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, 2022

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 26, 2022: 155,611,630 shares.

TABLE OF CONTENTS

	Page
Forward-Looking Statements	3
Part I. Financial Information
Item 1. Financial Statements	4
Unaudited Condensed Consolidated Balance Sheets	4
Unaudited Condensed Consolidated Statements of Operations	5
Unaudited Condensed Consolidated Statements of Comprehensive Income	6
Unaudited Condensed Consolidated Statements of Equity	7
Unaudited Condensed Consolidated Statements of Cash Flows	9
Notes to Unaudited Condensed Consolidated Financial Statements	10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3. Quantitative and Qualitative Disclosures About Market Risk	32
Item 4. Controls and Procedures	32
Part II. Other Information
Item 1. Legal Proceedings	33
Item 1A. Risk Factors	33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3. Defaults Upon Senior Securities	33
Item 4. Mine Safety Disclosures	33
Item 5. Other Information	33
Item 6. Exhibits	34
Signatures	35

2

FORWARD–LOOKING STATEMENTS

This Quarterly Report on Form 10–Q (this “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 Form 10–Q are forward–looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including, without limitation, our business growth strategy and projected costs; future financial position; the sufficiency of available cash flows to fund continuing operations and pay dividends; the expected amount of our capital expenditures; anticipated cost savings; future revenue, gross margin and other financial or operational measures related to our business; the future value of our equipment; and plans and objectives of our management for our future operations. You can identify many of these statements by words such as “believe,” “expect,” “intend,” “project,” “anticipate,” “estimate,” “will continue” or similar words or the negative thereof.

Such forward–looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this 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 Annual Report on Form 10–K for the year ended December 31, 2021 (the “Form 10–K) and those set forth from time to time in our filings with the United States Securities and Exchange Commission (the “SEC”), which are available through our website at www.archrock.com and through the SEC’s website at www.sec.gov.

All forward–looking statements included in this Form 10–Q are based on information available to us on the date of this 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 Form 10–Q.

3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Archrock, Inc.

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except par value and share amounts)

	September 30, 2022		December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	2,042	$	1,569
Accounts receivable, net of allowance of $1,487 and $2,152, respectively		127,334		104,931
Inventory		84,091		72,869
Other current assets		6,817		7,201
Total current assets		220,284		186,570
Property, plant and equipment, net		2,214,666		2,226,526
Operating lease right-of-use assets		16,089		17,491
Intangible assets, net		39,019		47,887
Contract costs, net		32,598		25,418
Deferred tax assets		37,001		47,879
Other assets		37,051		28,384
Assets of discontinued operations		8,893		9,811
Total assets	$	2,605,601	$	2,589,966
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	89,602	$	38,920
Accrued liabilities		97,021		82,517
Deferred revenue		7,707		3,817
Total current liabilities		194,330		125,254
Long-term debt		1,498,895		1,530,825
Operating lease liabilities		14,286		15,940
Deferred tax liabilities		1,076		1,136
Other liabilities		19,330		17,505
Liabilities of discontinued operations		7,868		7,868
Total liabilities		1,735,785		1,698,528
Commitments and contingencies (Note 8)
Stockholders' 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, 163,412,780 and 161,482,852 shares issued, respectively		1,633		1,615
Additional paid-in capital		3,453,720		3,440,059
Accumulated deficit		(2,497,002)		(2,463,114)
Accumulated other comprehensive loss		—		(984)
Treasury stock: 7,801,150 and 7,417,401 common shares, at cost, respectively		(88,535)		(86,138)
Total stockholders' equity		869,816		891,438
Total liabilities and stockholders' equity	$	2,605,601	$	2,589,966

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

4

Archrock, Inc.

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Revenue:
Contract operations	$	170,497	$	158,911	$	500,451	$	488,810
Aftermarket services		43,171		36,255		126,246		97,402
Total revenue		213,668		195,166		626,697		586,212
Cost of sales (excluding depreciation and amortization):
Contract operations		71,694		61,280		204,550		184,032
Aftermarket services		35,833		30,652		106,181		83,925
Total cost of sales (excluding depreciation and amortization)		107,527		91,932		310,731		267,957
Selling, general and administrative		30,500		28,839		85,964		80,000
Depreciation and amortization		39,953		45,280		124,348		135,185
Long-lived and other asset impairment		4,154		5,121		16,217		15,154
Restructuring charges		—		313		—		1,953
Interest expense		25,177		25,508		74,879		82,711
Gain on sale of assets, net		(12,695)		(15,393)		(33,755)		(29,549)
Other (income) expense, net		(585)		337		(52)		(1,634)
Income before income taxes		19,637		13,229		48,365		34,435
Provision for income taxes		4,266		3,925		14,527		12,210
Net income	$	15,371	$	9,304	$	33,838	$	22,225
Basic and diluted earnings per common share	$	0.10	$	0.06	$	0.21	$	0.14
Weighted average common shares outstanding:
Basic		153,550		152,158		153,168		151,615
Diluted		153,687		152,297		153,297		151,769

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

5

Archrock, Inc.

Unaudited Condensed Consolidated Statements of Comprehensive Income

(in thousands)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Net income	$	15,371	$	9,304	$	33,838	$	22,225
Other comprehensive income, net of tax:
Interest rate swap gain, net of reclassifications to earnings		—		585		574		2,547
Amortization of dedesignated interest rate swap		—		431		410		431
Total other comprehensive income, net of tax		—		1,016		984		2,978
Comprehensive income	$	15,371	$	10,320	$	34,822	$	25,203

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

6

Archrock, Inc.

Unaudited Condensed Consolidated Statements of Equity

(in thousands, except shares and per share amounts)

									Accumulated
					Additional				Other
	Common Stock				Paid-in		Accumulated		Comprehensive		Treasury Stock
		Shares		Amount	Capital		Deficit		Loss		Shares	Amount		Total
Balance at June 30, 2022		163,385,390	$	1,633	$	3,450,603	$	(2,489,814)	$	—	(7,740,919)	$	(88,504)	$	873,918
Treasury stock purchased		—		—		—		—		—	(3,636)		(31)		(31)
Cash dividends ($0.145 per common share		—		—		—		(22,559)		—	—		—		(22,559)
Shares issued under employee stock purchase plan ("ESPP")		27,390		—		167		—		—	—		—		167
Stock-based compensation, net of forfeitures		—		—		2,998		—		—	(56,595)		—		2,998
Net proceeds from issuance of common stock		—		—		(48)		—		—	—		—		(48)
Net income		—		—		—		15,371		—	—		—		15,371
Balance at September 30, 2022		163,412,780	$	1,633	$	3,453,720	$	(2,497,002)	$	—	(7,801,150)	$	(88,535)	$	869,816
Balance at June 30, 2021		161,339,554	$	1,613	$	3,434,224	$	(2,433,553)	$	(3,044)	(7,278,449)	$	(85,419)	$	913,821
Treasury stock purchased		—		—		—		—		—	(92,540)		(663)		(663)
Cash dividends ($0.145 per common share		—		—		—		(22,506)		—	—		—		(22,506)
Shares issued under ESPP		22,425		—		175		—		—	—		—		175
Stock-based compensation, net of forfeitures		97,426		1		2,899		—		—	(31,199)		—		2,900
Comprehensive income:
Net income		—		—		—		9,304		—	—		—		9,304
Other comprehensive income		—		—		—		—		1,016	—		—		1,016
Balance at September 30, 2021		161,459,405	$	1,614	$	3,437,298	$	(2,446,755)	$	(2,028)	(7,402,188)	$	(86,082)	$	904,047

7

Archrock, Inc.

Unaudited Condensed Consolidated Statements of Equity (continued)

(in thousands, except share and per share amounts)

									Accumulated
					Additional				Other
	Common Stock				Paid-in		Accumulated		Comprehensive		Treasury Stock
		Shares		Amount	Capital		Deficit		Loss		Shares	Amount		Total
Balance at December 31, 2021		161,482,852	$	1,615	$	3,440,059	$	(2,463,114)	$	(984)	(7,417,401)	$	(86,138)	$	891,438
Treasury stock purchased		—		—		—		—		—	(276,342)		(2,397)		(2,397)
Cash dividends ($0.435 per common share)		—		—		—		(67,726)		—	—		—		(67,726)
Shares issued under ESPP		66,236				462		—		—	—		—		462
Stock-based compensation, net of forfeitures		1,416,672		14		9,021		—		—	(107,407)		—		9,035
Net proceeds from issuance of common stock		447,020		4		4,178		—		—	—		—		4,182
Comprehensive income:
Net income		—		—		—		33,838		—	—		—		33,838
Other comprehensive income		—		—		—		—		984	—		—		984
Balance at September 30, 2022		163,412,780	$	1,633	$	3,453,720	$	(2,497,002)	$	—	(7,801,150)	$	(88,535)	$	869,816
Balance at December 31, 2020		160,014,960	$	1,600	$	3,424,624	$	(2,401,988)	$	(5,006)	(7,052,769)	$	(83,673)	$	935,557
Treasury stock purchased		—		—		—		—		—	(277,316)		(2,409)		(2,409)
Cash dividends ($0.435 per common share)		—		—		—		(66,992)		—	—		—		(66,992)
Shares issued under ESPP		66,541		—		546		—		—	—		—		546
Stock-based compensation, net of forfeitures		1,020,756		10		8,731		—		—	(72,103)		—		8,741
Net proceeds from issuance of common stock		357,148		4		3,397		—		—	—		—		3,401
Comprehensive income:
Net income		—		—		—		22,225		—	—		—		22,225
Other comprehensive income		—		—		—		—		2,978	—		—		2,978
Balance at September 30, 2021		161,459,405	$	1,614	$	3,437,298	$	(2,446,755)	$	(2,028)	(7,402,188)	$	(86,082)	$	904,047

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

8

Archrock, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

	Nine Months Ended
	September 30,
	2022		2021
Cash flows from operating activities:
Net income	$	33,838	$	22,225
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		124,348		135,185
Long-lived and other asset impairment		16,217		15,154
Inventory write-downs		1,040		621
Amortization of operating lease right-of-use assets		2,407		2,922
Amortization of debt issuance costs		3,864		8,839
Amortization of debt premium		(1,504)		(1,504)
Amortization of dedesignated interest rate swap		410		431
Interest rate swaps		631		2,866
Stock-based compensation expense		9,035		8,741
Provision for credit losses		(28)		151
Gain on sale of assets, net		(5,535)		(10,604)
Gain on sale of business		(28,220)		(18,945)
Deferred income tax provision		13,624		11,778
Amortization of contract costs		14,211		15,523
Deferred revenue recognized in earnings		(15,709)		(8,081)
Changes in operating assets and liabilities:
Accounts receivable, net		(29,130)		(2,133)
Inventory		(8,339)		(5,994)
Other assets		697		1,326
Contract costs		(22,486)		(11,481)
Accounts payable and other liabilities		37,251		33,626
Deferred revenue		19,614		8,167
Other		96		(88)
Net cash provided by operating activities		166,332		208,725
Cash flows from investing activities:
Capital expenditures		(171,032)		(70,881)
Proceeds from sale of property, equipment and other assets		13,348		24,683
Proceeds from sale of business		99,785		83,075
Proceeds from insurance and other settlements		3,353		977
Investments in unconsolidated entities		(12,000)		—
Net cash (used in) provided by investing activities		(66,546)		37,854
Cash flows from financing activities:
Borrowings of long-term debt		579,483		522,751
Repayments of long-term debt		(611,983)		(695,751)
Payments of debt issuance costs		—		(2,451)
Payments for settlement of interest rate swaps that include financing elements		(1,334)		(3,283)
Dividends paid to stockholders		(67,726)		(66,992)
Net proceeds from issuance of common stock		4,182		3,401
Proceeds from stock issued under ESPP		462		546
Purchases of treasury stock		(2,397)		(2,409)
Net cash used in financing activities		(99,313)		(244,188)
Net increase in cash and cash equivalents		473		2,391
Cash and cash equivalents, beginning of period		1,569		1,097
Cash and cash equivalents, end of period	$	2,042	$	3,488

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

9

Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 1. GENERAL

Description of Business

Archrock, Inc. (individually and together with its wholly owned subsidiaries, “we,” “our” or us”) is an energy infrastructure company with a primary focus on midstream natural gas compression. We are the leading provider of natural gas compression services to customers in the energy industry throughout the United States (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.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements included herein have been prepared in accordance with U.S. Generally Accepted Accounting Policies (“GAAP”) and the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP are not required in these interim financial statements and have been condensed or omitted. Management believes that the information furnished reflects all normal recurring adjustments necessary to fairly present our consolidated financial position, results of operations and cash flows for the periods indicated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements presented in our 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.

All intercompany accounts and transactions have been eliminated in consolidation.  In the Notes to Unaudited Condensed Consolidated Financial Statements, all dollar and share amounts in tabulations are in thousands of dollars and shares, respectively, unless otherwise indicated.  

NOTE 2. DISPOSITIONS

In September 2022, we completed the sale of certain contract operations customer service agreements and approximately 390 compressors, comprising approximately 100,000 horsepower, used to provide compression services under those agreements, as well as other assets used to support the operations. We allocated customer–related and contract–based intangible assets based on a ratio of the horsepower sold relative to the total horsepower of the asset group. We received cash consideration of $44.3 million for the sale and recorded a gain on the sale of $11.5 million during the three months and nine months ended September 30, 2022.

In May 2022, we completed the sale of certain contract operations customer service agreements and approximately 380 compressors, comprising approximately 70,000 horsepower, used to provide compression services under those agreements, as well as other assets used to support the operations. We allocated customer–related and contract–based intangible assets based on a ratio of the horsepower sold relative to the total horsepower of the asset group. We received cash consideration of $55.5 million for the sale and recorded a gain on the sale of $16.7 million during the nine months ended September 30, 2022.

10

Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

NOTE 3. INVENTORY

Inventory is comprised of the following:

	September 30, 2022		December 31, 2021
Parts and supplies	$	67,459	$	63,628
Work in progress		16,632		9,241
Inventory	$	84,091	$	72,869

NOTE 4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is comprised of the following:

	September 30, 2022		December 31, 2021
Compression equipment, facilities and other fleet assets	$	3,243,488	$	3,273,770
Land and buildings		44,056		43,540
Transportation and shop equipment		90,116		92,490
Computer hardware and software		77,357		76,908
Other		5,518		6,229
Property, plant and equipment		3,460,535		3,492,937
Accumulated depreciation		(1,245,869)		(1,266,411)
Property, plant and equipment, net	$	2,214,666	$	2,226,526

NOTE 5. EQUITY INVESTMENTS

Investments in which we are deemed to exert significant influence, but not control, are accounted for using the equity method of accounting, except in cases where the fair value option is elected. For such investments where we have elected the fair value option, the election is irrevocable and is applied on an investment–by–investment basis at initial recognition.

In April 2022, we agreed to acquire for cash a 25% equity interest in Ecotec International Holdings, LLC. (“ECOTEC”), a company specializing in methane emissions detection, monitoring and management. We have elected the fair value option to account for this investment (see Note 16). As of September 30, 2022, our ownership interest in ECOTEC is 19%, which is included in Other assets in our unaudited condensed consolidated balance sheets.

Changes in the fair value of this investment are recognized in Other (income) expense, net in our unaudited condensed consolidated statements of operations.

NOTE 6. HOSTING ARRANGEMENTS

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

As of September 30, 2022 and December 31, 2021, we had $15.1 million and $12.7 million, respectively, of capitalized implementation costs related to these hosting arrangements included in Other assets in our unaudited condensed consolidated balance sheets. Accumulated amortization was $2.1 million and $0.7 million as of September 30, 2022 and December 31, 2021, respectively.

