Filing and reporting period
The supplied filing is Exterran Holdings, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2014, filed August 5, 2014. It is not filed under the name Archrock, Inc.; verify the registrant and corporate history before applying this summary to Archrock.
Exterran provides natural-gas compression contract operations, aftermarket services, and fabrication. Its consolidated results include Exterran Partners, L.P. (the Partnership), in which public unitholders held a 63% interest at June 30, 2014. Canadian operations, Venezuelan contract operations, and the contract water-treatment business are reported as discontinued operations.
Financial results and liquidity
Amounts below are in millions of dollars except per-share data and operating statistics.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | 739.3 | 835.9 | 1,382.3 | 1,645.8 |
| Gross margin | 256.0 | 255.9 | 489.5 | 480.6 |
| Net income attributable to Exterran stockholders | 12.4 | 9.3 | 45.0 | 59.5 |
| Adjusted EBITDA | 161.1 | 176.1 | 305.9 | 322.2 |
| Operating cash flow | Not separately stated for the quarter | 122.6 | 80.6 |
Q2 net income attributable to Exterran stockholders was $0.19 per diluted share, versus $0.14; six-month diluted earnings were $0.64 per share, versus $0.90. Q2 income from continuing operations attributable to Exterran common stockholders was a loss of $5.4 million, compared with income of $10.4 million a year earlier. Q2 net income included $17.8 million from discontinued operations; six-month discontinued-operations income was $36.5 million.
- Revenue and margins: Lower fabrication revenue drove the year-over-year revenue decline. Q2 fabrication revenue fell 29% to $322.6 million and its gross margin fell 43% to $42.6 million; North America and international contract-operations revenue grew 12% and 14%, respectively. Six-month fabrication revenue declined 33%, while total gross margin rose modestly.
- Costs and unusual items: Q2 depreciation and amortization rose 39% to $112.0 million, largely reflecting acquired assets and accelerated depreciation on projects. Six-month impairment charges were $13.7 million, primarily for idle compressor units; restructuring charges were $5.2 million, mainly related to shop centralization. A fabrication warranty accrual also weighed on margins.
- Cash and liquidity: Cash was $53.9 million at June 30, versus $35.7 million at year-end 2013; working capital was $674.5 million. Six-month operating cash flow was $122.6 million; capital expenditures were $238.2 million and investing cash outflow was $542.7 million, including the acquisition. Financing cash inflow was $442.3 million.
- Debt: Long-term debt totaled $1.853 billion, up from $1.502 billion at year-end. Exterran reported $327.4 million of available capacity on its revolving facility; the Partnership reported $448.0 million available on its revolver. Exterran redeemed its 4.25% convertible notes in June for $370 million cash and 6.8 million shares, and exercised related call options to acquire 6.5 million shares. The Partnership issued $350 million of 6% notes in connection with the MidCon acquisition.
- Margins and utilization: Q2 gross margin was $104.4 million in North America contract operations, $87.9 million in international contract operations, $21.1 million in aftermarket services, and $42.6 million in fabrication. Total horsepower utilization was 84% at quarter-end, compared with 83% a year earlier.
Changes, outlook, risks, and contingencies
- The April 2014 MidCon acquisition added 337 compressor units and approximately 444,000 horsepower for $351.1 million, with a seven-year service agreement with Access Midstream. Acquired assets contributed $20.5 million of revenue from closing through June 30; standalone earnings were not provided. A further approximately $135 million MidCon acquisition was announced in July, subject to closing conditions, and expected in Q3 2014.
- Management expected 2014 net capital expenditures of $500–$550 million, including $100–$110 million of contract-operations maintenance capital. It expected operating cash flow and available credit to cover operating needs, capital expenditures, debt service, and anticipated dividends through December 31, 2014, based on then-current conditions. No specific earnings guidance was provided. Management reported improving North American fabrication bookings and backlog, but did not expect backlog to return to 2012 levels; it expected continued benefits from cost and efficiency initiatives.
- The July 2014 board declaration maintained a $0.15-per-share quarterly dividend. Future dividends remained discretionary and subject to financial condition and debt restrictions.
- Customer and acquisition exposure: Access represented approximately 14% of the Partnership’s revenue in Q2 following the MidCon transaction. Integration, performance, liabilities, or loss of Access business could reduce Partnership distributions to Exterran.
- Tax litigation: Exterran had recorded a cumulative $20.3 million benefit from a disputed Texas compressor property-tax methodology; $15.0 million remained disputed. An adverse outcome could require repayment, penalties and interest, and higher future tax expense.
- Venezuela collections: Approximately $149 million of principal remained payable by PDVSA Gas through Q3 2016 under the asset-sale agreement, but was not recorded as a receivable; future installments are recognized when received. Approximately $30 million remained due to Venezuelan joint ventures through Q1 2016, also not recorded as a receivable. Collection and geopolitical risk remain relevant.
- Other disclosed risks include commodity-industry spending and demand, foreign exchange and political conditions, customer credit, equipment and safety risks, access to capital, interest rates, and covenant compliance. Exterran and the Partnership reported compliance with their financial covenants at June 30, 2014. Management reported effective disclosure controls and no material change in internal control during the quarter.
Most important facts for investors to verify
- Confirm the filing’s registrant and its relationship to Archrock; this 10-Q names Exterran Holdings, Inc.
- Review fabrication backlog, project margins, warranty exposure, and the sustainability of contract-operations growth.
- Assess the MidCon acquisitions’ integration, financing, customer concentration, and contribution to cash flow and distributions.
- Track debt, revolver availability, capital-spending execution, covenant headroom, and the affordability of dividends.
- Verify collections from PDVSA Gas and developments in the Texas property-tax litigation.