds from the July 2024 Equity Offering and a $85.5 million increase in net borrowings of long-term debt, partially offset by $202.0 million for the 2027 Notes Tender Offer, a $14.6 million increase in dividends to Archrock shareholders, a $6.3 million increase in debt issuance costs paid, a $4.5 million increase in shares repurchased under the Share Repurchase Program and a $2.7 million increase in taxes paid related to net share settlement of equity awards.
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Critical Accounting Estimates
We describe our significant accounting policies more fully in Note 2 (“Basis of Presentation and Significant Accounting Policies”) to our Financial Statements. As disclosed in Note 2, the preparation of financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses and related disclosures of contingent assets and liabilities. 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 cash flows.
Depreciation
Property, plant and equipment, net, at December 31, 2024 was $3.3 billion and depreciation expense was $185.1 million for the year ended December 31, 2024. Property, plant and equipment are carried at cost and depreciated using the straight–line basis over the estimated useful life of the asset.
Our estimate of useful lives and salvage values are based on assumptions and judgments that reflect both historical experience and expectations regarding future use of our assets, including wear and tear, obsolescence, technical standards, market demand and geographic location. 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 and results of operations.
The estimated useful life of an asset is monitored to determine its appropriateness, especially when business circumstances change. For example, changes in technology, excessive wear and tear, or unanticipated government actions may result in a shorter estimated useful life than originally anticipated. In these cases, we would depreciate the remaining net book value over the new estimated remaining life, thereby increasing depreciation expense per year on a prospective basis. Likewise, if the estimated useful life is increased, the adjustment to the useful life would decrease depreciation expense per year on a prospective basis.
Impairment of Assets
During the year ended December 31, 2024, we recorded long–lived and other asset impairments of $10.7 million.
Impairment Assessments of Property, Plant and Equipment and Identifiable Intangible Assets
We review long–lived assets, which include property, plant and equipment and intangibles assets that are being amortized, for impairment whenever events or changes in circumstances, including the removal of compressors from our active fleet, indicate that the carrying amount of an asset may not be recoverable. 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.
Compression Fleet. The fair value of a compressor is estimated on the expected net sale proceeds compared to fleet units we recently sold, a review of other units recently offered for sale by third parties or the estimated component value of the equipment we plan to use. See Note 22 (“Long-Lived and Other Asset Impairment”) and Note 27 (“Fair Value Measurements”) to our Financial Statements for further details of our fleet asset impairments.
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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. and have investments in unconsolidated affiliates that operate in the U.S. and international locations. Significant judgments and estimates are required in determining consolidated income tax expense.
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 results of discontinued operations and changes in accounting policies and incorporate assumptions, including the amount of future U.S. federal, state, and international pretax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax–planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative income (loss) before income taxes.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Aside from the budget reconciliation process currently occurring in Congress, 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 accounting standards for income taxes provide that a tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. We adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. 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.
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.
As of December 31, 2024, we had $408.3 million of variable interest rate indebtedness outstanding at a weighted average interest rate of 6.8%.
A 1% increase or decrease in the effective interest rate on the outstanding balance under our Credit Facility at December 31, 2024 would have resulted in an annual increase or decrease in our interest expense of approximately $4.1 million.
Item 8. Financial Statements and Supplementary Data
The information specified by this Item is presented in Part IV, Item 15 of this Form 10–K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
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Item 9A. Controls and Procedures
Management’sEvaluation of Disclosure Controls and Procedures
As of the end of the period covered by this 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, 2024, 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, 2024.
On August 30, 2024, we completed the TOPS Acquisition which was the acquisition of a privately-held company that was not subject to Section 404 of the Sarbanes-Oxley Act. As the TOPS Acquisition occurred during the third quarter of 2024, and TOPS was not previously subject to Section 404 of the Sarbanes-Oxley Act, management concluded there was insufficient time for management to complete its assessment of the internal controls over financial reporting related to TOPS, and, therefore, TOPS’s internal controls over financial reporting were excluded from this report on internal control over financial reporting.
Our management with the participation of the Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting excluding TOPS’ internal controls as of December 31, 2024 (covering approximately 94.3% of the revenue on the Consolidated Statements of Operations for the year ended December 31, 2024 and 70.2% of the total assets on the Consolidated Balance Sheets as of December 31, 2024) based on the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on its evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2024.
The effectiveness of internal control over financial reporting as of December 31, 2024 was audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in its report found within this Form 10–K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Archrock, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Archrock, Inc. and subsidiaries (the “Company”) as of December 31, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB) the consolidated financial statements as of and for the year ended December 31, 2024, of the Company and our report dated February 25, 2025, expressed an unqualified opinion on those financial statements.