Included in Selling, general and administrative in our unaudited condensed consolidated statements of operations is amortization of $0.6 million and $0.1 million during the three months ended September 30, 2022 and 2021, respectively, and $1.5 million and $0.3 million during the nine months ended September 30, 2022 and 2021, respectively.

11

Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

NOTE 7. LONG–TERM DEBT

Long–term debt is comprised of the following:

	September 30, 2022		December 31, 2021
Credit Facility	$	202,000	$	234,500
6.25% senior notes due April 2028
Principal outstanding		800,000		800,000
Unamortized debt premium		11,031		12,536
Unamortized debt issuance costs		(9,158)		(10,406)
		801,873		802,130
6.875% senior notes due April 2027
Principal outstanding		500,000		500,000
Unamortized debt issuance costs		(4,978)		(5,805)
		495,022		494,195
Long-term debt	$	1,498,895	$	1,530,825

Our $750.0 million asset–based revolving Credit Facility, as amended (the “Credit Facility”), matures in November 2024. As of September 30, 2022, there were $5.8 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.4%. The weighted average annual interest rate on the outstanding balance under our Credit Facility, excluding the effect of interest rate swaps, was 5.5% and 2.6% at September 30, 2022 and December 31, 2021, respectively. We incurred $0.5 million of commitment fees on the daily unused amount of the Credit Facility in each of the three months ended September 30, 2022 and 2021 and $1.5 million in each of the nine months ended September 30, 2022 and 2021.

As of September 30, 2022, we were in compliance with all covenants under our Credit Facility agreement. As a result of the Credit Facility’s financial ratio requirements, $486.4 million of the $542.2 million of undrawn capacity was available for additional borrowings as of September 30, 2022.

In February 2021, we amended our Credit Facility to, among other things, reduce the aggregate revolving commitment from $1.25 billion to $750.0 million and adjust certain financial ratios. We wrote off $4.9 million of unamortized deferred financing costs as a result of the amendment, which was recorded to interest expense in our unaudited condensed consolidated statements of operations during the nine months ended September 30, 2021.

NOTE 8. COMMITMENTS AND CONTINGENCIES

Insurance Matters

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

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

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Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

In August 2021, Hurricane Ida caused operational disruptions, damage to compressors and a temporary shutdown of facilities in Louisiana that negatively impacted our financial performance. At December 31, 2021, we had an insurance recovery receivable of $2.8 million related to the facility and compressor damages, which we received in cash during the three months ended March 31, 2022. In September 2022, we received $0.4 million of business interruption insurance recovery proceeds, which resolved the remainder of our insurance claims related to Hurricane Ida.

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, 2022 and December 31, 2021, we had $3.9 million and $5.8 million, respectively, accrued 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.

In 2021, one of our sales and use tax audits advanced from the audit review phase to the contested hearing phase. As of both September 30, 2022 and December 31, 2021, we had $0.6 million accrued for this audit.

Litigation and Claims

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

NOTE 9. STOCKHOLDERS’ EQUITY

Equity Distribution Agreement

During the nine months ended September 30, 2022, we sold 447,020 shares of common stock for net proceeds of $4.2 million pursuant to an Equity Distribution agreement, dated February 23, 2021, entered into with Wells Fargo Securities, LLC and BofA Securities, Inc., as sales agents, relating to the at–the–market offer and sale of shares of our common stock from time to time (the “Equity Distribution Agreement”). During the nine months ended September 30, 2021, we sold 357,148 shares of common stock under this program for net proceeds of $3.4 million.

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Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Cash Dividends

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

	Dividends per
	Common Share		Dividends Paid
2022
Q3	$	0.145	$	22,559
Q2		0.145		22,494
Q1		0.145		22,673
2021
Q4	$	0.145	$	22,351
Q3		0.145		22,506
Q2		0.145		22,331
Q1		0.145		22,155

On October 27, 2022, our Board of Directors declared a quarterly dividend of $0.145 per share of common stock to be paid on November 15, 2022 to stockholders of record at the close of business on November 8, 2022.

Accumulated Other Comprehensive Loss

Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with owners. Our accumulated other comprehensive loss consists of changes in the fair value of our interest rate swap derivative instruments, net of tax. See Note 15 for further details on our interest rate swap derivative instruments.

The following table presents the changes in accumulated other comprehensive loss, net of tax:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Beginning accumulated other comprehensive loss	$	—	$	(3,044)	$	(984)	$	(5,006)
Other comprehensive income, net of tax:
Loss recognized in other comprehensive income		—		(458)		(405)		(529)
Loss reclassified from accumulated other comprehensive loss to interest expense		—		1,474		1,389		3,507
Total other comprehensive income		—		1,016		984		2,978
Ending accumulated other comprehensive loss	$	—	$	(2,028)	$	—	$	(2,028)

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Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

NOTE 10. REVENUE FROM CONTRACTS WITH CUSTOMERS

The following table presents our revenue from contracts with customers by segment (see Note 18) and disaggregated by revenue source:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Contract operations:
0 ― 1,000 horsepower per unit	$	38,967	$	41,576	$	121,298	$	134,413
1,001 ― 1,500 horsepower per unit		72,463		66,138		208,161		201,454
Over 1,500 horsepower per unit		58,818		51,018		170,297		152,360
Other (1)		249		179		695		583
Total contract operations revenue (2)		170,497		158,911		500,451		488,810
Aftermarket services:
Services		23,528		19,249		66,666		53,149
Over–the–counter (“OTC”) parts and components sales		19,643		17,006		59,580		44,253
Total aftermarket services revenue (3)		43,171		36,255		126,246		97,402
Total revenue	$	213,668	$	195,166	$	626,697	$	586,212

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

(2) Includes $0.7 million and $0.7 million for the three months ended September 30, 2022 and 2021, respectively, and $1.8 million and $3.1 million for the nine months ended September 30, 2022 and 2021, respectively, related to billable maintenance on owned compressors that was recognized at a point in time. All other contract operations revenue is recognized over time.

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

Performance Obligations

As of September 30, 2022, we had $282.3 million of remaining performance obligations related to our contract operations segment, which will be recognized through 2027 as follows:

	2022		2023		2024		2025		2026		2027		Total
Remaining performance obligations	$	99,377	$	122,031	$	46,882	$	12,870	$	919	$	192	$	282,271

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

Contract Assets and Liabilities

Contract Assets

As of September 30, 2022 and December 31, 2021, our receivables from contracts with customers, net of allowance for credit losses, were $118.9 million and $84.7 million, respectively.

Allowance for Credit Losses

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

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Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Due to the short-term nature of our trade receivables, we consider the amortized cost to be the same as the carrying amount of the receivable, excluding the allowance for credit losses. We recognize an allowance for credit losses when a receivable is recorded, even when the risk of loss is remote. We utilize an aging schedule to determine our allowance for credit losses and measure expected credit losses on a collective (pool) basis when similar risk characteristics exist. We rely primarily on ratings assigned by external rating agencies and credit monitoring services to assess credit risk and aggregate customers first by low, medium or high risk asset pools, and then by delinquency status. We also consider the internal risk associated with geographic location and the services we provide to the customer when determining asset pools. If a customer does not share similar risk characteristics with other customers, we evaluate the customer’s outstanding trade receivables for expected credit losses on an individual basis. Trade receivables evaluated individually are not included in our collective assessment. Each reporting period, we reassess our customers’ risk profiles and determine the appropriate asset pool classification, or perform individual assessments of expected credit losses, based on the customers’ risk characteristics at the reporting date.

The contractual life of our trade receivables is primarily 30 days based on the payment terms specified in the contract. Contract operations services are generally billed monthly at the beginning of the month in which service is being provided. Aftermarket services billings typically occur when parts are delivered or service is completed. Loss rates are separately determined for each asset pool based on the length of time a trade receivable has been outstanding. We analyze two years of internal historical loss data, including the effects of prepayments, write-offs and subsequent recoveries, to determine our historical loss experience. Our historical loss information is a relevant data point for estimating credit losses, as the data closely aligns with trade receivables due from our customers. Ratings assigned by external rating agencies and credit monitoring services consider past performance and forecasts of future economic conditions in assessing credit risk. We routinely update our historical loss data to reflect our customers’ current risk profile, to ensure the historical data and loss rates are relevant to the pool of assets for which we are estimating expected credit losses.

Our allowance for credit losses balance changed as follows during the nine months ended September 30, 2022:

Balance at December 31, 2021	$	2,152
Provision for credit losses		(28)
Write-offs charged against allowance		(637)
Balance at September 30, 2022	$	1,487

Contract Liabilities

Freight billings to customers for the transport of compression assets, customer–specified modifications of compression assets and milestone billings on aftermarket services often result in a contract liability. As of September 30, 2022 and December 31, 2021, our contract liabilities were $8.3 million and $4.4 million, respectively.

During the nine months ended September 30, 2022, we deferred revenue of $19.6 million and recognized deferred revenue of $15.7 million. The revenue recognized during the period primarily related to freight billings and milestone billings on aftermarket services.

NOTE 11. STOCK–BASED COMPENSATION

We grant various forms of stock–based compensation to our employees and non–employee directors. These stock–based awards can consist of stock options, stock appreciation rights, restricted stock awards, restricted stock units (“RSUs”), performance–based RSUs, other stock–based awards and dividend equivalent rights. We recognize stock–based compensation expense related to restricted stock awards, RSUs, performance–based RSUs and shares issued under our ESPP.

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Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

The following table presents the stock–based compensation expense recognized in our unaudited condensed consolidated statements of operations:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Equity award expense	$	2,998	$	2,900	$	9,035	$	8,741
Liability award expense		24		127		904		1,121
Total stock-based compensation expense	$	3,022	$	3,027	$	9,939	$	9,862

The following table presents our restricted stock activity in the nine months ended September 30, 2022:

		Weighted
		Average
		Grant Date
	Shares	Fair Value
	(in thousands)	Per Share
Non-vested restricted stock, December 31, 2021	2,578	$	10.35
Granted	1,861		9.03
Vested	(1,152)		10.25
Canceled	(244)		9.28
Non-vested restricted stock, September 30, 2022 (1)	3,043	$	9.67

(1) Comprised of 508 cash-settled units and 2,534 stock–settled awards and units.

As of September 30, 2022, there was $17.1 million of unrecognized stock–based compensation expense which is expected to be recognized over a weighted average period of 1.9 years.

NOTE 12. LONG–LIVED AND OTHER ASSET IMPAIRMENT

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

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

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

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Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Idle compressors retired from the active fleet		25		60		100		175
Horsepower of idle compressors retired from the active fleet		23,000		24,000		80,000		61,000
Impairment recorded on idle compressors retired from the active fleet	$	4,149	$	5,120	$	16,205	$	14,964

See Note 16 for additional information.

NOTE 13. INCOME TAXES

Valuation Allowance

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

Effective Tax Rate

The year-to-date effective tax rate for the nine months ended September 30, 2022 differed significantly from our statutory rate primarily due to unrecognized tax benefits and the limitation on executive compensation.

Unrecognized Tax Benefits

As of September 30, 2022, we believe it is reasonably possible that $2.7 million of our unrecognized tax benefits, including penalties, interest and discontinued operations, will be reduced prior to September 30, 2023 due to the settlement of audits or the expiration of statutes of limitations or both. However, due to the uncertain and complex application of the tax regulations, it is possible that the ultimate resolution of these matters may result in liabilities that could materially differ from this estimate.

Impact of New Legislation

On August 16, 2022, President Biden signed into law the Inflation Reduction Act (Public Law Number 117–169). This legislation is expected to have an immaterial impact to our unaudited condensed consolidated financial statements.

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Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

NOTE 14. EARNINGS PER COMMON SHARE

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

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

The following table shows the calculation of net income attributable to common stockholders, which is used in the calculation of basic and diluted earnings per common share, potential shares of common stock that were included in computing diluted earnings per common share and the potential shares of common stock issuable that were excluded from computing diluted earnings per common share as their inclusion would have been anti–dilutive:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Net income	$	15,371	$	9,304	$	33,838	$	22,225
Allocation of earnings to participating securities		(294)		(456)		(1,114)		(909)
Net income attributable to common stockholders	$	15,077	$	8,848	$	32,724	$	21,316
Weighted average common shares outstanding used in basic earnings per common share		153,550		152,158		153,168		151,615
Effect of dilutive securities:
Restricted stock units		131		138		125		152
ESPP shares		6		1		4		2
Weighted average common shares outstanding used in diluted earnings per common share		153,687		152,297		153,297		151,769
On exercise of options where exercise price is greater than average market price for the period		—		15		—		27

NOTE 15. DERIVATIVES AND HEDGING

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

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

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Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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

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

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Total amount of interest expense in which the effects of cash flow hedges and undesignated interest rate swaps are recorded	$	25,177	$	25,508	$	74,879	$	82,711
Interest rate swaps designated as cash flow hedging instruments:
Pre-tax loss recognized in other comprehensive income	$	—	$	(581)	$	(512)	$	(670)
Pre-tax loss reclassified from accumulated other comprehensive loss into interest expense		—		(1,867)		(1,758)		(4,440)
Interest rate swaps not designated as hedging instruments:
Gain recognized in interest expense	$	—	$	532	$	523	$	532

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Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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

	September 30, 2022		December 31, 2021
Interest rate swaps designated as cash flow hedging instruments
Accrued liabilities	$	—	$	727
Interest rate swaps not designated as hedging instruments
Accrued liabilities		—		523
Total derivative liabilities	$	—	$	1,250

Please see Note 9 and Note 16 for additional details on our derivative instruments.

16. FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Investment in ECOTEC

During the nine months ended September 30, 2022, we acquired a 19% equity interest in ECOTEC. We have elected the fair value option to account for this investment. The investment is valued at its transaction price, unless and until there is a significant change in the investment, such as an impairment or an additional investment. The investment’s fair value is reviewed periodically and is classified as a Level 3 measurement. As of September 30, 2022, the fair value of our investment in ECOTEC was as follows:

	September 30, 2022
Investment in ECOTEC	$	12,000

Interest Rate Swaps

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

	September 30, 2022		December 31, 2021
Derivative liabilities	$	—	$	1,250

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

During the three months and nine months ended September 30, 2022, we recorded nonrecurring fair value measurements of $4.1 million and $16.2 million, respectively, related to our idle compressors (see Note 12). Our estimate of the compressors’ fair value was primarily based on the expected net sale proceeds compared with 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. The fair value of our compressors impaired in 2022 and 2021 was as follows:

	September 30, 2022		December 31, 2021
Impaired compressors	$	1,548	$	4,380

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Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

These fair value measurements are classified as Level 3. The significant unobservable inputs used to develop the above fair value measurements were weighted by the relative fair value of the compressors being measured. Additional quantitative information related to our significant unobservable inputs follows:

	Range	Weighted Average (1)
Estimated net sale proceeds:
As of September 30, 2022	$0 - $621 per horsepower	$44 per horsepower
As of December 31, 2021	$0 - $621 per horsepower	$35 per horsepower

(1) Calculated based on an estimated discount for market liquidity of 56% and 64% as of September 30, 2022 and December 31, 2021, respectively.

Other Financial Instruments

The carrying amounts of our cash, accounts receivable and accounts payable approximate fair value due to the short–term nature of these instruments.

The carrying amount of borrowings outstanding under our Credit Facility approximates fair value due to the variable interest rate. The measurement of the fair value of these outstanding borrowings is a Level 3 measurement.

The fair value of our fixed rate debt is estimated using yields observable in active markets, which are Level 2 inputs, and was as follows:

	September 30, 2022		December 31, 2021
Carrying amount of fixed rate debt (1)	$	1,296,895	$	1,296,325
Fair value of fixed rate debt		1,155,760		1,361,000

(1) Carrying amounts are shown net of unamortized premium and deferred financing costs. See Note 7.

