Archrock Inc

Previous wording

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, impairments, restructuring charges, interest expense, 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.

Current wording

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.

Previous wording

Revenue was $270.5 million and $247.5 million during the three months ended June 30, 2024, and 2023, respectively, and $539.0 million and $477.4 million during the six months ended June 30, 2024 and 2023, respectively. The increase in revenue was primarily due to increased revenue from our contract operations business during the three months ended June 30, 2024 and both our contract operations business and aftermarket services business during the six months ended June 30, 2024. See “Contract Operations” and “Aftermarket Services” below for further details.

Current wording

Revenue was $292.2 million and $253.4 million during the three months ended September 30, 2024 and 2023, respectively, and $831.2 million and $730.7 million during the nine months ended September 30, 2024 and 2023, respectively. The increase in revenue was primarily due to increased revenue from our contract operations business during the three and nine months ended September 30, 2024. See “Contract Operations” and “Aftermarket Services” below for further details.

Previous wording

Net income was $34.4 million and $24.7 million during the three months ended June 30, 2024, and 2023, respectively. The increase was primarily driven by higher adjusted gross margin from both our contract operations business and aftermarket services business. These changes were partially offset by increases in SG&A, depreciation and amortization expense, transaction-related costs and long-lived and other asset impairment, and a decrease in the unrealized change in the fair value of our investment in an unconsolidated affiliate.

Current wording

Net income was $37.5 million and $30.9 million during the three months ended September 30, 2024 and 2023, respectively. The increase was primarily driven by higher adjusted gross margin from both our contract operations business and aftermarket services business. These changes were partially offset by increases in transaction-related costs, depreciation and amortization, SG&A, provision for income taxes, debt extinguishment loss and interest expense, and a decrease in gain on sale of assets, net.

Previous wording

Net income was $75.0 million and $41.1 million during the six months ended June 30, 2024, and 2023, respectively. The increase was primarily driven by higher adjusted gross margin from both our contract operations business and aftermarket services business. These changes were partially offset by increases in SG&A, depreciation and amortization expense, transaction-related costs, long-lived and other asset impairment, and decreases in the gain on sale of assets and in the unrealized change in the fair value of our investment in an unconsolidated affiliate.

Current wording

Net income was $112.5 million and $72.0 million during the nine months ended September 30, 2024 and 2023, respectively. The increase was primarily driven by higher adjusted gross margin from both our contract operations business and aftermarket services business. These changes were partially offset by increases in provision for income taxes, SG&A, depreciation and amortization, transaction-related costs, debt extinguishment loss, interest expense, long-lived and other asset impairment, and decreases in the gain on sale of assets, net and the unrealized change in the fair value of our investment in an unconsolidated affiliate.

Previous wording

Revenue in our contract operations business increased primarily due to higher rates and an increase in average operating horsepower for contract compression in response to higher utilization at Archrock and across our industry.

Current wording

Revenue in our contract operations business increased primarily due to $20.7 million in higher rates, an increase of $15.6 million due to the compression units acquired in the TOPS Acquisition and increase in average operating horsepower for contract compression.

Previous wording

The increase in cost of sales, exclusive of depreciation and amortization, was primarily due to a $3.7 million increase in total employee compensation expense and a $1.1 million increase in parts expense. This increase was partially offset by a decrease of $1.9 million in startup expenses resulting from average horsepower utilization for the fleet at record levels as well as fewer unit stops.

Current wording

The increase in cost of sales, exclusive of depreciation and amortization, was primarily due to a $3.9 million increase in total employee compensation expense and a $1.4 million increase in parts expense. This increase was partially offset by a decrease of $1.9 million in lube oil expenses as a result of lower prices.

Previous wording

Revenue in our aftermarket services business decreased primarily due to a decrease in part sales, partially offset by higher levels of service activities driven by an increase in customer demand.

Current wording

Revenue in our aftermarket services business increased primarily due to higher levels of service activities driven by an increase in customer demand, and maintenance service contracts, which was partially offset by a decrease in part sales.

