10-Q

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 September 30, 2019

or

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

 For the transition period from         to                   

Commission File No. 001-33666

Archrock, Inc.

(Exact name of registrant as specified in its charter)

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 October 22, 2019: 151,909,911 shares.

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 (unaudited)	10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3. Quantitative and Qualitative Disclosures About Market Risk	40
Item 4. Controls and Procedures	41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	42
Item 1A. Risk Factors	42
Item 2. Unregistered Sales of Equity Securities	43
Item 3. Defaults Upon Senior Securities	43
Item 4. Mine Safety Disclosures	43
Item 5. Other Information	43
Item 6. Exhibits	44
SIGNATURES	45

2

GLOSSARY

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

2018 Form 10-K	Archrock, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2018
2021 Notes	$350.0 million of 6% senior notes due April 2021, issued in March 2013
2022 Notes	$350.0 million of 6% senior notes due October 2022, issued in April 2014
2027 Notes	$500.0 million of 6.875% senior notes due April 2027, issued in March 2019
Archrock, our, we, us	Archrock, Inc., individually and together with its wholly-owned subsidiaries
Archrock Credit Facility	Archrock’s $350 million revolving credit facility terminated in April 2018 in connection with the Merger
ASC 606 Revenue	Accounting Standards Codification Topic 606 Revenue from Contracts with Customers
ASC 840 Leases	Accounting Standards Codification Topic 840 Leases
ASC 842 Leases	Accounting Standards Codification Topic 842 Leases
ASU 2016-13	Accounting Standards Update No. 2016-13—Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
ASU 2017-04	Accounting Standards Update No. 2017-04—Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
ASU 2017-12	Accounting Standards Update No. 2017-12—Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
ASU 2018-02	Accounting Standards Update No. 2018-02—Income Statement—Reporting Comprehensive Income (Topic 220)—Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
ASU 2018-13	Accounting Standards Update No. 2018-13—Fair Value Measurement (Topic 820)—Disclosure Framework —Changes to the Disclosure Requirements for Fair Value Measurement
Credit Facility	$1.25 billion asset-based revolving credit facility due March 2022, as governed by Amendment No. 1 to Credit Agreement, dated February 23, 2018, which amended that certain Credit Agreement, dated as of March 30, 2017
EBITDA	Earnings before interest, taxes, depreciation and amortization
Elite Acquisition	Transaction completed on August 1, 2019 pursuant to the Asset Purchase Agreement entered into with Elite Compression on June 23, 2019
Elite Compression	Elite Compression Services, LLC
ERP	Enterprise Resource Planning
Exchange Act	Securities Exchange Act of 1934, as amended
FASB	Financial Accounting Standards Board
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
Harvest	Harvest Four Corners, LLC
Harvest Sale	Transaction completed on August 1, 2019 pursuant to the Asset Purchase Agreement entered into with Harvest on June 23, 2019
Hilcorp	Hilcorp Energy Company
JDH Capital	JDH Capital Holdings, L.P.
Merger	Transaction completed on April 26, 2018 in which Archrock acquired all of the Partnership’s outstanding common units not already owned by Archrock pursuant to the Agreement and Plan of Merger, dated as of January 1, 2018, among Archrock and the Partnership, which was amended by Amendment No. 1 to Agreement and Plan of Merger on January 11, 2018
OTC	Over-the-counter, as related to aftermarket services parts and components
Partnership	Archrock Partners, L.P., together with its subsidiaries
ROU	Right-of-use, as related to the ASC 842 lease model
SEC	U.S. Securities and Exchange Commission
Securities Act	Securities Act of 1933, as amended
SG&A	Selling, general and administrative
Spin-off	Spin-off of our international contract operations, international aftermarket services and global fabrication businesses into a standalone public company operating as Exterran Corporation which was completed in November 2015
U.S.	United States of America

3

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, statements regarding the effects of the Merger or the Elite Acquisition; 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 2018 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, as well as the following:

• the risk that cost savings, tax benefits and any other synergies from the Elite Acquisition may not be fully realized or may take longer to realize than expected.

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.

4

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ARCHROCK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share amounts)

(unaudited)

	September 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	3,426		$	5,610
Accounts receivable, trade, net of allowance of $1,967 and $1,452, respectively	157,342			147,985
Inventory	78,306			76,333
Tax refund receivable	—			15,262
Other current assets	14,068			10,706
Current assets associated with discontinued operations	—			300
Total current assets	253,142			256,196
Property, plant and equipment, net	2,580,321			2,171,038
Operating lease ROU assets	18,681			—
Intangible assets, net	70,379			52,370
Contract costs, net	43,161			39,020
Goodwill	106,928			—
Other assets	19,694			26,828
Noncurrent assets associated with discontinued operations	8,498			7,063
Total assets	$	3,100,804		$	2,552,515
Liabilities and Equity
Current liabilities:
Accounts payable, trade	$	62,510		$	54,939
Accrued liabilities	94,938			78,997
Deferred revenue	10,120			16,509
Current liabilities associated with discontinued operations	—			297
Total current liabilities	167,568			150,742
Long-term debt	1,825,475			1,529,501
Operating lease liabilities	16,854			—
Deferred income taxes	4,321			2,842
Other liabilities	21,070			20,793
Noncurrent liabilities associated with discontinued operations	8,498			7,063
Total liabilities	2,043,786			1,710,941
Commitments and contingencies (Note 20)
Equity:
Preferred stock: $0.01 par value per share, 50,000,000 shares authorized, zero issued	—			—
Common stock: $0.01 par value per share, 250,000,000 shares authorized, 158,602,309 and 135,787,509 shares issued, respectively	1,586			1,358
Additional paid-in capital	3,410,378			3,177,982
Accumulated other comprehensive income (loss)	(4,187		)	5,773
Accumulated deficit	(2,268,890		)	(2,263,677		)
Treasury stock: 6,702,602 and 6,381,605 common shares, at cost, respectively	(81,869		)	(79,862		)
Total equity	1,057,018			841,574
Total liabilities and equity	$	3,100,804		$	2,552,515

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

5

ARCHROCK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue:
Contract operations	$	198,337		$	169,509		$	567,102		$	496,156
Aftermarket services	46,612			62,863			152,396			175,126
Total revenue	244,949			232,372			719,498			671,282
Cost of sales (excluding depreciation and amortization):
Contract operations	75,941			69,056			221,197			201,460
Aftermarket services	37,625			50,043			123,742			143,173
Total cost of sales (excluding depreciation and amortization)	113,566			119,099			344,939			344,633
Selling, general and administrative	29,526			26,298			87,133			80,455
Depreciation and amortization	48,409			43,779			137,997			131,565
Long-lived asset impairment	7,097			6,660			18,821			18,323
Restatement and other charges	—			396			445			(195		)
Interest expense	27,401			23,518			76,972			69,402
Debt extinguishment loss	—			—			3,653			2,450
Transaction-related costs	4,905			182			7,772			9,993
Other income, net	(7,810		)	(660		)	(10,025		)	(3,449		)
Income before income taxes	21,855			13,100			51,791			18,105
Provision for income taxes	1,448			3,126			232			1,913
Income from continuing operations	20,407			9,974			51,559			16,192
Loss from discontinued operations, net of tax	—			—			(273		)	—
Net income	20,407			9,974			51,286			16,192
Less: Net income attributable to the noncontrolling interest	—			—			—			(8,097		)
Net income attributable to Archrock stockholders	$	20,407		$	9,974		$	51,286		$	8,095
Basic and diluted net income per common share attributable to Archrock common stockholders	$	0.14		$	0.08		$	0.38		$	0.07
Weighted average common shares outstanding:
Basic	142,931			127,842			133,170			102,913
Diluted	142,965			127,955			133,206			103,013

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

6

ARCHROCK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Net income	$	20,407		$	9,974	$	51,286		$	16,192
Other comprehensive income (loss), net of tax:
Interest rate swap gain (loss), net of reclassifications to earnings	(1,415		)	959		(9,960		)	7,241
Amortization of terminated interest rate swaps	—			—		—			230
Merger-related adjustments	—			—		—			5,670
Total other comprehensive income (loss)	(1,415		)	959		(9,960		)	13,141
Comprehensive income	18,992			10,933		41,326			29,333
Less: Comprehensive income attributable to the noncontrolling interest	—			—		—			(12,360		)
Comprehensive income attributable to Archrock stockholders	$	18,992		$	10,933	$	41,326		$	16,973

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

7

ARCHROCK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in thousands, except share and per share amounts)

(unaudited)

	Archrock Stockholders
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Treasury Stock					Accumulated Deficit
	Amount		Shares						Amount			Shares					Total
Balance at July 1, 2018	$	1,355	135,478,039	$	3,150,118	$	9,374		$	(77,773	)	(6,072,751	)	$	(2,252,349	)	$	830,725
Treasury stock purchased									(687		)	(54,844	)				(687		)
Cash dividends ($0.132 per common share)														(17,114		)	(17,114		)
Shares issued in employee stock purchase plan			17,886	200													200
Stock-based compensation, net of forfeitures	1		76,757	1,804								(108,216	)				1,804
Merger-related adjustments				1,936													1,936
Comprehensive income
Net income														9,974			9,974
Interest rate swap gain, net of reclassifications to earnings						959											959
Balance at September 30, 2018	$	1,356	135,572,682	$	3,154,058	$	10,333		$	(78,460	)	(6,235,811	)	$	(2,259,489	)	$	827,798
Balance at July 1, 2019	$	1,369	136,899,297	$	3,182,247	$	(2,772	)	$	(80,719	)	(6,577,558	)	$	(2,267,235	)	$	832,890
Treasury stock purchased									(1,150		)	(125,044	)				(1,150		)
Cash dividends ($0.145 per common share)														(22,062		)	(22,062		)
Shares issued in employee stock purchase plan			20,288	192													192
Stock-based compensation, net of forfeitures			26,041	2,276													2,276
Shares issued for Elite Acquisition	217		21,656,683	225,663													225,880
Comprehensive income
Net income														20,407			20,407
Interest rate swap loss, net of reclassifications to earnings						(1,415		)									(1,415		)
Balance at September 30, 2019	$	1,586	158,602,309	$	3,410,378	$	(4,187	)	$	(81,869	)	(6,702,602	)	$	(2,268,890	)	$	1,057,018

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

ARCHROCK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in thousands, except share and per share amounts)

(unaudited)

	Archrock Stockholders
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Treasury Stock					Accumulated Deficit			Noncontrolling Interest
	Amount		Shares						Amount			Shares								Total
Balance at January 1, 2018	$	769	76,880,862	$	3,093,058	$	1,197		$	(76,732	)	(5,930,380	)	$	(2,241,243	)	$	(41,431	)	$	735,618
Treasury stock purchased									(1,728		)	(164,310	)							(1,728		)
Cash dividends ($0.372 per common share)														(41,132		)				(41,132		)
Shares issued in employee stock purchase plan	1		67,932	615																616
Stock-based compensation, net of forfeitures	10		960,028	5,372								(141,121	)				(64		)	5,318
Stock options exercised			29,855	262																262
Cash distribution to noncontrolling unitholders of the Partnership																	(11,766		)	(11,766		)
Impact of adoption of ASC 606 Revenue														14,666						14,666
Impact of adoption of ASU 2017-12														383						383
Impact of adoption of ASU 2018-02						258								(258		)				—
Merger-related adjustments	576		57,634,005	54,751													40,901			96,228
Comprehensive income
Net income														8,095			8,097			16,192
Interest rate swap gain, net of reclassifications to earnings						2,978											4,263			7,241
Amortization of terminated interest rate swaps						230														230
Merger-related adjustments						5,670														5,670
Balance at September 30, 2018	$	1,356	135,572,682	$	3,154,058	$	10,333		$	(78,460	)	(6,235,811	)	$	(2,259,489	)	$	—		$	827,798
Balance at January 1, 2019	$	1,358	135,787,509	$	3,177,982	$	5,773		$	(79,862	)	(6,381,605	)	$	(2,263,677	)	$	—		$	841,574
Treasury stock purchased									(2,007		)	(212,080	)							(2,007		)
Cash dividends ($0.409 per common share)														(56,499		)				(56,499		)
Shares issued in employee stock purchase plan			69,089	599																599
Stock-based compensation, net of forfeitures	11		1,089,028	6,134								(108,917	)							6,145
Shares issued for Elite Acquisition	217		21,656,683	225,663																225,880
Comprehensive income
Net income														51,286						51,286
Interest rate swap loss, net of reclassifications to earnings						(9,960		)												(9,960		)
Balance at September 30, 2019	$	1,586	158,602,309	$	3,410,378	$	(4,187	)	$	(81,869	)	(6,702,602	)	$	(2,268,890	)	$	—		$	1,057,018

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

8

ARCHROCK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net income	$	51,286		$	16,192
Adjustments to reconcile net income to cash provided by operating activities:
Loss from discontinued operations, net of tax	273			—
Depreciation and amortization	137,997			131,565
Long-lived asset impairment	18,821			18,323
Inventory write-downs	662			1,185
Amortization of operating lease ROU assets	2,151			—
Amortization of deferred financing costs	4,569			4,604
Amortization of debt discount	726			1,049
Amortization of terminated interest rate swaps	—			291
Debt extinguishment loss	3,653			2,450
Interest rate swaps	(1,063		)	166
Stock-based compensation expense	6,145			5,567
Provision for doubtful accounts	979			1,544
Gain on sale of assets	(9,644		)	(2,894		)
Deferred income tax provision (benefit)	(330		)	1,514
Amortization of contract costs	16,834			10,332
Deferred revenue recognized in earnings	(33,538		)	(17,420		)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, trade	(7,005		)	(21,591		)
Inventory	2,584			3,800
Other assets	13,272			1,251
Contract costs, net	(20,975		)	(25,290		)
Accounts payable and other liabilities	8,996			16,461
Deferred revenue	27,390			21,765
Other	111			(159		)
Net cash provided by continuing operations	223,894			170,705
Net cash used in discontinued operations	(269		)	—
Net cash provided by operating activities	223,625			170,705
Cash flows from investing activities:
Capital expenditures	(303,467		)	(241,183		)
Proceeds from sale of property, plant and equipment and other assets	55,674			24,061
Proceeds from insurance and other settlements	2,830			252
Cash paid in Elite Acquisition	(214,233		)	—
Net cash used in investing activities	(459,196		)	(216,870		)
Cash flows from financing activities:
Borrowings of long-term debt	1,685,250			536,830
Repayments of long-term debt	(1,386,250		)	(440,636		)
Payments for debt issuance costs	(8,829		)	(3,332		)
Proceeds from (payments for) settlement of interest rate swaps that include financing elements	1,123			(61		)
Dividends paid to Archrock stockholders	(56,499		)	(41,132		)
Distributions paid to noncontrolling partners in the Partnership	—			(11,766		)
Proceeds from stock options exercised	—			262
Proceeds from stock issued under employee stock purchase plan	599			616
Purchases of treasury stock	(2,007		)	(1,728		)
Net cash provided by financing activities	233,387			39,053
Net decrease in cash and cash equivalents	(2,184		)	(7,112		)
Cash and cash equivalents, beginning of period	5,610			10,536
Cash and cash equivalents, end of period	$	3,426		$	3,424
Supplemental disclosure of non-cash transactions:
Issuance of Archrock common stock pursuant to Merger, net of tax	$	—		$	55,327
Issuance of Archrock common stock pursuant to Elite Acquisition, net of tax	225,880			—

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

9

ARCHROCK, INC. 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization and Basis of Presentation

We are an energy infrastructure company with a pure-play focus on midstream natural gas compression. We believe 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 includes all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly 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 2018 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. Certain prior year amounts have been reclassified to conform to the current year presentation.

2. Recent Accounting Developments

Accounting Standards Updates Implemented

Leases

ASC 842 Leases establishes a ROU model that requires a lessee to record a ROU asset and a lease liability on the balance sheet. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Under the new guidance, lessor accounting is largely unchanged. We adopted ASC 842 Leases on January 1, 2019 using the modified retrospective transition method and elected the practical expedient package to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) lease classification of any expired or existing leases and (iii) initial direct costs for any existing leases. We did not elect the practical expedient to use hindsight in determining the lease term. Adoption of ASC 842 Leases resulted in recognition of an operating lease ROU asset of $18.6 million and an operating lease liability of $20.0 million in our condensed consolidated balance sheet at January 1, 2019. The difference of $1.4 million related to accrued rent and prepaid lease payments recorded to our consolidated balance sheet as of December 31, 2018. We did not recognize any finance lease ROU assets or liabilities upon adoption of ASC 842 Leases. There was no impact to our condensed consolidated statements of operations, equity or cash flows upon adoption. Comparative information has not been recast and continues to be reported under the accounting standards in effect for those periods.

ASC 842 Leases also provides a practical expedient, elected by class of underlying asset, to not separate lease and nonlease components and instead account for those components as a single component if certain conditions are met. ASC 842 Leases also provides clarification for lessors on whether ASC 842 Leases or ASC 606 Revenue is applicable to the combined component based on determination of the predominant component. We have concluded that for our contract operations services agreements, in which we are a lessor, the services nonlease component is predominant over the compression unit lease component and therefore ongoing recognition of these agreements will continue to follow the ASC 606 Revenue guidance. We have also elected, as a lessee, to not separate lease and nonlease components as it relates to our facility leases.

In addition, we have made an accounting policy election, as permitted by ASC 842 Leases, to not apply the recognition requirements of ASC 842 Leases to leases with an initial term of 12 months or less.

10

Goodwill

On October 1, 2019, we prospectively adopted ASU 2017-04 which simplifies the test for goodwill impairment by eliminating Step 2 in the test for goodwill impairment, which required an entity to calculate the implied fair value of goodwill. Under this amendment, an entity should perform its goodwill impairment test on at least an annual basis by comparing the fair value of a reporting unit, including any income tax effects from any tax deductible goodwill, with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

Accounting Standards Updates Not Yet Implemented

In August 2018, the FASB issued ASU 2018-13 which amends the required fair value measurements disclosures related to valuation techniques and inputs used, uncertainty in measurement and changes in measurements applied. These amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty are to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments are to be applied retrospectively to all periods presented upon their effective date. We are currently evaluating the impact of ASU 2018-13 on our consolidated financial statements and footnote disclosures.

In June 2016, the FASB issued ASU 2016-13 which changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in earlier recognition of allowance for losses. For public entities that meet the definition of an SEC filer, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. Entities will apply ASU 2016-13 provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently evaluating the impact of ASU 2016-13 on our consolidated financial statements and footnote disclosures.

3. Business Transactions

Elite Acquisition

On August 1, 2019, we completed the Elite Acquisition whereby we acquired from Elite Compression substantially all of its assets, including a fleet of predominantly large compressor units comprising approximately 430,000 horsepower, vehicles, real property and inventory, and certain liabilities for aggregate consideration consisting of $209.2 million in cash and 21,656,683 shares of common stock with an acquisition date fair value of $225.9 million. The cash portion of the acquisition was funded with borrowings on the Credit Facility. The purchase price paid is subject to customary post-closing adjustments in accordance with the terms of the acquisition's asset purchase agreement.

The Elite Acquisition was accounted for using the acquisition method which requires, among other things, assets acquired and liabilities assumed to be recorded at their fair value on the acquisition date. The excess of the consideration transferred over those fair values is recorded as goodwill. The preliminary allocation of the purchase price, which is subject to certain adjustments, was based upon preliminary valuations and our estimates and assumptions are subject to change upon the completion of management’s review of the final valuations. We are in the process of finalizing valuations related to property, plant and equipment, identifiable intangible assets and goodwill. Post-closing adjustments to the purchase price could impact future depreciation and amortization expense as well as income tax expense. The final valuation of net assets acquired is expected to be completed as soon as possible, but no later than one year from the acquisition date.

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The following table summarizes the preliminary purchase price allocation based on the estimated fair values of the acquired assets and liabilities as of the acquisition date (in millions):

Accounts receivable	$	9.0
Inventory	7.7
Other current assets	0.8
Property, plant and equipment	286.3
Operating lease ROU assets	0.7
Intangible assets	29.1
Goodwill	106.9
Accounts payable, trade	(2.1		)
Accrued liabilities	(3.0		)
Operating lease liabilities	(0.3		)
Purchase price	$	435.1

The preliminary amount of property, plant and equipment is primarily comprised of compression equipment that will be depreciated on a straight-line basis over an estimated average remaining useful life of 15 years.

The intangible assets consist of customer relationships that have an estimated useful life of 15 years. The preliminary amount of intangible assets and their associated useful life were determined based on the period over which the assets are expected to contribute directly or indirectly to our future cash flows.

The preliminary amount of goodwill resulting from the acquisition is attributable to the expansion of our services in various regions in which we currently operate and was allocated to our contract operations segment. The goodwill recorded is considered to have an indefinite life and will be reviewed annually for impairment or more frequently if indicators of potential impairment exist. All of the goodwill recorded for this acquisition is expected to be deductible for U.S. federal income tax purposes.

The results of operations attributable to the assets and liabilities acquired in the Elite Acquisition have been included in our condensed consolidated financial statements as part of our contract operations segment since the date of acquisition. Revenue attributable to the assets acquired from the date of acquisition, August 1, 2019, through September 30, 2019 was $13.1 million. We are unable to provide earnings attributable to the assets and liabilities acquired since the date of acquisition as we do not prepare full stand-alone earnings reports for those assets and liabilities.

Unaudited Pro Forma Financial Information

The unaudited pro forma financial information for the three and nine months ended September 30, 2019 and 2018 was derived by adjusting our historical financial statements in order to give effect to the assets and liabilities acquired in the Elite Acquisition. The Elite Acquisition is presented in this unaudited pro forma financial information as though the acquisition occurred as of January 1, 2018, and reflects the following:

• the acquisition of substantially all of Elite Compression’s assets, including a compression fleet of approximately 430,000 horsepower, vehicles, real property and inventory, and certain liabilities;

• borrowings of $209.2 million under the Credit Facility for cash consideration exchanged in the acquisition; and

• the exclusion of $4.8 million and $7.4 million of financial advisory, legal and other professional fees incurred related to the acquisition and recorded to transaction-related costs in our condensed consolidated statements of operations during the three and nine months ended September 30, 2019, respectively.

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The unaudited pro forma financial information below is presented for informational purposes only and is not necessarily indicative of our results of operations that would have occurred had the transaction been consummated at the beginning of the period presented, nor is it necessarily indicative of future results.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Revenue	$	251,505	$	251,060	$	763,776	$	728,188
Net income attributable to Archrock stockholders	27,207		11,957		65,152		11,907

Harvest Sale

On August 1, 2019, we completed an asset sale in which Harvest acquired from us approximately 80,000 active and idle compression horsepower, vehicles and parts inventory for cash consideration of $30.0 million. We recorded a $6.6 million gain on the sale of these assets to other income, net in our condensed consolidated statements of operations during the three and nine months ended September 30, 2019. The assets were previously reported under our contract operations segment.

4. Related Party Transactions

In connection with the closing of the Elite Acquisition, we issued 21,656,683 shares of our common stock to JDH Capital, an affiliate of our customer Hilcorp. As long as JDH Capital, together with affiliates of Hilcorp, owns at least 7.5% of our outstanding common stock, it will have the right to designate one director to our board of directors. On August 1, 2019, Jeffery D. Hildebrand, founder and executive chairman of Hilcorp, was elected to our board of directors. As of September 30, 2019, JDH Capital owned 14.3% of our outstanding common stock.

Revenue from Hilcorp and affiliates was $9.7 million and $2.2 million during the three months ended September 30, 2019 and 2018, respectively, and $20.1 million and $6.6 million during the nine months ended September 30, 2019 and 2018, respectively. Accounts receivable, net due from Hilcorp and affiliates were $6.1 million and $3.6 million as of September 30, 2019 and December 31, 2018, respectively.

5. Discontinued Operations

In 2015 we completed the Spin-off. In order to effect the Spin-off and govern our relationship with Exterran Corporation after the Spin-off, we entered into several agreements with Exterran Corporation which include, but are not limited to, the tax matters agreement. The tax matters agreement governs the respective rights, responsibilities and obligations of Exterran Corporation and us with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and certain other matters regarding taxes. Subject to the provisions of this agreement, we and Exterran Corporation agreed to indemnify the primary obligor of any return for tax periods beginning before and ending before or after the Spin-off (including any ongoing or future amendments and audits for these returns) for the portion of the tax liability (including interest and penalties) that relates to their respective operations reported in the filing.