NOTE 17. RELATED PARTY TRANSACTIONS

Old Ocean Reserves, LP (“Old Ocean Reserves”), formerly JDH Capital Holdings, L.P., an affiliate of our customer Hilcorp Energy Company (“Hilcorp”), has the right to designate one director to serve on our board of directors as long as Old Ocean Reserves or its successors (together with its affiliates) owns at least 7.5% of our outstanding common stock. As of September 30, 2022, Old Ocean Reserves owned 10.8% of our outstanding common stock. Jason C. Rebrook, Chief Executive Officer and Director of Harvest Midstream Company, a Hilcorp affiliate, has served as Old Ocean Reserves’ representative director since July 2020.

Revenue from Hilcorp was $9.2 million and $9.5 million during the three months ended September 30, 2022 and 2021, respectively, and $27.8 million and $28.6 million during the nine months ended September 30, 2022 and 2021, respectively. Accounts receivable, net due from Hilcorp was $3.2 million and $3.7 million as of September 30, 2022 and December 31, 2021, respectively.

NOTE 18. SEGMENT INFORMATION

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

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Archrock, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

We evaluate the performance of our segments based on gross margin, defined as revenue less cost of sales (excluding depreciation and amortization) for each segment. Segment revenue includes only sales to external customers.

Summarized financial information for our reporting segments is shown below:

	Contract		Aftermarket
	Operations		Services		Total
Three months ended September 30, 2022
Revenue	$	170,497	$	43,171	$	213,668
Gross margin		98,803		7,338		106,141
Three months ended September 30, 2021
Revenue	$	158,911	$	36,255	$	195,166
Gross margin		97,631		5,603		103,234
Nine months ended September 30, 2022
Revenue	$	500,451	$	126,246	$	626,697
Gross margin		295,901		20,065		315,966
Nine months ended September 30, 2021
Revenue	$	488,810	$	97,402	$	586,212
Gross margin		304,778		13,477		318,255

The following table reconciles total gross margin to income before income taxes:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Total gross margin	$	106,141	$	103,234	$	315,966	$	318,255
Less:
Selling, general and administrative		30,500		28,839		85,964		80,000
Depreciation and amortization		39,953		45,280		124,348		135,185
Long-lived and other asset impairment		4,154		5,121		16,217		15,154
Restructuring charges		—		313		—		1,953
Interest expense		25,177		25,508		74,879		82,711
Gain on sale of assets, net		(12,695)		(15,393)		(33,755)		(29,549)
Other (income) expense, net		(585)		337		(52)		(1,634)
Income before income taxes	$	19,637	$	13,229	$	48,365	$	34,435

NOTE 19. SUBSEQUENT EVENTS

On October 3, 2022, we acquired an additional equity interest in ECOTEC, which increased our total ownership interest to 23%.

23

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included in this Form 10–Q, as well as our Form 10–K.

OVERVIEW

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

Recent Business Developments

Dispositions

In September 2022, we completed the sale of certain contract operations customer service agreements and approximately 390 compressors, comprising approximately 100,000 horsepower, used to provide compression services under those agreements, as well as other assets used to support the operations. We received cash consideration of $44.3 million for the sale and recorded a gain on the sale of $11.5 million during the three months and nine months ended September 30, 2022.

In May 2022, we completed the sale of certain contract operations customer service agreements and approximately 380 compressors, comprising approximately 70,000 horsepower, used to provide compression services under those agreements, as well as other assets used to support the operations. We received cash consideration of $55.5 million for the sale and recorded a gain on the sale of $16.7 million during the nine months ended September 30, 2022.

Investment in ECOTEC

In April 2022, we agreed to acquire for cash a 25% equity interest in ECOTEC, a company specializing in methane emissions monitoring and management. As of September 30, 2022, our equity interest was 19%. See Note 5 in our Notes to Unaudited Condensed Consolidated Financial Statements for additional information about this investment.

Operating Highlights

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Total available horsepower (at period end)(1)	3,747		3,913		3,747		3,913
Total operating horsepower (at period end)(2)	3,353		3,196		3,353		3,196
Average operating horsepower	3,355		3,225		3,304		3,298
Horsepower utilization:
Spot (at period end)	89	%	82	%	89	%	82	%
Average	88	%	82	%	86	%	82	%

(1) Defined as idle and operating horsepower. Includes new compressors completed by third party manufacturers that have been delivered to us.

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

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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 selling, general & administrative (“SG&A”) activities, our financing methods and income taxes. In addition, depreciation and amortization may not accurately reflect the costs required to maintain and replenish the operational usage of our assets and therefore may not portray the costs of current operating activity. As an indicator of our operating performance, gross margin should not be considered an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP. Our gross margin may not be comparable to a similarly–titled measure of other entities because other entities may not calculate gross margin in the same manner.

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

The following table reconciles net income to gross margin:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Net income	$	15,371	$	9,304	$	33,838	$	22,225
Selling, general and administrative		30,500		28,839		85,964		80,000
Depreciation and amortization		39,953		45,280		124,348		135,185
Long-lived and other asset impairment		4,154		5,121		16,217		15,154
Restructuring charges		—		313		—		1,953
Interest expense		25,177		25,508		74,879		82,711
Gain on sale of assets, net		(12,695)		(15,393)		(33,755)		(29,549)
Other (income) expense, net		(585)		337		(52)		(1,634)
Provision for income taxes		4,266		3,925		14,527		12,210
Gross margin	$	106,141	$	103,234	$	315,966	$	318,255

RESULTS OF OPERATIONS

Summary of Results

Revenue was $213.7 million and $195.2 million during the three months ended September 30, 2022 and 2021, respectively, and $626.7 million and $586.2 million during the nine months ended September 30, 2022 and 2021, respectively. The increases in consolidated revenue during these periods were primarily due to increased revenue from both our contract operations business and aftermarket services business. See “Contract Operations” and “Aftermarket Services” below for further details.

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Net income was $15.4 million and $9.3 million during the three months ended September 30, 2022 and 2021, respectively. The increase was primarily driven by a higher gross margin from both our aftermarket services business and our contract operations business and decreased depreciation and amortization expense, partially offset by increased SG&A and lower gain on sale of assets, net.

Net income was $33.8 million and $22.2 million during the nine months ended September 30, 2022 and 2021, respectively. The increase was primarily driven by a higher gross margin from our aftermarket services business, decreased depreciation and amortization expense and interest expense and an increased gain on sale of assets, net, partially offset by a lower gross margin from our contract operations business and higher SG&A.

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Contract Operations

	Three Months Ended
	September 30,						Increase
	2022			2021			(Decrease)
Revenue	$	170,497		$	158,911		7	%
Cost of sales (excluding depreciation and amortization)		71,694			61,280		17	%
Gross margin	$	98,803		$	97,631		1	%
Gross margin percentage (1)		58	%		61	%	(3)	%

(1) Defined as gross margin divided by revenue.

Revenue in our contract operations business increased primarily due to an increase in average operating horsepower and higher rates in response to improving market conditions, partially offset by the impact of the strategic dispositions in 2021 and 2022. Average operating horsepower for the three months ended September 30, 2022 increased when compared with the three months ended September 30, 2021 before adjusting for the dispositions.

Despite the increase in revenue, the increase in gross margin in our contract operations business was partially offset by our increase in cost of sales. Start–up, maintenance, lube oil and other operating expenses increased, driven by higher pricing throughout our supply chain, as well as increased volumes associated with unit redeployment as customer activity accelerated. Partially offsetting these cost increases was the decrease in expense attributable to the horsepower sold in 2021 and 2022.

Aftermarket Services

	Three Months Ended
	September 30,						Increase
	2022			2021			(Decrease)
Revenue	$	43,171		$	36,255		19	%
Cost of sales (excluding depreciation and amortization)		35,833			30,652		17	%
Gross margin	$	7,338		$	5,603		31	%
Gross margin percentage		17	%		15	%	2	%

Revenue in our aftermarket services business increased primarily due to higher parts sales and service activities, as the market recovery drove an increase in customer demand.

Gross margin increased in our aftermarket services business as a result of increased revenue partially offset by the associated increase in cost of sales, which was primarily driven by the same increases in parts sales and service activities.

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Costs and Expenses

	Three Months Ended
	September 30,
	2022		2021
Selling, general and administrative	$	30,500	$	28,839
Depreciation and amortization		39,953		45,280
Long-lived and other asset impairment		4,154		5,121
Restructuring charges		—		313
Interest expense		25,177		25,508
Gain on sale of assets, net		(12,695)		(15,393)
Other (income) expense, net		(585)		337
Provision for income taxes		4,266		3,925
Effective tax rate		22%		30%

Selling, general and administrative. The increase in SG&A was primarily due to a $1.1 million increase in employee compensation costs and a $0.9 million increase in information technology expense related to increased amortization of capitalized implementation costs and increased service agreement costs related to the substantial completion of our process and technology transformation project at the end of 2021.

Depreciation and amortization. The decrease in depreciation and amortization expense was primarily due to the impact of assets reaching the end of their depreciable lives and compression and other asset sales, partially offset by the impact of fixed asset additions.

Long-lived and other asset impairment. We periodically review the future deployment of our idle compressors for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. We also evaluate for impairment our idle units that have been culled from our compression fleet in prior years and are available for sale. During the three months ended September 30, 2022 and 2021, we recognized $4.2 million and $5.1 million, respectively, of impairment charges to write down these compressors to their fair value. See Note 12 in our Notes to Unaudited Condensed Consolidated Financial Statements for additional information about these impairment charges. The following table presents the results of our compression fleet impairment review, as recorded in our contract operations segment:

	Three Months Ended
	September 30,
	2022		2021
Idle compressors retired from the active fleet		25		60
Horsepower of idle compressors retired from the active fleet		23,000		24,000
Impairment recorded on idle compressors retired from the active fleet	$	4,149	$	5,120

Interest expense. The decrease in interest expense was due to a lower average outstanding balance of long–term debt, partially offset by a higher average interest rate as a result of the expiration of our interest rate swaps in the first quarter of 2022.

Gain on sale of assets, net. The net gain on sale of assets during the three months ended September 30, 2022 was primarily the result of the $11.5 million of gain recognized on the September 2022 disposition of assets and gains of $1.2 million recognized on sales of other compression, transportation and shop assets during the period.

The net gain on sale of assets during the three months ended September 30, 2021 was primarily the result of the $13.0 million of gain recognized on the July 2021 disposition of assets and gains of $2.2 million recognized in on other compression asset sales during the period.

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Provision for income taxes. The increase in provision for income taxes was primarily due to the tax effect of the increase in book income during the three months ended September 30, 2022 compared with the three months ended September 30, 2021.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Contract Operations

	Nine Months Ended
	September 30,						Increase
	2022			2021			(Decrease)
Revenue	$	500,451		$	488,810		2	%
Cost of sales (excluding depreciation and amortization)		204,550			184,032		11	%
Gross margin	$	295,901		$	304,778		(3)	%
Gross margin percentage		59	%		62	%	(3)	%

Revenue in our contract operations business increased primarily due to higher rates and an increase in average operating horsepower in response to improving market conditions, partially offset by the impact of the strategic dispositions in 2021 and 2022. Average operating horsepower for the nine months ended September 30, 2022 increased when compared with the nine months ended September 30, 2021 before adjusting for the dispositions.

Despite the increase in revenue, the decrease in gross margin in our contract operations business reflects the impact of a larger increase in cost of sales. Start–up, maintenance, lube oil and other operating expenses increased, driven by higher pricing throughout our supply chain, as well as increased volumes associated with unit redeployment as customer activity accelerated. Partially offsetting these cost increases was the decrease in expense attributable to the horsepower sold in 2021 and 2022.

Aftermarket Services

	Nine Months Ended
	September 30,						Increase
	2022			2021			(Decrease)
Revenue	$	126,246		$	97,402		30	%
Cost of sales (excluding depreciation and amortization)		106,181			83,925		27	%
Gross margin	$	20,065		$	13,477		49	%
Gross margin percentage		16	%		14	%	2	%

Revenue in our aftermarket services business increased primarily due to higher parts sales and service activities, as the market recovery drove an increase in customer demand.

Gross margin in our aftermarket services business increased due to an increase in revenue and despite an increase in cost of sales, which was primarily driven by the same increases in parts sales and service activities.

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Costs and Expenses

	Nine Months Ended
	September 30,
	2022		2021
Selling, general and administrative	$	85,964	$	80,000
Depreciation and amortization		124,348		135,185
Long-lived and other asset impairment		16,217		15,154
Restructuring charges		—		1,953
Interest expense		74,879		82,711
Gain on sale of assets, net		(33,755)		(29,549)
Other (income), net		(52)		(1,634)
Provision for income taxes		14,527		12,210
Effective tax rate		30%		35%

Selling, general and administrative. The increase in SG&A was primarily due to a $2.0 million increase in sales and use tax resulting from audit settlements reached during the nine months ended September 30, 2021, a $1.7 million increase in information technology expense related to increased amortization of capitalized implementation costs and increased service agreement costs related to the substantial completion of our process and technology transformation project at the end of 2021, a $0.9 million increase in employee compensation costs and a $0.9 million increase in higher travel and meeting expenses.

Depreciation and amortization. The decrease in depreciation and amortization expense was primarily due to the impact of assets reaching the end of their depreciable lives, compression and other asset sales and impairments, partially offset by the impact of fixed asset additions.

Long-lived and other asset impairment. We periodically review the future deployment of our idle compressors for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. We also evaluate for impairment our idle units that have been culled from our compression fleet in prior years and are available for sale. During the nine months ended September 30, 2022 and 2021, we recognized $16.2 million and $15.2 million, respectively, of impairment charges to write down these compressors to their fair value. See Note 12 in our Notes to Unaudited Condensed Consolidated Financial Statements for additional information about these impairment charges. The following table presents the results of our compression fleet impairment review, as recorded in our contract operations segment:

	Nine Months Ended
	September 30,
	2022		2021
Idle compressors retired from the active fleet		100		175
Horsepower of idle compressors retired from the active fleet		80,000		61,000
Impairment recorded on idle compressors retired from the active fleet	$	16,205	$	14,964

Interest expense. The decrease in interest expense was due to the $4.9 million write–off of unamortized deferred financing costs related to the amendment of our Credit Facility in the first quarter of 2021 and a lower average outstanding balance of long–term debt, offset by a higher average interest rate as a result of the expiration of our interest rate swaps in the first quarter of 2022.

Gain on sale of assets, net. The net gain on sale of assets during the nine months ended September 30, 2022 was primarily the result of the $28.2 million of gains recognized on the May 2022 and September 2022 dispositions of assets and gains of $5.6 million recognized on sales of other compression, transportation and shop assets during the period.

The net gain on sale of assets during the nine months ended September 30, 2021 was primarily the result of the $19.0 million of gains recognized on the February 2021 and July 2021 dispositions of assets and gains of $8.6 million recognized on other compression asset sales during the period.

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Provision for income taxes. The increase in provision for income taxes was primarily due to the tax effect of the increase in book income during the nine months ended September 30, 2022 compared with the nine months ended September 30, 2021.

LIQUIDITY AND CAPITAL RESOURCES

Overview

Our ability to fund operations, finance capital expenditures and pay dividends depends on the levels of our operating cash flows and access to the capital and credit markets. Our primary sources of liquidity are cash flows generated from our operations and our borrowing availability under our Credit Facility. Our cash flow is affected by numerous factors including prices and demand for our services, oil and natural gas exploration and production spending, conditions in the financial markets and other factors. We have no near-term maturities and believe that our operating cash flows and borrowings under the Credit Facility will be sufficient to meet our future liquidity needs.

