Archrock, Inc. [AROC] Filings

10-Q 1 aroc-20220331x10q.htm 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 001-33666

Archrock, Inc.

(Exact name of registrant as specified in its charter)


Delaware	74-3204509
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

9807 Katy Freeway, Suite 100, Houston, Texas 77024

(Address of principal executive offices, zip code)

(281) 836-8000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of exchange on which registered
Common stock, $0.01 par value per share	AROC	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of shares of the common stock of the registrant outstanding as of May 3, 2022: 155,215,024 shares.

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TABLE OF CONTENTS


	Page
Glossary	3
Forward-Looking Statements	4

Part I. Financial Information
Item 1. Financial Statements (unaudited)	5
Condensed Consolidated Balance Sheets	5
Condensed Consolidated Statements of Operations	6
Condensed Consolidated Statements of Comprehensive Income	7
Condensed Consolidated Statements of Equity	8
Condensed Consolidated Statements of Cash Flows	9
Notes to Condensed Consolidated Financial Statements	10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3. Quantitative and Qualitative Disclosures About Market Risk	29
Item 4. Controls and Procedures	29

Part II. Other Information
Item 1. Legal Proceedings	30
Item 1A. Risk Factors	30
Item 2. Purchases of Equity Securities by Issuer and Affiliated Purchasers	30
Item 3. Defaults Upon Senior Securities	30
Item 4. Mine Safety Disclosures	30
Item 5. Other Information	30
Item 6. Exhibits	31

Signatures	32

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GLOSSARY

The following terms and abbreviations appearing in the text of this report have the meanings indicated below.

2021 Form 10-K	Annual Report on Form 10-K for the year ended December 31, 2021
2027 Notes	$500.0 million of 6.875% senior notes due April 2027, issued in March 2019
2028 Notes	$800.0 million of 6.25% senior notes due April 2028, $500.0 million of which was issued in December 2019, $300.0 million of which was issued in December 2020
Archrock, our, we, us	Archrock, Inc., individually and together with its wholly-owned subsidiaries
ATM Agreement	Equity Distribution Agreement, dated February 23, 2021, entered into with Wells Fargo Securities, LLC and BofA Securities, Inc., as sales agents, relating to the at-the-market offer and sale of shares of our common stock from time to time
Credit Facility	$750.0 million asset-based revolving credit facility due November 2024, as governed by Amendment No. 3 to Credit Agreement, dated February 22, 2021, which amended that Credit Agreement, dated as of March 30, 2017
ECOTEC	Ecotec International Holdings, LLC
ERP	Enterprise Resource Planning
ESPP	Employee Stock Purchase Plan
Exchange Act	Securities Exchange Act of 1934, as amended
February 2021 Disposition	Sale completed in February 2021 of certain contract operations customer service agreements, compressors and other assets
Financial Statements	Condensed consolidated financial statements included in Part I Item 1 of this Quarterly Report on Form 10-Q
GAAP	U.S. generally accepted accounting principles
Hilcorp	Hilcorp Energy Company
LIBOR	London Interbank Offered Rate
Old Ocean Reserves	Old Ocean Reserves, LP, formerly JDH Capital Holdings, L.P.
OTC	Over-the-counter, as related to aftermarket services parts and components
ROU	Right-of-use, as related to the lease model under Accounting Standards Codification Topic 842 Leases
SEC	U.S. Securities and Exchange Commission
SG&A	Selling, general and administrative
U.S.	United States of America

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 21E of the Exchange Act, including, without limitation, our business growth strategy and projected costs; future financial position; the sufficiency of available cash flows to fund continuing operations and pay dividends; the expected amount of our capital expenditures; anticipated cost savings; future revenue, gross margin and other financial or operational measures related to our business; the future value of our equipment; and plans and objectives of our management for our future operations. You can identify many of these statements by words such as “believe,” “expect,” “intend,” “project,” “anticipate,” “estimate,” “will continue” or similar words or the negative thereof.

Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this Quarterly Report on Form 10-Q. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct. Known material factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include the risk factors described in our 2021 Form 10-K and those set forth from time to time in our filings with the SEC, which are available through our website at www.archrock.com and through the SEC’s website at www.sec.gov.