As of September 30, 2019 and December 31, 2018, we had $8.5 million and $7.1 million, respectively, of unrecognized tax benefits (including interest and penalties) related to Exterran Corporation operations prior to the Spin-off recorded to noncurrent liabilities associated with discontinued operations in our condensed consolidated balance sheets. We had an offsetting indemnification asset of $8.5 million and $7.1 million related to these unrecognized tax benefits recorded to noncurrent assets associated with discontinued operations as of September 30, 2019 and December 31, 2018, respectively.

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The following table summarizes the balance sheet data for discontinued operations (in thousands):

	September 30, 2019		December 31, 2018
Other current assets	$	—	$	300
Other assets	8,498		7,063
Total assets associated with discontinued operations	$	8,498	$	7,363
Accrued liabilities	$	—	$	297
Deferred income taxes	8,498		7,063
Total liabilities associated with discontinued operations	$	8,498	$	7,360

The following table summarizes the statements of operations data for discontinued operations (in thousands):

	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
Other income, net	$	(31	)	$	(1,463	)
Provision for income taxes	31			1,736
Loss from discontinued operations, net of tax	$	—		$	(273	)

6. Inventory

Inventory consisted of the following (in thousands):

	September 30, 2019		December 31, 2018
Parts and supplies	$	67,262	$	65,645
Work in progress	11,044		10,688
Inventory	$	78,306	$	76,333

7. Property, Plant and Equipment, Net

Property, plant and equipment, net consisted of the following (in thousands):

	September 30, 2019			December 31, 2018
Compression equipment, facilities and other fleet assets	$	3,735,162		$	3,323,465
Land and buildings	49,706			47,067
Transportation and shop equipment	111,381			103,766
Computer hardware and software	93,479			92,174
Other	14,403			11,880
Property, plant and equipment	4,004,131			3,578,352
Accumulated depreciation	(1,423,810		)	(1,407,314		)
Property, plant and equipment, net	$	2,580,321		$	2,171,038

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8. Long-Term Debt

Long-term debt consisted of the following (in thousands):

	September 30, 2019			December 31, 2018
Credit Facility	$	988,500		$	839,500
2027 Notes	500,000			—
Less: Deferred financing costs, net of amortization	(8,275		)	—
	491,725			—
2022 Notes	350,000			350,000
Less: Debt discount, net of amortization	(2,230		)	(2,766		)
Less: Deferred financing costs, net of amortization	(2,520		)	(3,133		)
	345,250			344,101
2021 Notes	—			350,000
Less: Debt discount, net of amortization	—			(1,789		)
Less: Deferred financing costs, net of amortization	—			(2,311		)
	—			345,900
Long-term debt	$	1,825,475		$	1,529,501

Archrock Credit Facility

In April 2018, in connection with the Merger, the Archrock Credit Facility was terminated. As a result of the termination, we recorded a debt extinguishment loss of $2.5 million during the nine months ended September 30, 2018. We incurred $0.2 million in commitment fees in 2018 prior to the facility’s termination and were in compliance with all covenants through its closing.

Credit Facility

As of September 30, 2019, there were $15.2 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.7%. The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 4.9% and 5.4% at September 30, 2019 and December 31, 2018, respectively. We incurred $0.4 million and $0.6 million in commitment fees on the daily unused amount of the Credit Facility during the three months ended September 30, 2019 and 2018, respectively, and $1.5 million and $1.7 million during the nine months ended September 30, 2019 and 2018, respectively.

We must maintain the following consolidated financial ratios, as defined in our Credit Facility agreement:

EBITDA to Interest Expense	2.5 to 1.0
Senior Secured Debt to EBITDA	3.5 to 1.0
Total Debt to EBITDA
Through fiscal year 2019	5.75 to 1.0
Through second quarter of 2020	5.50 to 1.0
Thereafter (1)	5.25 to 1.0

——————

⁽¹⁾  Subject to a temporary increase to 5.5 to 1.0 for any quarter during which an acquisition satisfying certain thresholds is completed and for the two quarters immediately following such quarter.

As of September 30, 2019, the ratio requirements above did not constrain our undrawn capacity and as such, all of the $246.3 million of undrawn capacity was available for additional borrowings. As of September 30, 2019, we were in compliance with all covenants under the Credit Facility agreement.

15

2027 Notes

On March 21, 2019, we completed a private offering of $500.0 million aggregate principal amount of 6.875% senior notes due April 2027 and received net proceeds of $491.2 million after deducting issuance costs. The $8.8 million of issuance costs were recorded as deferred financing costs within long-term debt in our condensed consolidated balance sheets and are being amortized to interest expense in our condensed consolidated statement of operations over the term of the notes. The net proceeds were used to repay borrowings outstanding under our Credit Facility as of March 31, 2019.

The 2027 Notes have not been and will not be registered under the Securities Act or the securities laws of any other jurisdiction and may not be offered or sold in the U.S. except pursuant to a registration exemption under the Securities Act and applicable state securities laws. We offered and issued the 2027 Notes only to qualified institutional buyers in accordance with Rule 144A under the Securities Act and to certain non-U.S. persons outside the U.S. in accordance with Regulation S under the Securities Act.

The 2027 Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by us and all of our existing subsidiaries, other than Archrock Partners, L.P. and APLP Finance Corp., which are co-issuers of the 2027 Notes, and certain of our future subsidiaries. The 2027 Notes and the guarantees rank equally in right of payment with all of our and the guarantors’ existing and future senior indebtedness.

The 2027 Notes may be redeemed at any time, in whole or in part, at specified redemption prices and make-whole premiums, plus any accrued and unpaid interest.

Redemption of 2021 Notes

On April 5, 2019, the 2021 Notes were redeemed at 100% of their $350.0 million aggregate principal amount plus accrued and unpaid interest of $0.2 million with borrowings from the Credit Facility. We recorded a debt extinguishment loss of $3.7 million related to the redemption during the nine months ended September 30, 2019.

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9. Revenue from Contracts with Customers

Disaggregation of Revenue

The following table presents our revenue from contracts with customers disaggregated by revenue source (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Contract operations (1):
0 - 1,000 horsepower per unit	$	66,026	$	60,725	$	193,448	$	179,917
1,001 - 1,500 horsepower per unit	81,755		69,663		231,693		204,841
Over 1,500 horsepower per unit	49,572		38,053		138,966		108,367
Other (2)	984		1,068		2,995		3,031
Total contract operations (3)	198,337		169,509		567,102		496,156
Aftermarket services (1):
Services (4)	28,888		38,863		95,689		107,776
OTC parts and components sales	17,724		24,000		56,707		67,350
Total aftermarket services (5)	46,612		62,863		152,396		175,126
Total revenue	$	244,949	$	232,372	$	719,498	$	671,282

——————

⁽¹⁾  We operate in two segments: contract operations and aftermarket services. See Note 21 (“Segments”) for further details.

⁽²⁾  Primarily relates to fees associated with owned non-compressor equipment.

⁽³⁾  Included $1.6 million for each of the three months ended September 30, 2019 and 2018 and $6.0 million and $4.3 million for the nine months ended September 30, 2019 and 2018, respectively, related to billable maintenance on owned units that was recognized at a point in time. All other contract operations revenue is recognized over time.

⁽⁴⁾  Included a reversal of $0.7 million of revenue during the three and nine months ended September 30, 2019 related to changes in estimates of performance obligations partially satisfied in prior periods.

⁽⁵⁾  All service revenue within aftermarket services is recognized over time. All OTC parts and components sales revenue is recognized at a point in time.

Performance Obligations

As of September 30, 2019, we had $453.2 million of remaining performance obligations related to our contract operations segment. We have elected to apply the practical expedient to not consider the effects of the time value of money, as the expected time between the transfer of services and payment for such services is less than one year. The remaining performance obligations will be recognized through 2024 as follows (in thousands):

	2019		2020		2021		2022		2023		2024		Total
Remaining performance obligations	$	114,677	$	198,753	$	100,244	$	34,878	$	4,090	$	563	$	453,205

As of September 30, 2019 we have elected to apply the practical expedient to 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.

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Contract Balances

As of September 30, 2019 and December 31, 2018, our receivables from contracts with customers, net of allowance for doubtful accounts, were $151.3 million and $142.1 million, respectively.

Freight billings to customers for the transport of compressor assets, customer-specified modifications of compressor assets and milestone billings on aftermarket services often result in a contract liability. As of September 30, 2019 and December 31, 2018, our contract liabilities were $11.0 million and $17.1 million, respectively, which were included in deferred revenue and other liabilities in our condensed consolidated balance sheets. We recognized $33.5 million of our December 31, 2018 contract liability balance as revenue during the nine months ended September 30, 2019.

10. Leases

Operating Leases

We determine if an arrangement is a lease at inception. We determine lease classification and recognize ROU assets and liabilities on the lease commencement date based on the present value of lease payments over the lease term. As the discount rate implicit in the lease is rarely readily determinable, we estimate our incremental borrowing rate using information available at commencement date in determining the present value of the lease payments. The lease term includes options to extend when we are reasonably certain to exercise the option. Short-term leases, those with an initial term of 12 months or less, are not recorded on the balance sheet. Variable costs such as our proportionate share of actual costs for utilities, common area maintenance, property taxes and insurance are not included in the lease liability and are recognized in the period in which they are incurred. Operating lease expense for lease payments is recognized on a straight-line basis over the term of the lease.

The facility leases discussed below, of which we are the lessee, contain lease and nonlease components for which we have elected the practical expedient to account for as a single lease component, as the nonlease components are not significant to the total consideration in the contract and separating the nonlease component would have no effect on lease classification. As it relates to our contract operations services agreements in which we are the lessor, the services nonlease component is predominant over the compression unit lease component and therefore recognition of these agreements will continue to follow the ASC 606 Revenue guidance.

We have operating leases and subleases for office space, temporary housing, storage and shops. Our leases have remaining lease terms of less than one year to 11 years and most include options to extend the lease term, at our discretion, for an additional three to five years. We are not, however, reasonably certain that we will exercise any of the options to extend and as such, they have not been included in the remaining lease terms.

Balance sheet information related to our operating leases was as follows (in thousands):

	Classification	September 30, 2019
ROU assets	Operating lease ROU assets	$	18,681
Lease liabilities
Current	Accrued liabilities	$	3,019
Noncurrent	Operating lease liabilities	16,854
Total lease liabilities		$	19,873

The components of lease cost were as follows (in thousands):

	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost	$	983	$	2,927
Short-term lease cost	64		302
Variable lease cost	322		1,264
Total lease cost	$	1,369	$	4,493

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Cash flow and noncash information related to our operating leases were as follows (in thousands):

	Nine Months Ended September 30, 2019
Operating cash flows - cash paid for amounts included in the measurement of operating lease liabilities	$	4,075
Operating lease ROU assets obtained in exchange for new lease liabilities	2,247

Other supplemental information related to our operating leases was as follows:

	September 30, 2019
Weighted average remaining lease term (in years)	8.3
Weighted average discount rate	5.3	%

Remaining maturities of lease liabilities governed under ASC 842 Leases as of September 30, 2019 were as follows (in thousands):

2019	$	676
2020	4,012
2021	3,715
2022	2,615
2023	2,310
2024	1,919
Thereafter	9,611
Total lease payments	24,858
Less: Interest	(4,985		)
Total lease liabilities under ASC 842 Leases	$	19,873

Maturities of lease liabilities governed under ASC 840 Leases as of December 31, 2018 were as follows (in thousands):

2019	$	4,317
2020	3,980
2021	3,562
2022	2,433
2023	2,170
Thereafter	11,935
Total lease liabilities under ASC 840 Leases	$	28,397

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11. Derivatives

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

At September 30, 2019, the following interest rate swaps, entered into to offset changes in expected cash flows due to fluctuations in the associated variable interest rates, were outstanding (in millions):

Expiration Date	Notional Value
May 2020	$	100
March 2022	300
	$	400

The counterparties to our derivative agreements are major financial institutions. We monitor the credit quality of these financial institutions and do not expect non-performance by any counterparty, although such non-performance could have a material adverse effect on us. We have no collateral posted for the derivative instruments.

We have designated these interest rate swaps as cash flow hedging instruments. Changes in the fair value of the interest rate swaps are recognized as a component of other comprehensive income (loss) until the hedged transaction affects earnings. At that time, amounts are reclassified into earnings to interest expense, the same statement of operations line item to which the earnings effect of the hedged item is recorded. Cash flows from derivatives designated as hedges are classified in our 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 this case, the cash settlements for these derivatives are classified as cash flows from financing activities.

We expect the hedging relationship to be highly effective as the swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate. We perform quarterly qualitative prospective and retrospective hedge effectiveness assessments unless facts and circumstances related to the hedging relationships change such that we can no longer assert qualitatively that the cash flow hedge relationships were and continue to be highly effective. We estimate that $0.4 million of the deferred pre-tax loss attributable to interest rate swaps included in accumulated other comprehensive income (loss) at September 30, 2019 will be reclassified into earnings as interest expense at then-current values during the next 12 months as the underlying hedged transactions occur.

As of September 30, 2019, the weighted average effective fixed interest rate on our interest rate swaps was 1.8%.

The following table presents the effect of our derivative instruments designated as cash flow hedging instruments on our condensed consolidated balance sheets (in thousands):

	September 30, 2019			December 31, 2018
Other current assets	$	73		$	3,185
Other assets	—			4,122
Total derivative assets	$	73		$	7,307
Accrued liabilities	$	(456	)	$	—
Other liabilities	(2,270		)	—
Total derivative liabilities	$	(2,726	)	$	—

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The following tables present the effect of our derivative instruments designated as cash flow hedging instruments on our condensed consolidated statements of operations (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Pre-tax gain (loss) recognized in other comprehensive income (loss)	$	(933	)	$	1,642	$	(7,761	)	$	8,583
Pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense	482			429		2,199			(83		)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Total amount of interest expense in which the effects of cash flow hedges are recorded	$	27,401	$	23,518	$	76,972	$	69,402
Amount of gain reclassified from accumulated other comprehensive income (loss) into interest expense	482		429		2,199		582

See Note 12 (“Fair Value Measurements”) and Note 19 (“Accumulated Other Comprehensive Income (Loss)”) for further details on our derivative instruments.

12. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

On a quarterly basis, our interest rate swap derivative instruments are valued based on the income approach (discounted cash flow) using market observable inputs, including London Interbank Offered Rate forward curves. These fair value measurements are classified as Level 2. The following table presents our derivative asset and liability measured at fair value on a recurring basis, with pricing levels as of the date of valuation (in thousands):

	September 30, 2019			December 31, 2018
Derivative asset	$	73		$	7,307
Derivative liability	(2,726		)	—

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

During the nine months ended September 30, 2019, we recorded non-recurring fair value measurements related to our idle and previously-culled compressor units. Our estimate of the compressor units’ fair value was primarily based on the expected net sale proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use. We discounted the expected proceeds, net of selling and other carrying costs, using a weighted average disposal period of four years. These fair value measurements are classified as Level 3. The fair value of our impaired compressor units was $2.1 million and $2.3 million at September 30, 2019 and December 31, 2018, respectively. See Note 13 (“Long-Lived Asset Impairment”) for further details.

Other Financial Instruments

The carrying amounts of our cash, receivables and payables approximate fair value due to the short-term nature of those instruments.

The carrying amount of borrowings outstanding under our Credit Facility approximates fair value due to its variable interest rate. The fair value of these outstanding borrowings was estimated using a discounted cash flow analysis based on interest rates offered on loans with similar terms to borrowers of similar credit quality, which are Level 3 inputs.

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The fair value of our fixed rate debt was estimated based on quoted prices in inactive markets and is considered a Level 2 measurement. The following table summarizes the carrying amount and fair value of our fixed rate debt (in thousands):

	September 30, 2019		December 31, 2018
Carrying amount of fixed rate debt (1)	$	836,975	$	690,001
Fair value of fixed rate debt	887,000		674,000

——————

⁽¹⁾  Carrying amounts are shown net of unamortized debt discounts and unamortized deferred financing costs. See Note 8 (“Long-Term Debt”).

13. Long-Lived Asset Impairment

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

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

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

The following table presents the results of our impairment review as recorded to our contract operations segment (dollars in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Idle compressor units retired from the active fleet	60		60		240		225
Horsepower of idle compressor units retired from the active fleet	28,000		23,000		84,000		73,000
Impairment recorded on idle compressor units retired from the active fleet	$	7,097	$	6,660	$	18,821	$	18,323

14. Hosting Arrangements

In the fourth quarter of 2018 we began a process and technology transformation project that will, among other things, upgrade our existing ERP system, improve our supply chain and inventory management and expand the remote monitoring capabilities of our compression fleet. Included in this project are hosting arrangements that are service contracts related to the cloud migration of our ERP system and cloud services for our new mobile workforce telematics tool.

Certain costs incurred for the implementation of our hosting arrangements that are service contracts are being capitalized and will be amortized on a straight-line basis over the term of the respective contract. As of September 30, 2019 and December 31, 2018, we had $3.1 million and $0.4 million, respectively, of implementation costs related to our hosting arrangements that are service contracts capitalized to other assets in our condensed consolidated balance sheets. Amortization of the capitalized implementation costs will be recorded to SG&A in our condensed consolidated statements of operations and is expected to begin in future periods as the individual components become ready for their intended use.

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15. Income Taxes

Effective Tax Rate

The year-to-date effective tax rate for the nine months ended September 30, 2019 differed significantly from our statutory rate primarily due to the reduction of a valuation allowance, which was recorded to offset the tax effect of the increase in book income in the nine months ended September 30, 2019, as well as the release of an unrecognized tax benefit due to the settlement of a tax audit.

Unrecognized Tax Benefits

As of September 30, 2019, we believe it is reasonably possible that $1.9 million of our unrecognized tax benefits, including penalties, interest and discontinued operations, will be reduced prior to September 30, 2020 due to the settlement of audits or the expiration of statutes of limitations or both. However, due to the uncertain and complex application of the tax regulations, it is possible that the ultimate resolution of these matters may result in liabilities which could materially differ from this estimate.

16. Earnings per Share

Basic net income (loss) attributable to Archrock common stockholders per common share is computed using the two-class method, which is an earnings allocation formula that determines net income (loss) per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Under the two-class method, basic net income (loss) attributable to Archrock common stockholders per common share is determined by dividing net income (loss) attributable to Archrock common stockholders, after deducting amounts allocated to participating securities, by the weighted average number of common shares outstanding for the period. Participating securities include unvested restricted stock and stock-settled restricted stock units that have nonforfeitable rights to receive dividends or dividend equivalents, whether paid or unpaid. During periods of net loss, no effect is given to participating securities because they do not have a contractual obligation to participate in our losses.

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

The following table summarizes net income attributable to Archrock common stockholders used in the calculation of basic and diluted net income per common share (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income from continuing operations attributable to Archrock stockholders	$	20,407		$	9,974		$	51,559		$	8,095
Loss from discontinued operations, net of tax	—			—			(273		)	—
Net income attributable to Archrock stockholders	20,407			9,974			51,286			8,095
Less: Net income attributable to participating securities	(302		)	(241		)	(876		)	(554		)
Net income attributable to Archrock common stockholders	$	20,105		$	9,733		$	50,410		$	7,541

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The following table shows the potential shares of common stock that were included in computing diluted net income attributable to Archrock common stockholders per common share (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Weighted average common shares outstanding including participating securities	144,692		129,486		135,081		104,489
Less: Weighted average participating securities outstanding	(1,761	)	(1,644	)	(1,911	)	(1,576	)
Weighted average common shares outstanding used in basic net income per common share	142,931		127,842		133,170		102,913
Net dilutive potential common shares issuable:
On exercise of options and vesting of performance-based restricted stock units	33		111		33		96
On settlement of employee stock purchase plan shares	1		2		3		4
Weighted average common shares outstanding used in diluted net income per common share	142,965		127,955		133,206		103,013

The following table shows the potential shares of common stock issuable that were excluded from computing diluted net income attributable to Archrock common stockholders per common share as their inclusion would have been anti-dilutive (in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
On exercise of options where exercise price is greater than average market value for the period	154	187	154	199

17. Equity

Elite Acquisition

On August 1, 2019, we completed the Elite Acquisition. A portion of the acquisition’s purchase price was funded through the issuance of 21,656,683 shares of common stock with an acquisition date fair value of $225.9 million, which was recorded to common stock and additional paid-in capital in our condensed consolidated statements of equity. See Note 3 (“Business Transactions”) for further details of this acquisition.

Merger Transaction

In April 2018, we completed the Merger and acquired all of the common units of the Partnership not owned by us prior to the Merger. As a result of the Merger, the Partnership’s common units are no longer publicly traded. The 2021 Notes and 2022 Notes were not impacted by the Merger.

As we controlled the Partnership prior to the Merger and continue to control the Partnership after the Merger, we accounted for the change in our ownership interest in the Partnership as an equity transaction in the second quarter of 2018 and no gain or loss was recognized in our condensed consolidated statements of operations as a result of the Merger. The tax effects of the Merger were reported as adjustments to other assets, noncurrent assets associated with discontinued operations, deferred income taxes, additional paid-in capital and other comprehensive income.

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The following table presents the effects of changes in our ownership interest in the Partnership on the equity attributable to Archrock stockholders:

	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Net income attributable to Archrock stockholders	$	9,974	$	8,095
Increase in Archrock stockholders’ additional paid-in capital for change in ownership of Partnership common units	1,936		54,751
Change from net income attributable to Archrock stockholders and transfers from noncontrolling interest	$	11,910	$	62,846

Prior to the Merger, public unitholders held a 57% ownership interest in the Partnership and we owned the remaining 43% equity interest. The earnings of the Partnership that were attributed to its common units held by the public prior to the Merger are reflected in net income attributable to the noncontrolling interest in our condensed consolidated statements of operations.

Cash Dividends

The following table summarizes our dividends declared and paid in each of the quarterly periods of 2019 and 2018:

	Dividends per Common Share		Total Dividends (in thousands)
2018
Q1	$	0.120	$	8,532
Q2	0.120		15,486
Q3	0.132		17,114
Q4	0.132		17,156
2019
Q1	$	0.132	$	17,231
Q2	0.132		17,206
Q3	0.145		22,062

On October 23, 2019, our board of directors declared a quarterly dividend of $0.145 per share of common stock to be paid on November 14, 2019 to stockholders of record at the close of business on November 7, 2019.

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18. Stock-Based Compensation

We have granted restricted stock, restricted stock units and performance-based restricted stock units to employees and non-employee directors under the Archrock, Inc. 2013 Stock Incentive Plan.

The following table presents restricted stock, restricted stock unit, performance-based restricted stock unit and cash-settled performance unit activity during the nine months ended September 30, 2019 (shares in thousands):

	Shares		Weighted Average Grant Date Fair Value Per Share
Non-vested awards, January 1, 2019	1,728		$	9.68
Granted	1,389		10.01
Vested	(933	)	8.83
Canceled	(153	)	10.33
Non-vested awards, September 30, 2019 (1)(2)	2,031		10.24

——————

⁽¹⁾  Non-vested awards as of September 30, 2019 are comprised of 376,000 cash-settled restricted stock units and cash-settled performance units and 1,655,000 restricted stock and stock-settled performance units.

⁽²⁾  During the nine months ended September 30, 2019, the settlement terms of 99,631 performance units, with grant dates in 2018 and 2019, were modified from settlement in stock to cash. The change in award settlement from stock to cash was the only modification to these awards; the vesting, forfeiture and all other terms and conditions were unchanged. The modification resulted in a $0.2 million reclassification from additional paid-in capital to other current liabilities in our condensed consolidated balance sheets and had an immaterial impact on our condensed consolidated statements of operations.

As of September 30, 2019, we expect $15.7 million of unrecognized compensation cost related to unvested restricted stock, stock-settled restricted stock units, performance units, cash-settled restricted stock units and cash-settled performance units to be recognized over the weighted-average period of 2.0 years.