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

Cash Requirements

Our contract operations business is capital intensive, requiring significant investment to maintain and upgrade existing operations. Our capital spending is primarily dependent on the demand for our contract operations services and the availability of the type of compression equipment required for us to provide those contract operations services to our customers. Our capital requirements have consisted primarily of, and we anticipate will continue to consist of, the following:

• operating expenses, namely employee compensation and benefits and inventory and lube oil purchases;

• growth capital expenditures;

• maintenance capital expenditures;

• interest on our outstanding debt obligations; and

• dividend payments to our stockholders.

Capital Expenditures

Growth Capital Expenditures. The majority of our growth capital expenditures are related to the acquisition cost of new compressors when our idle equipment cannot be reconfigured to economically fulfill a project’s requirements and the new compressor is expected to generate economic returns that exceed our cost of capital over the compressor’s expected useful life. In addition to newly-acquired compressors, growth capital expenditures include the upgrading of major components on an existing compression package where the current configuration of the compression package is no longer in demand and the compressor is not likely to return to an operating status without the capital expenditures. These expenditures substantially modify the operating parameters of the compression package such that it can be used in applications for which it previously was not suited.

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

Projected Capital Expenditures. We currently plan to spend approximately $230 million to $235 million in capital expenditures during 2022, primarily consisting of approximately $150 million for growth capital expenditures and approximately $70 million to $75 million for maintenance capital expenditures. The increase in 2022 capital expenditures, particularly growth capital expenditures, as compared to 2021 is due to increased investment in new compression equipment as a result of higher customer demand.

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Dividends

On October 27, 2022, our Board of Directors declared a quarterly dividend of $0.145 per share of common stock to be paid on November 15, 2022 to stockholders of record at the close of business on November 8, 2022. 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.

Sources of Cash

Revolving Credit Facility

During the nine months ended September 30, 2022 and 2021, our Credit Facility had an average debt balance of $228.9 million and $310.9 million, respectively. The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 5.5% and 2.6% at September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022, there were $5.8 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.4%.

As of September 30, 2022, we were in compliance with all covenants under our Credit Facility. As a result of the facility’s financial ratio requirements, $486.4 million of the $542.2 million of undrawn capacity was available for additional borrowings as of September 30, 2022.

Equity Distribution Agreement

During the nine months ended September 30, 2022 and 2021, we sold 447,020 and 357,148 shares of common stock for net proceeds of $4.2 million and $3.4 million, respectively, pursuant to the Equity Distribution Agreement.

Cash Flows

Our cash flows, as reflected in our unaudited condensed consolidated statements of cash flows, are summarized below:

	Nine Months Ended
	September 30,
	2022		2021
Net cash provided by (used in):
Operating activities	$	166,332	$	208,725
Investing activities		(66,546)		37,854
Financing activities		(99,313)		(244,188)

Operating Activities

The decrease in net cash provided by operating activities was primarily due to increased cash outflow for cost of sales, contract costs, and SG&A, as well as decreased cash inflow from accounts receivable. Partially offsetting these decreases in operating cash were increased cash inflow from revenue and deferred revenue.

Investing Activities

The change in net cash used in (provided by) investing activities was primarily due to a $100.2 million increase in capital expenditures and the $12.0 million investment made in unconsolidated entities during the nine months ended September 30, 2022. These cash outflows were partially offset by an increase of $5.4 million in proceeds from business dispositions and other sales of property, plant and equipment and an increase of $2.4 million in insurance and other settlements.

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Financing Activities

The decrease in net cash used in financing activities was primarily due to $32.5 million of net repayments of long–term debt during the nine months ended September 30, 2022 compared with $173.0 million of net repayments of long–term debt during the nine months ended September 30, 2021.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks associated with changes in the variable interest rate of our Credit Facility. We have previously used derivative instruments to manage our exposure to fluctuation in this variable interest rate; however, our interest rate swaps expired in the first quarter of 2022, and all borrowings under our Credit Facility are now subject to variable interest rates.

A 1% increase in the effective interest rate on our Credit Facility’s outstanding balance at September 30, 2022 would have resulted in an annual increase in our interest expense of $2.0 million.

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 Form 10–Q 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, 2022 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

In the first quarter of 2022, we implemented a new ERP system, which replaced our existing core financial systems, resulting in changes to our financial close processes and procedures. As a result of the implementation, certain internal controls over financial reporting were automated, modified or implemented. While we believe the new ERP system will enhance our internal controls, there are inherent risks in implementing any new system, and we will continue to evaluate these control changes as part of our assessment of control design and effectiveness throughout 2022.

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) that occurred 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 we are unable to predict the ultimate outcome of these actions, we believe that any ultimate liability arising from any of these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends.

ITEM 1A. RISK FACTORS

There have been no material changes or updates to the risk factors previously disclosed in our Form 10–K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES BY ISSUER AND USE OF PROCEEDS

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

The following table summarizes our purchases of equity securities during the nine months ended September 30, 2022:

					Maximum
					Number of Shares
				Total Number of	That May Yet be
		Average		Shares Purchased	Purchased Under
	Total Number	Price		as Part of Publicly	the Publicly
	of Shares	Paid per		Announced Plans	Announced Plans
	Purchased (1)	Share		or Programs	or Programs
July 1, 2022 — July 31, 2022	2,919	$	8.39	N/A	N/A
August 1, 2022 — August 31, 2022	717		8.25	N/A	N/A
September 1, 2022 — September 30, 2022	—		—	N/A	N/A
Total	3,636		8.36	N/A	N/A

(1) Represents shares of common stock purchased from employees to satisfy tax withholding obligations in connection with the vesting of restricted stock awards during the period.

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

The exhibits listed below are filed or furnished as part of this report:

3.1	Composite Certificate of Incorporation of Archrock, Inc., as amended as of November 3, 2015, (incorporated by reference to Exhibit 3.3 to Archrock Inc.’s Annual Report on Form 10–K for the year ended December 31, 2015)
3.2	Third Amended and Restated Bylaws of Exterran Holdings, Inc., now Archrock, Inc. (incorporated by reference to Exhibit 3.1 of Archrock Inc.’s Current Report on Form 8–K filed on March 20, 2013)
3.3	Amendment No. 1 to Third Amended and Restated Bylaws of Archrock, Inc. (incorporated by reference to Exhibit 3.1 of Archrock Inc.’s Current Report on Form 8–K filed on May 5, 2020)
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 (formatted in Inline XBRL) pursuant to Rule 405 of Regulation S–T
104.1*	Cover page interactive data file (formatted in Inline XBRL) pursuant to Rule 406 of Regulation S–T

*      Filed herewith

**    Furnished, not filed

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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)
	November 3, 2022

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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: November 3, 2022

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: November 3, 2022

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, 2022 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: November 3, 2022

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, 2022 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: November 3, 2022

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

Cover - shares	9 Months Ended
	Sep. 30, 2022	Oct. 26, 2022
Cover page.
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Sep. 30, 2022
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		155,611,630
Entity Central Index Key	0001389050
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2022
Document Fiscal Period Focus	Q3
Amendment Flag	false

XML

Unaudited Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Current assets:
Cash and cash equivalents	$ 2,042	$ 1,569
Accounts receivable, net of allowance of $1,487 and $2,152, respectively	127,334	104,931
Inventory	84,091	72,869
Other current assets	6,817	7,201
Total current assets	220,284	186,570
Property, plant and equipment, net	2,214,666	2,226,526
Operating lease right-of-use assets	16,089	17,491
Intangible assets, net	39,019	47,887
Contract costs, net	32,598	25,418
Deferred tax assets	37,001	47,879
Other assets	37,051	28,384
Assets of discontinued operations	8,893	9,811
Total assets	2,605,601	2,589,966
Current liabilities:
Accounts payable	89,602	38,920
Accrued liabilities	97,021	82,517
Deferred revenue	7,707	3,817
Total current liabilities	194,330	125,254
Long-term debt	1,498,895	1,530,825
Operating lease liabilities	14,286	15,940
Deferred tax liabilities	1,076	1,136
Other liabilities	19,330	17,505
Liabilities of discontinued operations	7,868	7,868
Total liabilities	1,735,785	1,698,528
Commitments and contingencies (Note 8)
Stockholders' 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, 163,412,780 and 161,482,852 shares issued, respectively	1,633	1,615
Additional paid-in capital	3,453,720	3,440,059
Accumulated deficit	(2,497,002)	(2,463,114)
Accumulated other comprehensive loss		(984)
Treasury stock, 7,801,150 and 7,417,401 common shares, at cost, respectively	(88,535)	(86,138)
Total stockholders' equity	869,816	891,438
Total liabilities and stockholders' equity	$ 2,605,601	$ 2,589,966

XML

Unaudited Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Unaudited Condensed Consolidated Balance Sheets
Accounts receivable, allowance	$ 1,487	$ 2,152
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)	163,412,780	161,482,852
Treasury stock, common shares (in shares)	7,801,150	7,417,401

XML

Unaudited Condensed Consolidated Statements of Operations - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Revenues	$ 213,668	$ 195,166	$ 626,697	$ 586,212
Total cost of sales (excluding depreciation and amortization)	107,527	91,932	310,731	267,957
Selling, general and administrative	30,500	28,839	85,964	80,000
Depreciation and amortization	39,953	45,280	124,348	135,185
Long-lived and other asset impairment	4,154	5,121	16,217	15,154
Restructuring charges		313		1,953
Interest expense	25,177	25,508	74,879	82,711
Gain on sale of assets, net	(12,695)	(15,393)	(33,755)	(29,549)
Other (income) expense, net	(585)	337	(52)	(1,634)
Income before income taxes	19,637	13,229	48,365	34,435
Provision for income taxes	4,266	3,925	14,527	12,210
Net income	$ 15,371	$ 9,304	$ 33,838	$ 22,225
Basic earnings per common share (in dollars per share)	$ 0.10	$ 0.06	$ 0.21	$ 0.14
Diluted earnings per common share(in dollars per share)	$ 0.10	$ 0.06	$ 0.21	$ 0.14
Weighted average common shares outstanding:
Basic (in shares)	153,550	152,158	153,168	151,615
Diluted (in shares)	153,687	152,297	153,297	151,769
Contract Operations
Revenues	$ 170,497	$ 158,911	$ 500,451	$ 488,810
Total cost of sales (excluding depreciation and amortization)	71,694	61,280	204,550	184,032
Aftermarket Services
Revenues	43,171	36,255	126,246	97,402
Total cost of sales (excluding depreciation and amortization)	$ 35,833	$ 30,652	$ 106,181	$ 83,925

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Unaudited Condensed Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Unaudited Condensed Consolidated Statements of Comprehensive Income
Net income	$ 15,371	$ 9,304	$ 33,838	$ 22,225
Other comprehensive income, net of tax:
Interest rate swap gain, net of reclassifications to earnings		585	574	2,547
Amortization of dedesignated interest rate swap		431	410	431
Total other comprehensive income, net of tax		1,016	984	2,978
Comprehensive income	$ 15,371	$ 10,320	$ 34,822	$ 25,203

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Unaudited Condensed Consolidated Statements of Equity - USD ($) $ in Thousands	Common Stock	Additional Paid-in Capital	Accumulated Deficit	Accumulated Other Comprehensive Loss	Treasury Stock, Common	Total
Beginning balance at Dec. 31, 2020	$ 1,600	$ 3,424,624	$ (2,401,988)	$ (5,006)	$ (83,673)	$ 935,557
Beginning balance (in shares) at Dec. 31, 2020	160,014,960
Treasury stock, common shares, Beginning balance (in shares) at Dec. 31, 2020					(7,052,769)
Increase (Decrease) in Stockholders' Equity
Treasury stock purchased					$ (2,409)	(2,409)
Treasury stock purchased (in shares)					(277,316)
Cash dividends			(66,992)			(66,992)
Shares issued under employee stock purchase plan ("ESPP")		546				546
Shares issued under employee stock purchase plan ("ESPP") (in shares)	66,541
Stock-based compensation, net of forfeitures	$ 10	8,731				8,741
Stock-based compensation, net of forfeitures (in shares)	1,020,756				(72,103)
Net proceeds from issuance of common stock	$ 4	3,397				3,401
Net proceeds from issuance of common stock (in shares)	357,148
Comprehensive income (loss)
Net income			22,225			22,225
Other comprehensive income				2,978		2,978
Ending balance at Sep. 30, 2021	$ 1,614	3,437,298	(2,446,755)	(2,028)	$ (86,082)	904,047
Ending balance (in shares) at Sep. 30, 2021	161,459,405
Treasury stock, common shares, Ending balance (in shares) at Sep. 30, 2021					(7,402,188)
Beginning balance at Jun. 30, 2021	$ 1,613	3,434,224	(2,433,553)	(3,044)	$ (85,419)	913,821
Beginning balance (in shares) at Jun. 30, 2021	161,339,554
Treasury stock, common shares, Beginning balance (in shares) at Jun. 30, 2021					(7,278,449)
Increase (Decrease) in Stockholders' Equity
Treasury stock purchased					$ (663)	(663)
Treasury stock purchased (in shares)					(92,540)
Cash dividends			(22,506)			(22,506)
Shares issued under employee stock purchase plan ("ESPP")		175				175
Shares issued under employee stock purchase plan ("ESPP") (in shares)	22,425
Stock-based compensation, net of forfeitures	$ 1	2,899				2,900
Stock-based compensation, net of forfeitures (in shares)	97,426				(31,199)
Comprehensive income (loss)
Net income			9,304			9,304
Other comprehensive income				1,016		1,016
Ending balance at Sep. 30, 2021	$ 1,614	3,437,298	(2,446,755)	(2,028)	$ (86,082)	904,047
Ending balance (in shares) at Sep. 30, 2021	161,459,405
Treasury stock, common shares, Ending balance (in shares) at Sep. 30, 2021					(7,402,188)
Beginning balance at Dec. 31, 2021	$ 1,615	3,440,059	(2,463,114)	(984)	$ (86,138)	$ 891,438
Beginning balance (in shares) at Dec. 31, 2021	161,482,852
Treasury stock, common shares, Beginning balance (in shares) at Dec. 31, 2021					(7,417,401)	(7,417,401)
Increase (Decrease) in Stockholders' Equity
Treasury stock purchased					$ (2,397)	$ (2,397)
Treasury stock purchased (in shares)					(276,342)
Cash dividends			(67,726)			(67,726)
Shares issued under employee stock purchase plan ("ESPP")		462				462
Shares issued under employee stock purchase plan ("ESPP") (in shares)	66,236
Stock-based compensation, net of forfeitures	$ 14	9,021				9,035
Stock-based compensation, net of forfeitures (in shares)	1,416,672				(107,407)
Net proceeds from issuance of common stock	$ 4	4,178				4,182
Net proceeds from issuance of common stock (in shares)	447,020
Comprehensive income (loss)
Net income			33,838			33,838
Other comprehensive income				$ 984		984
Ending balance at Sep. 30, 2022	$ 1,633	3,453,720	(2,497,002)		$ (88,535)	$ 869,816
Ending balance (in shares) at Sep. 30, 2022	163,412,780
Treasury stock, common shares, Ending balance (in shares) at Sep. 30, 2022					(7,801,150)	(7,801,150)
Beginning balance at Jun. 30, 2022	$ 1,633	3,450,603	(2,489,814)		$ (88,504)	$ 873,918
Beginning balance (in shares) at Jun. 30, 2022	163,385,390
Treasury stock, common shares, Beginning balance (in shares) at Jun. 30, 2022					(7,740,919)
Increase (Decrease) in Stockholders' Equity
Treasury stock purchased					$ (31)	(31)
Treasury stock purchased (in shares)					(3,636)
Cash dividends			(22,559)			(22,559)
Shares issued under employee stock purchase plan ("ESPP")		167				167
Shares issued under employee stock purchase plan ("ESPP") (in shares)	27,390
Stock-based compensation, net of forfeitures		2,998				2,998
Stock-based compensation, net of forfeitures (in shares)					(56,595)
Net proceeds from issuance of common stock		(48)				(48)
Comprehensive income (loss)
Net income			15,371			15,371
Ending balance at Sep. 30, 2022	$ 1,633	$ 3,453,720	$ (2,497,002)		$ (88,535)	$ 869,816
Ending balance (in shares) at Sep. 30, 2022	163,412,780
Treasury stock, common shares, Ending balance (in shares) at Sep. 30, 2022					(7,801,150)	(7,801,150)

