Archrock, Inc. quarterly report, Q1 FY2013

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Business context and reporting period

This is Exterran Holdings, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2013—not a filing under the name Archrock, Inc. Exterran provided natural-gas compression and production/processing services, aftermarket support, and fabricated equipment. Results exclude the Venezuelan contract-operations business and Canadian contract-operations and aftermarket-services businesses, which are reported as discontinued operations.

Financial performance

Unless otherwise indicated, amounts are in U.S. dollars; financial statement amounts below are in millions.

  • Revenue: $811.4 million, up 32% from $615.2 million. Fabrication revenue rose 75% to $458.8 million; contract operations in North America increased 6% to $159.4 million, while international contract operations fell 3% to $109.6 million and aftermarket services fell 7% to $83.6 million.
  • Profit: Income from continuing operations was $25.5 million versus $8.4 million. Net income attributable to Exterran stockholders was $50.2 million, or $0.77 basic and $0.76 diluted per share, versus $5.5 million, or $0.09 per share. The 2013 result included $33.3 million of income from discontinued operations, principally a Venezuelan asset-sale installment; it is not a measure of recurring continuing-operations earnings.
  • Gross margin: $225.3 million versus $189.8 million. Fabrication gross margin was $56.4 million (12% of segment revenue), up from $26.6 million (10%); North America contract operations was $87.4 million (55%), international contract operations $63.4 million (58%), and aftermarket services $18.2 million (22%).
  • Adjusted EBITDA: $146.5 million versus $96.2 million. This is a company-defined non-GAAP measure.
  • Cash flow: Operating cash flow was $22.7 million versus $38.7 million. Capital expenditures were $107.0 million; investing cash outflow was $56.7 million and financing cash inflow was $33.0 million. Cash declined $1.4 million to $33.2 million.
  • Liquidity: Working capital was $539.7 million, up from $463.4 million at year-end 2012. The increase was driven in part by higher inventory and contract costs in excess of billings.
  • Debt: Long-term debt was $1.630 billion, up from $1.565 billion at year-end. Exterran reported $505.7 million of available capacity under its revolver and the Partnership reported $412.0 million under its revolver. Both entities stated they were in compliance with financial covenants. Exterran’s debt/adjusted EBITDA covenant ratio was 2.5x; the Partnership’s debt/EBITDA ratio was 3.4x.

Material changes versus the prior-year quarter

  • Revenue and gross margin growth came mainly from fabrication; fabrication gross margin more than doubled, although three large turnkey projects had significant cost overruns.
  • North America contract-operations gross margin improved with higher operating horsepower and rates, field-cost initiatives, and a $2.1 million ad valorem tax benefit. International contract-operations gross margin declined 8% amid terminated or completed projects.
  • SG&A declined 10% to $85.0 million; interest expense declined 27% to $27.9 million. No restructuring charge was recorded, compared with $3.0 million in Q1 2012.
  • Operating cash flow decreased, mainly because of greater working-capital use. Inventory rose to $430.9 million from $387.7 million at year-end.
  • Exterran redeemed $143.8 million of 4.75% convertible notes in January. The Partnership issued $350.0 million of 6% senior notes and used net proceeds to repay revolving debt; its credit facility was amended and extended to May 2018.
  • In March, Exterran transferred U.S. contract-operation customer agreements and compressor assets to the Partnership for approximately $174.0 million of Partnership units.

Outlook, risks and unusual items

  • Management expected 2013 North American fabrication revenue and gross margin to exceed 2012 levels, citing backlog and activity; international backlog was reported 38% higher than a year earlier. Total fabrication backlog was $994.0 million at March 31, 2013, down from $1.066 billion at year-end.
  • Planned 2013 net capital expenditures were approximately $425–$450 million, including $105–$115 million of contract-operations maintenance capital. Management expected operating cash flow and credit availability to fund operating needs, capital spending, interest and scheduled debt repayments through December 31, 2013, based on then-current conditions.
  • Management expected either to sell the U.K. fabrication facility with its contracts and working capital during 2013 or early 2014, or close it after completing backlog. A sale or shutdown could entail a $5–$10 million loss or period of operating costs exceeding revenues.
  • Approximately $215 million remained payable by PDVSA Gas for the Venezuelan asset sale, in quarterly installments through Q3 2016; the amount was not recorded as a receivable, and future receipts would be recognized when received. A separate approximately $52 million remained due for Venezuelan joint-venture assets through Q1 2016.
  • Risks include energy-industry demand and commodity conditions, competition, project execution and cost overruns, customer and supplier exposure, foreign exchange and political risks, debt and covenant compliance, and reliance on Partnership distributions. A 1% rise in rates on debt effectively subject to floating rates was estimated to increase annual interest expense by about $3.6 million.
  • Contingencies include disputed Texas compressor property-tax assessments: the quarter included a $2.0 million benefit, while litigation was pending and potential penalties and interest were noted. The company also disclosed ordinary-course legal matters, industry hazards, and substantial self-insurance for certain employee claims.

Key facts for investors to verify

  1. Confirm issuer identity: the supplied filing is for Exterran Holdings, Inc.; determine its relationship to the requested Archrock, Inc.
  2. Separate recurring operating results from Venezuelan installment receipts, discontinued operations, asset-sale gains, and other nonrecurring items.
  3. Review fabrication project profitability and cost overruns, backlog conversion, and working-capital requirements.
  4. Check debt maturities, available borrowing capacity, covenant headroom, and the Partnership’s ability to sustain distributions.
  5. Track collection of the remaining Venezuelan sale proceeds and the outcome of the Canadian disposition, U.K. facility decision, and Texas property-tax disputes.