Total stock-based compensation expense consisted of the following (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Equity awards	$	2,276	$	1,804	$	6,145	$	5,567
Liability awards	274		334		1,880		1,301
Total stock-based compensation expense	$	2,550	$	2,138	$	8,025	$	6,868

19. Accumulated Other Comprehensive Income (Loss)

Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with owners. Our accumulated other comprehensive income (loss) consists of changes in the fair value of our interest rate swap derivative instruments, net of tax, which are designated as cash flow hedges, amortization of terminated interest rate swaps and adjustments related to changes in our ownership of the Partnership.

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The following table presents the changes in accumulated other comprehensive income (loss) of our derivative cash flow hedges, net of tax and excluding noncontrolling interest, during the three and nine months ended September 30, 2019 and 2018 (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Beginning accumulated other comprehensive income (loss)	$	(2,772	)	$	9,374		$	5,773		$	1,197
Gain (loss) recognized in other comprehensive income (loss), net of tax provision of $0, $345, $0 and $1,234, respectively (1)	(933		)	1,298			(7,761		)	3,349
(Gain) loss reclassified from accumulated other comprehensive income (loss) to interest expense, net of tax provision of $0, $90, $0 and $37, respectively (1)(2)	(482		)	(339		)	(2,199		)	117
Merger-related adjustments (3)	—			—			—			5,670
Other comprehensive income (loss) attributable to Archrock stockholders	(1,415		)	959			(9,960		)	9,136
Ending accumulated other comprehensive income (loss)	$	(4,187	)	$	10,333		$	(4,187	)	$	10,333

——————

⁽¹⁾  Included adjustments of $0.3 million and $2.1 million related to an increase in the valuation allowance recorded to offset the tax effect of other comprehensive loss recorded during the three and nine months ended September 30, 2019, respectively.

⁽²⁾  Included stranded tax effects resulting from the Tax Cuts and Jobs Act, which was implemented in December 2017, of $0.3 million reclassified to accumulated deficit during the nine months ended September 30, 2018.

⁽³⁾  Pursuant to the Merger, we reclassified a gain of $5.7 million from noncontrolling interest to accumulated other comprehensive income (loss) related to the fair value of our derivative instruments that was previously attributed to public ownership of the Partnership.

See Note 11 (“Derivatives”) for further details on our interest rate swap derivative instruments.

20. Commitments and Contingencies

Performance Bonds

In the normal course of business we have issued performance bonds to various state authorities that ensure payment of certain obligations. We have also issued a bond to protect our 401(k) retirement plan against losses caused by acts of fraud or dishonesty. The bonds have expiration dates in 2019 through the third quarter of 2020 and maximum potential future payments of $2.3 million. As of September 30, 2019, we were in compliance with all obligations to which the performance bonds pertain.

Tax Matters

We are subject to a number of state and local taxes that are not income-based. As many of these taxes are subject to audit by the taxing authorities, it is possible that an audit could result in additional taxes due. We accrue for such additional taxes when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the liability. As of September 30, 2019 and December 31, 2018, we accrued $2.4 million and $4.5 million, respectively, for the outcomes of non-income-based tax audits. We do not expect that the ultimate resolutions of these audits will result in a material variance from the amounts accrued. We do not accrue for unasserted claims for tax audits unless we believe the assertion of a claim is probable, it is probable that it will be determined that the claim is owed and we can reasonably estimate the claim or range of the claim. We believe the likelihood is remote that the impact of potential unasserted claims from non-income-based tax audits could be material to our consolidated financial position, but it is possible that the resolution of future audits could be material to our consolidated results of operations or cash flows.

Subject to the provisions of the tax matters agreement between Exterran Corporation and us, both parties agreed to indemnify the primary obligor of any return for tax periods beginning before and ending before or after the Spin-off (including any ongoing or future amendments and audits for these returns) for the portion of the tax liability (including interest and penalties) that relates to their respective operations reported in the filing. The tax contingencies mentioned above relate to tax matters for which we are responsible in managing the audit. As of September 30, 2019 and December 31, 2018, we recorded an indemnification liability (including penalties and interest), in addition to the tax contingency above, of $2.8 million and $2.6 million, respectively, for our share of non-income-based tax contingencies related to audits being managed by Exterran Corporation.

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Insurance Matters

Our business can be hazardous, involving unforeseen circumstances such as uncontrollable flows of natural gas or well fluids and fires or explosions. As is customary in our industry, we review our safety equipment and procedures and carry insurance against some, but not all, risks of our business. Our insurance coverage includes property damage, general liability and commercial automobile liability and other coverage we believe is appropriate. We believe that our insurance coverage is customary for the industry and adequate for our business; however, losses and liabilities not covered by insurance would increase our costs.

Additionally, we are substantially self-insured for workers’ compensation and employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses up to the deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages.

Litigation and Claims

In the ordinary course of business, we are involved in various pending or threatened legal actions. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from any of these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends.

21. Segments

We manage our business segments primarily based on the type of product or service provided. We have two segments which we operate within the U.S.: contract operations and aftermarket services. The contract operations segment primarily provides natural gas compression services to meet specific customer requirements. The aftermarket services segment provides a full range of services to support the compression needs of customers, from part sales and normal maintenance services to full operation of a customer’s owned assets.

We evaluate the performance of our segments based on gross margin for each segment. Revenue includes only sales to external customers.

The following table presents revenue and gross margin by segment during the three and nine months ended September 30, 2019 and 2018 (in thousands): 

	Contract Operations		Aftermarket Services		Total
Three months ended September 30, 2019
Revenue	$	198,337	$	46,612	$	244,949
Gross margin	122,396		8,987		131,383
Three months ended September 30, 2018
Revenue	$	169,509	$	62,863	$	232,372
Gross margin	100,453		12,820		113,273
Nine months ended September 30, 2019
Revenue	$	567,102	$	152,396	$	719,498
Gross margin	345,905		28,654		374,559
Nine months ended September 30, 2018
Revenue	$	496,156	$	175,126	$	671,282
Gross margin	294,696		31,953		326,649

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The following table reconciles total gross margin to income before income taxes (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Total gross margin	$	131,383		$	113,273		$	374,559		$	326,649
Less:
Selling, general and administrative	29,526			26,298			87,133			80,455
Depreciation and amortization	48,409			43,779			137,997			131,565
Long-lived asset impairment	7,097			6,660			18,821			18,323
Restatement and other charges	—			396			445			(195		)
Interest expense	27,401			23,518			76,972			69,402
Debt extinguishment loss	—			—			3,653			2,450
Transaction-related costs	4,905			182			7,772			9,993
Other income, net	(7,810		)	(660		)	(10,025		)	(3,449		)
Income before income taxes	$	21,855		$	13,100		$	51,791		$	18,105

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Item 2. 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 unaudited financial statements and the notes thereto included in the Financial Statements of this Quarterly Report on Form 10-Q and in conjunction with our 2018 Form 10-K.

Overview

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

Recent Business Developments

Elite Acquisition

On August 1, 2019, we completed the Elite Acquisition whereby we acquired from Elite Compression substantially all of its assets, including a fleet of predominantly large compressor units comprising approximately 430,000 horsepower, vehicles, real property and inventory, and certain liabilities for aggregate consideration consisting of $209.2 million in cash and 21,656,683 shares of common stock with an acquisition date fair value of $225.9 million. The cash portion of the acquisition was funded with borrowings on the Credit Facility.

Harvest Sale

On August 1, 2019, we completed an asset sale in which Harvest acquired from us approximately 80,000 active and idle compression horsepower, vehicles and parts inventory for cash consideration of $30.0 million. We recorded a $6.6 million gain on the sale of these assets during the three and nine months ended September 30, 2019.

See Note 3 (“Business Transactions”) to our Financial Statements for further details of the Elite Acquisition and the Harvest Sale.

Senior Notes Offering and Redemption

On March 21, 2019, we completed a private offering of $500.0 million aggregate principal amount of 6.875% senior notes due April 2027. We received net proceeds of $491.2 million after issuance costs which were used to repay borrowings outstanding under the Credit Facility as of March 31, 2019. On April 5, 2019, we borrowed on the Credit Facility to repay the 2021 Notes. See Note 8 (“Long-Term Debt”) to our Financial Statements for further details of these transactions.

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Operating Highlights

The following table summarizes our available and operating horsepower and horsepower utilization (in thousands, except percentages):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Total available horsepower (at period end)(1)	4,441		3,937		4,441		3,937
Total operating horsepower (at period end)(2)	3,916		3,465		3,916		3,465
Average operating horsepower	3,770		3,406		3,644		3,348
Horsepower utilization:
Spot (at period end)	88	%	88	%	88	%	88	%
Average	88	%	87	%	89	%	86	%

——————

⁽¹⁾  Defined as idle and operating horsepower. New compressor units completed by a third party manufacturer that have been delivered to us are included in the fleet.

⁽²⁾  Defined as horsepower that is operating under contract and horsepower that is idle but under contract and generating revenue such as standby revenue.

Non-GAAP Financial Measures

Management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include the non-GAAP financial measure of gross margin.

We define gross margin as total revenue less cost of sales (excluding depreciation and amortization). Gross margin is included as a supplemental disclosure because it is a primary measure used by our management to evaluate the results of revenue and cost of sales (excluding depreciation and amortization), which are key components of our operations. We believe gross margin is important because it focuses on the current operating performance of our operations and excludes the impact of the prior historical costs of the assets acquired or constructed that are utilized in those operations, the indirect costs associated with our SG&A activities, our financing methods and income taxes. In addition, depreciation and amortization may not accurately reflect the costs required to maintain and replenish the operational usage of our assets and therefore may not portray the costs of current operating activity. As an indicator of our operating performance, gross margin should not be considered an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP. Our gross margin may not be comparable to a similarly-titled measure of other companies because other entities may not calculate gross margin in the same manner.

Gross margin has certain material limitations associated with its use as compared to net income (loss). These limitations are primarily due to the exclusion of SG&A, depreciation and amortization, impairments, restatement and other charges, interest expense, debt extinguishment loss, transaction-related costs, other (income) loss, net, provision for (benefit from) income taxes and loss from discontinued operations, net of tax. Because we intend to finance a portion of our operations through borrowings, interest expense is a necessary element of our costs and our ability to generate revenue. Additionally, because we use capital assets, depreciation expense is a necessary element of our costs and our ability to generate revenue and SG&A is necessary to support our operations and required corporate activities. To compensate for these limitations, management uses this non-GAAP measure as a supplemental measure to other GAAP results to provide a more complete understanding of our performance.

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The following table reconciles net income to gross margin (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income	$	20,407		$	9,974		$	51,286		$	16,192
Selling, general and administrative	29,526			26,298			87,133			80,455
Depreciation and amortization	48,409			43,779			137,997			131,565
Long-lived asset impairment	7,097			6,660			18,821			18,323
Restatement and other charges	—			396			445			(195		)
Interest expense	27,401			23,518			76,972			69,402
Debt extinguishment loss	—			—			3,653			2,450
Transaction-related costs	4,905			182			7,772			9,993
Other income, net	(7,810		)	(660		)	(10,025		)	(3,449		)
Provision for income taxes	1,448			3,126			232			1,913
Loss from discontinued operations, net of tax	—			—			273			—
Gross margin	$	131,383		$	113,273		$	374,559		$	326,649

Financial Results of Operations

Summary of Results

Revenue. Revenue was $244.9 million and $232.4 million during the three months ended September 30, 2019 and 2018, respectively, and $719.5 million and $671.3 million during the nine months ended September 30, 2019 and 2018, respectively. The increases in revenue during the three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018 were due to increases in revenue from our contract operations business, partially offset by decreases in revenue from our aftermarket services business.

Net income attributable to Archrock stockholders. Net income attributable to Archrock stockholders was $20.4 million and $10.0 million during the three months ended September 30, 2019 and 2018, respectively, and $51.3 million and $8.1 million during the nine months ended September 30, 2019 and 2018, respectively.

The increase in net income attributable to Archrock stockholders during the three months ended September 30, 2019 compared to the three months ended September 30, 2018 was primarily driven by increases in gross margin from our contract operations business and other income, net, partially offset by increases in transaction-related costs, depreciation and amortization, interest expense and SG&A and a decrease in gross margin from our aftermarket services business.

The increase in net income attributable to Archrock stockholders during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily driven by increases in gross margin from our contract operations business and other income, net, as well as a decrease in net income attributable to the noncontrolling interest, partially offset by increases in interest expense, SG&A, depreciation and amortization and a decrease in gross margin from our aftermarket services business.

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Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

Contract Operations

(dollars in thousands)

	Three Months Ended September 30,						Increase
	2019			2018			(Decrease)
Revenue	$	198,337		$	169,509		17	%
Cost of sales (excluding depreciation and amortization expense)	75,941			69,056			10	%
Gross margin	$	122,396		$	100,453		22	%
Gross margin percentage (1)	62		%	59		%	3	%

——————

⁽¹⁾    Defined as gross margin divided by revenue.

The increase in revenue during the three months ended September 30, 2019 compared to the three months ended September 30, 2018 was primarily due to an increase in contract operations rates driven by an increase in customer demand, an increase in average operating horsepower and $13.1 million of revenue associated with the compressor units acquired in the Elite Acquisition during the three months ended September 30, 2019.

Gross margin increased during the three months ended September 30, 2019 compared to the three months ended September 30, 2018 due to the increase in revenue mentioned above, partially offset by the increase in cost of sales. The increase in cost of sales was primarily driven by increases in maintenance, freight and lube oil expense associated with the increase in average operating horsepower.

Gross margin percentage increased during the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to the increase in contract operations rates mentioned above.

Aftermarket Services

(dollars in thousands)

	Three Months Ended September 30,						Increase
	2019			2018			(Decrease)
Revenue	$	46,612		$	62,863		(26)	%
Cost of sales (excluding depreciation and amortization expense)	37,625			50,043			(25)	%
Gross margin	$	8,987		$	12,820		(30)	%
Gross margin percentage	19		%	20		%	(1	)%

The decrease in revenue during the three months ended September 30, 2019 compared to the three months ended September 30, 2018 was primarily due to decreases in parts sales and service activities as customers delayed maintenance activities.

Gross margin decreased during the three months ended September 30, 2019 compared to the three months ended September 30, 2018 due to the decrease in revenue mentioned above, partially offset by a smaller decrease in cost of sales. The decrease in cost of sales was primarily driven by the decrease in parts sales and service activities.

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Costs and Expenses

(dollars in thousands)

	Three Months Ended September 30,						Increase
	2019			2018			(Decrease)
Selling, general and administrative	$	29,526		$	26,298		12	%
Depreciation and amortization	48,409			43,779			11	%
Long-lived asset impairment	7,097			6,660			7	%
Restatement and other charges	—			396			(100	)%
Interest expense	27,401			23,518			17	%
Transaction-related costs	4,905			182			2,595	%
Other income, net	(7,810		)	(660		)	1,083	%

Selling, general and administrative. The increase in SG&A during the three months ended September 30, 2019 compared to the three months ended September 30, 2018 was primarily due to a $2.4 million increase in compensation and benefits, a $0.4 million increase in sales and use tax expense, a $0.4 million increase in professional expenses and a $0.3 million increase in office rent expense.

Depreciation and amortization. The increase in depreciation and amortization expense during the three months ended September 30, 2019 compared to the three months ended September 30, 2018 was primarily due to an increase in depreciation expense associated with fixed asset additions, which more than offset a decrease in expense from assets reaching the end of their useful lives, asset retirements and the impact of asset impairments during 2018 and 2019. The increase in depreciation expense was partially offset by a decrease in amortization expense resulting from certain intangible assets reaching the end of their useful lives.

Long-lived asset impairment. During the three months ended September 30, 2019 and 2018, we reviewed the future deployment of our idle compression assets for units that were not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. In addition, we evaluated for impairment idle units that had been culled from our fleet in prior years and were available for sale. See Note 13 (“Long-Lived Asset Impairment”) to our Financial Statements for further details.

The following table presents the results of our impairment review as recorded in our contract operations segment (dollars in thousands):

	Three Months Ended September 30,
	2019		2018
Idle compressor units retired from the active fleet	60		60
Horsepower of idle compressor units retired from the active fleet	28,000		23,000
Impairment recorded on idle compressor units retired from the active fleet	$	7,097	$	6,660

Interest expense. The increase in interest expense during the three months ended September 30, 2019 compared to the three months ended September 30, 2018 was due to an increase in the average outstanding balance of long-term debt.

Transaction-related costs. We incurred $4.9 million and $0.2 million of financial advisory, legal and other professional fees during the three months ended September 30, 2019 and 2018, respectively. The $4.9 million of fees incurred during the three months ended September 30, 2019 primarily related to the Elite Acquisition. The $0.2 million of fees incurred during the three months ended September 30, 2018 related to the Merger. See Note 3 (“Business Transactions”) and Note 17 (“Equity”) to our Financial Statements for further details.

Other income, net. The increase in other income, net during the three months ended September 30, 2019 compared to the three months ended September 30, 2018 was primarily due to a $7.1 million increase in the gain on sale of property, plant and equipment, of which $6.6 million was related to the Harvest Sale completed in August 2019. See Note 3 (“Business Transactions”) to our Financial Statements for further details.

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Provision for Income Taxes

(dollars in thousands)

	Three Months Ended September 30,						Increase
	2019			2018			(Decrease)
Provision for income taxes	$	1,448		$	3,126		(54	)%
Effective tax rate	7		%	24		%	(17	)%

The decrease in provision for income taxes was primarily due to the reduction of a valuation allowance in the three months ended September 30, 2019, which was recorded to offset the tax effect of the increase in book income in the three months ended September 30, 2019 compared to the three months ended September 30, 2018.

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Contract Operations

(dollars in thousands)

	Nine Months Ended September 30,						Increase
	2019			2018			(Decrease)
Revenue	$	567,102		$	496,156		14	%
Cost of sales (excluding depreciation and amortization)	221,197			201,460			10	%
Gross margin	$	345,905		$	294,696		17	%
Gross margin percentage	61		%	59		%	2	%

The increase in revenue during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily due to an increase in contract operations rates driven by an increase in customer demand, an increase in average operating horsepower and $13.1 million of revenue associated with the compressor units acquired in the Elite Acquisition during the nine months ended September 30, 2019.

Gross margin increased during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 due to the increase in revenue mentioned above, partially offset by the increase in cost of sales. The increase in cost of sales was primarily driven by increases in maintenance, freight and lube oil expense associated with the increase in average operating horsepower. These increases in cost of sales were partially offset by a decrease in cost associated with the start-up of compressor units, as the majority of the increase in average operating horsepower was comprised of newly-built compressor units.

Gross margin percentage increased during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to the increase in contract operations rates mentioned above.

Aftermarket Services

(dollars in thousands)

	Nine Months Ended September 30,						Increase
	2019			2018			(Decrease)
Revenue	$	152,396		$	175,126		(13	)%
Cost of sales (excluding depreciation and amortization)	123,742			143,173			(14	)%
Gross margin	$	28,654		$	31,953		(10	)%
Gross margin percentage	19		%	18		%	1	%

The decrease in revenue during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily due to decreases in parts sales and service activities as customers delayed maintenance activities.

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Gross margin decreased during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 due to the decrease in revenue mentioned above, partially offset by a smaller decrease in cost of sales. The decrease in cost of sales was primarily driven by the decrease in parts sales and service activities.

Costs and Expenses

(dollars in thousands)

	Nine Months Ended September 30,						Increase
	2019			2018			(Decrease)
Selling, general and administrative	$	87,133		$	80,455		8	%
Depreciation and amortization	137,997			131,565			5	%
Long-lived asset impairment	18,821			18,323			3	%
Restatement and other charges	445			(195		)	328	%
Interest expense	76,972			69,402			11	%
Debt extinguishment loss	3,653			2,450			49	%
Transaction-related costs	7,772			9,993			(22	)%
Other income, net	(10,025		)	(3,449		)	191	%

Selling, general and administrative. The increase in SG&A during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily due to a $5.0 million increase in compensation and benefits, a $2.5 million increase in professional expenses, a $0.9 million increase in office rent expense and a $0.6 million increase in sales and use tax expense. These increases were partially offset by a $0.6 million decrease in bad debt expense and a $0.5 million decrease in miscellaneous tax expense.

Depreciation and amortization. The increase in depreciation and amortization expense during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily due to an increase in depreciation expense associated with fixed asset additions, which more than offset a decrease in expense from assets reaching the end of their useful lives, asset retirements and the impact of asset impairments during 2018 and 2019. The increase in depreciation expense was partially offset by a decrease in amortization expense resulting from certain intangible assets reaching the end of their useful lives.

Long-lived asset impairment. During the nine months ended September 30, 2019 and 2018, we reviewed the future deployment of our idle compression assets for units that were not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. In addition, we evaluated for impairment idle units that had been culled from our fleet in prior years and were available for sale. See Note 13 (“Long-Lived Asset Impairment”) to our Financial Statements for further details.

The following table presents the results of our impairment review as recorded in our contract operations segment (dollars in thousands):

	Nine Months Ended September 30,
	2019		2018
Idle compressor units retired from the active fleet	240		225
Horsepower of idle compressor units retired from the active fleet	84,000		73,000
Impairment recorded on idle compressor units retired from the active fleet	$	18,821	$	18,323

Restatement and other charges. During the nine months ended September 30, 2019 and 2018, we recorded expense of $0.4 million and $1.6 million, respectively, for our share of professional and legal fees related to the restatement of prior period financial statements and disclosures and related matters. We recorded $1.8 million for the expected recovery of shared fees incurred during the nine months ended September 30, 2018.

Interest expense. The increase in interest expense during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily due to an increase in the average outstanding balance of long-term debt, partially offset by a decrease in the weighted average effective interest rate.

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Debt extinguishment loss. We recorded a debt extinguishment loss of $3.7 million during the nine months ended September 30, 2019 as a result of the redemption of the 2021 Notes. We recorded a debt extinguishment loss of $2.5 million during the nine months ended September 30, 2018 as a result of the termination of the Archrock Credit Facility. See Note 8 (“Long-Term Debt”) to our Financial Statements for further details.

Transaction-related costs. We incurred $7.8 million and $10.0 million of financial advisory, legal and other professional fees during the nine months ended September 30, 2019 and 2018, respectively. The $7.8 million of fees incurred during the nine months ended September 30, 2019 primarily related to the Elite Acquisition. The $10.0 million of fees incurred during the nine months ended September 30, 2018 related to the Merger. See Note 3 (“Business Transactions”) and Note 17 (“Equity”) to our Financial Statements for further details of these transactions.

Other income, net. The increase in other income, net during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily due to a $6.6 million gain on sale of property, plant and equipment related to the Harvest Sale and income of $0.3 million related to equipment damaged at a customer site during the nine months ended September 30, 2019, partially offset by $0.5 million of indemnification income earned pursuant to our tax matters agreement with Exterran during the nine months ended September 30, 2018 and a $0.4 million increase in indemnification expense incurred pursuant to that same agreement. See Note 3 (“Business Transactions”) to our Financial Statements for further details of the Harvest Sale.

Provision for Income Taxes

(dollars in thousands)

	Nine Months Ended September 30,						Increase
	2019			2018			(Decrease)
Provision for income taxes	$	232		$	1,913		(88	)%
Effective tax rate	—		%	11		%	(11	)%

The decrease in provision for income taxes was primarily due to the reduction of a valuation allowance in the nine months ended September 30, 2019, which was recorded to offset the tax effect of the increase in book income in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, as well as a higher release of an unrecognized tax benefit due to the settlement of a tax audit in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.

Net Income Attributable to the Noncontrolling Interest

(dollars in thousands)

	Nine Months Ended September 30,					Increase
	2019		2018			(Decrease)
Net income attributable to the noncontrolling interest	$	—	$	(8,097	)	(100	)%

Net income attributable to the noncontrolling interest during the nine months ended September 30, 2018 was the portion of the Partnership’s earnings that were applicable to the Partnership’s publicly-held common unitholder interest through the completion of the Merger. Immediately prior to the Merger, public unitholders held a 57% ownership in the Partnership. Subsequent to the Merger, the Partnership is a wholly-owned subsidiary. See Note 17 (“Equity”) to our Financial Statements for further details of the Merger.