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Unaudited Condensed Consolidated Statements of Equity (Parenthetical) - $ / shares	3 Months Ended							9 Months Ended
	Sep. 30, 2022	Jun. 30, 2022	Mar. 31, 2022	Dec. 31, 2021	Sep. 30, 2021	Jun. 30, 2021	Mar. 31, 2021	Sep. 30, 2022	Sep. 30, 2021
Unaudited Condensed Consolidated Statements of Equity
Dividend declared per common stock (in dollars per share)	$ 0.145	$ 0.145	$ 0.145	$ 0.145	$ 0.145	$ 0.145	$ 0.145	$ 0.435	$ 0.435

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Unaudited Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021
Cash flows from operating activities:
Net income	$ 33,838	$ 22,225
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	124,348	135,185
Long-lived and other asset impairment	16,217	15,154
Inventory write-downs	1,040	621
Amortization of operating lease right-of-use assets	2,407	2,922
Amortization of debt issuance costs	3,864	8,839
Amortization of debt premium	(1,504)	(1,504)
Amortization of dedesignated interest rate swap	410	431
Interest rate swaps	631	2,866
Stock-based compensation expense	9,035	8,741
Provision for credit losses	(28)	151
Gain on sale of assets, net	(5,535)	(10,604)
Gain on sale of business	(28,220)	(18,945)
Deferred income tax provision	13,624	11,778
Amortization of contract costs	14,211	15,523
Deferred revenue recognized in earnings	(15,709)	(8,081)
Changes in operating assets and liabilities:
Accounts receivable, net	(29,130)	(2,133)
Inventory	(8,339)	(5,994)
Other assets	697	1,326
Contract costs	(22,486)	(11,481)
Accounts payable and other liabilities	37,251	33,626
Deferred revenue recognized in earnings	19,614	8,167
Other	96	(88)
Net cash provided by operating activities	166,332	208,725
Cash flows from investing activities:
Capital expenditures	(171,032)	(70,881)
Proceeds from sale of property, equipment and other assets	13,348	24,683
Proceeds from sale of business	99,785	83,075
Proceeds from insurance and other settlements	3,353	977
Investments in unconsolidated entities	(12,000)
Net cash (used in) provided by investing activities	(66,546)	37,854
Cash flows from financing activities:
Borrowings of long-term debt	579,483	522,751
Repayments of long-term debt	(611,983)	(695,751)
Payments of debt issuance costs		(2,451)
Payments for settlement of interest rate swaps that include financing elements	(1,334)	(3,283)
Dividends paid to stockholders	(67,726)	(66,992)
Net proceeds from issuance of common stock	4,182	3,401
Proceeds from stock issued under ESPP	462	546
Purchases of treasury stock	(2,397)	(2,409)
Net cash used in financing activities	(99,313)	(244,188)
Net increase in cash and cash equivalents	473	2,391
Cash and cash equivalents, beginning of period	1,569	1,097
Cash and cash equivalents, end of period	$ 2,042	$ 3,488

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GENERAL

9 Months Ended

Sep. 30, 2022

GENERAL

GENERAL

NOTE 1. GENERAL

Description of Business

Archrock, Inc. (individually and together with its wholly owned subsidiaries, “we,” “our” or us”) is an energy infrastructure company with a primary focus on midstream natural gas compression. We are the leading provider of natural gas compression services to customers in the energy industry throughout the United States (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.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements included herein have been prepared in accordance with U.S. Generally Accepted Accounting Policies (“GAAP”) and the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP are not required in these interim financial statements and have been condensed or omitted. Management believes that the information furnished reflects all normal recurring adjustments necessary to fairly present our consolidated financial position, results of operations and cash flows for the periods indicated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements presented in our 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.

All intercompany accounts and transactions have been eliminated in consolidation.  In the Notes to Unaudited Condensed Consolidated Financial Statements, all dollar and share amounts in tabulations are in thousands of dollars and shares, respectively, unless otherwise indicated.  

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DISPOSITIONS

9 Months Ended

Sep. 30, 2022

DISPOSITIONS

DISPOSITIONS

NOTE 2. DISPOSITIONS

In September 2022, we completed the sale of certain contract operations customer service agreements and approximately 390 compressors, comprising approximately 100,000 horsepower, used to provide compression services under those agreements, as well as other assets used to support the operations. We allocated customer–related and contract–based intangible assets based on a ratio of the horsepower sold relative to the total horsepower of the asset group. We received cash consideration of $44.3 million for the sale and recorded a gain on the sale of $11.5 million during the three months and nine months ended September 30, 2022.

In May 2022, we completed the sale of certain contract operations customer service agreements and approximately 380 compressors, comprising approximately 70,000 horsepower, used to provide compression services under those agreements, as well as other assets used to support the operations. We allocated customer–related and contract–based intangible assets based on a ratio of the horsepower sold relative to the total horsepower of the asset group. We received cash consideration of $55.5 million for the sale and recorded a gain on the sale of $16.7 million during the nine months ended September 30, 2022.

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INVENTORY

9 Months Ended

Sep. 30, 2022

INVENTORY

INVENTORY

NOTE 3. INVENTORY

Inventory is comprised of the following:

	September 30, 2022		December 31, 2021
Parts and supplies	$	67,459	$	63,628
Work in progress		16,632		9,241
Inventory	$	84,091	$	72,869

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PROPERTY, PLANT AND EQUIPMENT

9 Months Ended

Sep. 30, 2022

PROPERTY, PLANT AND EQUIPMENT

PROPERTY, PLANT AND EQUIPMENT

NOTE 4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is comprised of the following:

	September 30, 2022		December 31, 2021
Compression equipment, facilities and other fleet assets	$	3,243,488	$	3,273,770
Land and buildings		44,056		43,540
Transportation and shop equipment		90,116		92,490
Computer hardware and software		77,357		76,908
Other		5,518		6,229
Property, plant and equipment		3,460,535		3,492,937
Accumulated depreciation		(1,245,869)		(1,266,411)
Property, plant and equipment, net	$	2,214,666	$	2,226,526

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EQUITY INVESTMENTS

9 Months Ended

Sep. 30, 2022

EQUITY INVESTMENTS

EQUITY INVESTMENTS

NOTE 5. EQUITY INVESTMENTS

Investments in which we are deemed to exert significant influence, but not control, are accounted for using the equity method of accounting, except in cases where the fair value option is elected. For such investments where we have elected the fair value option, the election is irrevocable and is applied on an investment–by–investment basis at initial recognition.

In April 2022, we agreed to acquire for cash a 25% equity interest in Ecotec International Holdings, LLC. (“ECOTEC”), a company specializing in methane emissions detection, monitoring and management. We have elected the fair value option to account for this investment (see Note 16). As of September 30, 2022, our ownership interest in ECOTEC is 19%, which is included in Other assets in our unaudited condensed consolidated balance sheets.

Changes in the fair value of this investment are recognized in Other (income) expense, net in our unaudited condensed consolidated statements of operations.

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HOSTING ARRANGEMENTS

9 Months Ended

Sep. 30, 2022

HOSTING ARRANGEMENTS

Hosting Arrangements

NOTE 6. HOSTING ARRANGEMENTS

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

As of September 30, 2022 and December 31, 2021, we had $15.1 million and $12.7 million, respectively, of capitalized implementation costs related to these hosting arrangements included in Other assets in our unaudited condensed consolidated balance sheets. Accumulated amortization was $2.1 million and $0.7 million as of September 30, 2022 and December 31, 2021, respectively.

Included in Selling, general and administrative in our unaudited condensed consolidated statements of operations is amortization of $0.6 million and $0.1 million during the three months ended September 30, 2022 and 2021, respectively, and $1.5 million and $0.3 million during the nine months ended September 30, 2022 and 2021, respectively.

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LONG-TERM DEBT

9 Months Ended

Sep. 30, 2022

LONG-TERM DEBT

LONG-TERM DEBT

NOTE 7. LONG–TERM DEBT

Long–term debt is comprised of the following:

	September 30, 2022		December 31, 2021
Credit Facility	$	202,000	$	234,500
6.25% senior notes due April 2028
Principal outstanding		800,000		800,000
Unamortized debt premium		11,031		12,536
Unamortized debt issuance costs		(9,158)		(10,406)
		801,873		802,130
6.875% senior notes due April 2027
Principal outstanding		500,000		500,000
Unamortized debt issuance costs		(4,978)		(5,805)
		495,022		494,195
Long-term debt	$	1,498,895	$	1,530,825

Our $750.0 million asset–based revolving Credit Facility, as amended (the “Credit Facility”), matures in November 2024. As of September 30, 2022, there were $5.8 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.4%. The weighted average annual interest rate on the outstanding balance under our Credit Facility, excluding the effect of interest rate swaps, was 5.5% and 2.6% at September 30, 2022 and December 31, 2021, respectively. We incurred $0.5 million of commitment fees on the daily unused amount of the Credit Facility in each of the three months ended September 30, 2022 and 2021 and $1.5 million in each of the nine months ended September 30, 2022 and 2021.

As of September 30, 2022, we were in compliance with all covenants under our Credit Facility agreement. As a result of the Credit Facility’s financial ratio requirements, $486.4 million of the $542.2 million of undrawn capacity was available for additional borrowings as of September 30, 2022.

In February 2021, we amended our Credit Facility to, among other things, reduce the aggregate revolving commitment from $1.25 billion to $750.0 million and adjust certain financial ratios. We wrote off $4.9 million of unamortized deferred financing costs as a result of the amendment, which was recorded to interest expense in our unaudited condensed consolidated statements of operations during the nine months ended September 30, 2021.

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COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2022

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

NOTE 8. COMMITMENTS AND CONTINGENCIES

Insurance Matters

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

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

In August 2021, Hurricane Ida caused operational disruptions, damage to compressors and a temporary shutdown of facilities in Louisiana that negatively impacted our financial performance. At December 31, 2021, we had an insurance recovery receivable of $2.8 million related to the facility and compressor damages, which we received in cash during the three months ended March 31, 2022. In September 2022, we received $0.4 million of business interruption insurance recovery proceeds, which resolved the remainder of our insurance claims related to Hurricane Ida.

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, 2022 and December 31, 2021, we had $3.9 million and $5.8 million, respectively, accrued 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.

In 2021, one of our sales and use tax audits advanced from the audit review phase to the contested hearing phase. As of both September 30, 2022 and December 31, 2021, we had $0.6 million accrued for this audit.

Litigation and Claims

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

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STOCKHOLDERS' EQUITY

9 Months Ended

Sep. 30, 2022

STOCKHOLDERS' EQUITY

STOCKHOLDERS' EQUITY

NOTE 9. STOCKHOLDERS’ EQUITY

Equity Distribution Agreement

During the nine months ended September 30, 2022, we sold 447,020 shares of common stock for net proceeds of $4.2 million pursuant to an Equity Distribution agreement, dated February 23, 2021, entered into with Wells Fargo Securities, LLC and BofA Securities, Inc., as sales agents, relating to the at–the–market offer and sale of shares of our common stock from time to time (the “Equity Distribution Agreement”). During the nine months ended September 30, 2021, we sold 357,148 shares of common stock under this program for net proceeds of $3.4 million.

Cash Dividends

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

	Dividends per
	Common Share		Dividends Paid
2022
Q3	$	0.145	$	22,559
Q2		0.145		22,494
Q1		0.145		22,673
2021
Q4	$	0.145	$	22,351
Q3		0.145		22,506
Q2		0.145		22,331
Q1		0.145		22,155

On October 27, 2022, our Board of Directors declared a quarterly dividend of $0.145 per share of common stock to be paid on November 15, 2022 to stockholders of record at the close of business on November 8, 2022.

Accumulated Other Comprehensive Loss

Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with owners. Our accumulated other comprehensive loss consists of changes in the fair value of our interest rate swap derivative instruments, net of tax. See Note 15 for further details on our interest rate swap derivative instruments.

The following table presents the changes in accumulated other comprehensive loss, net of tax:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Beginning accumulated other comprehensive loss	$	—	$	(3,044)	$	(984)	$	(5,006)
Other comprehensive income, net of tax:
Loss recognized in other comprehensive income		—		(458)		(405)		(529)
Loss reclassified from accumulated other comprehensive loss to interest expense		—		1,474		1,389		3,507
Total other comprehensive income		—		1,016		984		2,978
Ending accumulated other comprehensive loss	$	—	$	(2,028)	$	—	$	(2,028)

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REVENUE FROM CONTRACTS WITH CUSTOMERS

9 Months Ended

Sep. 30, 2022

REVENUE FROM CONTRACTS WITH CUSTOMERS

REVENUE FROM CONTRACTS WITH CUSTOMERS

NOTE 10. REVENUE FROM CONTRACTS WITH CUSTOMERS

The following table presents our revenue from contracts with customers by segment (see Note 18) and disaggregated by revenue source:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Contract operations:
0 ― 1,000 horsepower per unit	$	38,967	$	41,576	$	121,298	$	134,413
1,001 ― 1,500 horsepower per unit		72,463		66,138		208,161		201,454
Over 1,500 horsepower per unit		58,818		51,018		170,297		152,360
Other (1)		249		179		695		583
Total contract operations revenue (2)		170,497		158,911		500,451		488,810
Aftermarket services:
Services		23,528		19,249		66,666		53,149
Over–the–counter (“OTC”) parts and components sales		19,643		17,006		59,580		44,253
Total aftermarket services revenue (3)		43,171		36,255		126,246		97,402
Total revenue	$	213,668	$	195,166	$	626,697	$	586,212

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

(2) Includes $0.7 million and $0.7 million for the three months ended September 30, 2022 and 2021, respectively, and $1.8 million and $3.1 million for the nine months ended September 30, 2022 and 2021, respectively, related to billable maintenance on owned compressors that was recognized at a point in time. All other contract operations revenue is recognized over time.

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

Performance Obligations

As of September 30, 2022, we had $282.3 million of remaining performance obligations related to our contract operations segment, which will be recognized through 2027 as follows:

	2022		2023		2024		2025		2026		2027		Total
Remaining performance obligations	$	99,377	$	122,031	$	46,882	$	12,870	$	919	$	192	$	282,271

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

Contract Assets and Liabilities

Contract Assets

As of September 30, 2022 and December 31, 2021, our receivables from contracts with customers, net of allowance for credit losses, were $118.9 million and $84.7 million, respectively.