As described in Management’s Annual Report on Internal Control Over Financial Reporting, appearing in Item 9A, management excluded from its assessment the internal control over financial reporting at TOPS which was acquired on August 30, 2024, and whose financial statements constitute 29.8% and 5.7% of total assets and revenue, respectively of the consolidated financial statement amounts as of and for the year ended December 31, 2024. Accordingly, our audit did not include the internal control over financial reporting at TOPS.
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.
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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 25, 2025
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Item 9B. Other Information
Insider Trading Arrangements
During the three months ended December 31, 2024, none of our directors or officers adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Part III Item 10 of this Form 10-K is incorporated by reference to the sections entitled “Election of Directors,” “Governance” and “Stock Ownership” in the definitive proxy statement related to our 2025 Annual Meeting of Stockholders, which is to be filed with the SEC within 120 days following the end of our 2024 fiscal year.
We have adopted an Insider Trading Policy that governs the purchase, sale, and/or other dispositions of our securities by directors, officers and employees that is reasonably designed to promote compliance with insider trading laws, rules and regulations and NYSE listing standards. A copy of our Insider Trading Policy is filed as Exhibit 19.1 to this Form 10-K.
Item 11. Executive Compensation
The information required by Part III Item 11 of this Form 10-K is incorporated by reference to the sections entitled “Governance” and “Compensation Discussion and Analysis” in the definitive proxy statement related to our 2025 Annual Meeting of Stockholders, which is to be filed with the SEC within 120 days following the end of our 2024 fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Portions of the information required in Part III Item 12 of this Form 10-K are incorporated by reference to the section entitled “Stock Ownership” in the definitive proxy statement related to our 2025 Annual Meeting of Stockholders, which is to be filed with the SEC within 120 days following the end of our 2024 fiscal year.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information as of December 31, 2024, with respect to our compensation plans under which our common stock is authorized for issuance, aggregated as follows:
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Number of Securities
to be Issued Upon Weighted Average Number of Securities
Exercise of Exercise Price of Remaining Available for
Outstanding Options, Outstanding Options, Future Issuance Under
Warrants and Rights Warrants and Rights Equity Compensation Plans
(a) (b) (c)
(1) Comprised of the 2020 Plan and the ESPP.
(3) Performance–based restricted stock units do not have an exercise price.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by Part III Item 13 of this Form 10-K is incorporated by reference to the section entitled “Governance” in the definitive proxy statement related to our 2025 Annual Meeting of Stockholders, which is to be filed with the SEC within 120 days following the end of our 2024 fiscal year.
Item 14. Principal Accountant Fees and Services
The information required by Part III Item 14 of this Form 10-K is incorporated by reference to the section entitled “Ratification of the Appointment of the Independent Registered Public Accounting Firm” in the definitive proxy statement related to our 2025 Annual Meeting of Stockholders, which is to be filed with the SEC within 120 days following the end of our 2024 fiscal year.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) List of Documents filed as a part of this Form 10–K
Report of Independent Registered Public Accounting Firm (PCAOB ID 34) F–1
Consolidated Balance Sheets F–3
Consolidated Statements of Operations F–4
Consolidated Statements of Comprehensive Income F–5
Consolidated Statements of Equity F–6
Consolidated Statements of Cash Flows F–7
Notes to Consolidated Financial Statements F–8
2.Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable or the information is set forth in the consolidated financial statements or notes thereto within Item 8 “Financial Statements and Supplementary Data.”
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3.Exhibits
Exhibit No. Description
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Exhibit No. Description
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Exhibit No. Description
10.30†* Amendment to the Archrock, Inc. 2020 Stock Incentive Plan
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Exhibit No. Description
19.1* Insider Trading Policy
21.1* List of Subsidiaries of Archrock, Inc.
23.1* Consent of Deloitte & Touche LLP
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Exhibit No. Description
101.1* Interactive data files pursuant to Rule 405 of Regulation S–T
† Management contract or compensatory plan or arrangement.
* Filed herewith.
** Furnished, not filed.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Archrock, Inc.
/s/ D. Bradley Childers
D. Bradley Childers
President and Chief Executive Officer
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POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints D. Bradley Childers, Douglas S. Aron, Donna A. Henderson and Stephanie C. Hildebrandt, and each of them, his or her true and lawful attorneys–in–fact and agents, with full power of substitution and resubstitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys–in–fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done as fully to all said attorneys–in–fact and agents, or any of them, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 25, 2025.