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Liquidity and Capital Resources

Overview

Our ability to fund operations, finance capital expenditures and pay dividends depends on the levels of our operating cash flows and access to the capital and credit markets. Our primary sources of liquidity are cash flows generated from our operations and our borrowing availability under the Credit Facility. Our cash flow is affected by numerous factors including prices and demand for our services, volatility in commodity prices and their effect on oil and natural gas exploration and production spending, conditions in the financial markets and other factors. We believe that our operating cash flows and borrowings under the Credit Facility will be sufficient to meet our liquidity needs through at least September 30, 2020.

We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

Capital Requirements

Our contract operations business is capital intensive, requiring significant investment to maintain and upgrade existing operations. Our capital spending is primarily dependent on the demand for our contract operations services and the availability of the type of compression equipment required for us to 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, which are made to expand or to replace partially or fully depreciated assets or to expand the operating capacity or revenue-generating capabilities of existing or new assets, whether through construction, acquisition or modification; and

• maintenance capital expenditures, which are made to maintain the existing operating capacity of our assets and related cash flows, further extending the useful lives of the assets.

The majority of our growth capital expenditures are related to the acquisition cost of new compressor units that we add to our fleet. In addition to the cost of newly acquired compressor units, growth capital expenditures can also include the upgrading of major components on an existing compressor unit where the current configuration of the compressor unit is no longer in demand and the compressor is not likely to return to an operating status without the capital expenditures. These latter expenditures substantially modify the operating parameters of the compressor unit such that it can be used in applications for which it previously was not suited. Maintenance capital expenditures are related to major overhauls of significant components of a compressor unit, such as the engine, compressor and cooler, which return the components to a like-new condition but do not modify the applications for which the compressor unit was designed.

We generally invest funds necessary to purchase fleet additions when our idle equipment cannot be reconfigured to economically fulfill a project’s requirements and the new equipment expenditure is expected to generate economic returns over its expected useful life that exceed our targeted return on capital. We currently plan to spend approximately $375 million to $400 million in capital expenditures during 2019, primarily consisting of approximately $285 million to $300 million for growth capital expenditures and approximately $60 million to $65 million for maintenance capital expenditures.

Financial Resources

Revolving Credit Facilities

Archrock Credit Facility. In April 2018, in connection with the Merger, we terminated the Archrock Credit Facility and borrowed on the Credit Facility to repay $63.2 million in borrowings and accrued and unpaid interest and fees outstanding. All commitments under the Archrock Credit Facility were terminated and the $15.4 million of letters of credit outstanding under the Archrock Credit Facility were converted to letters of credit under the Credit Facility. Prior to its termination, the Archrock Credit Facility required us to maintain various financial ratios and other covenants, all of which we were in compliance with through its closing. The average daily debt balance under the Archrock Credit Facility in 2018, through its closing in April 2018, was $51.7 million.

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Credit Facility. During the nine months ended September 30, 2019 and 2018, the Credit Facility had an average daily debt balance of $826.5 million and $741.5 million, respectively. The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 4.9% and 5.4% at September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019, there were $15.2 million letters of credit outstanding under the Credit Facility.

We must maintain the following consolidated financial ratios, as defined in the Credit Facility agreement:

EBITDA to Interest Expense	2.5 to 1.0
Senior Secured Debt to EBITDA	3.5 to 1.0
Total Debt to EBITDA
Through fiscal year 2019	5.75 to 1.0
Through second quarter of 2020	5.50 to 1.0
Thereafter (1)	5.25 to 1.0

——————

⁽¹⁾  Subject to a temporary increase to 5.50 to 1.0 for any quarter during which an acquisition satisfying certain thresholds is completed and for the two quarters immediately following such quarter.

As of September 30, 2019, the ratio requirements above did not constrain our undrawn capacity and as such, all of the $246.3 million of undrawn capacity was available for additional borrowings.

The Credit Facility agreement contains various additional covenants including, but not limited to, mandatory prepayments from the net cash proceeds of certain asset transfers, restrictions on the use of proceeds from borrowings and limitations on our ability to incur additional indebtedness, engage in transactions with affiliates, merge or consolidate, sell assets, make certain investments and acquisitions, make loans, grant liens, repurchase equity and pay distributions. In addition, if as of any date we have cash and cash equivalents (other than proceeds from a debt or equity issuance received in the 30 days prior to such date reasonably expected to be used to fund an acquisition permitted under the Credit Facility agreement) in excess of $50.0 million, then such excess amount will be used to pay down outstanding borrowings of a corresponding amount under the Credit Facility. As of September 30, 2019, we were in compliance with all covenants under the Credit Facility.

2027 Notes Offering and Redemption of 2021 Notes

On March 21, 2019, we completed a private offering of $500.0 million aggregate principal amount of 6.875% senior notes due April 2027 and received net proceeds of $491.2 million after deducting issuance costs of $8.8 million. The net proceeds were used to repay borrowings outstanding under the Credit Facility as of March 31, 2019. On April 5, 2019, we borrowed on the Credit Facility to repay the $350.0 million of 2021 Notes. See Note 8 (“Long-Term Debt”) to our Financial Statements for further details of these transactions.

Cash Flows

Our cash flows from operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows, are summarized in the table below (in thousands): 

	Nine Months Ended September 30,
	2019			2018
Net cash provided by (used in):
Operating activities	$	223,625		$	170,705
Investing activities	(459,196		)	(216,870		)
Financing activities	233,387			39,053
Net decrease in cash and cash equivalents	$	(2,184	)	$	(7,112	)

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Operating Activities

The increase in net cash provided by operating activities during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily due to increases in revenue from our contract operations business and deferred revenue from our aftermarket services, the receipt of cash proceeds pursuant to a settlement of certain sales and use tax audits and decreases in accounts receivable and cost of sales (excluding depreciation and amortization). These cash inflows were partially offset by an increase in interest paid on our long-term debt and an increase in cash SG&A expenses.

Investing Activities

The increase in net cash used in investing activities during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily due to $214.2 million of cash paid in the Elite Acquisition during the nine months ended September 30, 2019 and a $62.3 million increase in capital expenditures, partially offset by a $31.6 million increase in proceeds from sale of property, plant and equipment and other assets.

Financing Activities

The increase in net cash provided by financing activities during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily due to a $202.8 million net increase in borrowings of long-term debt and a $11.8 million decrease in distributions paid to noncontrolling partners in the Partnership. These cash inflows were partially offset by a $15.4 million increase in dividends paid to Archrock stockholders and a $5.5 million increase in payments for debt issuance costs.

Dividends

On October 23, 2019, our board of directors declared a quarterly dividend of $0.145 per share of common stock to be paid on November 14, 2019 to stockholders of record at the close of business on November 7, 2019. 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.

Off-Balance Sheet Arrangements

For information on our obligations with respect to letters of credit and performance bonds see Note 8 (“Long-Term Debt”) and Note 20 (“Commitments and Contingencies”), respectively, to our Financial Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

As of September 30, 2019, after taking into consideration interest rate swaps, we had $588.5 million of outstanding indebtedness that was effectively subject to variable interest rates. A 1% increase in the effective interest rate on our outstanding debt subject to variable interest rates at September 30, 2019 would result in an annual increase in our interest expense of $5.9 million.

See Note 11 (“Derivatives”) to our Financial Statements for further information regarding our use of interest rate swaps in managing our exposure to interest rate fluctuations.

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Item 4. Controls and Procedures

This Item 4 includes information concerning the controls and controls evaluation referred to in the certifications of our Chief Executive Officer and Chief Financial Officer required by Rule 13a-14 of the Exchange Act included in this Quarterly Report as Exhibits 31.1 and 31.2.

Management’s Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosures.

As of the end of the period covered by this Quarterly Report on Form 10-Q, 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 September 30, 2019 our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to management, and made known to our principal executive officer and principal financial officer, on a timely basis to ensure that it is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

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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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of business, we are involved in various pending or threatened legal actions. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from any of these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends.

Item 1A. Risk Factors

The following risk factors became significant to us in the third quarter of 2019 and should be read in conjunction with the risk factors previously disclosed in our 2018 Form 10-K.

The Elite Acquisition may require significant time and attention of our management, and we may not achieve the intended benefits of the transaction as and when expected, or at all. Difficulties with the integration of the Elite Compression business and workforce could have an adverse effect on our business.

On August 1, 2019, we completed the Elite Acquisition whereby we acquired from Elite Compression substantially all of its assets, liabilities and workforce for aggregate consideration of $209.2 million cash and 21,656,683 shares of Archrock common stock. See Note 3 (“Business Transactions”) to our Financial Statements for further details of this transaction.

The integration of Elite Compression will continue to require significant expense, time and the attention of our management, which may divert resources away from the operation of our business and the execution of our other strategic initiatives. In addition, we now operate a larger combined organization and the difficulties associated with integrating the acquired assets, infrastructure and personnel into our existing operations may require additional time or expense. Our and Elite Compression’s employees may also be uncertain about their future roles within Archrock subsequent to the completion of the Elite Acquisition, which could lead to departures and increased expenses related to hiring and training new employees. Further, we may not realize the benefits we expect to realize from the Elite Acquisition. Any such difficulties could have an adverse effect on our business, results of operations and financial condition.

Further, we may not be successful in integrating the Elite Acquisition into our existing operations within our anticipated timeframe, which may result in unforeseen operational difficulties and expenses, diminish our financial performance or require a disproportionate amount of our management’s attention to address. In addition, the acquired business or assets may perform at levels below the levels we anticipated at the time of acquiring such business or assets due to factors beyond our control. As a result, there can be no assurance that the Elite Acquisition will deliver the benefits anticipated by us, and any failure to create such benefits may result in a negative impact to, or material adverse effect on, our business, results of operations, financial condition and cash flows.

The Elite Acquisition resulted in our dependence on Hilcorp for a significant portion of our revenue. The loss of business with Hilcorp or the inability or failure of Hilcorp to meet its payment obligations may adversely affect our financial results.

In connection with the Elite Acquisition, Elite Compression’s contract operations services agreements transferred to us and we expect that Hilcorp, the primary customer of Elite Compression, will account for a significant portion of our future revenue.

During the year ended December 31, 2018, Hilcorp accounted for approximately 1% of our revenue. With the closing of the Elite Acquisition, we estimate that Hilcorp will become one of our most significant customers. Any loss of business from Hilcorp, unless offset by additional contract compression services revenue from other customers, or the inability or failure of Hilcorp to meet its payment obligations could have a material adverse effect on our business, results of operations and financial condition.

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Following the closing of the Elite Acquisition, an affiliate of Hilcorp now holds a significant portion of our common stock, and Hilcorp’s interest as an equity holder may conflict with the interests of our other shareholders or our noteholders.

In connection with the closing of the Elite Acquisition, JDH Capital, an affiliate of Hilcorp, received 21,656,683 shares of our common stock, representing 14.3% of our outstanding common stock as of September 30, 2019. As long as JDH Capital, together with affiliates of Hilcorp, owns at least 7.5% of our outstanding common stock, it will have the right to nominate one director to our board of directors. Given its ownership level and board representation, JDH Capital may have some influence over our operations and strategic direction and may have interests that conflict with the interests of other equity and debt holders.

Item 2. Unregistered Sales of Equity Securities

During the three months ended September 30, 2019, we repurchased equity securities to satisfy employees’ tax withholding obligations in connection with the vesting of restricted stock awards as follows:

	Total Number of Shares Repurchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares yet to be Purchased Under the Publicly Announced Plans or Programs
July 1, 2019 — July 31, 2019	2,074	$	10.47	N/A	N/A
August 1, 2019 — August 31, 2019	117,837	9.14		N/A	N/A
September 1, 2019 — September 30, 2019	5,133	9.97		N/A	N/A
Total	125,044	$	9.20	N/A	N/A

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibit No.	Description
2.1	Agreement and Plan of Merger, dated as of January 1, 2018, by and among Archrock, Inc., Archrock GP LLC, Archrock General Partner, L.P. and Archrock Partners, L.P., incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on January 2, 2018
2.2	Amendment No. 1 to Agreement and Plan of Merger, dated as of January 11, 2018, by and among Archrock, Inc., Archrock GP LLC, Archrock General Partner, L.P., Archrock Partners, L.P. and Amethyst Merger Sub LLC, incorporated by reference to Exhibit 2.2 of the Registrant’s Current Report on Form 8-K filed on January 16, 2018
2.3	Asset Purchase Agreement, dated as of June 23, 2019, by and among Archrock Services, L.P., Archrock, Inc. and Elite Compression Services, LLC, incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on June 24, 2019
2.4	Asset Purchase Agreement, dated as of June 23, 2019, by and between Archrock Services, L.P. and Harvest Four Corners, LLC, incorporated by reference to Exhibit 2.2 of the Registrant’s Current Report on Form 8-K filed on June 24, 2019
3.1	Restated Certificate of Incorporation of Exterran Holdings, Inc. (now Archrock, Inc.), incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on August 20, 2007
3.2	Certificate of Amendment of Certificate of Incorporation of Exterran Holdings, Inc. (now Archrock, Inc.), incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on November 5, 2015
3.3	Composite Certificate of Incorporation of Archrock, Inc. (as amended as of November 3,2015), incorporated by reference to Exhibit 3.3 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015
3.4	Third Amended and Restated Bylaws of Exterran Holdings, Inc. (now Archrock, Inc.), incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on March 20, 2013
4.1	Indenture, dated as of March 21, 2019, by and among Archrock Partners, L.P., Archrock Partners Finance Corp., the guarantors party thereto and Wells Fargo Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed on March 21, 2019
10.1	Board Representation Agreement, dated as of August 1, 2019, by and between Archrock, Inc. and JDH Capital Holdings, L.P., incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on August 1, 2019
10.2	Registration Rights Agreement, dated as of August 1, 2019, by and between Archrock, Inc. and JDH Capital Holdings, L.P., incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed on August 1, 2019
31.1*	Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.1*	Interactive data files pursuant to Rule 405 of Regulation S-T
104.1*	Cover page interactive data files pursuant to Rule 406 of Regulation S-T

* Filed herewith.

** Furnished, not filed.

44

SIGNATURES

Pursuant to the requirements 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.
By:	/s/ DOUGLAS S. ARON
	Douglas S. Aron
	Senior Vice President and Chief Financial Officer
	(Principal Financial Officer)
By:	/s/ DONNA A. HENDERSON
	Donna A. Henderson
	Vice President and Chief Accounting Officer
	(Principal Accounting Officer)
	October 30, 2019

45

EX-31.1

Exhibit 31.1

Certification

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, D. Bradley Childers, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Archrock, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 30, 2019

By:	/s/ D. BRADLEY CHILDERS
	Name:	D. Bradley Childers
	Title:	President and Chief Executive Officer
		(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Douglas S. Aron, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Archrock, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 30, 2019

By:	/s/ DOUGLAS S. ARON
	Name:	Douglas S. Aron
	Title:	Senior Vice President and Chief Financial Officer
		(Principal Financial Officer)

EX-32.1

Exhibit 32.1

Certification of CEO Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Archrock, Inc. (the “Company”) for the quarter ended September 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), D. Bradley Childers, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ D. BRADLEY CHILDERS
Name:	D. Bradley Childers
Title:	President and Chief Executive Officer
Date: October 30, 2019

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

Certification of CFO Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Archrock, Inc. (the “Company”) for the quarter ended September 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Douglas S. Aron, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ DOUGLAS S. ARON
Name:	Douglas S. Aron
Title:	Senior Vice President and Chief Financial Officer
Date: October 30, 2019

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Cash flows from operating activities:
Net income	$ 51,286	$ 16,192
Adjustments to reconcile net income to cash provided by operating activities:
Loss from discontinued operations, net of tax	273	0
Depreciation and amortization	137,997	131,565
Long-lived asset impairment	18,821	18,323
Inventory write-downs	662	1,185
Amortization of operating lease ROU assets	2,151	0
Amortization of deferred financing costs	4,569	4,604
Amortization of debt discount	726	1,049
Amortization of terminated interest rate swaps	0	291
Debt extinguishment loss	3,653	2,450
Interest rate swaps	(1,063)	166
Stock-based compensation expense	6,145	5,567
Provision for doubtful accounts	979	1,544
Gain on sale of assets	(9,644)	(2,894)
Deferred income tax provision (benefit)	(330)	1,514
Amortization of contract costs	16,834	10,332
Deferred revenue recognized in earnings	(33,538)	(17,420)
Changes in assets and liabilities:
Accounts receivable, trade	(7,005)	(21,591)
Inventory	2,584	3,800
Other assets	13,272	1,251
Contract costs, net	(20,975)	(25,290)
Accounts payable and other liabilities	8,996	16,461
Deferred revenue	27,390	21,765
Other	111	(159)
Net cash provided by continuing operations	223,894	170,705
Net cash used in discontinued operations	(269)	0
Net cash provided by operating activities	223,625	170,705
Cash flows from investing activities:
Capital expenditures	(303,467)	(241,183)
Proceeds from sale of property, plant and equipment and other assets	55,674	24,061
Proceeds from insurance and other settlements	2,830	252
Cash paid in Elite Acquisition	(214,233)	0
Net cash used in investing activities	(459,196)	(216,870)
Cash flows from financing activities:
Borrowings of long-term debt	1,685,250	536,830
Repayments of long-term debt	(1,386,250)	(440,636)
Payments for debt issuance costs	(8,829)	(3,332)
Proceeds from (payments for) settlement of interest rate swaps that include financing elements	1,123
Proceeds from (payments for) settlement of interest rate swaps that include financing elements		(61)
Dividends paid to Archrock stockholders	(56,499)	(41,132)
Distributions paid to noncontrolling partners in the Partnership	0	(11,766)
Proceeds from stock options exercised	0	262
Proceeds from stock issued under employee stock purchase plan	599	616
Purchases of treasury stock	(2,007)	(1,728)
Net cash provided by financing activities	233,387	39,053
Net decrease in cash and cash equivalents	(2,184)	(7,112)
Cash and cash equivalents, beginning of period	5,610	10,536
Cash and cash equivalents, end of period	3,426	3,424
Elite Acquisition
Supplemental disclosure of non-cash transactions:
Issuance of Archrock common stock pursuant to Merger, net of tax	225,880	0
Archrock, Inc. | Affiliated Entity
Supplemental disclosure of non-cash transactions:
Issuance of Archrock common stock pursuant to Merger, net of tax	$ 0	$ 55,327

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2019

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

20. Commitments and Contingencies

Performance Bonds

In the normal course of business we have issued performance bonds to various state authorities that ensure payment of certain obligations. We have also issued a bond to protect our 401(k) retirement plan against losses caused by acts of fraud or dishonesty. The bonds have expiration dates in 2019 through the third quarter of 2020 and maximum potential future payments of $2.3 million. As of September 30, 2019, we were in compliance with all obligations to which the performance bonds pertain.

Tax Matters

We are subject to a number of state and local taxes that are not income-based. As many of these taxes are subject to audit by the taxing authorities, it is possible that an audit could result in additional taxes due. We accrue for such additional taxes when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the liability. As of September 30, 2019 and December 31, 2018, we accrued $2.4 million and $4.5 million, respectively, for the outcomes of non-income-based tax audits. We do not expect that the ultimate resolutions of these audits will result in a material variance from the amounts accrued. We do not accrue for unasserted claims for tax audits unless we believe the assertion of a claim is probable, it is probable that it will be determined that the claim is owed and we can reasonably estimate the claim or range of the claim. We believe the likelihood is remote that the impact of potential unasserted claims from non-income-based tax audits could be material to our consolidated financial position, but it is possible that the resolution of future audits could be material to our consolidated results of operations or cash flows.

Subject to the provisions of the tax matters agreement between Exterran Corporation and us, both parties agreed to indemnify the primary obligor of any return for tax periods beginning before and ending before or after the Spin-off (including any ongoing or future amendments and audits for these returns) for the portion of the tax liability (including interest and penalties) that relates to their respective operations reported in the filing. The tax contingencies mentioned above relate to tax matters for which we are responsible in managing the audit. As of September 30, 2019 and December 31, 2018, we recorded an indemnification liability (including penalties and interest), in addition to the tax contingency above, of $2.8 million and $2.6 million, respectively, for our share of non-income-based tax contingencies related to audits being managed by Exterran Corporation.

Insurance Matters

Our business can be hazardous, involving unforeseen circumstances such as uncontrollable flows of natural gas or well fluids and fires or explosions. As is customary in our industry, we review our safety equipment and procedures and carry insurance against some, but not all, risks of our business. Our insurance coverage includes property damage, general liability and commercial automobile liability and other coverage we believe is appropriate. We believe that our insurance coverage is customary for the industry and adequate for our business; however, losses and liabilities not covered by insurance would increase our costs.

Additionally, we are substantially self-insured for workers’ compensation and employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses up to the deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages.

Litigation and Claims

In the ordinary course of business, we are involved in various pending or threatened legal actions. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from any of these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends.

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Fair Value Measurements

9 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements

12. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

On a quarterly basis, our interest rate swap derivative instruments are valued based on the income approach (discounted cash flow) using market observable inputs, including London Interbank Offered Rate forward curves. These fair value measurements are classified as Level 2. The following table presents our derivative asset and liability measured at fair value on a recurring basis, with pricing levels as of the date of valuation (in thousands):

	September 30, 2019			December 31, 2018
Derivative asset	$	73		$	7,307
Derivative liability	(2,726		)	—

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

During the nine months ended September 30, 2019, we recorded non-recurring fair value measurements related to our idle and previously-culled compressor units. Our estimate of the compressor units’ fair value was primarily based on the expected net sale proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use. We discounted the expected proceeds, net of selling and other carrying costs, using a weighted average disposal period of four years. These fair value measurements are classified as Level 3. The fair value of our impaired compressor units was $2.1 million and $2.3 million at September 30, 2019 and December 31, 2018, respectively. See Note 13 (“Long-Lived Asset Impairment”) for further details.

Other Financial Instruments

The carrying amounts of our cash, receivables and payables approximate fair value due to the short-term nature of those instruments.

The carrying amount of borrowings outstanding under our Credit Facility approximates fair value due to its variable interest rate. The fair value of these outstanding borrowings was estimated using a discounted cash flow analysis based on interest rates offered on loans with similar terms to borrowers of similar credit quality, which are Level 3 inputs.

The fair value of our fixed rate debt was estimated based on quoted prices in inactive markets and is considered a Level 2 measurement. The following table summarizes the carrying amount and fair value of our fixed rate debt (in thousands):

	September 30, 2019		December 31, 2018
Carrying amount of fixed rate debt (1)	$	836,975	$	690,001
Fair value of fixed rate debt	887,000		674,000

——————

⁽¹⁾ 

Carrying amounts are shown net of unamortized debt discounts and unamortized deferred financing costs. See Note 8 (“Long-Term Debt”).

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Revenue:
Revenues	$ 244,949	$ 232,372	$ 719,498	$ 671,282
Total cost of sales (excluding depreciation and amortization)	113,566	119,099	344,939	344,633
Selling, general and administrative	29,526	26,298	87,133	80,455
Depreciation and amortization	48,409	43,779	137,997	131,565
Long-lived asset impairment	7,097	6,660	18,821	18,323
Restatement and other charges	0	396	445	(195)
Interest expense	27,401	23,518	76,972	69,402
Debt extinguishment loss	0	0	3,653	2,450
Transaction-related costs	4,905	182	7,772	9,993
Other income, net	(7,810)	(660)	(10,025)	(3,449)
Income before income taxes	21,855	13,100	51,791	18,105
Provision for income taxes	1,448	3,126	232	1,913
Income from continuing operations	20,407	9,974	51,559	16,192
Loss from discontinued operations, net of tax	0	0	(273)	0
Net income	20,407	9,974	51,286	16,192
Less: Net income attributable to the noncontrolling interest	0	0	0	(8,097)
Net income attributable to Archrock stockholders	$ 20,407	$ 9,974	$ 51,286	$ 8,095
Basic and diluted net income (loss) per common share attributable to Archrock common stockholders (in dollars per share)	$ 0.14	$ 0.08	$ 0.38	$ 0.07
Weighted average common shares outstanding:
Basic (in shares)	142,931	127,842	133,170	102,913
Diluted (in shares)	142,965	127,955	133,206	103,013
Contract Operations | Contract operations
Revenue:
Revenues	$ 198,337	$ 169,509	$ 567,102	$ 496,156
Total cost of sales (excluding depreciation and amortization)	75,941	69,056	221,197	201,460
Aftermarket Services | Aftermarket services
Revenue:
Revenues	46,612	62,863	152,396	175,126
Total cost of sales (excluding depreciation and amortization)	$ 37,625	$ 50,043	$ 123,742	$ 143,173

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Earnings Per Share

9 Months Ended

Sep. 30, 2019

Earnings Per Share [Abstract]

Earnings Per Share

16. Earnings per Share

Basic net income (loss) attributable to Archrock common stockholders per common share is computed using the two-class method, which is an earnings allocation formula that determines net income (loss) per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Under the two-class method, basic net income (loss) attributable to Archrock common stockholders per common share is determined by dividing net income (loss) attributable to Archrock common stockholders, after deducting amounts allocated to participating securities, by the weighted average number of common shares outstanding for the period. Participating securities include unvested restricted stock and stock-settled restricted stock units that have nonforfeitable rights to receive dividends or dividend equivalents, whether paid or unpaid. During periods of net loss, no effect is given to participating securities because they do not have a contractual obligation to participate in our losses.