All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us on the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this Quarterly Report on Form 10-Q.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Archrock, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except par value and share amounts)

(unaudited)


	March 31, 2022		December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	1,262	$	1,569
Accounts receivable, trade, net of allowance of $2,209 and $2,152, respectively		115,162		104,931
Inventory		73,596		72,869
Other current assets		6,364		7,201
Total current assets		196,384		186,570
Property, plant and equipment, net		2,230,134		2,226,526
Operating lease ROU assets		17,116		17,491
Intangible assets, net		45,374		47,887
Contract costs, net		26,262		25,418
Deferred tax assets		47,504		47,879
Other assets		27,741		28,384
Noncurrent assets associated with discontinued operations		9,505		9,811
Total assets	$	2,600,020	$	2,589,966

Liabilities and Equity
Current liabilities:
Accounts payable, trade	$	70,878	$	38,920
Accrued liabilities		90,168		82,517
Deferred revenue		7,264		3,817
Total current liabilities		168,310		125,254
Long-term debt		1,517,015		1,530,825
Operating lease liabilities		15,448		15,940
Deferred tax liabilities		1,177		1,136
Other liabilities		17,879		17,505
Noncurrent liabilities associated with discontinued operations		7,868		7,868
Total liabilities		1,727,697		1,698,528
Commitments and contingencies (Note 17)
Equity:
Preferred stock: $0.01 par value per share, 50,000,000 shares authorized, zero issued		—		—
Common stock: $0.01 par value per share, 250,000,000 shares authorized, 162,919,584 and 161,482,852 shares issued, respectively		1,629		1,615
Additional paid-in capital		3,443,261		3,440,059
Accumulated other comprehensive loss		—		(984)
Accumulated deficit		(2,484,066)		(2,463,114)
Treasury stock: 7,698,812 and 7,417,401 common shares, at cost, respectively		(88,501)		(86,138)
Total equity		872,323		891,438
Total liabilities and equity	$	2,600,020	$	2,589,966

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Archrock, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended
	March 31,
	2022		2021
Revenue:
Contract operations	$	163,656	$	166,034
Aftermarket services		33,545		29,397
Total revenue		197,201		195,431
Cost of sales (excluding depreciation and amortization):
Contract operations		64,501		61,365
Aftermarket services		28,638		25,783
Total cost of sales (excluding depreciation and amortization)		93,139		87,148
Selling, general and administrative		27,773		25,084
Depreciation and amortization		43,039		45,712
Long-lived and other asset impairment		7,416		7,073
Restructuring charges		—		897
Interest expense		25,246		31,245
Gain on sale of assets, net		(2,112)		(11,032)
Other (income) expense, net		36		(1,889)
Income before income taxes		2,664		11,193
Provision for income taxes		943		7,024
Net income	$	1,721	$	4,169

Basic and diluted net income per common share	$	0.01	$	0.03

Weighted average common shares outstanding:
Basic		152,690		151,425
Diluted		152,810		151,578

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Archrock, Inc.

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)


	Three Months Ended
	March 31,
	2022		2021
Net income	$	1,721	$	4,169
Other comprehensive income, net of tax:
Interest rate swap gain, net of reclassifications to earnings		574		996
Amortization of dedesignated interest rate swap		410		—
Total other comprehensive income, net of tax		984		996
Comprehensive income	$	2,705	$	5,165

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Archrock, Inc.

Condensed Consolidated Statements of Equity

(in thousands, except share and per share amounts)

(unaudited)


						Accumulated
	Common			Additional		Other				Treasury
	Stock			Paid-in		Comprehensive		Accumulated		Stock
	Amount		Shares	Capital		Loss		Deficit		Amount		Shares	Total
Balance at December 31, 2020	$	1,600	160,014,960	$	3,424,624	$	(5,006)	$	(2,401,988)	$	(83,673)	(7,052,769)	$	935,557
Treasury stock purchased											(1,742)	(184,393)		(1,742)
Cash dividends ($0.145 per common share)									(22,155)					(22,155)
Shares issued under ESPP		—	28,054		235									235
Stock-based compensation, net of forfeitures		9	923,330		2,654							(26,011)		2,663
Net proceeds from issuance of common stock		4	357,148		3,397									3,401
Comprehensive income
Net income									4,169					4,169
Interest rate swap gain, net of reclassifications to earnings							996							996
Balance at March 31, 2021	$	1,613	161,323,492	$	3,430,910	$	(4,010)	$	(2,419,974)	$	(85,415)	(7,263,173)	$	923,124