Signature Title
/s/ D. Bradley Childers President, Chief Executive Officer and Director
D. Bradley Childers (Principal Executive Officer)
/s/ Douglas S. Aron Senior Vice President and Chief Financial Officer
Douglas S. Aron (Principal Financial Officer)
/s/ Donna A. Henderson Vice President and Chief Accounting Officer
Donna A. Henderson (Principal Accounting Officer)
/s/ Anne–Marie N. Ainsworth Director
Anne–Marie N. Ainsworth
/s/ Gordon T. Hall Director
Gordon T. Hall
/s/ Frances Powell Hawes Director
Frances Powell Hawes
/s/ J.W.G. Honeybourne Director
J.W.G. Honeybourne
/s/ James H. Lytal Director
James H. Lytal
/s/ Leonard W. Mallett Director
Leonard W. Mallett
/s/ Jason C. Rebrook Director
Jason C. Rebrook
/s/ Edmund P. Segner, III Director
Edmund P. Segner, III
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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, 2024 and 2023, the related consolidated statements of operations, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2024, and the related notes and the schedules 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, 2024, and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, 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, 2024, 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 25, 2025, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
TOPS ACQUISITION - Refer to Note 4 and 18 to the financial statements.
Critical Audit Matter Description
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The Company completed the acquisition of Total Operations and Production Services, LLC (TOPS) for cash consideration of $868.7 million and 6,873,650 shares of common stock with an acquisition date fair value of $139.1 million. Accordingly, the purchase price paid for assets acquired and liabilities assumed was allocated, based on respective fair value, to property, plant and equipment (including compressors) and other intangible assets. The method for determining respective fair value varied depending on the type of asset or liability and involved management making significant estimates related to assumptions such as future cash flows, discount rates, market data, projected revenue, and current market interest rates.
Given the respective fair value determination of assets acquired and liabilities assumed requires management to make significant estimates related to assumptions such as future cash flows, discount rates, market data, projected revenue, and current market interest rates, performing audit procedures to evaluate the reasonableness of these assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management's selection of a weighted average cost of capital, and the fair value of acquired property, plant and equipment and intangible assets for TOPS included the following, among others:
Our audit procedures also included testing the effectiveness of internal controls over the long-lived asset impairment process, including those over the identification of units to be retired from the active fleet and assessed for impairment.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2025
We have served as the Company’s auditor since 2007
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Archrock, Inc.
Consolidated Balance Sheets
(in thousands, except par value and share amounts)
x
Assets
Current assets:
Cash and cash equivalents $ 4,420 $ 1,338
Operating lease right-of-use assets 15,365 14,097
Non-current assets of discontinued operations 7,868 7,868
Liabilities and Stockholders' Equity
Current liabilities:
Non-current liabilities of discontinued operations 7,868 7,868
Commitments and contingencies (Note 17)
Equity:
The accompanying notes are an integral part of these consolidated financial statements.
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Archrock, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
Year Ended December 31,
Revenue:
Cost of sales, exclusive of depreciation and amortization
Restructuring charges — 1,775 —
Debt extinguishment loss 3,181 — —
Transaction-related costs 13,249 — —
Basic and diluted earnings per common share $ 1.05 $ 0.67 $ 0.28
Weighted-average common shares outstanding:
The accompanying notes are an integral part of these consolidated financial statements.
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Archrock, Inc.
Consolidated Statements of Comprehensive Income
(in thousands, except share amounts)
Year Ended December 31,
Other comprehensive income, net of tax:
Interest rate swap gain, net of reclassifications to earnings — — 574
Amortization of dedesignated interest rate swap — — 410
Total other comprehensive income, net of tax — — 984
The accompanying notes are an integral part of these consolidated financial statements.
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Archrock, Inc.
Consolidated Statements of Equity
(in thousands, except share amounts)
Accumulated
Additional Other
Common Stock Paid-in Accumulated Comprehensive Treasury Stock
Amount Shares Capital Deficit Income (Loss) Amount Shares Total
Shares issued under ESPP 1 92,469 632 — — — — 633
Comprehensive income —
Net income — — — 44,296 — — — 44,296
Other comprehensive income — — — 984 — — 984
Shares repurchased — — — — — (8,860) (750,374) (8,860)
Shares issued under ESPP 1 82,359 816 — — — — 817
Comprehensive income —
Shares issued under ESPP — 65,824 1,117 — — — — 1,117
Comprehensive income —
The accompanying notes are an integral part of these consolidated financial statements.