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

The following table summarizes net income attributable to Archrock common stockholders used in the calculation of basic and diluted net income per common share (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income from continuing operations attributable to Archrock stockholders	$	20,407		$	9,974		$	51,559		$	8,095
Loss from discontinued operations, net of tax	—			—			(273		)	—
Net income attributable to Archrock stockholders	20,407			9,974			51,286			8,095
Less: Net income attributable to participating securities	(302		)	(241		)	(876		)	(554		)
Net income attributable to Archrock common stockholders	$	20,105		$	9,733		$	50,410		$	7,541

The following table shows the potential shares of common stock that were included in computing diluted net income attributable to Archrock common stockholders per common share (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Weighted average common shares outstanding including participating securities	144,692		129,486		135,081		104,489
Less: Weighted average participating securities outstanding	(1,761	)	(1,644	)	(1,911	)	(1,576	)
Weighted average common shares outstanding used in basic net income per common share	142,931		127,842		133,170		102,913
Net dilutive potential common shares issuable:
On exercise of options and vesting of performance-based restricted stock units	33		111		33		96
On settlement of employee stock purchase plan shares	1		2		3		4
Weighted average common shares outstanding used in diluted net income per common share	142,965		127,955		133,206		103,013

The following table shows the potential shares of common stock issuable that were excluded from computing diluted net income attributable to Archrock common stockholders per common share as their inclusion would have been anti-dilutive (in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
On exercise of options where exercise price is greater than average market value for the period	154	187	154	199

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Segments (Tables)

9 Months Ended

Sep. 30, 2019

Segment Reporting [Abstract]

Revenue and other financial information by reportable segment

The following table presents revenue and gross margin by segment during the three and nine months ended September 30, 2019 and 2018 (in thousands): 

	Contract Operations		Aftermarket Services		Total
Three months ended September 30, 2019
Revenue	$	198,337	$	46,612	$	244,949
Gross margin	122,396		8,987		131,383
Three months ended September 30, 2018
Revenue	$	169,509	$	62,863	$	232,372
Gross margin	100,453		12,820		113,273
Nine months ended September 30, 2019
Revenue	$	567,102	$	152,396	$	719,498
Gross margin	345,905		28,654		374,559
Nine months ended September 30, 2018
Revenue	$	496,156	$	175,126	$	671,282
Gross margin	294,696		31,953		326,649

Reconciliation of net income (loss) to gross margin

The following table reconciles total gross margin to income before income taxes (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Total gross margin	$	131,383		$	113,273		$	374,559		$	326,649
Less:
Selling, general and administrative	29,526			26,298			87,133			80,455
Depreciation and amortization	48,409			43,779			137,997			131,565
Long-lived asset impairment	7,097			6,660			18,821			18,323
Restatement and other charges	—			396			445			(195		)
Interest expense	27,401			23,518			76,972			69,402
Debt extinguishment loss	—			—			3,653			2,450
Transaction-related costs	4,905			182			7,772			9,993
Other income, net	(7,810		)	(660		)	(10,025		)	(3,449		)
Income before income taxes	$	21,855		$	13,100		$	51,791		$	18,105

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Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2019

Earnings Per Share [Abstract]

Summary of net income (loss) attributable to Archrock common stockholders used in the calculation of basic and diluted income (loss) per common share

The following table summarizes net income attributable to Archrock common stockholders used in the calculation of basic and diluted net income per common share (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income from continuing operations attributable to Archrock stockholders	$	20,407		$	9,974		$	51,559		$	8,095
Loss from discontinued operations, net of tax	—			—			(273		)	—
Net income attributable to Archrock stockholders	20,407			9,974			51,286			8,095
Less: Net income attributable to participating securities	(302		)	(241		)	(876		)	(554		)
Net income attributable to Archrock common stockholders	$	20,105		$	9,733		$	50,410		$	7,541

Schedule of potential shares of common stock that were included in computing diluted income (loss) attributable to Archrock common stockholders per common share

The following table shows the potential shares of common stock that were included in computing diluted net income attributable to Archrock common stockholders per common share (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Weighted average common shares outstanding including participating securities	144,692		129,486		135,081		104,489
Less: Weighted average participating securities outstanding	(1,761	)	(1,644	)	(1,911	)	(1,576	)
Weighted average common shares outstanding used in basic net income per common share	142,931		127,842		133,170		102,913
Net dilutive potential common shares issuable:
On exercise of options and vesting of performance-based restricted stock units	33		111		33		96
On settlement of employee stock purchase plan shares	1		2		3		4
Weighted average common shares outstanding used in diluted net income per common share	142,965		127,955		133,206		103,013

Schedule of potential shares of common stock issuable, excluded from computation of diluted income (loss), attributable to Archrock common stockholders per common share

The following table shows the potential shares of common stock issuable that were excluded from computing diluted net income attributable to Archrock common stockholders per common share as their inclusion would have been anti-dilutive (in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
On exercise of options where exercise price is greater than average market value for the period	154	187	154	199

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Business Transactions - Asset Acquisition (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Aug. 01, 2019	Dec. 31, 2018
Schedule of Asset Acquisition
Goodwill	$ 106,928		$ 0
Elite Acquisition
Schedule of Asset Acquisition
Accounts receivable		$ 9,000
Inventory		7,700
Other current assets		800
Property, plant and equipment		286,300
Operating lease ROU assets		700
Intangible assets		29,100
Goodwill		106,900
Accounts payable, trade		(2,100)
Accrued liabilities		(3,000)
Operating lease liabilities		(300)
Accrued liabilities		$ 435,100

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Long-Term Debt - Redemption of 2021 Notes (Details) - USD ($) $ in Thousands		3 Months Ended		9 Months Ended
	Apr. 05, 2019	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Debt Instrument
Repayments of long-term debt				$ 1,386,250	$ 440,636
Debt extinguishment loss		$ 0	$ 0	3,653	$ 2,450
Senior Notes | 2021 Notes
Debt Instrument
Redemption rate (as a percent)	100.00%
Repayments of long-term debt	$ 350,000
Interest paid	$ 200
Debt extinguishment loss				$ 3,700

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Commitments and Contingencies - Guarantees Not Recorded on Balance Sheet (Details) $ in Millions	Sep. 30, 2019 USD ($)
Performance Bonds
Commitments and contingencies
Maximum potential undiscounted payments	$ 2.3

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Segments - Reconciliation of Net Income to Gross Margin (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Reconciliation Net Income (Loss) to Gross Margin
Total gross margin	$ 131,383	$ 113,273	$ 374,559	$ 326,649
Less:
Selling, general and administrative	29,526	26,298	87,133	80,455
Depreciation and amortization	48,409	43,779	137,997	131,565
Long-lived asset impairment	7,097	6,660	18,821	18,323
Restatement and other charges	0	396	445	(195)
Interest expense	27,401	23,518	76,972	69,402
Debt extinguishment loss	0	0	3,653	2,450
Transaction-related costs	4,905	182	7,772	9,993
Other income, net	(7,810)	(660)	(10,025)	(3,449)
Income before income taxes	$ 21,855	$ 13,100	$ 51,791	$ 18,105

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Leases - (Narratives) (Details)	9 Months Ended
	Sep. 30, 2019
Minimum
Lessee, Lease, Description
Weighted average remaining lease term (in years)	1 year
Operating lease renewal term (in years)	3 years
Maximum
Lessee, Lease, Description
Weighted average remaining lease term (in years)	11 years
Operating lease renewal term (in years)	5 years

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Long-Term Debt - Archrock Credit Facility (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Line of Credit Facility
Debt extinguishment loss	$ 0	$ 0	$ 3,653	$ 2,450
Revolving Credit Facility | Terminated Credit Facility
Line of Credit Facility
Debt extinguishment loss				2,500
Commitment fee amount				$ 200

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Business Transactions - Pro Forma Information (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Business Combinations [Abstract]
Revenue	$ 251,505	$ 251,060	$ 763,776	$ 728,188
Net income attributable to Archrock stockholders	$ 27,207	$ 11,957	$ 65,152	$ 11,907

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Discontinued Operations - Income Statement Data for Discontinued Operations (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Disposal Group, Including Discontinued Operation, Income Statement Disclosures
Loss from discontinued operations, net of tax	$ 0	$ 0	$ (273)	$ 0
Spinoff | Exterran Corporation
Disposal Group, Including Discontinued Operation, Income Statement Disclosures
Other income, net	(31)		(1,463)
Provision for income taxes	31		1,736
Loss from discontinued operations, net of tax	$ 0		$ (273)

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Fair Value Measurements - Assets and Liabilities Measured at Fair Value (Details) - Recurring Basis - Level 2 - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Fair value measurement of assets and liabilities
Derivative asset	$ 73	$ 7,307
Derivative liability	$ (2,726)	$ 0

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Equity - Cash Dividends (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended							9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018
Distributions
Dividends per Common Share (in dollars per share)	$ 0.145	$ 0.132	$ 0.132	$ 0.132	$ 0.132	$ 0.120	$ 0.120	$ 0.409	$ 0.372
Total Dividends	$ 22,062	$ 17,206	$ 17,231	$ 17,156	$ 17,114	$ 15,486	$ 8,532	$ 56,499	$ 41,132

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Earnings Per Share - Net Income Attributable to Archrock Common Stockholders (Details) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Summary of net income attributable to Archrock common stockholders used in the calculation of basic and diluted income per common share
Net income from continuing operations attributable to Archrock stockholders	$ 20,407	$ 9,974	$ 51,559	$ 8,095
Loss from discontinued operations, net of tax	0	0	(273)	0
Net income attributable to Archrock stockholders	20,407	9,974	51,286	8,095
Less: Net income attributable to participating securities	(302)	(241)	(876)	(554)
Net income attributable to Archrock common stockholders	$ 20,105	$ 9,733	$ 50,410	$ 7,541
Potential shares of common stock included in computing diluted income attributable to Exterran common stockholders per common share
Weighted average common shares outstanding including participating securities (in shares)	144,692	129,486	135,081	104,489
Less: Weighted average participating securities outstanding (in shares)	(1,761)	(1,644)	(1,911)	(1,576)
Weighted average common shares outstanding — used in basic net income (loss) per common share (in shares)	142,931	127,842	133,170	102,913
Net dilutive potential common shares issuable:
Weighted average common shares outstanding - used in diluted net income per common share (in shares)	142,965	127,955	133,206	103,013
On exercise of options and vesting of performance-based restricted stock units
Net dilutive potential common shares issuable:
On exercise of options (in shares)	33	111	33	96
On settlement of employee stock purchase plan shares
Net dilutive potential common shares issuable:
On exercise of options (in shares)	1	2	3	4

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Derivatives - Interest Rate Risk (Narratives) (Details) - Derivatives Designated as Hedging Instruments - Interest Rate Swaps $ in Millions	Sep. 30, 2019 USD ($)
Derivatives
Deferred pre-tax losses to be reclassified during next 12 months	$ 0.4
Weighted average effective fixed interest rate on interest rate swaps (as a percent)	1.80%

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Related Party Transactions

9 Months Ended

Sep. 30, 2019

Related Party Transactions [Abstract]

Related Party Transactions

4. Related Party Transactions

In connection with the closing of the Elite Acquisition, we issued 21,656,683 shares of our common stock to JDH Capital, an affiliate of our customer Hilcorp. As long as JDH Capital, together with affiliates of Hilcorp, owns at least 7.5% of our outstanding common stock, it will have the right to designate one director to our board of directors. On August 1, 2019, Jeffery D. Hildebrand, founder and executive chairman of Hilcorp, was elected to our board of directors. As of September 30, 2019, JDH Capital owned 14.3% of our outstanding common stock.

Revenue from Hilcorp and affiliates was $9.7 million and $2.2 million during the three months ended September 30, 2019 and 2018, respectively, and $20.1 million and $6.6 million during the nine months ended September 30, 2019 and 2018, respectively. Accounts receivable, net due from Hilcorp and affiliates were $6.1 million and $3.6 million as of September 30, 2019 and December 31, 2018, respectively.

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Long-Term Debt

9 Months Ended

Sep. 30, 2019

Debt Disclosure [Abstract]

Long-Term Debt

8. Long-Term Debt

Long-term debt consisted of the following (in thousands):

	September 30, 2019			December 31, 2018
Credit Facility	$	988,500		$	839,500
2027 Notes	500,000			—
Less: Deferred financing costs, net of amortization	(8,275		)	—
	491,725			—
2022 Notes	350,000			350,000
Less: Debt discount, net of amortization	(2,230		)	(2,766		)
Less: Deferred financing costs, net of amortization	(2,520		)	(3,133		)
	345,250			344,101
2021 Notes	—			350,000
Less: Debt discount, net of amortization	—			(1,789		)
Less: Deferred financing costs, net of amortization	—			(2,311		)
	—			345,900
Long-term debt	$	1,825,475		$	1,529,501

Archrock Credit Facility

In April 2018, in connection with the Merger, the Archrock Credit Facility was terminated. As a result of the termination, we recorded a debt extinguishment loss of $2.5 million during the nine months ended September 30, 2018. We incurred $0.2 million in commitment fees in 2018 prior to the facility’s termination and were in compliance with all covenants through its closing.

Credit Facility

As of September 30, 2019, there were $15.2 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.7%. The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 4.9% and 5.4% at September 30, 2019 and December 31, 2018, respectively. We incurred $0.4 million and $0.6 million in commitment fees on the daily unused amount of the Credit Facility during the three months ended September 30, 2019 and 2018, respectively, and $1.5 million and $1.7 million during the nine months ended September 30, 2019 and 2018, respectively.

We must maintain the following consolidated financial ratios, as defined in our Credit Facility agreement:

EBITDA to Interest Expense	2.5 to 1.0
Senior Secured Debt to EBITDA	3.5 to 1.0
Total Debt to EBITDA
Through fiscal year 2019	5.75 to 1.0
Through second quarter of 2020	5.50 to 1.0
Thereafter (1)	5.25 to 1.0

——————

⁽¹⁾  Subject to a temporary increase to 5.5 to 1.0 for any quarter during which an acquisition satisfying certain thresholds is completed and for the two quarters immediately following such quarter.

As of September 30, 2019, the ratio requirements above did not constrain our undrawn capacity and as such, all of the $246.3 million of undrawn capacity was available for additional borrowings. As of September 30, 2019, we were in compliance with all covenants under the Credit Facility agreement.

2027 Notes

On March 21, 2019, we completed a private offering of $500.0 million aggregate principal amount of 6.875% senior notes due April 2027 and received net proceeds of $491.2 million after deducting issuance costs. The $8.8 million of issuance costs were recorded as deferred financing costs within long-term debt in our condensed consolidated balance sheets and are being amortized to interest expense in our condensed consolidated statement of operations over the term of the notes. The net proceeds were used to repay borrowings outstanding under our Credit Facility as of March 31, 2019.

The 2027 Notes have not been and will not be registered under the Securities Act or the securities laws of any other jurisdiction and may not be offered or sold in the U.S. except pursuant to a registration exemption under the Securities Act and applicable state securities laws. We offered and issued the 2027 Notes only to qualified institutional buyers in accordance with Rule 144A under the Securities Act and to certain non-U.S. persons outside the U.S. in accordance with Regulation S under the Securities Act.

The 2027 Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by us and all of our existing subsidiaries, other than Archrock Partners, L.P. and APLP Finance Corp., which are co-issuers of the 2027 Notes, and certain of our future subsidiaries. The 2027 Notes and the guarantees rank equally in right of payment with all of our and the guarantors’ existing and future senior indebtedness.

The 2027 Notes may be redeemed at any time, in whole or in part, at specified redemption prices and make-whole premiums, plus any accrued and unpaid interest.

Redemption of 2021 Notes

On April 5, 2019, the 2021 Notes were redeemed at 100% of their $350.0 million aggregate principal amount plus accrued and unpaid interest of $0.2 million with borrowings from the Credit Facility. We recorded a debt extinguishment loss of $3.7 million related to the redemption during the nine months ended September 30, 2019.

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Long-Term Debt (Tables)

9 Months Ended

Sep. 30, 2019

Debt Disclosure [Abstract]

Schedule of long-term debt

We must maintain the following consolidated financial ratios, as defined in our Credit Facility agreement:

EBITDA to Interest Expense	2.5 to 1.0
Senior Secured Debt to EBITDA	3.5 to 1.0
Total Debt to EBITDA
Through fiscal year 2019	5.75 to 1.0
Through second quarter of 2020	5.50 to 1.0
Thereafter (1)	5.25 to 1.0

——————

⁽¹⁾  Subject to a temporary increase to 5.5 to 1.0 for any quarter during which an acquisition satisfying certain thresholds is completed and for the two quarters immediately following such quarter.

Long-term debt consisted of the following (in thousands):

	September 30, 2019			December 31, 2018
Credit Facility	$	988,500		$	839,500
2027 Notes	500,000			—
Less: Deferred financing costs, net of amortization	(8,275		)	—
	491,725			—
2022 Notes	350,000			350,000
Less: Debt discount, net of amortization	(2,230		)	(2,766		)
Less: Deferred financing costs, net of amortization	(2,520		)	(3,133		)
	345,250			344,101
2021 Notes	—			350,000
Less: Debt discount, net of amortization	—			(1,789		)
Less: Deferred financing costs, net of amortization	—			(2,311		)
	—			345,900
Long-term debt	$	1,825,475		$	1,529,501

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Business Transactions (Tables)

9 Months Ended

Sep. 30, 2019

Business Combinations [Abstract]

Asset Acquisitions

The following table summarizes the preliminary purchase price allocation based on the estimated fair values of the acquired assets and liabilities as of the acquisition date (in millions):

Accounts receivable	$	9.0
Inventory	7.7
Other current assets	0.8
Property, plant and equipment	286.3
Operating lease ROU assets	0.7
Intangible assets	29.1
Goodwill	106.9
Accounts payable, trade	(2.1		)
Accrued liabilities	(3.0		)
Operating lease liabilities	(0.3		)
Purchase price	$	435.1

Pro Forma Information

The unaudited pro forma financial information below is presented for informational purposes only and is not necessarily indicative of our results of operations that would have occurred had the transaction been consummated at the beginning of the period presented, nor is it necessarily indicative of future results.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Revenue	$	251,505	$	251,060	$	763,776	$	728,188
Net income attributable to Archrock stockholders	27,207		11,957		65,152		11,907

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

Summary of assets and liabilities measured at fair value on recurring basis

The following table presents our derivative asset and liability measured at fair value on a recurring basis, with pricing levels as of the date of valuation (in thousands):

	September 30, 2019			December 31, 2018
Derivative asset	$	73		$	7,307
Derivative liability	(2,726		)	—

Schedule of carrying value and estimated fair value of debt instruments

The following table summarizes the carrying amount and fair value of our fixed rate debt (in thousands):

	September 30, 2019		December 31, 2018
Carrying amount of fixed rate debt (1)	$	836,975	$	690,001
Fair value of fixed rate debt	887,000		674,000

——————

⁽¹⁾ 

Carrying amounts are shown net of unamortized debt discounts and unamortized deferred financing costs. See Note 8 (“Long-Term Debt”).

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Related Party Transactions (Details) - Affiliated Entity - USD ($) $ in Millions		3 Months Ended		9 Months Ended
	Aug. 01, 2019	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
JDH Capital | Archrock, Inc.
Related Party Transaction
Ownership interest (percent)		14.30%		14.30%
Elite Acquisition | Common Stock
Related Party Transaction
Minimum ownership interest of outstanding shares required to elect a board of director (percent)		7.50%		7.50%
Hilcorp
Related Party Transaction
Revenue from related party transactions		$ 9.7	$ 2.2	$ 20.1	$ 6.6
Due from related party		$ 6.1		$ 6.1		$ 3.6
Hilcorp | Elite Acquisition | Common Stock
Related Party Transaction
Shares issued as compensation for asset acquisition (shares)	21,656,683

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Inventory (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Composition of Inventory net of reserves
Parts and supplies	$ 67,262	$ 65,645
Work in progress	11,044	10,688
Inventory	$ 78,306	$ 76,333

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Long-Term Debt - Credit Facility (Details) - Revolving Credit Facility - Credit Facility - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Line of Credit Facility
Letter of credit outstanding	$ 15.2		$ 15.2
Debt instrument, variable rate (percentage)			2.70%
Debt instrument weighted average interest rate (percent)	4.90%		4.90%		5.40%
Commitment fee amount	$ 0.4	$ 0.6	$ 1.5	$ 1.7
Undrawn capacity under revolving credit facility	$ 246.3		$ 246.3

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Derivatives - Derivative Gain (Loss) Recognized in Income Statement (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Effect of derivative instruments on results of operations
Interest expense	$ (27,401)	$ (23,518)	$ (76,972)	$ (69,402)
Accumulated Other Comprehensive Income (Loss) | Reclassification adjustments
Effect of derivative instruments on results of operations
Interest expense	$ 482	$ 429	$ 2,199	$ 582

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Equity - Effects of Changes in Ownership Interest (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Equity [Abstract]
Net income attributable to Archrock stockholders	$ 20,407	$ 9,974	$ 51,286	$ 8,095
Increase in Archrock stockholders’ additional paid-in capital for change in ownership of Partnership common units		1,936		54,751
Change from net income attributable to Archrock stockholders and transfers from noncontrolling interest		$ 11,910		$ 62,846

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Income Taxes (Details) $ in Millions	Sep. 30, 2019 USD ($)
Income Tax Disclosure [Abstract]
Potential decrease in unrecognized tax benefit	$ 1.9

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Derivatives - Interest Rate Risk (Details) - Derivatives Designated as Hedging Instruments $ in Millions	Sep. 30, 2019 USD ($)
Interest Rate Swaps
Notional Disclosures
Notional amount of interest rate swaps	$ 400
May 2020
Notional Disclosures
Notional amount of interest rate swaps	100
March 2022
Notional Disclosures
Notional amount of interest rate swaps	$ 300

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Discontinued Operations

9 Months Ended

Sep. 30, 2019

Discontinued Operations and Disposal Groups [Abstract]

Discontinued Operations

5. Discontinued Operations

In 2015 we completed the Spin-off. In order to effect the Spin-off and govern our relationship with Exterran Corporation after the Spin-off, we entered into several agreements with Exterran Corporation which include, but are not limited to, the tax matters agreement. The tax matters agreement governs the respective rights, responsibilities and obligations of Exterran Corporation and us with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and certain other matters regarding taxes. Subject to the provisions of this agreement, we and Exterran Corporation agreed to indemnify the primary obligor of any return for tax periods beginning before and ending before or after the Spin-off (including any ongoing or future amendments and audits for these returns) for the portion of the tax liability (including interest and penalties) that relates to their respective operations reported in the filing.

As of September 30, 2019 and December 31, 2018, we had $8.5 million and $7.1 million, respectively, of unrecognized tax benefits (including interest and penalties) related to Exterran Corporation operations prior to the Spin-off recorded to noncurrent liabilities associated with discontinued operations in our condensed consolidated balance sheets. We had an offsetting indemnification asset of $8.5 million and $7.1 million related to these unrecognized tax benefits recorded to noncurrent assets associated with discontinued operations as of September 30, 2019 and December 31, 2018, respectively.

