Business context and reporting period
This is Exterran Holdings, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. The filing identifies the registrant as Exterran Holdings, Inc., not Archrock, Inc. Exterran provides natural-gas compression and oil and gas production, processing, fabrication, and aftermarket services. Amounts below are in U.S. dollars; financial figures are in millions unless otherwise indicated.
Financial results and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $718.7 | $689.8 | $1,964.7 | $1,940.8 |
| Gross margin (non-GAAP) | $210.7 | $186.7 | $594.8 | $543.8 |
| Gross margin as % of revenue | 29.3% | 27.1% | 30.3% | 28.0% |
| Net income (loss) attributable to Exterran stockholders | $113.4 | $(216.0) | $(33.7) | $(274.0) |
| Adjusted EBITDA (non-GAAP) | $126.4 | $98.8 | $324.0 | $277.9 |
Q3 2012 continuing-operations income attributable to Exterran stockholders was $2.5 million; the quarter’s reported net income was principally driven by $110.9 million of discontinued-operations income. For the first nine months, continuing-operations loss attributable to stockholders was $100.6 million, partly offset by $66.9 million of discontinued-operations income. Adjusted EBITDA and gross margin are non-GAAP measures identified by the company.
- Revenue mix: Q3 North America contract operations revenue was $151.5 million, international contract operations $110.6 million, aftermarket services $95.9 million, and fabrication $360.7 million. Fabrication revenue rose 8% year over year, while international contract operations revenue fell 3%.
- Cash flow: Nine-month operating cash flow was $144.4 million ($142.0 million from continuing operations), versus $74.3 million a year earlier. Capital expenditures were $328.7 million, up from $171.3 million. Continuing-operations operating cash flow less capital expenditures was therefore approximately negative $186.7 million.
- Liquidity: At September 30, cash was $22.1 million and working capital was $546.7 million. Available borrowing capacity was $469.3 million under Exterran’s revolving facility and $235.5 million under the Partnership’s facility.
- Debt: Long-term debt totaled $1.706 billion, down from $1.773 billion at December 31, 2011. Exterran reported $232.0 million drawn on its revolver; the Partnership had $514.5 million drawn on its revolver and $150.0 million on its term loan. Exterran reported compliance with its financial covenants at quarter-end.
Material changes versus prior comparable periods
- Q3 revenue increased 4% year over year; nine-month revenue increased 1%. The filing attributes the overall increase mainly to North American fabrication and aftermarket services, partly offset by weaker Eastern Hemisphere fabrication.
- Gross margin improved in both periods. Q3 improvement was led by fabrication, whose gross margin increased 70% to $49.9 million; nine-month aftermarket-services gross margin increased 70% to $62.3 million.
- Year-to-date operating cash flow increased, while capital spending also rose substantially. The company cited higher fabrication activity and investment in its contract-operations fleet.
- Q3 2011 included a $196.1 million goodwill impairment; 2012 did not. Conversely, 2012 included $135.9 million of long-lived asset impairments for the first nine months, including impairment of idle compressor units.
Outlook, commentary, risks and unusual items
- Management expected fabrication revenue over the next twelve months to exceed the prior twelve-month level, citing current backlog and North American activity. Fabrication backlog was $1.240 billion at September 30, 2012, versus $735.3 million at year-end 2011.
- Management planned 2012 net capital expenditures of approximately $375 million to $400 million, including $105 million to $115 million of contract-operations maintenance capital. It expected operating cash flow and available credit to cover operating costs, capital spending, interest, and scheduled debt repayments through December 31, 2012, while noting it might seek additional financing if needed.
- Natural-gas prices remained historically low after reaching about $2.00/MMBtu in April 2012 and recovering to slightly above $3.00/MMBtu by October. Management warned that sustained low prices could reduce production activity, demand, and pricing for its services and equipment. The filing also identifies competition, customer credit and contract-renewal risks, international political and currency risks, and execution and financing risks.
- In August 2012, Exterran sold its previously nationalized Venezuelan subsidiary assets to PDVSA Gas for approximately $441.7 million. It received $176.7 million at closing, remitted $50.0 million to its insurer, and expected approximately $265.0 million in installments through Q3 2016. Future installments were not recorded as a receivable and are to be recognized as received. Related Q3 discontinued-operations income included a $15.5 million tax benefit.
- Exterran committed to sell its Canadian contract-operations and aftermarket-services businesses and recorded $68.5 million of related impairments for the first nine months. It also recorded $128.5 million of impairment on idle compressor fleet assets. The planned UK subsidiary sale remained an objective, but the assets were no longer classified as held for sale because a sale within one year was no longer considered probable.
- Further Venezuelan installment payments and approximately $65.3 million due through Q1 2016 from the sale of Venezuelan joint-venture assets depend on PDVSA Gas payment. The filing notes ongoing legal matters, ad valorem tax appeals in Texas, and potential costs from emissions and climate-related regulation. It states there were no material off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the registrant and security being analyzed: this filing is for Exterran Holdings, Inc., notwithstanding the request’s Archrock, Inc. label.
- Track collection and timing of the remaining Venezuelan asset-sale installments, and distinguish cash receipts from recognized operating results.
- Assess whether fabrication backlog converts to revenue and cash at expected margins, and whether increased working-capital needs and capital expenditures remain manageable.
- Review utilization, impairment assumptions, and planned disposition or reuse of idle compressor equipment; approximately 316,000 horsepower of idle units was identified for sale or component reuse.
- Monitor debt maturities, borrowing availability, covenant headroom, floating-rate exposure, and the Partnership’s ability to meet its own credit terms and distributions.
- Follow the Canadian sale process, related discontinued-operations results, Texas tax disputes, and potential regulatory compliance costs.