Balance at December 31, 2021	$	1,615	161,482,852	$	3,440,059	$	(984)	$	(2,463,114)	$	(86,138)	(7,417,401)	$	891,438
Treasury stock purchased											(2,363)	(272,403)		(2,363)
Cash dividends ($0.145 per common share)									(22,673)					(22,673)
Shares issued under ESPP		—	20,060		149									149
Stock-based compensation, net of forfeitures		14	1,416,672		3,053							(9,008)		3,067
Comprehensive income
Net income									1,721					1,721
Interest rate swap gain, net of reclassifications to earnings							574							574
Amortization of dedesignated interest rate swap							410							410
Balance at March 31, 2022	$	1,629	162,919,584	$	3,443,261	$	—	$	(2,484,066)	$	(88,501)	(7,698,812)	$	872,323

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Archrock, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Three Months Ended
	March 31,
	2022		2021
Cash flows from operating activities:
Net income	$	1,721	$	4,169
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		43,039		45,712
Long-lived and other asset impairment		7,416		7,073
Inventory write-downs		294		218
Amortization of operating lease ROU assets		780		950
Amortization of deferred financing costs		1,288		6,264
Amortization of debt premium		(502)		(501)
Amortization of dedesignated interest rate swap		410		—
Interest rate swaps		631		1,071
Stock-based compensation expense		3,067		2,663
Provision for credit losses		108		224
Gain on sale of assets, net		(2,112)		(5,037)
Gain on sale of business		—		(5,995)
Deferred income tax provision		886		6,592
Amortization of contract costs		4,476		5,591
Deferred revenue recognized in earnings		(3,115)		(2,328)
Change in assets and liabilities:
Accounts receivable, trade		(15,084)		(4,108)
Inventory		(1,021)		(3,330)
Other assets		444		270
Contract costs, net		(5,320)		(2,283)
Accounts payable and other liabilities		32,718		18,881
Deferred revenue		6,351		1,397
Other		97		62
Net cash provided by operating activities		76,572		77,555
Cash flows from investing activities:
Capital expenditures		(44,858)		(11,539)
Proceeds from sale of business		—		18,168
Proceeds from sale of property, plant and equipment and other assets		5,437		9,114
Proceeds from insurance and other settlements		2,763		775
Net cash provided by (used in) investing activities		(36,658)		16,518
Cash flows from financing activities:
Borrowings of long-term debt		172,500		159,751
Repayments of long-term debt		(186,500)		(229,251)
Payments for debt issuance costs		—		(2,401)
Payments for settlement of interest rate swaps that include financing elements		(1,334)		(1,075)
Dividends paid to stockholders		(22,673)		(22,155)
Net proceeds from issuance of common stock		—		3,401
Proceeds from stock issued under ESPP		149		235
Purchases of treasury stock		(2,363)		(1,742)
Net cash used in financing activities		(40,221)		(93,237)
Net increase (decrease) in cash and cash equivalents		(307)		836
Cash and cash equivalents, beginning of period		1,569		1,097
Cash and cash equivalents, end of period	$	1,262	$	1,933

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Archrock, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Description of Business and Basis of Presentation

We are an energy infrastructure company with a pure-play focus on midstream natural gas compression. We are the leading provider of natural gas compression services to customers in the oil and natural gas industry throughout the U.S. and a leading supplier of aftermarket services to customers that own compression equipment in the U.S. We operate in two business segments: contract operations and aftermarket services. Our predominant segment, contract operations, primarily includes designing, sourcing, owning, installing, operating, servicing, repairing and maintaining our owned fleet of natural gas compression equipment to provide natural gas compression services to our customers. In our aftermarket services business, we sell parts and components and provide operations, maintenance, overhaul and reconfiguration services to customers who own compression equipment.

The accompanying unaudited condensed consolidated financial statements included herein have been prepared in accordance with GAAP and the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP are not required in these interim financial statements and have been condensed or omitted. Management believes that the information furnished reflects all normal recurring adjustments necessary to fairly present our consolidated financial position, results of operations and cash flows for the periods indicated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements presented in our 2021 Form 10-K, which contains a more comprehensive summary of our accounting policies. The interim results reported herein are not necessarily indicative of results for a full year.

