1. Organization and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements of Archrock included herein have been prepared in accordance with U.S. GAAP for interim financial information and the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP are not required in these interim financial statements and have been condensed or omitted. Management believes that the information furnished includes all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly our consolidated financial position, results of operations and cash flows for the periods indicated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements presented in our 2016 Form 10-K, which contains a more comprehensive summary of our accounting policies. The interim results reported herein are not necessarily indicative of results for a full year. Certain prior year amounts have been reclassified to conform to the current year presentation.

Organization

We are a pure play U.S. natural gas contract operations services business and the leading provider of natural gas compression services to customers in the oil and natural gas industry throughout the U.S. and a leading supplier of aftermarket services to customers that own compression equipment in the U.S. We operate in two primary business lines: contract operations and aftermarket services. In our contract operations business line, we use our fleet of natural gas compression equipment to provide operations services to our customers. In our aftermarket services business line, we sell parts and components and provide operations, maintenance, overhaul and reconfiguration services to customers who own compression equipment.

Income (Loss) Attributable to Archrock Common Stockholders Per Common Share

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

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

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Loss from continuing operations attributable to Archrock stockholders	$	(10,181	)	$	(9,632	)	$	(28,553	)	$	(15,902	)
Loss from discontinued operations, net of tax	(54		)	(16		)	(54		)	(42		)
Net loss attributable to Archrock stockholders	(10,235		)	(9,648		)	(28,607		)	(15,944		)
Less: Net income attributable to participating securities	(179		)	(135		)	(513		)	(470		)
Net loss attributable to Archrock common stockholders	$	(10,414	)	$	(9,783	)	$	(29,120	)	$	(16,414	)

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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Weighted average common shares outstanding including participating securities	70,952		70,603		70,847		70,450
Less: Weighted average participating securities outstanding	(1,308	)	(1,539	)	(1,327	)	(1,492	)
Weighted average common shares outstanding — used in basic income (loss) per common share	69,644		69,064		69,520		68,958
Net dilutive potential common shares issuable:
On exercise of options	*		*		*		*
On the settlement of employee stock purchase plan shares	*		—		*		—
Weighted average common shares outstanding — used in diluted income (loss) per common share	69,644		69,064		69,520		68,958


*	Excluded from diluted income (loss) per common share as their inclusion would have been anti-dilutive.

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



	Three Months Ended September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016
Net dilutive potential common shares issuable:
On exercise of options where exercise price is greater than average market value for the period	240	469	278	640
On exercise of options	100	88	116	44
On the settlement of employee stock purchase plan shares ⁽¹⁾	—	—	—	—
Net dilutive potential common shares issuable	340	557	394	684


⁽¹⁾	The Archrock, Inc. 2017 Employee Stock Purchase Plan commenced during the third quarter of 2017. For the three and nine months ended September 30, 2017 potential common shares calculated under the treasury stock method were immaterial.

Comprehensive Income (Loss)

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

The following table presents the changes in accumulated other comprehensive income (loss) by component, net of tax, and excluding noncontrolling interest, during the nine months ended September 30, 2016 and 2017 (in thousands):



	Derivatives Cash Flow Hedges
Accumulated other comprehensive loss, January 1, 2016	$	(1,570	)
Loss recognized in other comprehensive loss, net of tax⁽¹⁾	(2,132		)
Loss reclassified from accumulated other comprehensive loss, net of tax⁽²⁾	994
Other comprehensive loss attributable to Archrock stockholders	(1,138		)
Accumulated other comprehensive loss, September 30, 2016	$	(2,708	)

Accumulated other comprehensive loss, January 1, 2017	$	(1,678	)
Gain recognized in other comprehensive income, net of tax⁽³⁾	1,104
Loss reclassified from accumulated other comprehensive loss, net of tax⁽⁴⁾	769
Other comprehensive income attributable to Archrock stockholders	1,873
Accumulated other comprehensive loss, September 30, 2017	$	195

⁽¹⁾

During the three months ended September 30, 2016, we recognized a gain of $0.9 million and a tax provision of $0.3 million, in other comprehensive income (loss) related to the change in the fair value of derivative instruments. During the nine months ended September 30, 2016, we recognized a loss of $3.1 million and a tax benefit of $1.0 million in other comprehensive income (loss) related to the change in the fair value of derivative instruments.

⁽²⁾

During the three months ended September 30, 2016, we reclassified a loss of $0.5 million to interest expense and a tax benefit of $0.1 million to provision for (benefit from) income taxes in our condensed consolidated statements of operations from accumulated other comprehensive income (loss). During the nine months ended September 30, 2016, we reclassified a loss of $1.5 million to interest expense and a tax benefit of $0.5 million to provision for (benefit from) income taxes in our condensed consolidated statements of operations from accumulated other comprehensive income (loss).

⁽³⁾

During the three months ended September 30, 2017, we recognized a gain of $1.2 million and a tax provision of $0.3 million in other comprehensive income (loss) related to the change in the fair value of derivative instruments. During the nine months ended September 30, 2017, we recognized a gain of $1.4 million and tax provision of $0.3 million in other comprehensive income (loss) related to the change in the fair value of derivative instruments.

⁽⁴⁾

During the three months ended September 30, 2017, we reclassified a loss of $0.3 million to interest expense and a tax benefit of $0.1 million to provision for (benefit from) income taxes in our condensed consolidated statements of operations from accumulated other comprehensive income (loss). During the nine months ended September 30, 2017, we reclassified a loss of $1.2 million to interest expense and a tax benefit of $0.4 million to provision for (benefit from) income taxes in our condensed consolidated statements of operations from accumulated other comprehensive income (loss).