Archrock, Inc. (then Exterran Holdings, Inc.) — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited. The filing was made under Exterran Holdings’ name before the proposed spin-off and renaming to Archrock, Inc. The business provided natural-gas compression, aftermarket services and equipment fabrication.
Financial results and liquidity
- Q2 revenue: $683.8 million, down 7.5% from $739.3 million in Q2 2014. For the first half, revenue was $1.413 billion, up 2.2% from $1.382 billion.
- Q2 earnings: Continuing-operations income was $7.5 million; net income was $7.8 million, but the amount attributable to Exterran stockholders was a $1.4 million loss, or $(0.02) per diluted share, versus income of $12.4 million, or $0.19 per share, a year earlier. First-half attributable income was $30.8 million versus $45.0 million.
- Margins: Gross margin, a company-defined non-GAAP measure, was $246.8 million in Q2 versus $256.0 million; it was $515.9 million for the first half versus $489.5 million. Gross margin as a share of revenue was approximately 36.1% in Q2 and 36.5% for the first half.
- Cash flow: First-half cash provided by operating activities was $187.3 million ($186.0 million from continuing operations). Capital expenditures were $254.2 million. Cash and cash equivalents fell to $23.3 million from $39.7 million at year-end 2014.
- Debt and liquidity: Debt was $2.090 billion, compared with $2.027 billion at December 31, 2014. Working capital was $699.2 million. Exterran reported $449.1 million of available capacity under its revolver and the Partnership reported $358.5 million under its revolver. Both entities were in compliance with their financial covenants at quarter-end.
- Dividends: Exterran paid $0.15 per common share in Q2 and declared another $0.15 quarterly dividend in July 2015.
Changes versus comparable periods
- Q2 North America contract-operations revenue increased 9% to $198.3 million, supported by higher operating horsepower and acquisitions. International contract-operations revenue fell 14% to $115.3 million, chiefly reflecting the completion of a Brazilian project.
- Q2 aftermarket-services revenue declined 9% to $90.8 million, and fabrication revenue declined 13% to $279.5 million. Fabrication backlog fell to $600.5 million from $953.2 million at December 31, 2014.
- First-half North America contract-operations revenue rose 18% to $400.5 million; international contract operations, aftermarket services and fabrication revenue declined 4%, 6% and 2%, respectively.
- Adjusted EBITDA, a non-GAAP measure, was $162.5 million in Q2 versus $161.1 million, and $344.4 million for the first half versus $305.9 million. Higher North America gross margin and lower SG&A helped, while lower international and fabrication margins weighed on results.
Outlook, material items and risks
- Management expected operating cash flow and available credit to fund operating costs, capital expenditures, scheduled debt service and anticipated dividends through December 31, 2015, subject to market conditions. Net capital expenditures were forecast at $400–$450 million for 2015, including $270–$300 million of contract-operations growth spending and $100–$110 million of maintenance spending.
- Management cited lower oil and gas prices, customer budget cuts and weaker activity. North American fabrication bookings fell sharply, and management said sustained weak bookings could materially harm results and cash flow. It expected to invest more in international contract operations and less in North America during 2015.
- The proposed spin-off of international contract operations, international aftermarket services and global fabrication remained subject to market conditions, tax and SEC-related requirements, agreements and board approval; timing and completion were not assured. Exterran expected $30–$40 million of additional spin-off-related restructuring costs. A separate cost-reduction plan was expected to incur about $4.1 million of additional charges.
- Q2 included $19.6 million of restructuring and other charges and $15.4 million of long-lived asset impairments. The impairments included write-downs tied to retirement of idle compressor units; restructuring included spin-off costs, inventory write-downs, facility changes and employee termination benefits.
- If the spin-off proceeded as contemplated, the company estimated an additional $45–$65 million valuation allowance against foreign tax-credit assets could be required, materially increasing tax expense.
- Texas ad valorem tax litigation concerned $23.8 million of disputed recorded tax benefits. An unfavorable outcome could require repayment, potentially with penalties and interest, and could raise future costs. The filing also disclosed guarantees with maximum potential payments of $250.3 million.
- Approximately $99 million remained due from PDVSA Gas for the prior Venezuelan asset sale, but was not recorded as a receivable; future installments were to be recognized as received. A further $18.9 million payment was received in July 2015.
- After quarter-end, the company entered into a conditional $300 million revolving facility for the future Archrock entity and Exterran Corporation entered into a conditional $750 million facility. Both depended on the spin-off occurring by October 30, 2015; neither had borrowings outstanding at the filing date.
Most important facts for investors to verify
- Whether and when the spin-off closes, and the resulting allocation of assets, liabilities, tax attributes and financing.
- Fabrication order trends and backlog conversion amid customer spending cuts and lower commodity prices.
- Outcomes of the Texas compressor-property-tax cases and any related repayment exposure.
- Timely collection of the remaining Venezuelan installments and the impact of recognizing them only when received.
- Liquidity, covenant headroom and debt levels at both Exterran and the Partnership, including after any separation-related borrowing.