Previous wording

Adjusted gross margin decreased in our aftermarket services business as a result of decreased revenue which exceeded the decrease in cost of sales, exclusive of depreciation and amortization, due to a mix of product sales.

Current wording

Adjusted gross margin increased in our aftermarket services business as a result of increased revenue and decreased 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.

Previous wording

Selling, general and administrative. The increase in SG&A included a $1.9 million increase in long-term incentive compensation expense, a $0.2 million increase in employee compensation expense and a $0.2 million increase in amortization of capitalized implementation costs, partially offset by a decrease of $0.3 million in legal and other professional fees.

Current wording

Selling, general and administrative. The increase in SG&A primarily included a $3.6 million increase in employee incentive and other compensation expense, a $0.5 million increase in amortization of capitalized implementation costs and a $0.5 million increase in legal and other professional fees.

Previous wording

Depreciation and amortization. The increase in depreciation and amortization expense was primarily due to fixed assets additions and accelerated depreciation associated with certain assets. The increase was partially offset by a decrease in depreciation expense associated with assets reaching the end of their depreciable lives, the impact of compression and other asset sales, and long-lived asset impairments.

Current wording

Depreciation and amortization. The increase in depreciation and amortization was primarily due to fixed assets additions, including $3.7 million depreciation and amortization associated with the compression units and intangible assets acquired in the TOPS Acquisition. These increases were 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 and other asset impairments.

Previous wording

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 three months ended June 30, 2024 and 2023, we recognized $4.4 million and $2.9 million, respectively, of impairment charges to write down these compressors to their fair value. See Note 10 (“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:

Current wording

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 three months ended September 30, 2024 and 2023, we recognized $2.5 million and $2.9 million, respectively, of impairment charges to write down these compressors to their fair value. See Note 11 (“Long-Lived Asset and Other Impairments”) for further details. The following table presents the results of our compression fleet impairment review, as recorded in our contract operations segment:

Previous wording

*Restructuring charges.*Restructuring charges of $1.0 million during the six months ended June 30, 2023 consisted of severance and consulting costs related to our restructuring activities. See Note 11 (“Restructuring Charges”) for further details on these restructuring charges.

Current wording

*Restructuring charges.*Restructuring charges of $0.6 million during the three months ended September 30, 2023 consisted of severance and consulting costs related to our restructuring activities. See Note 12 (“Restructuring Charges”) for further details

Previous wording

*Transaction-related costs.*We incurred $1.8 million of legal and other professional fees during the three months ended June 30, 2024 related to the TOPS Acquisition.

Current wording

*Transaction-related costs.*We incurred $9.2 million of financial advisory, legal and other professional fees and retention and other employee compensation costs during the three months ended September 30, 2024 related to the TOPS Acquisition.

Previous wording

Gain on sale of assets, net. The decrease in gain on sale of assets was primarily due to gains of $0.3 million on compression asset sales and $0.3 million on transportation asset sales during the three months ended June 30, 2024, compared to gains of $0.6 million on compression asset sales and $0.4 million on other asset sales during the three months ended June 30, 2023.

Current wording

Gain on sale of assets, net. The decrease in gain on sale of assets, net was primarily due to gains of $2.6 million on compression asset sales during the three months ended September 30, 2024, compared to gains of $3.2 million on compression asset sales during the three months ended September 30, 2023.

Previous wording

The increase in provision for income taxes was primarily due to the tax effect of the increase in book income, offset by the reduction in valuation allowance during the three months ended June 30, 2024 compared with the three months ended June 30, 2023.

Current wording

The increase in provision for income taxes was primarily due to the tax effect of the increase in book income during the three months ended September 30, 2024 compared with the three months ended September 30, 2023.

Previous wording

Revenue in our contract operations business increased primarily due to higher rates and an increase in average operating horsepower for contract compression in response to higher utilization at Archrock and across our industry.

Current wording

Revenue in our contract operations business increased primarily due to $70.0 million in higher rates, an increase of $15.6 million due to the compression units acquired in the TOPS Acquisition and an increase in average operating horsepower for contract compression.