The following table summarizes the balance sheet data for discontinued operations (in thousands):

	September 30, 2019		December 31, 2018
Other current assets	$	—	$	300
Other assets	8,498		7,063
Total assets associated with discontinued operations	$	8,498	$	7,363
Accrued liabilities	$	—	$	297
Deferred income taxes	8,498		7,063
Total liabilities associated with discontinued operations	$	8,498	$	7,360

The following table summarizes the statements of operations data for discontinued operations (in thousands):

	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
Other income, net	$	(31	)	$	(1,463	)
Provision for income taxes	31			1,736
Loss from discontinued operations, net of tax	$	—		$	(273	)

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Revenue from Contract with Customers

9 Months Ended

Sep. 30, 2019

Revenue from Contract with Customer [Abstract]

Revenue from Contracts with Customers

9. Revenue from Contracts with Customers

Disaggregation of Revenue

The following table presents our revenue from contracts with customers disaggregated by revenue source (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Contract operations (1):
0 - 1,000 horsepower per unit	$	66,026	$	60,725	$	193,448	$	179,917
1,001 - 1,500 horsepower per unit	81,755		69,663		231,693		204,841
Over 1,500 horsepower per unit	49,572		38,053		138,966		108,367
Other (2)	984		1,068		2,995		3,031
Total contract operations (3)	198,337		169,509		567,102		496,156
Aftermarket services (1):
Services (4)	28,888		38,863		95,689		107,776
OTC parts and components sales	17,724		24,000		56,707		67,350
Total aftermarket services (5)	46,612		62,863		152,396		175,126
Total revenue	$	244,949	$	232,372	$	719,498	$	671,282

——————

⁽¹⁾  We operate in two segments: contract operations and aftermarket services. See Note 21 (“Segments”) for further details.

⁽²⁾  Primarily relates to fees associated with owned non-compressor equipment.

⁽³⁾  Included $1.6 million for each of the three months ended September 30, 2019 and 2018 and $6.0 million and $4.3 million for the nine months ended September 30, 2019 and 2018, respectively, related to billable maintenance on owned units that was recognized at a point in time. All other contract operations revenue is recognized over time.

⁽⁴⁾  Included a reversal of $0.7 million of revenue during the three and nine months ended September 30, 2019 related to changes in estimates of performance obligations partially satisfied in prior periods.

⁽⁵⁾  All service revenue within aftermarket services is recognized over time. All OTC parts and components sales revenue is recognized at a point in time.

Performance Obligations

As of September 30, 2019, we had $453.2 million of remaining performance obligations related to our contract operations segment. We have elected to apply the practical expedient to not consider the effects of the time value of money, as the expected time between the transfer of services and payment for such services is less than one year. The remaining performance obligations will be recognized through 2024 as follows (in thousands):

	2019		2020		2021		2022		2023		2024		Total
Remaining performance obligations	$	114,677	$	198,753	$	100,244	$	34,878	$	4,090	$	563	$	453,205

As of September 30, 2019 we have elected to apply the practical expedient to 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 Balances

As of September 30, 2019 and December 31, 2018, our receivables from contracts with customers, net of allowance for doubtful accounts, were $151.3 million and $142.1 million, respectively.

Freight billings to customers for the transport of compressor assets, customer-specified modifications of compressor assets and milestone billings on aftermarket services often result in a contract liability. As of September 30, 2019 and December 31, 2018, our contract liabilities were $11.0 million and $17.1 million, respectively, which were included in deferred revenue and other liabilities in our condensed consolidated balance sheets. We recognized $33.5 million of our December 31, 2018 contract liability balance as revenue during the nine months ended September 30, 2019.

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Derivatives (Tables)

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Schedule of interest rate swaps

At September 30, 2019, the following interest rate swaps, entered into to offset changes in expected cash flows due to fluctuations in the associated variable interest rates, were outstanding (in millions):

Expiration Date	Notional Value
May 2020	$	100
March 2022	300
	$	400

Effect of derivative instruments on consolidated financial position

The following table presents the effect of our derivative instruments designated as cash flow hedging instruments on our condensed consolidated balance sheets (in thousands):

	September 30, 2019			December 31, 2018
Other current assets	$	73		$	3,185
Other assets	—			4,122
Total derivative assets	$	73		$	7,307
Accrued liabilities	$	(456	)	$	—
Other liabilities	(2,270		)	—
Total derivative liabilities	$	(2,726	)	$	—

Effect of derivative instruments on results of operations

The following tables present the effect of our derivative instruments designated as cash flow hedging instruments on our condensed consolidated statements of operations (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Pre-tax gain (loss) recognized in other comprehensive income (loss)	$	(933	)	$	1,642	$	(7,761	)	$	8,583
Pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense	482			429		2,199			(83		)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Total amount of interest expense in which the effects of cash flow hedges are recorded	$	27,401	$	23,518	$	76,972	$	69,402
Amount of gain reclassified from accumulated other comprehensive income (loss) into interest expense	482		429		2,199		582

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Property, Plant and Equipment, Net (Tables)

9 Months Ended

Sep. 30, 2019

Property, Plant and Equipment [Abstract]

Schedule of property, plant and equipment, net

Property, plant and equipment, net consisted of the following (in thousands):

	September 30, 2019			December 31, 2018
Compression equipment, facilities and other fleet assets	$	3,735,162		$	3,323,465
Land and buildings	49,706			47,067
Transportation and shop equipment	111,381			103,766
Computer hardware and software	93,479			92,174
Other	14,403			11,880
Property, plant and equipment	4,004,131			3,578,352
Accumulated depreciation	(1,423,810		)	(1,407,314		)
Property, plant and equipment, net	$	2,580,321		$	2,171,038

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Recent Accounting Developments (Policies)

9 Months Ended

Sep. 30, 2019

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

Accounting Standards Updates Implemented and Accounting Standards Updates Not Yet Implemented

Accounting Standards Updates Implemented

Leases

ASC 842 Leases establishes a ROU model that requires a lessee to record a ROU asset and a lease liability on the balance sheet. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Under the new guidance, lessor accounting is largely unchanged. We adopted ASC 842 Leases on January 1, 2019 using the modified retrospective transition method and elected the practical expedient package to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) lease classification of any expired or existing leases and (iii) initial direct costs for any existing leases. We did not elect the practical expedient to use hindsight in determining the lease term. Adoption of ASC 842 Leases resulted in recognition of an operating lease ROU asset of $18.6 million and an operating lease liability of $20.0 million in our condensed consolidated balance sheet at January 1, 2019. The difference of $1.4 million related to accrued rent and prepaid lease payments recorded to our consolidated balance sheet as of December 31, 2018. We did not recognize any finance lease ROU assets or liabilities upon adoption of ASC 842 Leases. There was no impact to our condensed consolidated statements of operations, equity or cash flows upon adoption. Comparative information has not been recast and continues to be reported under the accounting standards in effect for those periods.

ASC 842 Leases also provides a practical expedient, elected by class of underlying asset, to not separate lease and nonlease components and instead account for those components as a single component if certain conditions are met. ASC 842 Leases also provides clarification for lessors on whether ASC 842 Leases or ASC 606 Revenue is applicable to the combined component based on determination of the predominant component. We have concluded that for our contract operations services agreements, in which we are a lessor, the services nonlease component is predominant over the compression unit lease component and therefore ongoing recognition of these agreements will continue to follow the ASC 606 Revenue guidance. We have also elected, as a lessee, to not separate lease and nonlease components as it relates to our facility leases.

In addition, we have made an accounting policy election, as permitted by ASC 842 Leases, to not apply the recognition requirements of ASC 842 Leases to leases with an initial term of 12 months or less.

Goodwill

On October 1, 2019, we prospectively adopted ASU 2017-04 which simplifies the test for goodwill impairment by eliminating Step 2 in the test for goodwill impairment, which required an entity to calculate the implied fair value of goodwill. Under this amendment, an entity should perform its goodwill impairment test on at least an annual basis by comparing the fair value of a reporting unit, including any income tax effects from any tax deductible goodwill, with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

Accounting Standards Updates Not Yet Implemented

In August 2018, the FASB issued ASU 2018-13 which amends the required fair value measurements disclosures related to valuation techniques and inputs used, uncertainty in measurement and changes in measurements applied. These amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty are to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments are to be applied retrospectively to all periods presented upon their effective date. We are currently evaluating the impact of ASU 2018-13 on our consolidated financial statements and footnote disclosures.

In June 2016, the FASB issued ASU 2016-13 which changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in earlier recognition of allowance for losses. For public entities that meet the definition of an SEC filer, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. Entities will apply ASU 2016-13 provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently evaluating the impact of ASU 2016-13 on our consolidated financial statements and footnote disclosures.

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Long-Lived Asset Impairment

9 Months Ended

Sep. 30, 2019

Asset Impairment Charges [Abstract]

Long-Lived Asset Impairment

13. Long-Lived Asset Impairment

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

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

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

The following table presents the results of our impairment review as recorded to our contract operations segment (dollars in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Idle compressor units retired from the active fleet	60		60		240		225
Horsepower of idle compressor units retired from the active fleet	28,000		23,000		84,000		73,000
Impairment recorded on idle compressor units retired from the active fleet	$	7,097	$	6,660	$	18,821	$	18,323

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Statement of Comprehensive Income [Abstract]
Net income	$ 20,407	$ 9,974	$ 51,286	$ 16,192
Other comprehensive income (loss), net of tax:
Interest rate swap gain (loss), net of reclassifications to earnings	(1,415)	959	(9,960)	7,241
Amortization of terminated interest rate swaps	0	0	0	230
Merger-related adjustments	0	0	0	5,670
Total other comprehensive income (loss)	(1,415)	959	(9,960)	13,141
Comprehensive income	18,992	10,933	41,326	29,333
Less: Comprehensive income attributable to the noncontrolling interest	0	0	0	(12,360)
Comprehensive income attributable to Archrock stockholders	$ 18,992	$ 10,933	$ 41,326	$ 16,973

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Equity

9 Months Ended

Sep. 30, 2019

Equity [Abstract]

Equity

17. Equity

Elite Acquisition

On August 1, 2019, we completed the Elite Acquisition. A portion of the acquisition’s purchase price was funded through the issuance of 21,656,683 shares of common stock with an acquisition date fair value of $225.9 million, which was recorded to common stock and additional paid-in capital in our condensed consolidated statements of equity. See Note 3 (“Business Transactions”) for further details of this acquisition.

Merger Transaction

In April 2018, we completed the Merger and acquired all of the common units of the Partnership not owned by us prior to the Merger. As a result of the Merger, the Partnership’s common units are no longer publicly traded. The 2021 Notes and 2022 Notes were not impacted by the Merger.

As we controlled the Partnership prior to the Merger and continue to control the Partnership after the Merger, we accounted for the change in our ownership interest in the Partnership as an equity transaction in the second quarter of 2018 and no gain or loss was recognized in our condensed consolidated statements of operations as a result of the Merger. The tax effects of the Merger were reported as adjustments to other assets, noncurrent assets associated with discontinued operations, deferred income taxes, additional paid-in capital and other comprehensive income.

The following table presents the effects of changes in our ownership interest in the Partnership on the equity attributable to Archrock stockholders:

	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Net income attributable to Archrock stockholders	$	9,974	$	8,095
Increase in Archrock stockholders’ additional paid-in capital for change in ownership of Partnership common units	1,936		54,751
Change from net income attributable to Archrock stockholders and transfers from noncontrolling interest	$	11,910	$	62,846

Prior to the Merger, public unitholders held a 57% ownership interest in the Partnership and we owned the remaining 43% equity interest. The earnings of the Partnership that were attributed to its common units held by the public prior to the Merger are reflected in net income attributable to the noncontrolling interest in our condensed consolidated statements of operations.

Cash Dividends

The following table summarizes our dividends declared and paid in each of the quarterly periods of 2019 and 2018:

	Dividends per Common Share		Total Dividends (in thousands)
2018
Q1	$	0.120	$	8,532
Q2	0.120		15,486
Q3	0.132		17,114
Q4	0.132		17,156
2019
Q1	$	0.132	$	17,231
Q2	0.132		17,206
Q3	0.145		22,062

On October 23, 2019, our board of directors declared a quarterly dividend of $0.145 per share of common stock to be paid on November 14, 2019 to stockholders of record at the close of business on November 7, 2019.

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Cover - shares	9 Months Ended
	Sep. 30, 2019	Oct. 22, 2019
Cover page.
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Sep. 30, 2019
Document Transition Report	false
Commission File Number	001-33666
Entity Registrant Name	Archrock, Inc.
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	74-3204509
Entity Street Address	9807 Katy Freeway
Entity Suite Number	Suite 100
Entity City	Houston
Entity State	TX
Entity Postal Zip Code	77024
City Area Code	281
Local Phone Number	836-8000
Title of each class	Common stock, $0.01 par value per share
Trading Symbol	AROC
Name of exchange on which registered	NYSE
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Large Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		151,909,911
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q3
Entity Central Index Key	0001389050
Amendment Flag	false
Current Fiscal Year End Date	--12-31

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Organization and Basis of Presentation

9 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Organization and Basis of Presentation

1. Organization and Basis of Presentation

We are an energy infrastructure company with a pure-play focus on midstream natural gas compression. We believe 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 includes all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly 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 2018 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. Certain prior year amounts have been reclassified to conform to the current year presentation.

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Segments

9 Months Ended

Sep. 30, 2019

Segment Reporting [Abstract]

Segments

21. Segments

We manage our business segments primarily based on the type of product or service provided. We have two segments which we operate within the U.S.: contract operations and aftermarket services. The contract operations segment primarily provides natural gas compression services to meet specific customer requirements. The aftermarket services segment provides a full range of services to support the compression needs of customers, from part sales and normal maintenance services to full operation of a customer’s owned assets.

We evaluate the performance of our segments based on gross margin for each segment. Revenue includes only sales to external customers.

The following table presents revenue and gross margin by segment during the three and nine months ended September 30, 2019 and 2018 (in thousands): 

	Contract Operations		Aftermarket Services		Total
Three months ended September 30, 2019
Revenue	$	198,337	$	46,612	$	244,949
Gross margin	122,396		8,987		131,383
Three months ended September 30, 2018
Revenue	$	169,509	$	62,863	$	232,372
Gross margin	100,453		12,820		113,273
Nine months ended September 30, 2019
Revenue	$	567,102	$	152,396	$	719,498
Gross margin	345,905		28,654		374,559
Nine months ended September 30, 2018
Revenue	$	496,156	$	175,126	$	671,282
Gross margin	294,696		31,953		326,649

The following table reconciles total gross margin to income before income taxes (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Total gross margin	$	131,383		$	113,273		$	374,559		$	326,649
Less:
Selling, general and administrative	29,526			26,298			87,133			80,455
Depreciation and amortization	48,409			43,779			137,997			131,565
Long-lived asset impairment	7,097			6,660			18,821			18,323
Restatement and other charges	—			396			445			(195		)
Interest expense	27,401			23,518			76,972			69,402
Debt extinguishment loss	—			—			3,653			2,450
Transaction-related costs	4,905			182			7,772			9,993
Other income, net	(7,810		)	(660		)	(10,025		)	(3,449		)
Income before income taxes	$	21,855		$	13,100		$	51,791		$	18,105

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Business Transactions - Narratives (Details) hp in Thousands, compressor_unit in Thousands, $ in Thousands		2 Months Ended	3 Months Ended		9 Months Ended
	Aug. 01, 2019 USD ($) hp compressor_unit shares	Sep. 30, 2019 USD ($)	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($)	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($)
Schedule of Asset Acquisition
Payments to acquire assets					$ 214,233	$ 0
Transaction-related costs			$ 4,905	$ 182	7,772	$ 9,993
Disposed of by Sale | Harvest
Schedule of Asset Acquisition
Compressor units horsepower (horsepower) | compressor_unit	80
Proceeds from sale of property, plant and equipment and other assets	$ 30,000
Gain on sale of assets			6,600		$ 6,600
Elite Acquisition
Schedule of Asset Acquisition
Compressor units horsepower (horsepower) | hp	430
Payments to acquire assets	$ 209,200
Property plant and equipment remaining useful life					15 years
Revenue attributable to assets acquired		$ 13,100
Transaction-related costs			$ 4,800		$ 7,400
Elite Acquisition | Customer relationships
Schedule of Asset Acquisition
Estimated average remaining life intangible assets					15 years
Elite Acquisition | Common Stock
Schedule of Asset Acquisition
Shares issued as compensation for asset acquisition (shares) | shares	21,656,683
Issuance of Archrock common stock pursuant to Elite Acquisition, net of tax	$ 225,900

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Accumulated Other Comprehensive Income (Loss) (Tables)

9 Months Ended

Sep. 30, 2019

Equity [Abstract]

Schedule of Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive income (loss) of our derivative cash flow hedges, net of tax and excluding noncontrolling interest, during the three and nine months ended September 30, 2019 and 2018 (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Beginning accumulated other comprehensive income (loss)	$	(2,772	)	$	9,374		$	5,773		$	1,197
Gain (loss) recognized in other comprehensive income (loss), net of tax provision of $0, $345, $0 and $1,234, respectively (1)	(933		)	1,298			(7,761		)	3,349
(Gain) loss reclassified from accumulated other comprehensive income (loss) to interest expense, net of tax provision of $0, $90, $0 and $37, respectively (1)(2)	(482		)	(339		)	(2,199		)	117
Merger-related adjustments (3)	—			—			—			5,670
Other comprehensive income (loss) attributable to Archrock stockholders	(1,415		)	959			(9,960		)	9,136
Ending accumulated other comprehensive income (loss)	$	(4,187	)	$	10,333		$	(4,187	)	$	10,333

——————

⁽¹⁾  Included adjustments of $0.3 million and $2.1 million related to an increase in the valuation allowance recorded to offset the tax effect of other comprehensive loss recorded during the three and nine months ended September 30, 2019, respectively.

⁽²⁾  Included stranded tax effects resulting from the Tax Cuts and Jobs Act, which was implemented in December 2017, of $0.3 million reclassified to accumulated deficit during the nine months ended September 30, 2018.

⁽³⁾ 

Pursuant to the Merger, we reclassified a gain of $5.7 million from noncontrolling interest to accumulated other comprehensive income (loss) related to the fair value of our derivative instruments that was previously attributed to public ownership of the Partnership.

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Long-Lived Assets Impairment (Tables)

9 Months Ended

Sep. 30, 2019

Asset Impairment Charges [Abstract]

Details of Impairment of Long-Lived Assets Held and Used by Asset

The following table presents the results of our impairment review as recorded to our contract operations segment (dollars in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Idle compressor units retired from the active fleet	60		60		240		225
Horsepower of idle compressor units retired from the active fleet	28,000		23,000		84,000		73,000
Impairment recorded on idle compressor units retired from the active fleet	$	7,097	$	6,660	$	18,821	$	18,323

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Label	Element	Value
Accounting Standards Update 2017-12 [Member]
Cumulative Effect of New Accounting Principle in Period of Adoption	us-gaap_CumulativeEffectOfNewAccountingPrincipleInPeriodOfAdoption	$ 383,000
Accounting Standards Update 2017-12 [Member] | Retained Earnings [Member]
Cumulative Effect of New Accounting Principle in Period of Adoption	us-gaap_CumulativeEffectOfNewAccountingPrincipleInPeriodOfAdoption	383,000
Accounting Standards Update 2014-09 [Member]
Cumulative Effect of New Accounting Principle in Period of Adoption	us-gaap_CumulativeEffectOfNewAccountingPrincipleInPeriodOfAdoption	14,666,000
Accounting Standards Update 2014-09 [Member] | Retained Earnings [Member]
Cumulative Effect of New Accounting Principle in Period of Adoption	us-gaap_CumulativeEffectOfNewAccountingPrincipleInPeriodOfAdoption	$ 14,666,000

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Revenue from Contract with Customers - Disaggregate Revenue (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($)	Sep. 30, 2019 USD ($) segment	Sep. 30, 2018 USD ($)
Disaggregation of Revenue
Contract revenue	$ 244,949	$ 232,372	$ 719,498	$ 671,282
Number of reportable segments | segment			2
Contract Operations | Transferred at Point in Time
Disaggregation of Revenue
Contract revenue	1,600	1,600	$ 6,000	4,300
Contract Operations | Contract operations
Disaggregation of Revenue
Contract revenue	198,337	169,509	567,102	496,156
Contract Operations | 0 - 1,000 horsepower per unit
Disaggregation of Revenue
Contract revenue	66,026	60,725	193,448	179,917
Contract Operations | 1,001 - 1,500 horsepower per unit
Disaggregation of Revenue
Contract revenue	81,755	69,663	231,693	204,841
Contract Operations | Over 1,500 horsepower per unit
Disaggregation of Revenue
Contract revenue	49,572	38,053	138,966	108,367
Contract Operations | Other
Disaggregation of Revenue
Contract revenue	984	1,068	2,995	3,031
Aftermarket Services | Aftermarket services
Disaggregation of Revenue
Contract revenue	46,612	62,863	152,396	175,126
Aftermarket Services | Services (4)
Disaggregation of Revenue
Contract revenue	28,888	38,863	95,689	107,776
Aftermarket Services | Services (4) | Adjustments
Disaggregation of Revenue
Contract revenue	(700)		(700)
Aftermarket Services | OTC parts and components sales
Disaggregation of Revenue
Contract revenue	$ 17,724	$ 24,000	$ 56,707	$ 67,350

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Commitments and Contingencies (Narratives) (Details) - USD ($) $ in Millions	Sep. 30, 2019	Dec. 31, 2018
Loss contingency
Accrued liability for the outcomes of non-income based tax audits	$ 2.4	$ 4.5
Indemnification liability	$ 2.8	$ 2.6

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Leases - Balance Sheet Information (Details) $ in Thousands	Sep. 30, 2019 USD ($)
Leases [Abstract]
ROU assets	$ 18,681
Lease liabilities
Current	3,019
Noncurrent	16,854
Total lease liabilities	$ 19,873

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Derivatives - Effect of Derivative Instruments on Balance Sheet (Details) - Derivatives Designated as Hedging Instruments - Interest Rate Swaps - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Fair Value Asset
Derivative assets	$ 73	$ 7,307
Derivative liability	(2,726)	0
Other current assets
Fair Value Asset
Derivative assets	73	3,185
Other assets
Fair Value Asset
Derivative assets	0	4,122
Accrued liabilities
Fair Value Asset
Derivative liability	(456)	0
Other liabilities
Fair Value Asset
Derivative liability	$ (2,270)	$ 0

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Earnings Per Share - Anti-dilutive Shares (Details) - shares shares in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
On exercise of options where exercise price is greater than average market value for the period
Anti-dilutive effect of the calculation of net dilutive potential shares of common stock issuable
Net dilutive potential common shares issuable (shares)	154	187	154	199

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Long-Lived Asset Impairment (Details) hp in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019 USD ($) compressor_unit hp	Sep. 30, 2018 USD ($) compressor_unit hp	Sep. 30, 2019 USD ($) compressor_unit hp	Sep. 30, 2018 USD ($) compressor_unit hp
Impaired Long-Lived Assets Held and Used
Impairment recorded on idle compressor units retired from the active fleet	$ 7,097	$ 6,660	$ 18,821	$ 18,323
Idle Compressor Units
Impaired Long-Lived Assets Held and Used
Idle compressor units retired from the active fleet (compressors) | compressor_unit	60	60	240	225
Horsepower of idle compressor units retired from the active fleet (horsepower) | hp	28	23	84	73
Impairment recorded on idle compressor units retired from the active fleet	$ 7,097	$ 6,660	$ 18,821	$ 18,323

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Leases - Other Supplemental Information (Details)	Sep. 30, 2019
Leases [Abstract]
Weighted average remaining lease term (in years)	8 years 3 months 18 days
Weighted average discount rate (percent)	5.30%

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Stock-Based Compensation - Restricted Stock, Restricted Stock Units, and Performance Units Activity (Details) - Restricted Stock, Restricted Stock Units, Performance Units, Cash Settled Restricted Stock Units and Cash Settled Performance Units shares in Thousands	9 Months Ended
	Sep. 30, 2019 $ / shares shares
Shares
Non-vested awards at the beginning of the period (in shares) | shares	1,728
Granted (in shares) | shares	1,389
Vested (in shares) | shares	(933)
Canceled (in shares) | shares	(153)
Non-vested awards at the end of the period (in shares) | shares	2,031
Weighted Average Grant Date Fair Value Per Share
Non-vested awards at the beginning of the period (in dollars per share) | $ / shares	$ 9.68
Granted (in dollars per share) | $ / shares	10.01
Vested (in dollars per share) | $ / shares	8.83
Canceled (in dollars per share) | $ / shares	10.33
Non-vested awards at the end of the period (in dollars per share) | $ / shares	$ 10.24

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Fair Value Measurements (Narratives) (Details) - USD ($) $ in Millions	9 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Nonrecurring Basis | Level 3
Valuation of our interest rate swaps and impaired assets
Impaired long-lived assets	$ 2.1	$ 2.3
Impaired Long-Lived Assets
Valuation of our interest rate swaps and impaired assets
Weighted average disposal period of impaired assets	4 years

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Discontinued Operations - Balance Sheet Data for Discontinued Operations (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Summary of balance sheet data for discontinued operations
Accrued liabilities	$ 0	$ 297
Spinoff | Exterran Corporation
Summary of balance sheet data for discontinued operations
Other current assets	0	300
Other assets	8,498	7,063
Total assets associated with discontinued operations	8,498	7,363
Accrued liabilities	0	297
Deferred income taxes	8,498	7,063
Total liabilities associated with discontinued operations	$ 8,498	$ 7,360

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Long-Term Debt - Schedule of Long-term Debt (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Debt Instrument
Long-term debt	$ 1,825,475	$ 1,529,501
Senior Notes | 2027 Notes
Debt Instrument
Long term debt gross	500,000	0
Less: Deferred financing costs, net of amortization	(8,275)	0
Long-term debt	491,725	0
Senior Notes | 2022 Notes
Debt Instrument
Long term debt gross	350,000	350,000
Less: Deferred financing costs, net of amortization	(2,520)	(3,133)
Less: Debt discount, net of amortization	(2,230)	(2,766)
Long-term debt	345,250	344,101
Senior Notes | 2021 Notes
Debt Instrument
Long term debt gross	0	350,000
Less: Deferred financing costs, net of amortization	0	(2,311)
Less: Debt discount, net of amortization	0	(1,789)
Long-term debt	0	345,900
Revolving Credit Facility | Credit Facility
Debt Instrument
Long-term debt	$ 988,500	$ 839,500

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Revenue from Contract with Customers (Tables)

9 Months Ended

Sep. 30, 2019

Revenue from Contract with Customer [Abstract]

Disaggregation of Revenue

The following table presents our revenue from contracts with customers disaggregated by revenue source (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Contract operations (1):
0 - 1,000 horsepower per unit	$	66,026	$	60,725	$	193,448	$	179,917
1,001 - 1,500 horsepower per unit	81,755		69,663		231,693		204,841
Over 1,500 horsepower per unit	49,572		38,053		138,966		108,367
Other (2)	984		1,068		2,995		3,031
Total contract operations (3)	198,337		169,509		567,102		496,156
Aftermarket services (1):
Services (4)	28,888		38,863		95,689		107,776
OTC parts and components sales	17,724		24,000		56,707		67,350
Total aftermarket services (5)	46,612		62,863		152,396		175,126
Total revenue	$	244,949	$	232,372	$	719,498	$	671,282

——————

⁽¹⁾  We operate in two segments: contract operations and aftermarket services. See Note 21 (“Segments”) for further details.