2. Business Transactions

February 2021 Disposition

In February 2021, we completed the sale of certain contract operations customer service agreements and approximately 300 compressors, comprising approximately 40,000 horsepower, used to provide compression services under those agreements as well as other assets used to support the operations. We allocated customer-related and contract-based intangible assets based on a ratio of the horsepower sold relative to the total horsepower of the asset group. We recorded a gain on the sale of $6.0 million in gain on sale of assets, net in our condensed consolidated statements of operations during the three months ended March 31, 2021.

3. Inventory


(in thousands)	March 31, 2022		December 31, 2021
Parts and supplies	$	62,248	$	63,628
Work in progress		11,348		9,241
Inventory	$	73,596	$	72,869

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4. Property, Plant and Equipment, net


(in thousands)	March 31, 2022		December 31, 2021
Compression equipment, facilities and other fleet assets	$	3,293,561	$	3,273,770
Land and buildings		43,932		43,540
Transportation and shop equipment		91,211		92,490
Computer hardware and software		76,933		76,908
Other		6,260		6,229
Property, plant and equipment		3,511,897		3,492,937
Accumulated depreciation		(1,281,763)		(1,266,411)
Property, plant and equipment, net	$	2,230,134	$	2,226,526

5. Hosting Arrangements

We have hosting arrangements that are service contracts related to the cloud migration of our ERP system and cloud services for our mobile workforce, telematics and inventory management tools.

As of March 31, 2022 and December 31, 2021, we had $13.8 million and $12.7 million, respectively, of capitalized implementation costs related to these hosting arrangements included in other assets in our condensed consolidated balance sheets. Accumulated amortization was $1.1 million and $0.7 million at March 31, 2022 and December 31, 2021, respectively. We recorded $0.4 million and $0.1 million of amortization expense to SG&A in our condensed consolidated statements of operations during the three months ended March 31, 2022 and 2021, respectively.

6. Long-Term Debt


(in thousands)	March 31, 2022		December 31, 2021
Credit Facility	$	220,500	$	234,500

2028 Notes
Principal		800,000		800,000
Premium, net of amortization		12,034		12,536
Deferred financing costs, net of amortization		(9,990)		(10,406)
		802,044		802,130

2027 Notes
Principal		500,000		500,000
Deferred financing costs, net of amortization		(5,529)		(5,805)
		494,471		494,195

Long-term debt	$	1,517,015	$	1,530,825

Credit Facility

As of March 31, 2022, there were $5.5 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.4%. The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 2.9% and 2.6% at March 31, 2022 and December 31, 2021, respectively. We incurred $0.5 million and $0.6 million in commitment fees on the daily unused amount of the Credit Facility during the three months ended March 31, 2022 and 2021, respectively.

As of March 31, 2022, we were in compliance with all covenants under our Credit Facility agreement. As a result of the facility’s financial ratio requirements, $435.2 million of the $524.0 million of undrawn capacity was available for additional borrowings as of March 31, 2022.

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In February 2021, we amended our Credit Facility to, among other things, reduce the aggregate revolving commitment from $1.25 billion to $750.0 million and adjust certain financial ratios. We wrote off $4.9 million of unamortized deferred financing costs as a result of the amendment, which was recorded to interest expense in our condensed consolidated statements of operations during the three months ended March 31, 2021.

7. Accumulated Other Comprehensive Loss

Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with owners. Our accumulated other comprehensive loss consists of changes in the fair value of our interest rate swap derivative instruments, net of tax.


	Three Months Ended
	March 31,
(in thousands)	2022		2021
Beginning accumulated other comprehensive loss	$	(984)	$	(5,006)
Other comprehensive income, net of tax:
Loss recognized in other comprehensive income, net of tax benefit of $107 and $2, respectively		(405)		(8)
Loss reclassified from accumulated other comprehensive loss to interest expense, net of tax benefit of $369 and $267, respectively		1,389		1,004
Total other comprehensive income		984		996
Ending accumulated other comprehensive loss	$	—	$	(4,010)

See Note 14 (“Derivatives”) for further details on our interest rate swap derivative instruments.

8. Equity

At-the-Market Continuous Equity Offering Program

During the three months ended March 31, 2021, we sold 357,148 shares of common stock for net proceeds of $3.4 million pursuant to our ATM Agreement.