Previous wording

The increase in cost of sales, exclusive of depreciation and amortization, was primarily due to a $5.2 million increase in total employee compensation expense, a $1.8 million increase in parts expense and a $1.4 million increase in local and miscellaneous taxes. This increase was partially offset by a decrease of $6.9 million in startup expenses resulting from average horsepower utilization for the fleet at record levels as well as fewer unit stops.

Current wording

The increase in cost of sales, exclusive of depreciation and amortization, was primarily due to a $9.1 million increase in total employee compensation expense, a $3.2 million increase in parts expense and a $1.6 million increase in local and miscellaneous taxes. This increase was partially offset by a decrease of $6.7 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 $3.0 million in lube oil expenses as a result of lower prices.

Previous wording

Revenue in our aftermarket services business increased primarily due to higher levels of service activities driven by an increase in customer demand, partially offset by a decrease in part sales.

Current wording

Revenue in our aftermarket services business increased primarily due to higher levels of service activities driven by an increase in customer demand, and maintenance service contracts partially offset by a decrease in part sales.

Previous wording

Adjusted gross margin increased in our aftermarket services business as a result of increased revenue which exceeded the increase in cost of sales, exclusive of depreciation and amortization, due to differences in the scope, timing and type of services performed.

Current wording

Adjusted gross margin increased in our aftermarket services business as a result of increased revenue and decreased cost of sales, exclusive of depreciation and amortization, due to differences in the scope, timing and type of services performed, including additional work associated with maintenance service contracts.

Previous wording

Selling, general and administrative. The increase in SG&A included primarily a $5.7 million increase in long-term incentive compensation expense, a $0.6 million increase in short-term incentive compensation expense, a $0.5 million increase in network and computer related costs, a $0.4 million increase in amortization of capitalized implementation costs, a $0.3 million increase in insurance expense and a $0.2 million increase in sales commissions expense, partially offset by a decrease of $0.7 million in professional fees.

Current wording

Selling, general and administrative. The increase in SG&A primarily included a $10.2 million increase in employee incentive and other compensation expense and a $0.9 million increase in network and computer-related costs, partially offset by a decrease of $0.5 million in professional fees.

Previous wording

Depreciation and amortization. The increase in depreciation and amortization expense was primarily due to fixed assets additions and accelerated depreciation associated with certain assets. The increase was partially offset by a decrease in depreciation expense associated with assets reaching the end of their depreciable lives, the impact of compression and other asset sales, and long-lived asset impairments.

Current wording

Depreciation and amortization. The increase in depreciation and amortization was primarily due to fixed assets additions, including $3.7 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.

Previous wording

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 six months ended June 30, 2024 and 2023, we recognized $7.0 million and $5.5 million, respectively, of impairment charges to write down these compressors to their fair value. See Note 10 (“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:

Current wording

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 nine months ended September 30, 2024 and 2023, we recognized $9.5 million and $8.4 million, respectively, of impairment charges to write down these compressors to their fair value. See Note 11 (“Long-Lived Asset and Other Impairments”) for further details. The following table presents the results of our compression fleet impairment review, as recorded in our contract operations segment:

Previous wording

Interest expense. The decrease in interest expense was primarily due to the write-off of $1.0 million of unamortized deferred financing costs as a result of the Amended and Restated Credit Agreement during the three months ended June 30, 2023, and a lower average outstanding balance of long-term debt, partially offset by a decrease in capitalized interest and an increase in interest rates.

Current wording

Interest expense. The increase in interest expense was primarily related 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 nine months ended September 30, 2023.

Previous wording

*Transaction-related costs.*We incurred $1.8 million of legal and other professional fees during the six months ended June 30, 2024 related to the TOPS Acquisition.

Current wording

*Transaction-related costs.*We incurred $11.0 million of financial advisory, legal and other professional fees and retention and other employee compensation costs during the nine months ended September 30, 2024 related to the TOPS Acquisition.