⁽²⁾  Primarily relates to fees associated with owned non-compressor equipment.

⁽³⁾  Included $1.6 million for each of the three months ended September 30, 2019 and 2018 and $6.0 million and $4.3 million for the nine months ended September 30, 2019 and 2018, respectively, related to billable maintenance on owned units that was recognized at a point in time. All other contract operations revenue is recognized over time.

⁽⁴⁾  Included a reversal of $0.7 million of revenue during the three and nine months ended September 30, 2019 related to changes in estimates of performance obligations partially satisfied in prior periods.

⁽⁵⁾ 

All service revenue within aftermarket services is recognized over time. All OTC parts and components sales revenue is recognized at a point in time.

Remaining Performance Obligation

The remaining performance obligations will be recognized through 2024 as follows (in thousands):

	2019		2020		2021		2022		2023		2024		Total
Remaining performance obligations	$	114,677	$	198,753	$	100,244	$	34,878	$	4,090	$	563	$	453,205

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Discontinued Operations (Tables)

9 Months Ended

Sep. 30, 2019

Discontinued Operations and Disposal Groups [Abstract]

Summary of operating results and balance sheet data for discontinued operations

The following table summarizes the balance sheet data for discontinued operations (in thousands):

	September 30, 2019		December 31, 2018
Other current assets	$	—	$	300
Other assets	8,498		7,063
Total assets associated with discontinued operations	$	8,498	$	7,363
Accrued liabilities	$	—	$	297
Deferred income taxes	8,498		7,063
Total liabilities associated with discontinued operations	$	8,498	$	7,360

The following table summarizes the statements of operations data for discontinued operations (in thousands):

	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
Other income, net	$	(31	)	$	(1,463	)
Provision for income taxes	31			1,736
Loss from discontinued operations, net of tax	$	—		$	(273	)

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Derivatives

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

11. Derivatives

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

At September 30, 2019, the following interest rate swaps, entered into to offset changes in expected cash flows due to fluctuations in the associated variable interest rates, were outstanding (in millions):

Expiration Date	Notional Value
May 2020	$	100
March 2022	300
	$	400

The counterparties to our derivative agreements are major financial institutions. We monitor the credit quality of these financial institutions and do not expect non-performance by any counterparty, although such non-performance could have a material adverse effect on us. We have no collateral posted for the derivative instruments.

We have designated these interest rate swaps as cash flow hedging instruments. Changes in the fair value of the interest rate swaps are recognized as a component of other comprehensive income (loss) until the hedged transaction affects earnings. At that time, amounts are reclassified into earnings to interest expense, the same statement of operations line item to which the earnings effect of the hedged item is recorded. Cash flows from derivatives designated as hedges are classified in our 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 this case, the cash settlements for these derivatives are classified as cash flows from financing activities.

We expect the hedging relationship to be highly effective as the swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate. We perform quarterly qualitative prospective and retrospective hedge effectiveness assessments unless facts and circumstances related to the hedging relationships change such that we can no longer assert qualitatively that the cash flow hedge relationships were and continue to be highly effective. We estimate that $0.4 million of the deferred pre-tax loss attributable to interest rate swaps included in accumulated other comprehensive income (loss) at September 30, 2019 will be reclassified into earnings as interest expense at then-current values during the next 12 months as the underlying hedged transactions occur.

As of September 30, 2019, the weighted average effective fixed interest rate on our interest rate swaps was 1.8%.

The following table presents the effect of our derivative instruments designated as cash flow hedging instruments on our condensed consolidated balance sheets (in thousands):

	September 30, 2019			December 31, 2018
Other current assets	$	73		$	3,185
Other assets	—			4,122
Total derivative assets	$	73		$	7,307
Accrued liabilities	$	(456	)	$	—
Other liabilities	(2,270		)	—
Total derivative liabilities	$	(2,726	)	$	—

The following tables present the effect of our derivative instruments designated as cash flow hedging instruments on our condensed consolidated statements of operations (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Pre-tax gain (loss) recognized in other comprehensive income (loss)	$	(933	)	$	1,642	$	(7,761	)	$	8,583
Pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense	482			429		2,199			(83		)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Total amount of interest expense in which the effects of cash flow hedges are recorded	$	27,401	$	23,518	$	76,972	$	69,402
Amount of gain reclassified from accumulated other comprehensive income (loss) into interest expense	482		429		2,199		582

See Note 12 (“Fair Value Measurements”) and Note 19 (“Accumulated Other Comprehensive Income (Loss)”) for further details on our derivative instruments.

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Business Transactions

9 Months Ended

Sep. 30, 2019

Business Combinations [Abstract]

Business Transactions

3. Business Transactions

Elite Acquisition

On August 1, 2019, we completed the Elite Acquisition whereby we acquired from Elite Compression substantially all of its assets, including a fleet of predominantly large compressor units comprising approximately 430,000 horsepower, vehicles, real property and inventory, and certain liabilities for aggregate consideration consisting of $209.2 million in cash and 21,656,683 shares of common stock with an acquisition date fair value of $225.9 million. The cash portion of the acquisition was funded with borrowings on the Credit Facility. The purchase price paid is subject to customary post-closing adjustments in accordance with the terms of the acquisition's asset purchase agreement.

The Elite Acquisition was accounted for using the acquisition method which requires, among other things, assets acquired and liabilities assumed to be recorded at their fair value on the acquisition date. The excess of the consideration transferred over those fair values is recorded as goodwill. The preliminary allocation of the purchase price, which is subject to certain adjustments, was based upon preliminary valuations and our estimates and assumptions are subject to change upon the completion of management’s review of the final valuations. We are in the process of finalizing valuations related to property, plant and equipment, identifiable intangible assets and goodwill. Post-closing adjustments to the purchase price could impact future depreciation and amortization expense as well as income tax expense. The final valuation of net assets acquired is expected to be completed as soon as possible, but no later than one year from the acquisition date.

The following table summarizes the preliminary purchase price allocation based on the estimated fair values of the acquired assets and liabilities as of the acquisition date (in millions):

Accounts receivable	$	9.0
Inventory	7.7
Other current assets	0.8
Property, plant and equipment	286.3
Operating lease ROU assets	0.7
Intangible assets	29.1
Goodwill	106.9
Accounts payable, trade	(2.1		)
Accrued liabilities	(3.0		)
Operating lease liabilities	(0.3		)
Purchase price	$	435.1

The preliminary amount of property, plant and equipment is primarily comprised of compression equipment that will be depreciated on a straight-line basis over an estimated average remaining useful life of 15 years.

The intangible assets consist of customer relationships that have an estimated useful life of 15 years. The preliminary amount of intangible assets and their associated useful life were determined based on the period over which the assets are expected to contribute directly or indirectly to our future cash flows.

The preliminary amount of goodwill resulting from the acquisition is attributable to the expansion of our services in various regions in which we currently operate and was allocated to our contract operations segment. The goodwill recorded is considered to have an indefinite life and will be reviewed annually for impairment or more frequently if indicators of potential impairment exist. All of the goodwill recorded for this acquisition is expected to be deductible for U.S. federal income tax purposes.

The results of operations attributable to the assets and liabilities acquired in the Elite Acquisition have been included in our condensed consolidated financial statements as part of our contract operations segment since the date of acquisition. Revenue attributable to the assets acquired from the date of acquisition, August 1, 2019, through September 30, 2019 was $13.1 million. We are unable to provide earnings attributable to the assets and liabilities acquired since the date of acquisition as we do not prepare full stand-alone earnings reports for those assets and liabilities.

Unaudited Pro Forma Financial Information

The unaudited pro forma financial information for the three and nine months ended September 30, 2019 and 2018 was derived by adjusting our historical financial statements in order to give effect to the assets and liabilities acquired in the Elite Acquisition. The Elite Acquisition is presented in this unaudited pro forma financial information as though the acquisition occurred as of January 1, 2018, and reflects the following:

• the acquisition of substantially all of Elite Compression’s assets, including a compression fleet of approximately 430,000 horsepower, vehicles, real property and inventory, and certain liabilities;

• borrowings of $209.2 million under the Credit Facility for cash consideration exchanged in the acquisition; and

• the exclusion of $4.8 million and $7.4 million of financial advisory, legal and other professional fees incurred related to the acquisition and recorded to transaction-related costs in our condensed consolidated statements of operations during the three and nine months ended September 30, 2019, respectively.

The unaudited pro forma financial information below is presented for informational purposes only and is not necessarily indicative of our results of operations that would have occurred had the transaction been consummated at the beginning of the period presented, nor is it necessarily indicative of future results.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Revenue	$	251,505	$	251,060	$	763,776	$	728,188
Net income attributable to Archrock stockholders	27,207		11,957		65,152		11,907

Harvest Sale

On August 1, 2019, we completed an asset sale in which Harvest acquired from us approximately 80,000 active and idle compression horsepower, vehicles and parts inventory for cash consideration of $30.0 million. We recorded a $6.6 million gain on the sale of these assets to other income, net in our condensed consolidated statements of operations during the three and nine months ended September 30, 2019. The assets were previously reported under our contract operations segment.

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Property, Plant and Equipment, Net

9 Months Ended

Sep. 30, 2019

Property, Plant and Equipment [Abstract]

Property, Plant and Equipment, Net

7. Property, Plant and Equipment, Net

Property, plant and equipment, net consisted of the following (in thousands):

	September 30, 2019			December 31, 2018
Compression equipment, facilities and other fleet assets	$	3,735,162		$	3,323,465
Land and buildings	49,706			47,067
Transportation and shop equipment	111,381			103,766
Computer hardware and software	93,479			92,174
Other	14,403			11,880
Property, plant and equipment	4,004,131			3,578,352
Accumulated depreciation	(1,423,810		)	(1,407,314		)
Property, plant and equipment, net	$	2,580,321		$	2,171,038

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CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Parentheticals) - $ / shares	3 Months Ended							9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018
Statement of Stockholders' Equity [Abstract]
Dividends declared and paid per common share (in dollars per share)	$ 0.145	$ 0.132	$ 0.132	$ 0.132	$ 0.132	$ 0.120	$ 0.120	$ 0.409	$ 0.372

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Income Taxes

9 Months Ended

Sep. 30, 2019

Income Tax Disclosure [Abstract]

Income Taxes

15. Income Taxes

Effective Tax Rate

The year-to-date effective tax rate for the nine months ended September 30, 2019 differed significantly from our statutory rate primarily due to the reduction of a valuation allowance, which was recorded to offset the tax effect of the increase in book income in the nine months ended September 30, 2019, as well as the release of an unrecognized tax benefit due to the settlement of a tax audit.

Unrecognized Tax Benefits

As of September 30, 2019, we believe it is reasonably possible that $1.9 million of our unrecognized tax benefits, including penalties, interest and discontinued operations, will be reduced prior to September 30, 2020 due to the settlement of audits or the expiration of statutes of limitations or both. However, due to the uncertain and complex application of the tax regulations, it is possible that the ultimate resolution of these matters may result in liabilities which could materially differ from this estimate.

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Statement of Financial Position [Abstract]
Accounts receivable, allowance	$ 1,967	$ 1,452
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized (in shares)	50,000,000	50,000,000
Preferred stock, shares issued (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	250,000,000	250,000,000
Common stock, shares issued (in shares)	158,602,309	135,787,509
Treasury stock, common shares (in shares)	6,702,602	6,381,605

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Accumulated Other Comprehensive Income (Loss)

9 Months Ended

Sep. 30, 2019

Equity [Abstract]

Accumulated Other Comprehensive Income (Loss)

19. Accumulated Other Comprehensive Income (Loss)

Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with owners. Our accumulated other comprehensive income (loss) consists of changes in the fair value of our interest rate swap derivative instruments, net of tax, which are designated as cash flow hedges, amortization of terminated interest rate swaps and adjustments related to changes in our ownership of the Partnership.

The following table presents the changes in accumulated other comprehensive income (loss) of our derivative cash flow hedges, net of tax and excluding noncontrolling interest, during the three and nine months ended September 30, 2019 and 2018 (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Beginning accumulated other comprehensive income (loss)	$	(2,772	)	$	9,374		$	5,773		$	1,197
Gain (loss) recognized in other comprehensive income (loss), net of tax provision of $0, $345, $0 and $1,234, respectively (1)	(933		)	1,298			(7,761		)	3,349
(Gain) loss reclassified from accumulated other comprehensive income (loss) to interest expense, net of tax provision of $0, $90, $0 and $37, respectively (1)(2)	(482		)	(339		)	(2,199		)	117
Merger-related adjustments (3)	—			—			—			5,670
Other comprehensive income (loss) attributable to Archrock stockholders	(1,415		)	959			(9,960		)	9,136
Ending accumulated other comprehensive income (loss)	$	(4,187	)	$	10,333		$	(4,187	)	$	10,333

——————

⁽¹⁾  Included adjustments of $0.3 million and $2.1 million related to an increase in the valuation allowance recorded to offset the tax effect of other comprehensive loss recorded during the three and nine months ended September 30, 2019, respectively.

⁽²⁾  Included stranded tax effects resulting from the Tax Cuts and Jobs Act, which was implemented in December 2017, of $0.3 million reclassified to accumulated deficit during the nine months ended September 30, 2018.

⁽³⁾  Pursuant to the Merger, we reclassified a gain of $5.7 million from noncontrolling interest to accumulated other comprehensive income (loss) related to the fair value of our derivative instruments that was previously attributed to public ownership of the Partnership.

See Note 11 (“Derivatives”) for further details on our interest rate swap derivative instruments.

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Leases - Cash Flow and Non-cash Information (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2019 USD ($)
Leases [Abstract]
Operating cash flows - cash paid for amounts included in the measurement of operating lease liabilities	$ 4,075
Operating lease ROU assets obtained in exchange for new lease liabilities	$ 2,247

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Long-Term Debt - Notes (Details) - USD ($)		9 Months Ended
	Mar. 21, 2019	Sep. 30, 2019	Sep. 30, 2018
Debt Instrument
Borrowings of long-term debt		$ 1,685,250,000	$ 536,830,000
Senior Notes | 2027 Notes
Debt Instrument
Debt instrument face amount	$ 500,000,000.0
Interest rate (as a percent)	6.875%
Borrowings of long-term debt	$ 491,200,000
Debt issuance cost	$ 8,800,000

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Accumulated Other Comprehensive Income (Loss) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Increase (Decrease) in Stockholders' Equity
Beginning balance	$ 832,890	$ 830,725	$ 841,574	$ 735,618
Merger-related adjustments				5,670
Total other comprehensive income (loss)	(1,415)	959	(9,960)	13,141
Ending balance	1,057,018	827,798	1,057,018	827,798
Valuation adjustment	300		2,100
Adjustments related to TCJA				300
Accumulated Other Comprehensive Income (Loss)
Increase (Decrease) in Stockholders' Equity
Beginning balance	(2,772)	9,374	5,773	1,197
Gain (loss) recognized in other comprehensive income (loss), net of tax provision of [OPEN], $345, [OPEN] and $1,234, respectively	(933)	1,298	(7,761)	3,349
(Gain) loss reclassified from accumulated other comprehensive income (loss) to interest expense, net of tax provision of [OPEN], $90, [OPEN] and $37, respectively	(482)	(339)	(2,199)	117
Merger-related adjustments	0	0	0	5,670
Total other comprehensive income (loss)	(1,415)	959	(9,960)	9,136
Ending balance	(4,187)	10,333	(4,187)	10,333
Gain recognized in other comprehensive income, tax	0	345	0	1,234
Loss reclassified from accumulated other comprehensive loss, tax	$ 0	$ 90	$ 0	$ 37

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Segments - Revenue and Gross Margin by Reportable Segment (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Revenue and other financial information by reportable segment
Revenues	$ 244,949	$ 232,372	$ 719,498	$ 671,282
Total gross margin	131,383	113,273	374,559	326,649
Contract Operations
Revenue and other financial information by reportable segment
Total gross margin	122,396	100,453	345,905	294,696
Contract Operations | Contract operations
Revenue and other financial information by reportable segment
Revenues	198,337	169,509	567,102	496,156
Aftermarket Services
Revenue and other financial information by reportable segment
Total gross margin	8,987	12,820	28,654	31,953
Aftermarket Services | Aftermarket services
Revenue and other financial information by reportable segment
Revenues	$ 46,612	$ 62,863	$ 152,396	$ 175,126

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Revenue from Contract with Customers - Contract Balances (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Disaggregation of Revenue
Accounts receivable, trade	$ 157,342		$ 147,985
Contract liability with customer	11,000		17,100
Deferred revenue recognized in earnings	33,538	$ 17,420
Contract with Customers
Disaggregation of Revenue
Accounts receivable, trade	$ 151,300		$ 142,100

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Organization (Details)	9 Months Ended
	Sep. 30, 2019 segment
Accounting Policies [Abstract]
Number of reportable segments	2

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Equity (Tables)

9 Months Ended

Sep. 30, 2019

Equity [Abstract]

Effects of changes in ownership interest

The following table presents the effects of changes in our ownership interest in the Partnership on the equity attributable to Archrock stockholders:

	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Net income attributable to Archrock stockholders	$	9,974	$	8,095
Increase in Archrock stockholders’ additional paid-in capital for change in ownership of Partnership common units	1,936		54,751
Change from net income attributable to Archrock stockholders and transfers from noncontrolling interest	$	11,910	$	62,846

Summary of entity's dividends per common share

The following table summarizes our dividends declared and paid in each of the quarterly periods of 2019 and 2018:

	Dividends per Common Share		Total Dividends (in thousands)
2018
Q1	$	0.120	$	8,532
Q2	0.120		15,486
Q3	0.132		17,114
Q4	0.132		17,156
2019
Q1	$	0.132	$	17,231
Q2	0.132		17,206
Q3	0.145		22,062

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CONDENSED CONSOLIDATED STATEMENTS OF EQUITY - USD ($) $ in Thousands	Total	Common Stock	Additional Paid-in Capital	Accumulated Other Comprehensive Income (Loss)	Treasury Stock	Accumulated Deficit	Noncontrolling Interest
Beginning balance at Dec. 31, 2017	$ 735,618	$ 769	$ 3,093,058	$ 1,197	$ (76,732)	$ (2,241,243)	$ (41,431)
Beginning, shares at Dec. 31, 2017		76,880,862			(5,930,380)
Increase (Decrease) in Stockholders' Equity
Treasury stock purchased	(1,728)				$ (1,728)
Treasury stock purchased, shares					(164,310)
Cash dividends	(41,132)					(41,132)
Shares issued in employee stock purchase plan	616	$ 1	615
Shares issued in employee stock purchase plan, shares		67,932
Stock-based compensation, net of forfeitures	5,318	$ 10	5,372				(64)
Stock-based compensation, net of forfeitures, shares		960,028			(141,121)
Stock options exercised	262		262
Stock options exercised, shares		29,855
Merger-related adjustments	96,228	$ 576	54,751				40,901
Merger-related adjustments, shares		57,634,005
Cash distribution to noncontrolling unitholders of the Partnership	(11,766)						(11,766)
Comprehensive income
Net income	16,192					8,095	8,097
Interest rate swap gain (loss), net of reclassifications to earnings	7,241			2,978			4,263
Amortization of terminated interest rate swaps	230			230
Merger-related adjustments	5,670			5,670
Impact of adoption of ASU 2018-02				258		(258)
Ending balance at Sep. 30, 2018	827,798	$ 1,356	3,154,058	10,333	$ (78,460)	(2,259,489)	0
Ending, shares at Sep. 30, 2018		135,572,682			(6,235,811)
Beginning balance at Jun. 30, 2018	830,725	$ 1,355	3,150,118	9,374	$ (77,773)	(2,252,349)
Beginning, shares at Jun. 30, 2018		135,478,039			(6,072,751)
Increase (Decrease) in Stockholders' Equity
Treasury stock purchased	(687)				$ (687)
Treasury stock purchased, shares					(54,844)
Cash dividends	(17,114)					(17,114)
Shares issued in employee stock purchase plan	200		200
Shares issued in employee stock purchase plan, shares		17,886
Stock-based compensation, net of forfeitures	1,804	$ 1	1,804
Stock-based compensation, net of forfeitures, shares		76,757			(108,216)
Merger-related adjustments	1,936		1,936
Comprehensive income
Net income	9,974					9,974
Interest rate swap gain (loss), net of reclassifications to earnings	959			959
Amortization of terminated interest rate swaps	0
Merger-related adjustments				0
Ending balance at Sep. 30, 2018	827,798	$ 1,356	3,154,058	10,333	$ (78,460)	(2,259,489)	0
Ending, shares at Sep. 30, 2018		135,572,682			(6,235,811)
Beginning balance at Dec. 31, 2018	841,574	$ 1,358	3,177,982	5,773	$ (79,862)	(2,263,677)	0
Beginning, shares at Dec. 31, 2018		135,787,509			(6,381,605)
Increase (Decrease) in Stockholders' Equity
Treasury stock purchased	(2,007)				$ (2,007)
Treasury stock purchased, shares					(212,080)
Cash dividends	(56,499)					(56,499)
Shares issued in employee stock purchase plan	599		599
Shares issued in employee stock purchase plan, shares		69,089
Stock-based compensation, net of forfeitures	6,145	$ 11	6,134
Stock-based compensation, net of forfeitures, shares		1,089,028			(108,917)
Shares issued for Elite acquisition	225,880	$ 217	225,663
Shares issued for Elite acquisition, shares		21,656,683
Comprehensive income
Net income	51,286					51,286
Interest rate swap gain (loss), net of reclassifications to earnings	(9,960)			(9,960)
Amortization of terminated interest rate swaps	0
Merger-related adjustments				0
Ending balance at Sep. 30, 2019	1,057,018	$ 1,586	3,410,378	(4,187)	$ (81,869)	(2,268,890)	0
Ending, shares at Sep. 30, 2019		158,602,309			(6,702,602)
Beginning balance at Jun. 30, 2019	832,890	$ 1,369	3,182,247	(2,772)	$ (80,719)	(2,267,235)
Beginning, shares at Jun. 30, 2019		136,899,297			(6,577,558)
Increase (Decrease) in Stockholders' Equity
Treasury stock purchased	(1,150)				$ (1,150)
Treasury stock purchased, shares					(125,044)
Cash dividends	(22,062)					(22,062)
Shares issued in employee stock purchase plan	192		192
Shares issued in employee stock purchase plan, shares		20,288
Stock-based compensation, net of forfeitures	2,276		2,276
Stock-based compensation, net of forfeitures, shares		26,041
Shares issued for Elite acquisition		$ 217	225,663
Shares issued for Elite acquisition, shares		21,656,683
Comprehensive income
Net income	20,407					20,407
Interest rate swap gain (loss), net of reclassifications to earnings	(1,415)			(1,415)
Amortization of terminated interest rate swaps	0
Merger-related adjustments				0
Ending balance at Sep. 30, 2019	$ 1,057,018	$ 1,586	$ 3,410,378	$ (4,187)	$ (81,869)	$ (2,268,890)	$ 0
Ending, shares at Sep. 30, 2019		158,602,309			(6,702,602)

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Hosting Arrangements

9 Months Ended

Sep. 30, 2019

Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]

Hosting Arrangements

14. Hosting Arrangements

In the fourth quarter of 2018 we began a process and technology transformation project that will, among other things, upgrade our existing ERP system, improve our supply chain and inventory management and expand the remote monitoring capabilities of our compression fleet. Included in this project are hosting arrangements that are service contracts related to the cloud migration of our ERP system and cloud services for our new mobile workforce telematics tool.

