Filing identity and reporting period
This is Exterran Holdings, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2013, filed August 6, 2013. The supplied filing is not filed under the name Archrock, Inc.; investors should verify the issuer and any corporate-name or successor relationship. Unless noted otherwise, amounts below are in millions of U.S. dollars.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $837.3 | $630.7 | $1,648.7 | $1,246.0 |
| Gross margin | $256.7 | $194.3 | $481.9 | $384.1 |
| Gross margin as % of revenue | 30.6% | 30.8% | 29.2% | 30.8% |
| Income (loss) from continuing operations | $26.1 | $(124.0) | $51.6 | $(115.6) |
| Net income (loss) attributable to Exterran stockholders | $9.3 | $(152.6) | $59.5 | $(147.1) |
| Diluted earnings (loss) per share attributable to Exterran stockholders | $0.14 | $(2.40) | $0.90 | $(2.32) |
| Adjusted EBITDA (non-GAAP) | $176.8 | $101.5 | $323.4 | $197.6 |
Revenue growth was driven chiefly by fabrication. Q2 fabrication revenue rose 71% to $456.5 million and segment gross margin rose to $74.9 million from $26.3 million. North America contract operations gross margin increased 18% to $92.5 million; international contract operations gross margin increased 4% to $67.9 million. Aftermarket services gross margin declined 12% to $21.4 million. Fabrication gross margin benefited from higher activity, improved North American conditions and cost reductions, but was partly offset by cost overruns on three large turnkey projects. Gross margin and adjusted EBITDA are non-GAAP measures.
- Cash from operating activities was $80.6 million for the first half, versus $53.7 million a year earlier. Continuing-operations operating cash flow was $76.1 million versus $52.6 million.
- Capital expenditures were $214.9 million; cash from continuing investing activities was negative $134.4 million. Cash and cash equivalents ended the period at $36.9 million.
- Working capital was $608.3 million, up from $463.4 million at year-end 2012, mainly reflecting higher inventory and contract costs in excess of billings.
- Debt was $1.643 billion, up from $1.565 billion at December 31, 2012. The company reported $497.3 million available under its revolving credit facility; the Partnership separately reported $430.0 million available under its revolver. Both were in compliance with financial covenants at June 30.
Material changes and unusual items
- Compared with the first half of 2012, first-half revenue increased 32%, while Exterran-attributable results moved from a loss to income. Lower impairment charges, lower SG&A and interest expense, and improved fabrication and North America contract operations margins contributed to the improvement.
- Long-lived asset impairment charges were $16.6 million in Q2 2013 versus $128.5 million in Q2 2012; first-half charges were $20.1 million versus $132.7 million. The 2013 charges included $11.9 million related to the U.K. fabrication business and $7.1 million for idle compressor units.
- First-half discontinued-operations income was $31.7 million, including a $34.3 million installment received from PDVSA for previously nationalized Venezuelan assets. Exterran had not recorded the remaining approximately $215 million Venezuelan sale balance as a receivable; future installments are recognized as income when received.
- In July 2013, the company completed the sale of its Canadian contract operations and aftermarket services businesses. Consideration included $12.4 million cash net of transaction expenses, a CDN$6.6 million note and contingent or potential additional consideration, subject to adjustments and conditions. It also sold the entity owning its U.K. fabrication facility.
- In March 2013, the Partnership acquired U.S. contract-operation customer agreements and compressor assets from Exterran for approximately $174 million in Partnership units. Exterran also redeemed $143.8 million of 4.75% convertible notes in January, using revolver borrowings, and the Partnership issued $350 million of 6% senior notes in March.
Outlook, risks and contingencies
- Management expected 2013 net capital expenditures of approximately $325–$350 million, including $100–$110 million of contract-operations maintenance capital. It expected operating cash flow and credit availability to cover operations, capital expenditures, scheduled interest and debt repayments through year-end 2013, subject to market conditions.
- Management expected North American fabrication revenue and gross margin in 2013 to exceed 2012 levels based on backlog, while noting Q2 booking activity had moderated from the prior year. It described natural-gas prices as still low and warned that low prices and new competitor equipment could weaken North American demand, especially in dry-gas areas. Fabrication backlog was $746.5 million at June 30, down from $1.286 billion a year earlier.
- Key risks include energy-market demand and pricing, competition, project execution and cost overruns, customer and counterparty credit, international political and currency exposure, access to capital, debt levels and covenant compliance, and operational, safety and environmental liabilities.
- Texas ad valorem tax disputes were pending: the company had recorded a cumulative $10.8 million benefit under its tax-appraisal position, but only about $2.3 million had been agreed to by appraisal bodies. Unsuccessful challenges could require additional taxes, penalties and interest.
- Guarantees, letters of credit and bid/performance bonds had maximum potential undiscounted payments of $322.5 million. The filing also describes ordinary-course litigation, self-insured claims and insurance limitations; management did not expect pending legal actions to have a material overall effect, but outcomes are uncertain.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing stated there were no material updates to the risk factors in the 2012 Form 10-K.
Most important facts to verify
- Confirm whether this Exterran Holdings filing is the intended filing for the Archrock request, including the relevant corporate history and issuer identity.
- Review the quality and sustainability of fabrication growth, backlog conversion, project cost overruns and the decline in aftermarket-services margins.
- Assess liquidity and refinancing needs against the $1.643 billion debt balance, 2013 capital-spending plan and upcoming note maturities.
- Verify timing and collectability of remaining Venezuelan payments and final adjustments or contingent consideration from the Canadian sale.
- Track resolution of the Texas property-tax cases and potential exposure to taxes, penalties, interest and other contingencies.