Business context and reporting period
This is Exterran Holdings, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2012, filed August 2, 2012. The supplied metadata identifies Archrock, Inc.; the filing itself names Exterran Holdings, Inc. as registrant. Exterran provides natural-gas compression services, fabrication, and aftermarket services.
Unless otherwise noted, amounts below are in U.S. dollars; financial statement figures are in millions.
Financial performance and position
- Revenue: Q2 2012 revenue was $630.7 million, down 2% from $644.1 million. First-half revenue was $1,246.0 million, essentially flat versus $1,251.0 million.
- Profitability: Q2 net loss attributable to Exterran stockholders was $152.6 million, or $2.40 per diluted share, compared with a $28.0 million loss, or $0.45 per share, a year earlier. First-half attributable loss was $147.1 million, or $2.32 per diluted share, versus $58.1 million, or $0.93 per share.
- Gross margin: Management’s non-GAAP gross margin was $194.3 million in Q2, up from $173.4 million; first-half gross margin was $384.1 million, up from $357.1 million. The reported Q2 margin rate was approximately 31%, versus 27% a year earlier. Adjusted EBITDA was $101.5 million in Q2 and $197.6 million for the first half, up from $82.8 million and $179.1 million, respectively.
- Cash flow and investment: First-half operating cash flow was $53.7 million, including $52.6 million from continuing operations, versus cash used of $4.9 million a year earlier. Capital expenditures were $227.9 million, up from $104.3 million; cash used in investing activities was $160.9 million. Cash and cash equivalents ended at $21.4 million.
- Liquidity and debt: Working capital was $524.8 million. Total debt was $1.804 billion, up from $1.773 billion at year-end 2011. Exterran reported $347.6 million of available capacity under its revolving facility and the Partnership reported $256.5 million. Exterran and the Partnership were in compliance with their financial covenants at quarter-end.
- Operating indicators: Total operating horsepower at period-end was 3.807 million, versus 3.764 million a year earlier; utilization was 84%, versus 78%. Fabrication backlog was $1.286 billion, versus $736.2 million a year earlier.
Material changes versus the prior comparable period
- Large impairment charges drove the deterioration in GAAP results: $128.5 million of long-lived asset impairment in Q2 and $132.7 million in the first half, compared with $2.1 million in each 2011 period. Exterran impaired idle compression equipment and revised estimates for previously impaired units.
- Canadian contract operations and aftermarket services were classified as discontinued operations after Exterran committed to sell them. The company recorded a $40.8 million impairment on those businesses in Q2. Canada contributed to discontinued-operations losses of $42.9 million in Q2 and $44.1 million in the first half.
- Aftermarket services improved substantially: Q2 revenue rose 20% and gross margin increased to $24.4 million from $7.2 million. North American and international contract-operations margins also improved.
- Fabrication remained pressured by weaker Eastern Hemisphere activity. Q2 revenue declined 11%, with gross margin down 19%; first-half revenue declined 9% and gross margin 28%.
- Exterran committed to sell its U.K. subsidiary and classified its assets and liabilities as held for sale; the expected sale timing was within 12 months. A $1.5 million impairment was recorded.
Outlook, commentary, risks and unusual items
- Management expected fabrication revenue to grow in the second half of 2012 compared with the first half, citing backlog and North American activity. It planned 2012 net capital expenditures of approximately $350–$375 million, including $105–$115 million of contract-operations maintenance capital.
- Management expected operating cash flow and credit-facility availability to fund operating needs, capital spending, interest and scheduled debt repayments through December 31, 2012, subject to market conditions; additional financing might be sought if needed.
- North American natural-gas prices had fallen to decade-plus lows in April 2012 and remained historically low in July. Management warned that continued low prices could reduce production activity, demand, and pricing for its services and equipment. International fabrication backlog declines could also weigh on revenue during the remainder of 2012.
- Argentina’s nationalization of YPF was identified as a risk. Exterran had 542,000 horsepower in Argentina and reported $75 million of first-half revenue there, including $32 million from YPF. The filing states that the effects were uncertain.
- Venezuela-related expropriation remains unresolved. An ICSID arbitration hearing occurred in July 2012, with a decision not expected until 2013; potential compensation was not recognized as an asset. Separately, Exterran received $42.3 million in first-half payments from the sale of two Venezuelan joint ventures’ assets and expected approximately $70 million more through the first quarter of 2016.
- Other risks include foreign-currency movements, customer and project execution risks, regulatory and environmental compliance costs, and leverage. A 1 percentage-point increase in effective rates on debt subject to floating rates was estimated to increase annual interest expense by approximately $2.9 million.
- Unusual items include foreign-currency losses, including a $10.8 million Q2 loss, and $4.3 million of first-half restructuring charges; management estimated approximately $1.0 million of additional restructuring charges.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for Exterran Holdings, Inc., although the request metadata names Archrock, Inc.
- Assess the valuation assumptions behind the $132.7 million continuing-operations impairment and the separate $40.8 million Canadian discontinued-operations impairment.
- Track progress and proceeds from the planned Canadian and U.K. sales, and the status and timing of remaining Venezuelan joint-venture payments and arbitration.
- Monitor fabrication backlog conversion, Eastern Hemisphere project margins, North American gas prices, and compressor utilization.
- Review cash generation against the $350–$375 million net capital-spending plan, debt maturities, available revolver capacity, and covenant headroom.