Cash Dividends

The following table summarizes our dividends declared and paid in each of the quarterly periods of 2022 and 2021:


	Declared Dividends		Dividends Paid
	per Common Share		(in thousands)
2022
Q1	$	0.145	$	22,673

2021
Q4	$	0.145	$	22,351
Q3		0.145		22,506
Q2		0.145		22,331
Q1		0.145		22,155

On April 28, 2022, our Board of Directors declared a quarterly dividend of $0.145 per share of common stock to be paid on May 17, 2022 to stockholders of record at the close of business on May 10, 2022.

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9. Revenue from Contracts with Customers

The following table presents our revenue from contracts with customers by segment (see Note 19 (“Segments”)) and disaggregated by revenue source:


	Three Months Ended
	March 31,
(in thousands)	2022		2021
Contract operations:
0 ― 1,000 horsepower per unit	$	41,842	$	46,919
1,001 ― 1,500 horsepower per unit		67,001		68,464
Over 1,500 horsepower per unit		54,594		50,403
Other ⁽¹⁾		219		248
Total contract operations revenue ⁽²⁾		163,656		166,034

Aftermarket services:
Services		17,137		16,892
OTC parts and components sales		16,408		12,505
Total aftermarket services revenue ⁽³⁾		33,545		29,397

Total revenue	$	197,201	$	195,431

(1)	Primarily relates to fees associated with owned non-compression equipment.

(2)	Includes $0.2 million and $1.0 million for the three months ended March 31, 2022 and 2021, respectively, related to billable maintenance on owned compressors that was recognized at a point in time. All other contract operations revenue is recognized over time.

(3)	Services revenue within aftermarket services is recognized over time. OTC parts and components sales revenue is recognized at a point in time.

Performance Obligations

As of March 31, 2022, we had $267.3 million of remaining performance obligations related to our contract operations segment, which will be recognized through 2027 as follows:


(in thousands)	2022		2023		2024		2025		2026		2027		Total
Remaining performance obligations	$	184,874	$	60,283	$	19,147	$	1,981	$	867	$	98	$	267,250

We do not disclose the aggregate transaction price for the remaining performance obligations for aftermarket services as there are no contracts with customers with an original contract term that is greater than one year.

Contract Assets and Liabilities

Contract Assets

As of March 31, 2022 and December 31, 2021, our receivables from contracts with customers, net of allowance for credit losses, were $103.0 million and $84.7 million, respectively.

Allowance for Credit Losses

Trade accounts receivable are due from companies of varying size engaged principally in oil and natural gas activities throughout the U.S. We review the financial condition of customers prior to extending credit and generally do not obtain collateral for trade receivables. Payment terms are on a short-term basis and in accordance with industry practice. We consider this credit risk to be limited due to these companies’ financial resources, the nature of the products and services we provide and the terms of our customer agreements.

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Due to the short-term nature of our trade receivables, we consider the amortized cost to be the same as the carrying 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. Trade receivables evaluated individually are not included in our collective assessment. 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.

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. 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. We routinely update our historical loss data to reflect our customers’ current risk profile, to ensure the historical data and loss rates are relevant to the pool of assets for which we are estimating expected credit losses.

Our allowance for credit losses balance changed as follows during the three months ended March 31, 2022:


(in thousands)
Balance at December 31, 2021	$	2,152
Provision for credit losses		108
Write-offs charged against allowance		(51)
Balance at March 31, 2022	$	2,209

Contract Liabilities

Freight billings to customers for the transport of compression assets, customer-specified modifications of compression assets and milestone billings on aftermarket services often result in a contract liability. Our contract liabilities were $7.6 million and $4.4 million as of March 31, 2022 and December 31, 2021, respectively, and were included in deferred revenue and other liabilities in our condensed consolidated balance sheets. During the three months ended March 31, 2022, we deferred revenue of $6.4 million and recognized $3.1 million as revenue. The revenue recognized and deferred during the period primarily related to freight billings and milestone billings on aftermarket services.

10. Long-Lived and Other Asset Impairment

We review long-lived assets, including property, plant and equipment and identifiable intangibles that are being amortized, for impairment whenever events or changes in circumstances, including the removal of compressors from our active fleet, indicate that the carrying amount of an asset may not be recoverable.