Allowance for Credit Losses

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

Due to the short-term nature of our trade receivables, we consider the amortized cost to be the same as the carrying amount of the receivable, excluding the allowance for credit losses. We recognize an allowance for credit losses when a receivable is recorded, even when the risk of loss is remote. We utilize an aging schedule to determine our allowance for credit losses and measure expected credit losses on a collective (pool) basis when similar risk characteristics exist. We rely primarily on ratings assigned by external rating agencies and credit monitoring services to assess credit risk and aggregate customers first by low, medium or high risk asset pools, and then by delinquency status. We also consider the internal risk associated with geographic location and the services we provide to the customer when determining asset pools. If a customer does not share similar risk characteristics with other customers, we evaluate the customer’s outstanding trade receivables for expected credit losses on an individual basis. Trade receivables evaluated individually are not included in our collective assessment. Each reporting period, we reassess our customers’ risk profiles and determine the appropriate asset pool classification, or perform individual assessments of expected credit losses, based on the customers’ risk characteristics at the reporting date.

The contractual life of our trade receivables is primarily 30 days based on the payment terms specified in the contract. Contract operations services are generally billed monthly at the beginning of the month in which service is being provided. Aftermarket services billings typically occur when parts are delivered or service is completed. Loss rates are separately determined for each asset pool based on the length of time a trade receivable has been outstanding. We analyze two years of internal historical loss data, including the effects of prepayments, write-offs and subsequent recoveries, to determine our historical loss experience. Our historical loss information is a relevant data point for estimating credit losses, as the data closely aligns with trade receivables due from our customers. Ratings assigned by external rating agencies and credit monitoring services consider past performance and forecasts of future economic conditions in assessing credit risk. We routinely update our historical loss data to reflect our customers’ current risk profile, to ensure the historical data and loss rates are relevant to the pool of assets for which we are estimating expected credit losses.

Our allowance for credit losses balance changed as follows during the nine months ended September 30, 2022:

Balance at December 31, 2021	$	2,152
Provision for credit losses		(28)
Write-offs charged against allowance		(637)
Balance at September 30, 2022	$	1,487

Contract Liabilities

Freight billings to customers for the transport of compression assets, customer–specified modifications of compression assets and milestone billings on aftermarket services often result in a contract liability. As of September 30, 2022 and December 31, 2021, our contract liabilities were $8.3 million and $4.4 million, respectively.

During the nine months ended September 30, 2022, we deferred revenue of $19.6 million and recognized deferred revenue of $15.7 million. The revenue recognized during the period primarily related to freight billings and milestone billings on aftermarket services.

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STOCK-BASED COMPENSATION

9 Months Ended

Sep. 30, 2022

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

NOTE 11. STOCK–BASED COMPENSATION

We grant various forms of stock–based compensation to our employees and non–employee directors. These stock–based awards can consist of stock options, stock appreciation rights, restricted stock awards, restricted stock units (“RSUs”), performance–based RSUs, other stock–based awards and dividend equivalent rights. We recognize stock–based compensation expense related to restricted stock awards, RSUs, performance–based RSUs and shares issued under our ESPP.

The following table presents the stock–based compensation expense recognized in our unaudited condensed consolidated statements of operations:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Equity award expense	$	2,998	$	2,900	$	9,035	$	8,741
Liability award expense		24		127		904		1,121
Total stock-based compensation expense	$	3,022	$	3,027	$	9,939	$	9,862

The following table presents our restricted stock activity in the nine months ended September 30, 2022:

		Weighted
		Average
		Grant Date
	Shares	Fair Value
	(in thousands)	Per Share
Non-vested restricted stock, December 31, 2021	2,578	$	10.35
Granted	1,861		9.03
Vested	(1,152)		10.25
Canceled	(244)		9.28
Non-vested restricted stock, September 30, 2022 (1)	3,043	$	9.67

(1) Comprised of 508 cash-settled units and 2,534 stock–settled awards and units.

As of September 30, 2022, there was $17.1 million of unrecognized stock–based compensation expense which is expected to be recognized over a weighted average period of 1.9 years.

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LONG-LIVED AND OTHER ASSET IMPAIRMENT

9 Months Ended

Sep. 30, 2022

LONG-LIVED AND OTHER ASSET IMPAIRMENT

Long-Lived and Other Asset Impairment

NOTE 12. LONG–LIVED AND OTHER ASSET IMPAIRMENT

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

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

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

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Idle compressors retired from the active fleet		25		60		100		175
Horsepower of idle compressors retired from the active fleet		23,000		24,000		80,000		61,000
Impairment recorded on idle compressors retired from the active fleet	$	4,149	$	5,120	$	16,205	$	14,964

See Note 16 for additional information.

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INCOME TAXES

9 Months Ended

Sep. 30, 2022

INCOME TAXES

INCOME TAXES

NOTE 13. INCOME TAXES

Valuation Allowance

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

Effective Tax Rate

The year-to-date effective tax rate for the nine months ended September 30, 2022 differed significantly from our statutory rate primarily due to unrecognized tax benefits and the limitation on executive compensation.

Unrecognized Tax Benefits

As of September 30, 2022, we believe it is reasonably possible that $2.7 million of our unrecognized tax benefits, including penalties, interest and discontinued operations, will be reduced prior to September 30, 2023 due to the settlement of audits or the expiration of statutes of limitations or both. However, due to the uncertain and complex application of the tax regulations, it is possible that the ultimate resolution of these matters may result in liabilities that could materially differ from this estimate.

Impact of New Legislation

On August 16, 2022, President Biden signed into law the Inflation Reduction Act (Public Law Number 117–169). This legislation is expected to have an immaterial impact to our unaudited condensed consolidated financial statements.

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EARNINGS PER COMMON SHARE

9 Months Ended

Sep. 30, 2022

EARNINGS PER COMMON SHARE

EARNINGS PER COMMON SHARE

NOTE 14. EARNINGS PER COMMON SHARE

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

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

The following table shows the calculation of net income attributable to common stockholders, which is used in the calculation of basic and diluted earnings per common share, potential shares of common stock that were included in computing diluted earnings per common share and the potential shares of common stock issuable that were excluded from computing diluted earnings per common share as their inclusion would have been anti–dilutive:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Net income	$	15,371	$	9,304	$	33,838	$	22,225
Allocation of earnings to participating securities		(294)		(456)		(1,114)		(909)
Net income attributable to common stockholders	$	15,077	$	8,848	$	32,724	$	21,316
Weighted average common shares outstanding used in basic earnings per common share		153,550		152,158		153,168		151,615
Effect of dilutive securities:
Restricted stock units		131		138		125		152
ESPP shares		6		1		4		2
Weighted average common shares outstanding used in diluted earnings per common share		153,687		152,297		153,297		151,769
On exercise of options where exercise price is greater than average market price for the period		—		15		—		27

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DERIVATIVES AND HEDGING

9 Months Ended

Sep. 30, 2022

DERIVATIVES AND HEDGING

DERIVATIVES AND HEDGING

NOTE 15. DERIVATIVES AND HEDGING

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

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

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

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

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Total amount of interest expense in which the effects of cash flow hedges and undesignated interest rate swaps are recorded	$	25,177	$	25,508	$	74,879	$	82,711
Interest rate swaps designated as cash flow hedging instruments:
Pre-tax loss recognized in other comprehensive income	$	—	$	(581)	$	(512)	$	(670)
Pre-tax loss reclassified from accumulated other comprehensive loss into interest expense		—		(1,867)		(1,758)		(4,440)
Interest rate swaps not designated as hedging instruments:
Gain recognized in interest expense	$	—	$	532	$	523	$	532

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

	September 30, 2022		December 31, 2021
Interest rate swaps designated as cash flow hedging instruments
Accrued liabilities	$	—	$	727
Interest rate swaps not designated as hedging instruments
Accrued liabilities		—		523
Total derivative liabilities	$	—	$	1,250

Please see Note 9 and Note 16 for additional details on our derivative instruments.

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FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2022

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

16. FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Investment in ECOTEC

During the nine months ended September 30, 2022, we acquired a 19% equity interest in ECOTEC. We have elected the fair value option to account for this investment. The investment is valued at its transaction price, unless and until there is a significant change in the investment, such as an impairment or an additional investment. The investment’s fair value is reviewed periodically and is classified as a Level 3 measurement. As of September 30, 2022, the fair value of our investment in ECOTEC was as follows:

	September 30, 2022
Investment in ECOTEC	$	12,000

Interest Rate Swaps

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

	September 30, 2022		December 31, 2021
Derivative liabilities	$	—	$	1,250

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

During the three months and nine months ended September 30, 2022, we recorded nonrecurring fair value measurements of $4.1 million and $16.2 million, respectively, related to our idle compressors (see Note 12). Our estimate of the compressors’ fair value was primarily based on the expected net sale proceeds compared with 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. The fair value of our compressors impaired in 2022 and 2021 was as follows:

	September 30, 2022		December 31, 2021
Impaired compressors	$	1,548	$	4,380

These fair value measurements are classified as Level 3. The significant unobservable inputs used to develop the above fair value measurements were weighted by the relative fair value of the compressors being measured. Additional quantitative information related to our significant unobservable inputs follows:

	Range	Weighted Average (1)
Estimated net sale proceeds:
As of September 30, 2022	$0 - $621 per horsepower	$44 per horsepower
As of December 31, 2021	$0 - $621 per horsepower	$35 per horsepower

(1) Calculated based on an estimated discount for market liquidity of 56% and 64% as of September 30, 2022 and December 31, 2021, respectively.

Other Financial Instruments

The carrying amounts of our cash, accounts receivable and accounts payable approximate fair value due to the short–term nature of these instruments.

The carrying amount of borrowings outstanding under our Credit Facility approximates fair value due to the variable interest rate. The measurement of the fair value of these outstanding borrowings is a Level 3 measurement.

The fair value of our fixed rate debt is estimated using yields observable in active markets, which are Level 2 inputs, and was as follows:

	September 30, 2022		December 31, 2021
Carrying amount of fixed rate debt (1)	$	1,296,895	$	1,296,325
Fair value of fixed rate debt		1,155,760		1,361,000

(1) Carrying amounts are shown net of unamortized premium and deferred financing costs. See Note 7.

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RELATED PARTY TRANSACTIONS

9 Months Ended

Sep. 30, 2022

RELATED PARTY TRANSACTIONS

RELATED PARTY TRANSACTIONS

NOTE 17. RELATED PARTY TRANSACTIONS

Old Ocean Reserves, LP (“Old Ocean Reserves”), formerly JDH Capital Holdings, L.P., an affiliate of our customer Hilcorp Energy Company (“Hilcorp”), has the right to designate one director to serve on our board of directors as long as Old Ocean Reserves or its successors (together with its affiliates) owns at least 7.5% of our outstanding common stock. As of September 30, 2022, Old Ocean Reserves owned 10.8% of our outstanding common stock. Jason C. Rebrook, Chief Executive Officer and Director of Harvest Midstream Company, a Hilcorp affiliate, has served as Old Ocean Reserves’ representative director since July 2020.

Revenue from Hilcorp was $9.2 million and $9.5 million during the three months ended September 30, 2022 and 2021, respectively, and $27.8 million and $28.6 million during the nine months ended September 30, 2022 and 2021, respectively. Accounts receivable, net due from Hilcorp was $3.2 million and $3.7 million as of September 30, 2022 and December 31, 2021, respectively.

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SEGMENT INFORMATION

9 Months Ended

Sep. 30, 2022

SEGMENT INFORMATION

SEGMENT INFORMATION

NOTE 18. SEGMENT INFORMATION

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

We evaluate the performance of our segments based on gross margin, defined as revenue less cost of sales (excluding depreciation and amortization) for each segment. Segment revenue includes only sales to external customers.

Summarized financial information for our reporting segments is shown below:

	Contract		Aftermarket
	Operations		Services		Total
Three months ended September 30, 2022
Revenue	$	170,497	$	43,171	$	213,668
Gross margin		98,803		7,338		106,141
Three months ended September 30, 2021
Revenue	$	158,911	$	36,255	$	195,166
Gross margin		97,631		5,603		103,234
Nine months ended September 30, 2022
Revenue	$	500,451	$	126,246	$	626,697
Gross margin		295,901		20,065		315,966
Nine months ended September 30, 2021
Revenue	$	488,810	$	97,402	$	586,212
Gross margin		304,778		13,477		318,255

The following table reconciles total gross margin to income before income taxes:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Total gross margin	$	106,141	$	103,234	$	315,966	$	318,255
Less:
Selling, general and administrative		30,500		28,839		85,964		80,000
Depreciation and amortization		39,953		45,280		124,348		135,185
Long-lived and other asset impairment		4,154		5,121		16,217		15,154
Restructuring charges		—		313		—		1,953
Interest expense		25,177		25,508		74,879		82,711
Gain on sale of assets, net		(12,695)		(15,393)		(33,755)		(29,549)
Other (income) expense, net		(585)		337		(52)		(1,634)
Income before income taxes	$	19,637	$	13,229	$	48,365	$	34,435

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SUBSEQUENT EVENTS

9 Months Ended

Sep. 30, 2022

SUBSEQUENT EVENTS

SUBSEQUENT EVENTS

NOTE 19. SUBSEQUENT EVENTS

On October 3, 2022, we acquired an additional equity interest in ECOTEC, which increased our total ownership interest to 23%.

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GENERAL (Policies)

9 Months Ended

Sep. 30, 2022

GENERAL

Basis of Presentation

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements included herein have been prepared in accordance with U.S. Generally Accepted Accounting Policies (“GAAP”) and the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP are not required in these interim financial statements and have been condensed or omitted. Management believes that the information furnished reflects all normal recurring adjustments necessary to fairly present our consolidated financial position, results of operations and cash flows for the periods indicated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements presented in our 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.

All intercompany accounts and transactions have been eliminated in consolidation.  In the Notes to Unaudited Condensed Consolidated Financial Statements, all dollar and share amounts in tabulations are in thousands of dollars and shares, respectively, unless otherwise indicated.  

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INVENTORY (Tables)

9 Months Ended

Sep. 30, 2022

INVENTORY

Schedule of inventory, net of reserves

	September 30, 2022		December 31, 2021
Parts and supplies	$	67,459	$	63,628
Work in progress		16,632		9,241
Inventory	$	84,091	$	72,869

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PROPERTY, PLANT AND EQUIPMENT (Tables)

9 Months Ended

Sep. 30, 2022

PROPERTY, PLANT AND EQUIPMENT

Schedule of property, plant and equipment, net

	September 30, 2022		December 31, 2021
Compression equipment, facilities and other fleet assets	$	3,243,488	$	3,273,770
Land and buildings		44,056		43,540
Transportation and shop equipment		90,116		92,490
Computer hardware and software		77,357		76,908
Other		5,518		6,229
Property, plant and equipment		3,460,535		3,492,937
Accumulated depreciation		(1,245,869)		(1,266,411)
Property, plant and equipment, net	$	2,214,666	$	2,226,526

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LONG-TERM DEBT (Tables)

9 Months Ended

Sep. 30, 2022

LONG-TERM DEBT

Schedule of long-term debt

	September 30, 2022		December 31, 2021
Credit Facility	$	202,000	$	234,500
6.25% senior notes due April 2028
Principal outstanding		800,000		800,000
Unamortized debt premium		11,031		12,536
Unamortized debt issuance costs		(9,158)		(10,406)
		801,873		802,130
6.875% senior notes due April 2027
Principal outstanding		500,000		500,000
Unamortized debt issuance costs		(4,978)		(5,805)
		495,022		494,195
Long-term debt	$	1,498,895	$	1,530,825

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STOCKHOLDERS' EQUITY (Tables)

9 Months Ended

Sep. 30, 2022

STOCKHOLDERS' EQUITY

Summary of entity's dividends per common share

	Dividends per
	Common Share		Dividends Paid
2022
Q3	$	0.145	$	22,559
Q2		0.145		22,494
Q1		0.145		22,673
2021
Q4	$	0.145	$	22,351
Q3		0.145		22,506
Q2		0.145		22,331
Q1		0.145		22,155

Schedule of Accumulated Other Comprehensive Loss

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Beginning accumulated other comprehensive loss	$	—	$	(3,044)	$	(984)	$	(5,006)
Other comprehensive income, net of tax:
Loss recognized in other comprehensive income		—		(458)		(405)		(529)
Loss reclassified from accumulated other comprehensive loss to interest expense		—		1,474		1,389		3,507
Total other comprehensive income		—		1,016		984		2,978
Ending accumulated other comprehensive loss	$	—	$	(2,028)	$	—	$	(2,028)

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REVENUE FROM CONTRACTS WITH CUSTOMERS (Tables)

9 Months Ended

Sep. 30, 2022

REVENUE FROM CONTRACTS WITH CUSTOMERS

Schedule of disaggregation of revenue

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Contract operations:
0 ― 1,000 horsepower per unit	$	38,967	$	41,576	$	121,298	$	134,413
1,001 ― 1,500 horsepower per unit		72,463		66,138		208,161		201,454
Over 1,500 horsepower per unit		58,818		51,018		170,297		152,360
Other (1)		249		179		695		583
Total contract operations revenue (2)		170,497		158,911		500,451		488,810
Aftermarket services:
Services		23,528		19,249		66,666		53,149
Over–the–counter (“OTC”) parts and components sales		19,643		17,006		59,580		44,253
Total aftermarket services revenue (3)		43,171		36,255		126,246		97,402
Total revenue	$	213,668	$	195,166	$	626,697	$	586,212

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

(2) Includes $0.7 million and $0.7 million for the three months ended September 30, 2022 and 2021, respectively, and $1.8 million and $3.1 million for the nine months ended September 30, 2022 and 2021, respectively, related to billable maintenance on owned compressors that was recognized at a point in time. All other contract operations revenue is recognized over time.