Previous wording

Gain on sale of assets, net. The decrease in gain on sale of assets was primarily due to gains of $2.5 million on compression asset sales and $0.4 million on transportation asset sales during the six months ended June 30, 2024 compared to gains of $3.9 million on compression asset sales and $0.8 million on transportation and other asset sales during the six months ended June 30, 2023.

Current wording

Gain on sale of assets, net. The decrease in gain on sale of assets, net was primarily due to gains of $5.1 million on compression asset sales during the nine months ended September 30, 2024 compared to gains of $7.3 million on compression asset sales during the nine months ended September 30, 2023.

Previous wording

Other expense, net. The increase in other expense, net was primarily due to a $2.0 million unrealized change in the fair value of our investment in an unconsolidated affiliate recognized during the six months ended June 30, 2023.

Current wording

Other expense (income), net. The change from other expense, net to other income, net was primarily due to a $2.0 million unrealized change in the fair value of our investment in an unconsolidated affiliate recognized during the nine months ended September 30, 2023.

Previous wording

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 and reduction in valuation allowance during the six months ended June 30, 2024 compared with the six months ended June 30, 2023.

Current wording

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 and reduction in valuation allowance during the nine months ended September 30, 2024 compared with the nine months ended September 30, 2023.

Previous wording

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

Current wording

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.

Previous wording

On July 25, 2024, our Board of Directors declared a quarterly dividend of $0.165 per share of common stock to be paid on August 13, 2024 to stockholders of record at the close of business on August 6, 2024. Any future determinations to pay cash dividends to our stockholders will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations and credit and loan agreements in effect at that time and other factors deemed relevant by our Board of Directors.

Current wording

On October 24, 2024, our Board of Directors declared a quarterly dividend of $0.175 per share of common stock to be paid on November 13, 2024 to stockholders of record at the close of business on November 6, 2024. Any future determinations to pay cash dividends to our stockholders will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations and credit and loan agreements in effect at that time and other factors deemed relevant by our Board of Directors.

Previous wording

During the six months ended June 30, 2024 and 2023, our Credit Facility had an average debt balance of $287.0 million and $282.5 million, respectively. The weighted average annual interest rate on the outstanding balance under the Credit Facility was 7.6% and 7.7% at June 30, 2024 and December 31, 2023, respectively. As of June 30, 2024, there were $4.1 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.1%.

Current wording

During the nine months ended September 30, 2024 and 2023, our Credit Facility had an average debt balance of $268.7 million and $294.5 million, respectively. The weighted-average annual interest rate on the outstanding balance under the Credit Facility was 7.2% and 7.7% at September 30, 2024 and December 31, 2023, respectively. As of September 30, 2024, there were $4.1 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.1%.

Previous wording

The increase in net cash provided by operating activities was primarily due to increased cash inflows of $65.9 million from adjusted gross margin, excluding deferred revenue recognized in earnings and amortization of freight and mobilization charges, changes of $14.3 million in accounts receivable due to increased cash receipts from customers, $11.4 million in accounts payable and accrued liabilities due to a reduction in overall spend and timing of vendor invoice payments and $8.7 million of inventory as a result of improvement in the lead time for parts.

Current wording

The increase in net cash provided by operating activities was primarily due to increased cash inflows of $99.0 million from adjusted gross margin, excluding deferred revenue recognized in earnings and amortization of freight and mobilization charges, changes of $5.1 million in inventory as a result of improvement in the lead time for parts and of $2.4 million in accounts receivable due to increased cash receipts from customers. These increases were partially offset by changes of $17.9 million in accounts payable and accrued liabilities due in part to accrued interest paid in connection with the 2027 Notes Tender Offer.

Previous wording

The increase in net cash used in investing activities was primarily due to a $20.5 million decrease in proceeds from the sale of property, plant and equipment and a $3.6 million increase in capital expenditures, partially offset by a $1.9 million decrease in investments in non-consolidated affiliates.

Current wording

The increase in net cash used in investing activities was primarily due to $869.1 million of cash paid in the TOPS Acquisition and a $30.5 million decrease in proceeds from the sale of property, plant and equipment.