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Archrock, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
Cash flows from operating activities:
Non-cash restructuring charges — 221 —
Amortization of deferred financing costs 5,072 5,729 5,152
Amortization of debt premium (2,006) (2,006) (2,006)
Amortization of capitalized implementation costs 3,009 2,624 1,984
Amortization of dedesignated interest rate swap — — 410
Interest rate swaps — — 631
Debt extinguishment loss 3,181 — —
Gain on sale of business — — (28,098)
Deferred revenue recognized in earnings (15,001) (16,464) (20,956)
Changes in operating assets and liabilities:
Cash flows from investing activities:
Proceeds from sale of business — — 99,611
Proceeds from insurance and other settlements 45 1,222 3,353
Cash paid in TOPS Acquisition, net of cash acquired (866,170) — —
Investments in unconsolidated entities (2,497) (7,287) (14,667)
Cash flows from financing activities:
Proceeds from 2032 Notes offering 700,000 — —
Partial repayment of 2027 Notes (201,987) — —
Payments of debt issuance costs (12,338) (6,031) —
Repurchases of common stock (13,337) (8,860) —
Net proceeds from issuance of common stock 255,747 — 4,176
Proceeds from stock issued under ESPP 1,117 817 633
Net increase (decrease) in cash and cash equivalents 3,082 (228) (3)
Cash and cash equivalents, beginning of period 1,338 1,566 1,569
Cash and cash equivalents, end of period $ 4,420 $ 1,338 $ 1,566
Supplemental disclosure of cash flow information:
Supplemental disclosure of non-cash investing transactions:
The accompanying notes are an integral part of these consolidated financial statements.
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ARCHROCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
We are an energy infrastructure company with a primary focus on midstream natural gas compression. We are a premier provider of natural gas compression services, in terms of total compression fleet horsepower, to customers in the energy 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 the accounts of Archrock and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Our Financial Statements are prepared in accordance with GAAP and the rules and regulations of the SEC. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures of contingent assets and liabilities. Because of the inherent uncertainties in this process, actual future results could differ from those expected as of the reporting date. Management believes that the estimates and assumptions used are reasonable.
Except as otherwise noted, any capitalized term used but not defined in our Financial Statements shall have the same meaning provided in our 2024 Form 10-K.
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.
Accounts Receivable and Allowance for Credit Losses
The contractual life of our trade receivables is primarily 30 days based on the payment terms specified in the contract. Contract operations services are generally billed monthly at the beginning of the month in which service is being provided. Aftermarket services billings typically occur when parts are delivered or service is completed. Due to the short–term nature of our trade accounts receivable, we consider the amortized cost to be the same as the carrying value amount of the receivable, excluding the allowance for credit losses.
We recognize an allowance for credit losses when a receivable is recorded, even when the risk of loss is remote. We utilize an aging schedule to determine our allowance for credit losses, and measure expected credit losses on a collective (pool) basis when similar risk characteristics exist. We rely primarily on ratings assigned by external rating agencies and credit monitoring services to assess credit risk and aggregate customers first by low, medium or high-risk asset pools, and then by delinquency status. We also consider the internal risk associated with geographic location and the services we provide to the customer when determining asset pools. If a customer does not share similar risk characteristics with other customers, we evaluate the customer’s outstanding trade receivables for expected credit losses on an individual basis. Each reporting period, we reassess our customers’ risk profiles and determine the appropriate asset pool classification, or perform individual assessments of expected credit losses, based on the customers’ risk characteristics at the reporting date.
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Archrock, Inc.
Notes to Consolidated Financial Statements (continued)
Loss rates are separately determined for each asset pool based on the length of time a trade receivable has been outstanding. We analyze two years of internal historical loss data, including the effects of prepayments, write–offs and subsequent recoveries, to determine our historical loss experience. Our historical loss information is a relevant data point for estimating credit losses, as the data closely aligns with trade receivables due from our customers. Ratings assigned by external rating agencies and credit monitoring services consider past performance and forecasts of future economic conditions in assessing credit risk.
Inventory
Inventory primarily consists of parts used for maintenance of natural gas compression equipment. Inventory is stated at the lower of cost and net realizable value using the average cost method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and depreciated using the straight–line method over their estimated useful lives as follows:
Compression equipment, facilities and other fleet assets 3 to 30 years
Buildings 20 to 35 years
Transportation and shop equipment 3 to 10 years
Computer hardware and software 3 to 5 years
Other 3 to 10 years
Major improvements that extend the useful life of an asset are capitalized and depreciated over the estimated useful life of the major improvement, up to seven years. Repairs and maintenance are expensed as incurred.
Goodwill
The goodwill acquired in connection with the TOPS 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 TOPS Acquisition was attributed to our contract operations reporting unit.