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

Schedule of remaining Performance Obligation

	2022		2023		2024		2025		2026		2027		Total
Remaining performance obligations	$	99,377	$	122,031	$	46,882	$	12,870	$	919	$	192	$	282,271

Summary of changes in allowance for credit losses

Balance at December 31, 2021	$	2,152
Provision for credit losses		(28)
Write-offs charged against allowance		(637)
Balance at September 30, 2022	$	1,487

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STOCK-BASED COMPENSATION (Tables)

9 Months Ended

Sep. 30, 2022

STOCK-BASED COMPENSATION

Schedule of allocated stock-based compensation

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Equity award expense	$	2,998	$	2,900	$	9,035	$	8,741
Liability award expense		24		127		904		1,121
Total stock-based compensation expense	$	3,022	$	3,027	$	9,939	$	9,862

Schedule of restricted stock activity

		Weighted
		Average
		Grant Date
	Shares	Fair Value
	(in thousands)	Per Share
Non-vested restricted stock, December 31, 2021	2,578	$	10.35
Granted	1,861		9.03
Vested	(1,152)		10.25
Canceled	(244)		9.28
Non-vested restricted stock, September 30, 2022 (1)	3,043	$	9.67

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LONG-LIVED AND OTHER ASSET IMPAIRMENT (Tables)

9 Months Ended

Sep. 30, 2022

LONG-LIVED AND OTHER ASSET IMPAIRMENT

Schedule of impairment of long-lived assets

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Idle compressors retired from the active fleet		25		60		100		175
Horsepower of idle compressors retired from the active fleet		23,000		24,000		80,000		61,000
Impairment recorded on idle compressors retired from the active fleet	$	4,149	$	5,120	$	16,205	$	14,964

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EARNINGS PER COMMON SHARE (Tables)

9 Months Ended

Sep. 30, 2022

EARNINGS PER COMMON SHARE

Schedule of calculation of basic and diluted earnings per common share

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Net income	$	15,371	$	9,304	$	33,838	$	22,225
Allocation of earnings to participating securities		(294)		(456)		(1,114)		(909)
Net income attributable to common stockholders	$	15,077	$	8,848	$	32,724	$	21,316
Weighted average common shares outstanding used in basic earnings per common share		153,550		152,158		153,168		151,615
Effect of dilutive securities:
Restricted stock units		131		138		125		152
ESPP shares		6		1		4		2
Weighted average common shares outstanding used in diluted earnings per common share		153,687		152,297		153,297		151,769
On exercise of options where exercise price is greater than average market price for the period		—		15		—		27

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DERIVATIVES AND HEDGING (Tables)

9 Months Ended

Sep. 30, 2022

DERIVATIVES AND HEDGING

Schedule of effect of derivative instruments on results of operations

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Total amount of interest expense in which the effects of cash flow hedges and undesignated interest rate swaps are recorded	$	25,177	$	25,508	$	74,879	$	82,711
Interest rate swaps designated as cash flow hedging instruments:
Pre-tax loss recognized in other comprehensive income	$	—	$	(581)	$	(512)	$	(670)
Pre-tax loss reclassified from accumulated other comprehensive loss into interest expense		—		(1,867)		(1,758)		(4,440)
Interest rate swaps not designated as hedging instruments:
Gain recognized in interest expense	$	—	$	532	$	523	$	532

Schedule of effect of derivative instruments on consolidated financial position

	September 30, 2022		December 31, 2021
Interest rate swaps designated as cash flow hedging instruments
Accrued liabilities	$	—	$	727
Interest rate swaps not designated as hedging instruments
Accrued liabilities		—		523
Total derivative liabilities	$	—	$	1,250

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FAIR VALUE MEASUREMENTS (Tables)

9 Months Ended

Sep. 30, 2022

Fair value

Schedule of fair value of equity interest

	September 30, 2022
Investment in ECOTEC	$	12,000

Schedule of fair value of derivative liabilities

	September 30, 2022		December 31, 2021
Derivative liabilities	$	—	$	1,250

Schedule of carrying value and estimated fair value of debt instruments

	September 30, 2022		December 31, 2021
Carrying amount of fixed rate debt (1)	$	1,296,895	$	1,296,325
Fair value of fixed rate debt		1,155,760		1,361,000

(1) Carrying amounts are shown net of unamortized premium and deferred financing costs. See Note 7.

Compressors

Fair value

Schedule of non-recurring fair value assets

	September 30, 2022		December 31, 2021
Impaired compressors	$	1,548	$	4,380

Schedule of significant unobservable inputs

	Range	Weighted Average (1)
Estimated net sale proceeds:
As of September 30, 2022	$0 - $621 per horsepower	$44 per horsepower
As of December 31, 2021	$0 - $621 per horsepower	$35 per horsepower

(1) Calculated based on an estimated discount for market liquidity of 56% and 64% as of September 30, 2022 and December 31, 2021, respectively.

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SEGMENT INFORMATION (Tables)

9 Months Ended

Sep. 30, 2022

SEGMENT INFORMATION

Summary of revenue and other financial information by reportable segment

	Contract		Aftermarket
	Operations		Services		Total
Three months ended September 30, 2022
Revenue	$	170,497	$	43,171	$	213,668
Gross margin		98,803		7,338		106,141
Three months ended September 30, 2021
Revenue	$	158,911	$	36,255	$	195,166
Gross margin		97,631		5,603		103,234
Nine months ended September 30, 2022
Revenue	$	500,451	$	126,246	$	626,697
Gross margin		295,901		20,065		315,966
Nine months ended September 30, 2021
Revenue	$	488,810	$	97,402	$	586,212
Gross margin		304,778		13,477		318,255

Reconciliation of total gross margin to income before taxes

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Total gross margin	$	106,141	$	103,234	$	315,966	$	318,255
Less:
Selling, general and administrative		30,500		28,839		85,964		80,000
Depreciation and amortization		39,953		45,280		124,348		135,185
Long-lived and other asset impairment		4,154		5,121		16,217		15,154
Restructuring charges		—		313		—		1,953
Interest expense		25,177		25,508		74,879		82,711
Gain on sale of assets, net		(12,695)		(15,393)		(33,755)		(29,549)
Other (income) expense, net		(585)		337		(52)		(1,634)
Income before income taxes	$	19,637	$	13,229	$	48,365	$	34,435

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GENERAL (Details)	9 Months Ended
	Sep. 30, 2022 segment
GENERAL
Number of reportable segments	2

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DISPOSITIONS (Details) hp in Thousands, $ in Thousands	1 Months Ended		3 Months Ended	9 Months Ended
	Sep. 30, 2022 USD ($) CompressorUnit hp	May 31, 2022 CompressorUnit hp	Sep. 30, 2022 USD ($)	Sep. 30, 2022 USD ($)	Sep. 30, 2021 USD ($)
Transactions
Gain on disposition				$ 28,220	$ 18,945
Disposed of by Sale | May 2022 Disposition
Transactions
Number of compressors | CompressorUnit		380
Compressor horsepower | hp		70
Cash consideration	$ 55,500		$ 55,500	$ 55,500
Disposal Group, Not Discontinued Operation, Name of Segment		Contract Operations		Contract Operations
Gain on disposition				$ 16,700
Disposed of by Sale | September 2022 Disposition
Transactions
Number of compressors | CompressorUnit	390
Compressor horsepower | hp	100
Cash consideration	$ 44,300		$ 44,300	$ 44,300
Disposal Group, Not Discontinued Operation, Name of Segment	Contract Operations		Contract Operations	Contract Operations
Gain on disposition			$ 11,500	$ 11,500

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INVENTORY (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Composition of Inventory net of reserves
Parts and supplies	$ 67,459	$ 63,628
Work in progress	16,632	9,241
Inventory	$ 84,091	$ 72,869

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PROPERTY, PLANT AND EQUIPMENT (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Property, Plant and Equipment
Property, plant and equipment, gross	$ 3,460,535	$ 3,492,937
Accumulated depreciation	(1,245,869)	(1,266,411)
Property, plant and equipment, net	2,214,666	2,226,526
Compression equipment, facilities and other fleet assets
Property, Plant and Equipment
Property, plant and equipment, gross	3,243,488	3,273,770
Land and buildings
Property, Plant and Equipment
Property, plant and equipment, gross	44,056	43,540
Transportation and shop equipment
Property, Plant and Equipment
Property, plant and equipment, gross	90,116	92,490
Computer hardware and software
Property, Plant and Equipment
Property, plant and equipment, gross	77,357	76,908
Other
Property, Plant and Equipment
Property, plant and equipment, gross	$ 5,518	$ 6,229

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EQUITY INVESTMENTS (Details) - Ecotec	1 Months Ended
	Apr. 30, 2022	Sep. 30, 2022
Investments
Equity interest agreed to acquire (as a percent)	25.00%
Ownership interest (as a percent)		19.00%

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HOSTING ARRANGEMENTS (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021	Dec. 31, 2021
HOSTING ARRANGEMENTS
Hosting arrangements, Capitalized costs	$ 15.1		$ 15.1		$ 12.7
Hosting arrangements, Accumulated amortization	2.1		2.1		$ 0.7
Hosting arrangements, Amortization	$ 0.6	$ 0.1	$ 1.5	$ 0.3

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LONG-TERM DEBT - Schedule of Long-term Debt (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Debt Instruments
Long-term debt	$ 1,498,895	$ 1,530,825
Credit facility
Debt Instruments
Long-term debt	202,000	234,500
6.25% senior notes due April 2028
Debt Instruments
Principal outstanding	800,000	800,000
Unamortized debt premium	11,031	12,536
Unamortized debt issuance costs	(9,158)	(10,406)
Long-term debt	$ 801,873	$ 802,130
Interest rate (as a percent)	6.25%	6.25%
6.875% senior notes due April 2027
Debt Instruments
Principal outstanding	$ 500,000	$ 500,000
Unamortized debt issuance costs	(4,978)	(5,805)
Long-term debt	$ 495,022	$ 494,195
Interest rate (as a percent)	6.875%	6.875%

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LONG-TERM DEBT - Credit Facility (Details) - Credit facility - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021	Dec. 31, 2021	Feb. 28, 2021	Dec. 31, 2020
Line of Credit Facility
Maximum borrowing capacity	$ 750.0		$ 750.0			$ 750.0	$ 1,250.0
Letter of credit outstanding	$ 5.8		$ 5.8
Debt instrument, variable rate (percentage)			2.40%
Debt instrument weighted average interest rate (percent)	5.50%		5.50%		2.60%
Commitment fee amount	$ 0.5	$ 0.5	$ 1.5	$ 1.5
Current borrowing capacity	486.4		486.4
Undrawn capacity	$ 542.2		$ 542.2
Debt issuance cost written off				$ 4.9

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COMMITMENTS AND CONTINGENCIES - Insurance Matters (Details) - USD ($) $ in Thousands	1 Months Ended	3 Months Ended	9 Months Ended
	Sep. 30, 2022	Mar. 31, 2022	Sep. 30, 2022	Sep. 30, 2021	Dec. 31, 2021
Natural disaster
Proceeds from insurance and other settlements			$ 3,353	$ 977
Hurricane Ida
Natural disaster
Insurance recovery receivable					$ 2,800
Proceeds from insurance and other settlements	$ 400	$ 2,800

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COMMITMENTS AND CONTINGENCIES - Tax Matters - Loss contingencies (Details) - USD ($) $ in Millions	Sep. 30, 2022	Dec. 31, 2021
Non-income based tax audits
Loss Contingencies
Accrued liability for the outcomes of non-income based tax audits	$ 3.9	$ 5.8
Non-income based tax audits in contested hearing phase
Loss Contingencies
Accrued liability for the outcomes of non-income based tax audits	$ 0.6	$ 0.6

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STOCKHOLDERS' EQUITY - Equity Distribution Agreement (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021
Equity offering
Net proceeds from issuance of common stock	$ 4,182	$ 3,401
Equity Distribution Agreement
Equity offering
Stock issued (in shares)	447,020	357,148
Net proceeds from issuance of common stock	$ 4,200	$ 3,400

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STOCKHOLDERS' EQUITY - Cash Dividends (Details) - USD ($) $ / shares in Units, $ in Thousands		3 Months Ended							9 Months Ended
	Oct. 27, 2022	Sep. 30, 2022	Jun. 30, 2022	Mar. 31, 2022	Dec. 31, 2021	Sep. 30, 2021	Jun. 30, 2021	Mar. 31, 2021	Sep. 30, 2022	Sep. 30, 2021
Distributions
Declared Dividends per Common Share (in dollars per share)		$ 0.145	$ 0.145	$ 0.145	$ 0.145	$ 0.145	$ 0.145	$ 0.145	$ 0.435	$ 0.435
Dividends Paid (in dollars)		$ 22,559	$ 22,494	$ 22,673	$ 22,351	$ 22,506	$ 22,331	$ 22,155	$ 67,726	$ 66,992
Subsequent Event.
Distributions
Declared Dividends per Common Share (in dollars per share)	$ 0.145

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STOCKHOLDERS' EQUITY - Accumulated Other Comprehensive Loss (Details) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Increase (Decrease) in Stockholders' Equity
Beginning balance	$ 913,821	$ 891,438	$ 935,557
Other comprehensive income, net of tax:
Total other comprehensive income, net of tax	1,016	984	2,978
Ending balance	904,047	869,816	904,047
Accumulated Other Comprehensive Loss
Increase (Decrease) in Stockholders' Equity
Beginning balance	(3,044)	(984)	(5,006)
Other comprehensive income, net of tax:
Loss recognized in other comprehensive income	(458)	(405)	(529)
Loss reclassified from accumulated other comprehensive loss to interest expense	1,474	1,389	3,507
Total other comprehensive income, net of tax	1,016	$ 984	2,978
Ending balance	$ (2,028)		$ (2,028)

