Business Context and Reporting Period
Company: Exterran Holdings, Inc. (formerly Hanover Compressor Company)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Exterran is a global market leader in natural gas compression services and a provider of equipment for oil and natural gas production, processing, and transportation. The company operates through four primary segments: North America Contract Operations, International Contract Operations, Aftermarket Services, and Fabrication. The 2008 reporting period reflects the full-year consolidated results of Universal Compression Holdings, Inc., following the merger completed in August 2007.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Revenues | $3,178.7 million | $2,540.5 million |
| Gross Margin (Non-GAAP) | $1,121.0 million | $822.3 million |
| Net Income (Loss) | $(947.3) million | $34.6 million |
| Diluted EPS | $(14.67) | $0.75 |
| Operating Cash Flow | $484.1 million | $239.7 million |
| Total Debt | $2,512.4 million | $2,333.9 million |
| Cash and Equivalents | $126.4 million | $149.2 million |
| Working Capital | $777.9 million | $670.5 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 25% to $3.18 billion, primarily driven by the inclusion of Universal's results for the full year compared to a partial year in 2007.
- Net Loss: The company reported a net loss of $947.3 million, a significant decline from the $34.6 million net income in 2007. This was primarily due to a non-cash goodwill impairment charge of $1,148.4 million recorded in the fourth quarter.
- Impairments: In addition to goodwill, the company recorded fleet impairment charges of $24.1 million, including a $21.6 million charge related to the Cawthorne Channel Project in Nigeria due to operational difficulties and civil unrest.
- Segment Performance: North America Contract Operations revenue grew 43%, while Fabrication revenue grew 8%. Gross margin percentages remained relatively stable across segments, with slight declines in North America Contract Operations and Aftermarket Services.
Guidance, Outlook, and Risks
Outlook: Management expects lower overall activity levels in 2009 compared to 2008 due to the global financial crisis, declining commodity prices, and reduced capital spending by customers. The Fabrication segment is expected to face order cancellations and delivery delays. While international markets are expected to remain relatively strong due to long-term infrastructure projects, North American demand is projected to decline.
Capital Strategy: The company plans net capital expenditures of $400 million to $450 million in 2009. The strategy to contribute U.S. contract operations assets to Exterran Partners, L.P. (the Partnership) is likely to be delayed due to difficult capital market conditions.
Key Risks:
- Global Financial Crisis: Disruptions in credit markets have reduced borrowing capacity (e.g., Lehman Brothers' bankruptcy reduced revolving credit availability by $3.2 million) and increased counterparty risk.
- International Operations: Significant exposure to political and economic instability in Venezuela (including potential nationalization of joint ventures) and Nigeria (civil unrest affecting the Cawthorne Channel Project).
- Commodity Prices: Declines in oil and natural gas prices directly impact customer capital spending and demand for fabrication and contract operations services.
- Debt Obligations: The company carries approximately $2.5 billion in debt, with significant exposure to floating interest rates, increasing vulnerability to rate hikes.
Investor Verification Checklist
- Goodwill Impairment Finalization: Verify the final amount of the $1.15 billion goodwill impairment charge, as the filing notes it is estimated and subject to finalization in Q1 2009.
- Venezuela Joint Ventures: Monitor the status of the SIMCO/Harwat Consortium and PIGAP II joint ventures, specifically regarding the Venezuelan National Guard's occupation of facilities and potential nationalization.
- Nigeria Project Viability: Assess the recoverability of the remaining $15.0 million net investment in the Cawthorne Channel Project given ongoing security issues.
- Debt Covenant Compliance: Confirm continued compliance with leverage and interest coverage ratios given the net loss and potential for further earnings volatility.
- Backlog Realization: Track the $1.13 billion fabrication backlog for signs of order cancellations or delays as predicted by management for 2009.