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Compression Fleet

We periodically review the future deployment of our idle compression assets for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. Based on these reviews, we determine that certain idle compressors should be retired from the active fleet. The retirement of these units from the active fleet triggers a review of these assets for impairment and as a result of our review, we may record an asset impairment to reduce the book value of each unit to its estimated fair value. The fair value of each unit is estimated based on the expected net sale proceeds compared to other fleet units we recently sold, a review of other units recently offered for sale by third parties or the estimated component value of the equipment we plan to use.

In connection with our review of our idle compression assets, we evaluate for impairment idle units that were culled from our fleet in prior years and are available for sale. Based on that review, we may reduce the expected proceeds from disposition and record additional impairment to reduce the book value of each unit to its estimated fair value.

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


	Three Months Ended
	March 31,
(dollars in thousands)	2022		2021
Idle compressors retired from the active fleet		45		70
Horsepower of idle compressors retired from the active fleet		31,000		24,000
Impairment recorded on idle compressors retired from the active fleet	$	7,409	$	7,012

11. Restructuring Charges

In response to the decreased activity level of our customers that resulted from the coronavirus pandemic beginning in the second quarter of 2020, we incurred severance costs of $7.0 million to right-size our business in 2020 and 2021. No additional costs will be incurred under this restructuring plan.

During the third quarter of 2020, a plan to dispose of certain non-core properties was approved by management. We incurred $1.5 million of costs in 2020 and 2021 as a result of these property disposals. No additional costs will be incurred under this restructuring plan.

The severance and property disposal costs incurred under the above restructuring plans were recorded to restructuring charges in our condensed consolidated statements of operations.

The following table presents restructuring charges incurred by segment:


	Contract		Aftermarket
(in thousands)	Operations		Services		Other⁽¹⁾		Total
Three months ended March 31, 2021
Pandemic restructuring	$	279	$	24	$	585	$	888
2020 Property restructuring		—		—		9		9
Total restructuring charges	$	279	$	24	$	594	$	897

(1)	Represents expense incurred within our corporate function and not directly attributable to our segments.

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The following table presents restructuring charges incurred by cost type:


	Three Months Ended
(in thousands)	March 31, 2021
Severance costs - pandemic restructuring	$	888
Impairment - 2020 property restructuring		9
Total restructuring charges	$	897

12. Income Taxes

Valuation Allowance

The amount of our deferred tax assets considered realizable could be adjusted if projections of future taxable income are reduced or objective negative evidence in the form of a three-year cumulative loss is present or both. Should we no longer have a level of sustained profitability, excluding nonrecurring charges, we will have to rely more on our future projections of taxable income to determine if we have an adequate source of taxable income for the realization of our deferred tax assets, namely net operating loss, interest limitation and tax credit carryforwards. This may result in the need to record a valuation allowance against all or a portion of our deferred tax assets.

Effective Tax Rate

The year-to-date effective tax rate for the three months ended March 31, 2022 differed significantly from our statutory rate primarily due to unrecognized tax benefits and the limitation on executive compensation.

Unrecognized Tax Benefits

As of March 31, 2022, we believe it is reasonably possible that $2.7 million of our unrecognized tax benefits, including penalties, interest and discontinued operations, will be reduced prior to March 31, 2023 due to the settlement of audits or the expiration of statutes of limitations or both. However, due to the uncertain and complex application of the tax regulations, it is possible that the ultimate resolution of these matters may result in liabilities that could materially differ from this estimate.

13. Earnings per Share

Basic net income (loss) per common share is computed using the two-class method, which is an earnings allocation formula that determines net income (loss) per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Under the two-class method, basic net income (loss) per common share is determined by dividing net income (loss), after deducting amounts allocated to participating securities, by the weighted average number of common shares outstanding for the period. Participating securities include unvested restricted stock and stock-settled restricted stock units that have nonforfeitable rights to receive dividends or dividend equivalents, whether paid or unpaid. During periods of net loss, only distributed earnings (dividends) are allocated to participating securities, as participating securities do not have a contractual obligation to participate in our undistributed losses.

Diluted net income (loss) per common share is computed using the weighted average number of shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options, performance-based restricted stock units and stock to be issued pursuant to our ESPP unless their effect would be anti-dilutive.