Certain costs incurred for the implementation of our hosting arrangements that are service contracts are being capitalized and will be amortized on a straight-line basis over the term of the respective contract. As of September 30, 2019 and December 31, 2018, we had $3.1 million and $0.4 million, respectively, of implementation costs related to our hosting arrangements that are service contracts capitalized to other assets in our condensed consolidated balance sheets. Amortization of the capitalized implementation costs will be recorded to SG&A in our condensed consolidated statements of operations and is expected to begin in future periods as the individual components become ready for their intended use.

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CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Current assets:
Cash and cash equivalents	$ 3,426	$ 5,610
Accounts receivable, trade, net of allowance of $1,967 and $1,452, respectively	157,342	147,985
Inventory	78,306	76,333
Tax refund receivable	0	15,262
Other current assets	14,068	10,706
Current assets associated with discontinued operations	0	300
Total current assets	253,142	256,196
Property, plant and equipment, net	2,580,321	2,171,038
Operating lease ROU assets	18,681
Intangible assets, net	70,379	52,370
Contract costs, net	43,161	39,020
Goodwill	106,928	0
Other assets	19,694	26,828
Noncurrent assets associated with discontinued operations	8,498	7,063
Total assets	3,100,804	2,552,515
Current liabilities:
Accounts payable, trade	62,510	54,939
Accrued liabilities	94,938	78,997
Deferred revenue	10,120	16,509
Current liabilities associated with discontinued operations	0	297
Total current liabilities	167,568	150,742
Long-term debt	1,825,475	1,529,501
Operating lease liabilities	16,854
Deferred income taxes	4,321	2,842
Other liabilities	21,070	20,793
Noncurrent liabilities associated with discontinued operations	8,498	7,063
Total liabilities	2,043,786	1,710,941
Commitments and contingencies (Note 20)
Equity:
Preferred stock: $0.01 par value per share, 50,000,000 shares authorized, zero issued	0	0
Common stock: $0.01 par value per share, 250,000,000 shares authorized, 158,602,309 and 135,787,509 shares issued, respectively	1,586	1,358
Additional paid-in capital	3,410,378	3,177,982
Accumulated other comprehensive income (loss)	(4,187)	5,773
Accumulated deficit	(2,268,890)	(2,263,677)
Treasury stock: 6,702,602 and 6,381,605 common shares, at cost, respectively	(81,869)	(79,862)
Total equity	1,057,018	841,574
Total liabilities and equity	$ 3,100,804	$ 2,552,515

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Stock-Based Compensation

9 Months Ended

Sep. 30, 2019

Share-based Payment Arrangement [Abstract]

Stock-Based Compensation

18. Stock-Based Compensation

We have granted restricted stock, restricted stock units and performance-based restricted stock units to employees and non-employee directors under the Archrock, Inc. 2013 Stock Incentive Plan.

The following table presents restricted stock, restricted stock unit, performance-based restricted stock unit and cash-settled performance unit activity during the nine months ended September 30, 2019 (shares in thousands):

	Shares		Weighted Average Grant Date Fair Value Per Share
Non-vested awards, January 1, 2019	1,728		$	9.68
Granted	1,389		10.01
Vested	(933	)	8.83
Canceled	(153	)	10.33
Non-vested awards, September 30, 2019 (1)(2)	2,031		10.24

——————

⁽¹⁾  Non-vested awards as of September 30, 2019 are comprised of 376,000 cash-settled restricted stock units and cash-settled performance units and 1,655,000 restricted stock and stock-settled performance units.

⁽²⁾  During the nine months ended September 30, 2019, the settlement terms of 99,631 performance units, with grant dates in 2018 and 2019, were modified from settlement in stock to cash. The change in award settlement from stock to cash was the only modification to these awards; the vesting, forfeiture and all other terms and conditions were unchanged. The modification resulted in a $0.2 million reclassification from additional paid-in capital to other current liabilities in our condensed consolidated balance sheets and had an immaterial impact on our condensed consolidated statements of operations.

As of September 30, 2019, we expect $15.7 million of unrecognized compensation cost related to unvested restricted stock, stock-settled restricted stock units, performance units, cash-settled restricted stock units and cash-settled performance units to be recognized over the weighted-average period of 2.0 years.

Total stock-based compensation expense consisted of the following (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Equity awards	$	2,276	$	1,804	$	6,145	$	5,567
Liability awards	274		334		1,880		1,301
Total stock-based compensation expense	$	2,550	$	2,138	$	8,025	$	6,868

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Long-Term Debt - Debt Ratios (Details) - Revolving Credit Facility	6 Months Ended	9 Months Ended	12 Months Ended	21 Months Ended
	Jun. 30, 2020	Sep. 30, 2019	Dec. 31, 2019	Mar. 30, 2022
Line of Credit Facility
EBITDA to Interest Expense		2.5
Senior Secured Debt to EBITDA		3.5
Forecasted
Line of Credit Facility
Total Debt to EBITDA ratio	5.50		5.75	5.25
Archrock Partners, L.P | Forecasted | Conditional Event
Line of Credit Facility
Total Debt to EBITDA ratio				5.5

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Stock-Based Compensation - Allocated Compensation (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost
Total stock-based compensation expense	$ 2,550	$ 2,138	$ 8,025	$ 6,868
Equity awards
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost
Total stock-based compensation expense	2,276	1,804	6,145	5,567
Liability awards
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost
Total stock-based compensation expense	$ 274	$ 334	$ 1,880	$ 1,301

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Segments (Narratives) (Details)	9 Months Ended
	Sep. 30, 2019 segment
Segment Reporting [Abstract]
Number of reportable segments	2

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Revenue from Contract with Customers - Remaining Performance Obligation (Details) $ in Thousands	Sep. 30, 2019 USD ($)
Revenue from Contract with Customer [Abstract]
Remaining performance obligations	$ 453,205
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2019-10-01
Revenue from Contract with Customer [Abstract]
Remaining performance obligations	$ 114,677
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Performance obligations expected to be satisfied, expected timing	3 months
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2020-01-01
Revenue from Contract with Customer [Abstract]
Remaining performance obligations	$ 198,753
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Performance obligations expected to be satisfied, expected timing	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2021-01-01
Revenue from Contract with Customer [Abstract]
Remaining performance obligations	$ 100,244
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Performance obligations expected to be satisfied, expected timing	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2022-01-01
Revenue from Contract with Customer [Abstract]
Remaining performance obligations	$ 34,878
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Performance obligations expected to be satisfied, expected timing	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2023-01-01
Revenue from Contract with Customer [Abstract]
Remaining performance obligations	$ 4,090
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Performance obligations expected to be satisfied, expected timing	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2024-01-01
Revenue from Contract with Customer [Abstract]
Remaining performance obligations	$ 563
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Performance obligations expected to be satisfied, expected timing	1 year

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Leases - Components of Lease Costs (Details) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2019
Leases [Abstract]
Operating lease cost	$ 983	$ 2,927
Short-term lease cost	64	302
Variable lease cost	322	1,264
Total lease cost	$ 1,369	$ 4,493

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Recent Accounting Developments (Narratives) (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jan. 01, 2019	Dec. 31, 2018
New Accounting Pronouncements or Change in Accounting Principle\
ROU assets	$ 18,681
Lease liability	$ 19,873
Prepaid rent			$ 1,400
ASU 2016-02
New Accounting Pronouncements or Change in Accounting Principle\
ROU assets		$ 18,600
Lease liability		$ 20,000

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Stock-Based Compensation (Tables)

9 Months Ended

Sep. 30, 2019

Share-based Payment Arrangement [Abstract]

Schedule of Restricted Stock, Restricted Stock Unit, Performance Unit, Cash Settled Restricted Stock Unit and Cash Settled Performance Unit Activity

The following table presents restricted stock, restricted stock unit, performance-based restricted stock unit and cash-settled performance unit activity during the nine months ended September 30, 2019 (shares in thousands):

	Shares		Weighted Average Grant Date Fair Value Per Share
Non-vested awards, January 1, 2019	1,728		$	9.68
Granted	1,389		10.01
Vested	(933	)	8.83
Canceled	(153	)	10.33
Non-vested awards, September 30, 2019 (1)(2)	2,031		10.24

——————

⁽¹⁾  Non-vested awards as of September 30, 2019 are comprised of 376,000 cash-settled restricted stock units and cash-settled performance units and 1,655,000 restricted stock and stock-settled performance units.

⁽²⁾ 

During the nine months ended September 30, 2019, the settlement terms of 99,631 performance units, with grant dates in 2018 and 2019, were modified from settlement in stock to cash. The change in award settlement from stock to cash was the only modification to these awards; the vesting, forfeiture and all other terms and conditions were unchanged. The modification resulted in a $0.2 million reclassification from additional paid-in capital to other current liabilities in our condensed consolidated balance sheets and had an immaterial impact on our condensed consolidated statements of operations.

Schedule of Allocation of Total Stock-based Compensation

Total stock-based compensation expense consisted of the following (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Equity awards	$	2,276	$	1,804	$	6,145	$	5,567
Liability awards	274		334		1,880		1,301
Total stock-based compensation expense	$	2,550	$	2,138	$	8,025	$	6,868

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Stock-Based Compensation - Restricted Stock, Restricted Stock Units, and Performance Units Activity (Narratives) (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Stock-Based Compensation
Additional paid-in capital	$ 3,410,378	$ 3,177,982
Reclassification
Stock-Based Compensation
Additional paid-in capital	(200)
Other current liabilities	$ 200
Performance Units
Stock-Based Compensation
Converted (in shares)	99,631
Cash Settled Restricted Stock Units and Cash Settled Performance Units
Stock-Based Compensation
Non-vested awards at the end of the period (in shares)	376,000
Restricted Stock Shares, Restricted Stock Units and Performance Units
Stock-Based Compensation
Non-vested awards at the end of the period (in shares)	1,655,000
Restricted Stock, Restricted Stock Units, Performance Units, Cash Settled Restricted Stock Units and Cash Settled Performance Units
Stock-Based Compensation
Non-vested awards at the end of the period (in shares)	2,031,000	1,728,000
Unrecognized compensation
Expected unrecognized compensation cost related to unvested awards (in dollars)	$ 15,700
Weighted-average period over which the expected unrecognized compensation cost related to unvested stock options will be recognized	2 years

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Fair Value Measurements - Fair Value of Debt (Details) - Fixed Rate Debt - Level 2 - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Carrying Amount
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Long-term debt, fair value	$ 836,975	$ 690,001
Fair Value
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Long-term debt, fair value	$ 887,000	$ 674,000

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Derivatives - Effect of Derivative Instruments on Income Statement (Details) - Interest Rate Swaps - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Effect of derivative instruments on results of operations
Pre-tax gain (loss) recognized in other comprehensive income (loss)	$ (933)	$ 1,642	$ (7,761)	$ 8,583
Interest Expense
Effect of derivative instruments on results of operations
Pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense	$ 482	$ 429	$ 2,199	$ (83)

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Equity (Narratives) (Details) - USD ($) $ / shares in Units, $ in Millions	Oct. 23, 2019	Aug. 01, 2019	Mar. 31, 2018
Class of Stock
Ownership percentage held by reporting entity (percent)			57.00%
Subsequent Event
Distributions
Dividend declared per common stock (in dollars per share)	$ 0.145
Archrock | Archrock, Inc.
Class of Stock
Ownership interest (percent)			43.00%
Elite Acquisition | Common Stock
Class of Stock
Shares issued as compensation for asset acquisition (shares)		21,656,683
Issuance of Archrock common stock pursuant to Elite Acquisition, net of tax		$ 225.9

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Hosting Arrangements - (Narratives) (Details) - USD ($) $ in Millions	Sep. 30, 2019	Dec. 31, 2018
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]
Capitalized implementation costs	$ 3.1	$ 0.4

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Leases - Maturity Schedule (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Operating Lease Liabilities, Payments Due
2019	$ 676
2020	4,012
2021	3,715
2022	2,615
2023	2,310
2024	1,919
Thereafter	9,611
Total lease payments	24,858
Less: Interest	(4,985)
Total lease liabilities under ASC 842 Leases	$ 19,873
Operating Leases, Future Minimum Payments Due, Fiscal Year Maturity
2019		$ 4,317
2020		3,980
2021		3,562
2022		2,433
2023		2,170
Thereafter		11,935
Total lease liabilities under ASC 840 Leases		$ 28,397

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Discontinued Operations (Narratives) (Details) - Exterran Corporation - Spinoff - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Discontinued Operations
Deferred income taxes	$ 8,498	$ 7,063
Indemnification asset	$ 8,498	$ 7,063

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Property, Plant and Equipment, Net (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Property, Plant and Equipment
Property, plant and equipment, gross	$ 4,004,131	$ 3,578,352
Accumulated depreciation	(1,423,810)	(1,407,314)
Property, plant and equipment, net	2,580,321	2,171,038
Compression equipment, facilities and other fleet assets
Property, Plant and Equipment
Property, plant and equipment, gross	3,735,162	3,323,465
Land and buildings
Property, Plant and Equipment
Property, plant and equipment, gross	49,706	47,067
Transportation and shop equipment
Property, Plant and Equipment
Property, plant and equipment, gross	111,381	103,766
Computer hardware and software
Property, Plant and Equipment
Property, plant and equipment, gross	93,479	92,174
Other
Property, Plant and Equipment
Property, plant and equipment, gross	$ 14,403	$ 11,880

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Leases (Tables)

9 Months Ended

Sep. 30, 2019

Leases [Abstract]

Leases Balance Sheet Location

Balance sheet information related to our operating leases was as follows (in thousands):

	Classification	September 30, 2019
ROU assets	Operating lease ROU assets	$	18,681
Lease liabilities
Current	Accrued liabilities	$	3,019
Noncurrent	Operating lease liabilities	16,854
Total lease liabilities		$	19,873

Components of Lease Costs

The components of lease cost were as follows (in thousands):

	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost	$	983	$	2,927
Short-term lease cost	64		302
Variable lease cost	322		1,264
Total lease cost	$	1,369	$	4,493

Cash flow and noncash information related to our operating leases were as follows (in thousands):

	Nine Months Ended September 30, 2019
Operating cash flows - cash paid for amounts included in the measurement of operating lease liabilities	$	4,075
Operating lease ROU assets obtained in exchange for new lease liabilities	2,247

Other supplemental information related to our operating leases was as follows:

	September 30, 2019
Weighted average remaining lease term (in years)	8.3
Weighted average discount rate	5.3	%

Operating Lease Maturity Schedule

Remaining maturities of lease liabilities governed under ASC 842 Leases as of September 30, 2019 were as follows (in thousands):

2019	$	676
2020	4,012
2021	3,715
2022	2,615
2023	2,310
2024	1,919
Thereafter	9,611
Total lease payments	24,858
Less: Interest	(4,985		)
Total lease liabilities under ASC 842 Leases	$	19,873

Maturities of Lease Liability Under ASC 840

Maturities of lease liabilities governed under ASC 840 Leases as of December 31, 2018 were as follows (in thousands):

2019	$	4,317
2020	3,980
2021	3,562
2022	2,433
2023	2,170
Thereafter	11,935
Total lease liabilities under ASC 840 Leases	$	28,397

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Inventory (Tables)

9 Months Ended

Sep. 30, 2019

Inventory Disclosure [Abstract]

Schedule of inventory, net of reserves

Inventory consisted of the following (in thousands):

	September 30, 2019		December 31, 2018
Parts and supplies	$	67,262	$	65,645
Work in progress	11,044		10,688
Inventory	$	78,306	$	76,333

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Recent Accounting Developments

9 Months Ended

Sep. 30, 2019

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

Recent Accounting Developments

2. Recent Accounting Developments

Accounting Standards Updates Implemented

Leases

ASC 842 Leases establishes a ROU model that requires a lessee to record a ROU asset and a lease liability on the balance sheet. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Under the new guidance, lessor accounting is largely unchanged. We adopted ASC 842 Leases on January 1, 2019 using the modified retrospective transition method and elected the practical expedient package to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) lease classification of any expired or existing leases and (iii) initial direct costs for any existing leases. We did not elect the practical expedient to use hindsight in determining the lease term. Adoption of ASC 842 Leases resulted in recognition of an operating lease ROU asset of $18.6 million and an operating lease liability of $20.0 million in our condensed consolidated balance sheet at January 1, 2019. The difference of $1.4 million related to accrued rent and prepaid lease payments recorded to our consolidated balance sheet as of December 31, 2018. We did not recognize any finance lease ROU assets or liabilities upon adoption of ASC 842 Leases. There was no impact to our condensed consolidated statements of operations, equity or cash flows upon adoption. Comparative information has not been recast and continues to be reported under the accounting standards in effect for those periods.

ASC 842 Leases also provides a practical expedient, elected by class of underlying asset, to not separate lease and nonlease components and instead account for those components as a single component if certain conditions are met. ASC 842 Leases also provides clarification for lessors on whether ASC 842 Leases or ASC 606 Revenue is applicable to the combined component based on determination of the predominant component. We have concluded that for our contract operations services agreements, in which we are a lessor, the services nonlease component is predominant over the compression unit lease component and therefore ongoing recognition of these agreements will continue to follow the ASC 606 Revenue guidance. We have also elected, as a lessee, to not separate lease and nonlease components as it relates to our facility leases.

In addition, we have made an accounting policy election, as permitted by ASC 842 Leases, to not apply the recognition requirements of ASC 842 Leases to leases with an initial term of 12 months or less.

Goodwill

On October 1, 2019, we prospectively adopted ASU 2017-04 which simplifies the test for goodwill impairment by eliminating Step 2 in the test for goodwill impairment, which required an entity to calculate the implied fair value of goodwill. Under this amendment, an entity should perform its goodwill impairment test on at least an annual basis by comparing the fair value of a reporting unit, including any income tax effects from any tax deductible goodwill, with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

Accounting Standards Updates Not Yet Implemented

In August 2018, the FASB issued ASU 2018-13 which amends the required fair value measurements disclosures related to valuation techniques and inputs used, uncertainty in measurement and changes in measurements applied. These amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty are to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments are to be applied retrospectively to all periods presented upon their effective date. We are currently evaluating the impact of ASU 2018-13 on our consolidated financial statements and footnote disclosures.

In June 2016, the FASB issued ASU 2016-13 which changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in earlier recognition of allowance for losses. For public entities that meet the definition of an SEC filer, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. Entities will apply ASU 2016-13 provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently evaluating the impact of ASU 2016-13 on our consolidated financial statements and footnote disclosures.

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Inventory

9 Months Ended

Sep. 30, 2019

Inventory Disclosure [Abstract]

Inventory

6. Inventory

Inventory consisted of the following (in thousands):

	September 30, 2019		December 31, 2018
Parts and supplies	$	67,262	$	65,645
Work in progress	11,044		10,688
Inventory	$	78,306	$	76,333

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Leases

9 Months Ended

Sep. 30, 2019

Leases [Abstract]

Leases

10. Leases

Operating Leases

We determine if an arrangement is a lease at inception. We determine lease classification and recognize ROU assets and liabilities on the lease commencement date based on the present value of lease payments over the lease term. As the discount rate implicit in the lease is rarely readily determinable, we estimate our incremental borrowing rate using information available at commencement date in determining the present value of the lease payments. The lease term includes options to extend when we are reasonably certain to exercise the option. Short-term leases, those with an initial term of 12 months or less, are not recorded on the balance sheet. Variable costs such as our proportionate share of actual costs for utilities, common area maintenance, property taxes and insurance are not included in the lease liability and are recognized in the period in which they are incurred. Operating lease expense for lease payments is recognized on a straight-line basis over the term of the lease.

The facility leases discussed below, of which we are the lessee, contain lease and nonlease components for which we have elected the practical expedient to account for as a single lease component, as the nonlease components are not significant to the total consideration in the contract and separating the nonlease component would have no effect on lease classification. As it relates to our contract operations services agreements in which we are the lessor, the services nonlease component is predominant over the compression unit lease component and therefore recognition of these agreements will continue to follow the ASC 606 Revenue guidance.

We have operating leases and subleases for office space, temporary housing, storage and shops. Our leases have remaining lease terms of less than one year to 11 years and most include options to extend the lease term, at our discretion, for an additional three to five years. We are not, however, reasonably certain that we will exercise any of the options to extend and as such, they have not been included in the remaining lease terms.

Balance sheet information related to our operating leases was as follows (in thousands):

	Classification	September 30, 2019
ROU assets	Operating lease ROU assets	$	18,681
Lease liabilities
Current	Accrued liabilities	$	3,019
Noncurrent	Operating lease liabilities	16,854
Total lease liabilities		$	19,873

The components of lease cost were as follows (in thousands):

	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost	$	983	$	2,927
Short-term lease cost	64		302
Variable lease cost	322		1,264
Total lease cost	$	1,369	$	4,493

Cash flow and noncash information related to our operating leases were as follows (in thousands):

	Nine Months Ended September 30, 2019
Operating cash flows - cash paid for amounts included in the measurement of operating lease liabilities	$	4,075
Operating lease ROU assets obtained in exchange for new lease liabilities	2,247

Other supplemental information related to our operating leases was as follows:

	September 30, 2019
Weighted average remaining lease term (in years)	8.3
Weighted average discount rate	5.3	%

Remaining maturities of lease liabilities governed under ASC 842 Leases as of September 30, 2019 were as follows (in thousands):

2019	$	676
2020	4,012
2021	3,715
2022	2,615
2023	2,310
2024	1,919
Thereafter	9,611
Total lease payments	24,858
Less: Interest	(4,985		)
Total lease liabilities under ASC 842 Leases	$	19,873

Maturities of lease liabilities governed under ASC 840 Leases as of December 31, 2018 were as follows (in thousands):

2019	$	4,317
2020	3,980
2021	3,562
2022	2,433
2023	2,170
Thereafter	11,935
Total lease liabilities under ASC 840 Leases	$	28,397