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REVENUE FROM CONTRACTS WITH CUSTOMERS - Disaggregate Revenue (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022 USD ($) hp	Sep. 30, 2021 USD ($) hp	Sep. 30, 2022 USD ($) hp	Sep. 30, 2021 USD ($) hp
Disaggregation of Revenue
Revenue	$ 213,668	$ 195,166	$ 626,697	$ 586,212
Contract Operations
Disaggregation of Revenue
Revenue	170,497	158,911	500,451	488,810
Contract Operations | Transferred at Point in Time
Disaggregation of Revenue
Revenue	700	700	1,800	3,100
Contract Operations | 0 - 1,000 horsepower per unit
Disaggregation of Revenue
Revenue	$ 38,967	$ 41,576	$ 121,298	$ 134,413
Contract Operations | 0 - 1,000 horsepower per unit | Minimum
Disaggregation of Revenue
Compressor unit horsepower (horsepower) | hp	0	0	0	0
Contract Operations | 0 - 1,000 horsepower per unit | Maximum
Disaggregation of Revenue
Compressor unit horsepower (horsepower) | hp	1,000	1,000	1,000	1,000
Contract Operations | 1,001 - 1,500 horsepower per unit
Disaggregation of Revenue
Revenue	$ 72,463	$ 66,138	$ 208,161	$ 201,454
Contract Operations | 1,001 - 1,500 horsepower per unit | Minimum
Disaggregation of Revenue
Compressor unit horsepower (horsepower) | hp	1,001	1,001	1,001	1,001
Contract Operations | 1,001 - 1,500 horsepower per unit | Maximum
Disaggregation of Revenue
Compressor unit horsepower (horsepower) | hp	1,500	1,500	1,500	1,500
Contract Operations | Over 1,500 horsepower per unit
Disaggregation of Revenue
Revenue	$ 58,818	$ 51,018	$ 170,297	$ 152,360
Contract Operations | Over 1,500 horsepower per unit | Minimum
Disaggregation of Revenue
Compressor unit horsepower (horsepower) | hp	1,500	1,500	1,500	1,500
Contract Operations | Other
Disaggregation of Revenue
Revenue	$ 249	$ 179	$ 695	$ 583
Aftermarket Services
Disaggregation of Revenue
Revenue	43,171	36,255	126,246	97,402
Aftermarket Services | Services
Disaggregation of Revenue
Revenue	23,528	19,249	66,666	53,149
Aftermarket Services | Over-the-counter ("OTC") parts and components sales
Disaggregation of Revenue
Revenue	$ 19,643	$ 17,006	$ 59,580	$ 44,253

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REVENUE FROM CONTRACTS WITH CUSTOMERS - Performance Obligations (Details) $ in Thousands	Sep. 30, 2022 USD ($)
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Remaining performance obligations	$ 282,271
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2022-10-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Remaining performance obligations	$ 99,377
Performance obligations expected to be satisfied, expected timing	3 months
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2023-01-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Remaining performance obligations	$ 122,031
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, Remaining Performance Obligation, Expected Timing of Satisfaction
Remaining performance obligations	$ 46,882
Performance obligations expected to be satisfied, expected timing	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2025-01-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Remaining performance obligations	$ 12,870
Performance obligations expected to be satisfied, expected timing	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2026-01-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Remaining performance obligations	$ 919
Performance obligations expected to be satisfied, expected timing	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2027-01-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction
Remaining performance obligations	$ 192
Performance obligations expected to be satisfied, expected timing	1 year

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REVENUE FROM CONTRACTS WITH CUSTOMERS - Contract Assets (Details) - USD ($) $ in Millions	Sep. 30, 2022	Dec. 31, 2021
Contract with Customers
Receivables
Accounts receivable, trade, net of allowance	$ 118.9	$ 84.7

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REVENUE FROM CONTRACTS WITH CUSTOMERS - Credit Losses (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021
REVENUE FROM CONTRACTS WITH CUSTOMERS
Contractual life of accounts receivable	30 days
Period for analyzing historical loss data to determine loss experience	2 years
Changes in the allowance for credit losses balance
Balance at beginning of period	$ 2,152
Provision for credit losses	(28)	$ 151
Write-offs charged against the allowance	(637)
Balance at end of period	$ 1,487

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REVENUE FROM CONTRACTS WITH CUSTOMERS - Contract Liabilities (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Dec. 31, 2021
REVENUE FROM CONTRACTS WITH CUSTOMERS
Contract liability with customer	$ 8,300		$ 4,400
Deferred revenue recognized in earnings	19,614	$ 8,167
Deferred revenue recognized in earnings	$ 15,709	$ 8,081

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STOCK-BASED COMPENSATION - Compensation Expense (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost
Total stock-based compensation expense	$ 3,022	$ 3,027	$ 9,939	$ 9,862
Equity awards
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost
Total stock-based compensation expense	2,998	2,900	9,035	8,741
Liability awards
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost
Total stock-based compensation expense	$ 24	$ 127	$ 904	$ 1,121

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STOCK-BASED COMPENSATION - Activity (Details) shares in Thousands	9 Months Ended
	Sep. 30, 2022 $ / shares shares
Restricted stock awards
Shares
Non-vested awards at beginning of period (in shares)	2,578
Granted (in shares)	1,861
Vested (in shares)	(1,152)
Canceled (in shares)	(244)
Non-vested awards at end of period (in shares)	3,043
Weighted Average Grant Date Fair Value Per Share
Non-vested awards at beginning of period (in dollars per share) | $ / shares	$ 10.35
Granted (in dollars per share) | $ / shares	9.03
Vested (in dollars per share) | $ / shares	10.25
Canceled (in dollars per share) | $ / shares	9.28
Non-vested awards at end of period (in dollars per share) | $ / shares	$ 9.67
Cash-settled units
Shares
Non-vested awards at end of period (in shares)	508
Stock-settled awards and units
Shares
Non-vested awards at end of period (in shares)	2,534

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STOCK-BASED COMPENSATION - Unrecognized expense (Details) - Restricted stock and restricted stock units $ in Millions	9 Months Ended
	Sep. 30, 2022 USD ($)
Unrecognized compensation
Unrecognized stock-based compensation expenses (in dollars)	$ 17.1
Weighted-average period over which the expected unrecognized compensation cost is expected to be recognized	1 year 10 months 24 days

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LONG-LIVED AND OTHER ASSET IMPAIRMENT (Details) - Idle Compressor Units hp in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022 USD ($) CompressorUnit hp	Sep. 30, 2021 USD ($) CompressorUnit hp	Sep. 30, 2022 USD ($) CompressorUnit hp	Sep. 30, 2021 USD ($) CompressorUnit hp
Impaired Long-Lived Assets Held and Used
Idle compressors retired from the active fleet | CompressorUnit	25	60	100	175
Horsepower of idle compressors retired from the active fleet | hp	23	24	80	61
Impairment recorded on idle compressors retired from the active fleet | $	$ 4,149	$ 5,120	$ 16,205	$ 14,964
Impairment, Long-Lived Asset, Held-for-Use, Statement of Income or Comprehensive Income	Long-lived and other asset impairment	Long-lived and other asset impairment	Long-lived and other asset impairment	Long-lived and other asset impairment

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INCOME TAXES (Details) $ in Millions	Sep. 30, 2022 USD ($)
INCOME TAXES
Potential decrease in unrecognized tax benefit in next twelve months	$ 2.7

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EARNINGS PER COMMON SHARE (Details) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Earnings Per Common Share
Net income	$ 15,371	$ 9,304	$ 33,838	$ 22,225
Allocation of earnings to participating securities	(294)	(456)	(1,114)	(909)
Net income attributable to common stockholders, basic	15,077	8,848	32,724	21,316
Net income attributable to common stockholders, diluted	$ 15,077	$ 8,848	$ 32,724	$ 21,316
Weighted average common shares outstanding used in basic earnings per common share (in shares)	153,550	152,158	153,168	151,615
Effect of dilutive securities:
Restricted stock units (in shares)	131	138	125	152
ESPP shares (in shares)	6	1	4	2
Weighted average common shares outstanding used in diluted net income per common share (in shares)	153,687	152,297	153,297	151,769
On exercise of options where exercise price is greater than average market value for the period
Effect of dilutive securities:
Net dilutive potential common shares issuable (shares)		15		27

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DERIVATIVES AND HEDGING - Interest Rate Swaps (Details) - Interest rate swap, March 2022 expiration - USD ($) $ in Millions	1 Months Ended	3 Months Ended
	Mar. 31, 2022	Sep. 30, 2021	Jun. 30, 2021
Notional Disclosures
Notional value of interest rate swaps that expired	$ 300.0
Collateral posted prior to expiration	0.0
Notional value dedesignated		$ 125.0
Fair value of derivative prior to dedesignation			$ 1.6
Derivatives Designated as Hedging Instruments
Notional Disclosures
Notional value of interest rate swaps that expired	$ 175.0

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DERIVATIVES AND HEDGING - Effect of Derivative Instruments on Statements of Operations (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Effect of derivative instruments on results of operations
Total amount of interest expense in which the effects of cash flow hedges and undesignated interest rate swaps are recorded	$ 25,177	$ 25,508	$ 74,879	$ 82,711
Derivatives Designated as Hedging Instruments | Interest Rate Swaps
Effect of derivative instruments on results of operations
Pre-tax gain (loss) recognized in other comprehensive income (loss)		(581)	(512)	(670)
Derivatives Designated as Hedging Instruments | Interest Rate Swaps | Interest expense
Effect of derivative instruments on results of operations
Pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense		(1,867)	(1,758)	(4,440)
Derivatives Not Designated as Hedging Instruments | Interest Rate Swaps
Effect of derivative instruments on results of operations
Gain recognized in interest expense		$ 532	$ 523	$ 532
Derivative, Gain (Loss), Statement of Income or Comprehensive Income	Total amount of interest expense in which the effects of cash flow hedges and undesignated interest rate swaps are recorded	Total amount of interest expense in which the effects of cash flow hedges and undesignated interest rate swaps are recorded	Total amount of interest expense in which the effects of cash flow hedges and undesignated interest rate swaps are recorded	Total amount of interest expense in which the effects of cash flow hedges and undesignated interest rate swaps are recorded

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DERIVATIVES AND HEDGING - Effect of Derivative Instruments on Balance Sheets (Details) - Interest Rate Swaps $ in Thousands	Dec. 31, 2021 USD ($)
Derivatives
Derivative liabilities	$ 1,250
Derivative Liability, Statement of Financial Position	Accrued liabilities
Derivatives Designated as Hedging Instruments
Derivatives
Derivative liabilities	$ 727
Derivative Liability, Statement of Financial Position	Accrued liabilities
Derivatives Not Designated as Hedging Instruments
Derivatives
Derivative liabilities	$ 523
Derivative Liability, Statement of Financial Position	Accrued liabilities

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FAIR VALUE MEASUREMENTS - Measured on Recurring Basis (Details) - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Ecotec
Fair value measurement of assets and liabilities
Ownership interest (as a percent)	19.00%
Recurring Basis
Fair value measurement of assets and liabilities
Investment in ECOTEC	$ 12,000
Equity Securities, FV-NI, Fair Value by Fair Value Hierarchy Level	Level 3
Derivative liabilities		$ 1,250
Derivative Liability, Fair Value by Fair Value Hierarchy Level	us-gaap:FairValueInputsLevel2Member	us-gaap:FairValueInputsLevel2Member

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FAIR VALUE MEASUREMENTS - Measured on Nonrecurring Basis (Details) - Level 3 $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2022 USD ($) Y $ / hp	Sep. 30, 2022 USD ($) Y $ / hp	Dec. 31, 2021 USD ($) $ / hp
Impaired Long-Lived Assets | Compressors | Measurement Input, Weighted average disposal period
Fair value
Measurement input | Y	4	4
Impaired Long-Lived Assets | Compressors | Measurement Input, Sale proceeds | Minimum
Fair value
Measurement input	0	0	0
Impaired Long-Lived Assets | Compressors | Measurement Input, Sale proceeds | Maximum
Fair value
Measurement input	621	621	621
Impaired Long-Lived Assets | Compressors | Measurement Input, Sale proceeds | Weighted average
Fair value
Measurement input	44	44	35
Impaired Long-Lived Assets | Compressors | Measurement Input, Discount for market liquidity
Fair value
Measurement input	0.56	0.56	0.64
Nonrecurring Basis | Idle Compressor Units
Fair value
Impairment recorded on idle compressors retired from the active fleet | $	$ 4,100	$ 16,200
Nonrecurring Basis | Impaired Long-Lived Assets | Compressors
Fair value
Impaired assets | $	$ 1,548	$ 1,548	$ 4,380

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FAIR VALUE MEASUREMENTS - Other Financial Instruments (Details) - Fixed Rate Debt - USD ($) $ in Thousands	Sep. 30, 2022	Dec. 31, 2021
Fair Value
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Long-term debt, fair value	$ 1,155,760	$ 1,361,000
Long-Term Debt, Fair Value by Fair Value Hierarchy Level	us-gaap:FairValueInputsLevel2Member	us-gaap:FairValueInputsLevel2Member
Carrying Amount
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Long-term debt, fair value	$ 1,296,895	$ 1,296,325

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RELATED PARTY TRANSACTIONS (Details) - Affiliated Entity $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2022 USD ($)	Sep. 30, 2021 USD ($)	Sep. 30, 2022 USD ($) director	Sep. 30, 2021 USD ($)	Dec. 31, 2021 USD ($)
Old Ocean Reserves | Archrock, Inc.
Related Party Transaction
Ownership interest (percent)	10.80%		10.80%
Old Ocean Reserves
Related Party Transaction
Number of directors shareholders have right to designate | director			1
Minimum ownership interest of outstanding shares required to elect a board of director (percent)	7.50%		7.50%
Hilcorp and affiliates
Related Party Transaction
Revenue from related party transactions	$ 9.2	$ 9.5	$ 27.8	$ 28.6
Due from related party	$ 3.2		$ 3.2		$ 3.7

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SEGMENT INFORMATION - Number (Details)	9 Months Ended
	Sep. 30, 2022 segment
SEGMENT INFORMATION
Number of reportable segments	2

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SEGMENT INFORMATION - Revenue and Gross Margin by Reportable Segment (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Revenue and other financial information by reportable segment
Revenue	$ 213,668	$ 195,166	$ 626,697	$ 586,212
Gross margin	106,141	103,234	315,966	318,255
Contract Operations
Revenue and other financial information by reportable segment
Revenue	170,497	158,911	500,451	488,810
Gross margin	98,803	97,631	295,901	304,778
Aftermarket Services
Revenue and other financial information by reportable segment
Revenue	43,171	36,255	126,246	97,402
Gross margin	$ 7,338	$ 5,603	$ 20,065	$ 13,477

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SEGMENT INFORMATION - Reconciliation of Net Income to Gross Margin (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Reconciliation Net Income (Loss) to Gross Margin
Total gross margin	$ 106,141	$ 103,234	$ 315,966	$ 318,255
Less:
Selling, general and administrative	30,500	28,839	85,964	80,000
Depreciation and amortization	39,953	45,280	124,348	135,185
Long-lived and other asset impairment	4,154	5,121	16,217	15,154
Restructuring charges		313		1,953
Interest expense	25,177	25,508	74,879	82,711
Gain on sale of assets, net	(12,695)	(15,393)	(33,755)	(29,549)
Other (income) expense, net	(585)	337	(52)	(1,634)
Income before income taxes	$ 19,637	$ 13,229	$ 48,365	$ 34,435

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SUBSEQUENT EVENT (Details) - Ecotec	Oct. 03, 2022	Sep. 30, 2022
Subsequent Event
Ownership interest (as a percent)		19.00%
Subsequent Event.
Subsequent Event
Ownership interest (as a percent)	23.00%