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The following table shows the calculation for net income attributable to common stockholders, which is used in the calculation of basic and diluted net income per common share:


	Three Months Ended
	March 31,
(in thousands)	2022		2021
Net income	$	1,721	$	4,169
Less: Earnings attributable to participating securities		(515)		(168)
Net income attributable to common stockholders	$	1,206	$	4,001

The following table shows the potential shares of common stock that were included in computing diluted net income per common share:


	Three Months Ended
	March 31,
(in thousands)	2022	2021
Weighted average common shares outstanding including participating securities	154,832	153,004
Less: Weighted average participating securities outstanding	(2,142)	(1,579)
Weighted average common shares outstanding used in basic net income per common share	152,690	151,425
Net dilutive potential common shares issuable:
On vesting of restricted stock units	117	149
On settlement of ESPP shares	3	4
Weighted average common shares outstanding used in diluted net income per common share	152,810	151,578

The following table shows the potential shares of common stock issuable that were excluded from computing diluted net income per common share as their inclusion would have been anti-dilutive:


	Three Months Ended
	March 31,
(in thousands)	2022	2021
On exercise of options where exercise price is greater than average market value for the period	—	44

14. Derivatives

We are exposed to market risks associated with changes in the variable interest rate of our Credit Facility. We have used derivative instruments, in the form of interest rate swaps, to manage our exposure to fluctuations in this variable interest rate and thereby minimize the risks and costs associated with financial activities. We do not use derivative instruments for trading or other speculative purposes.

In March 2022, our $300.0 million notional value of interest rate swaps expired. We previously entered into these swaps to offset changes in expected cash flows due to fluctuations in the associated variable interest rates and designated them as cash flow hedges. There was no nonperformance by any counterparty during the terms of the interest rate swaps and no collateral was posted for the instruments.

Prior to expiration, during the third quarter of 2021, we dedesignated $125.0 million notional value of our interest rate swaps. The fair value of this interest rate swap immediately prior to dedesignation was a liability of $1.6 million. The associated amount in accumulated other comprehensive loss related to this interest rate swap was amortized into interest expense over the remaining term of the swap through March 2022. Changes in the fair value of the dedesignated interest rate swap after dedesignation and prior to expiration were recorded in interest expense.

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The remaining $175.0 million notional value of our interest rate swaps were designated as (highly effective) cash flow hedging instruments until their expiration. Changes in the fair value of cash flow hedging instruments are recognized as a component of other comprehensive income (loss) until the hedged transaction affects earnings. At that time, amounts are reclassified into earnings to interest expense, the same statement of operations line item to which the earnings effect of the hedged item is recorded. Cash flows from derivatives designated as hedges are classified in our condensed consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions unless the derivative contract contains a significant financing element, in which case, the cash settlements for those derivatives are classified as cash flows from financing activities.

The following table presents the effect of our derivative instruments on our condensed consolidated balance sheets:


(in thousands)	March 31, 2022		December 31, 2021
Interest rate swaps designated as cash flow hedging instruments
Accrued liabilities	$	—	$	727

Interest rate swaps not designated as hedging instruments
Accrued liabilities		—		523

Total derivative liabilities	$	—	$	1,250

The following table presents the effect of our derivative instruments on our condensed consolidated statements of operations:


	Three Months Ended
	March 31,
(in thousands)	2022		2021
Total amount of interest expense in which the effects of cash flow hedges and undesignated interest rate swaps are recorded	$	25,246	$	31,245

Interest rate swaps designated as cash flow hedging instruments
Pre-tax loss recognized in other comprehensive income	$	(512)	$	(10)
Pre-tax loss reclassified from accumulated other comprehensive loss into interest expense		(1,758)		(1,271)

Interest rate swaps not designated as hedging instruments
Gain recognized in interest expense	$	523	$	—

See Note 7 (“Accumulated Other Comprehensive Loss”) and Note 15 (“Fair Value Measurements”) for further details on our derivative instruments.

15. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Prior to their expiration in the first quarter of 2022, our interest rate swap derivative instruments were valued quarterly based on the income approach (discounted cash flow) using market observable inputs, including LIBOR forward curves. These fair value measurements were classified as Level 2. The following table presents our derivative position measured at fair value on a recurring basis, with pricing levels as of the date of valuation:


(in thousands)	March 31, 2022		December 31, 2021
Derivative liabilities	$	—