Business context and reporting period
The supplied filing is Exterran Holdings, Inc.’s Form 10-K for the fiscal year ended December 31, 2014—not a filing under the name Archrock. Exterran (NYSE: EXH) provided natural-gas compression and production/processing services, aftermarket services, and fabricated equipment. It consolidated Exterran Partners, L.P. (the Partnership); public unitholders held 63% of the Partnership at year-end.
The 10-K reports annual results, with unaudited quarterly data for Q4 2014. Continuing-operations results exclude the Venezuelan, Canadian, and contract water-treatment businesses, which are presented as discontinued operations.
Financial and operating highlights
| Metric | FY 2014 | FY 2013 | Change / context |
|---|---|---|---|
| Revenue | $2.900 billion | $3.160 billion | Down 8%; fabrication revenue fell 23%, while North America contract operations rose 16%. |
| Gross margin (non-GAAP) | $1.031 billion | $963.0 million | Up 7%; 35.6% of revenue versus 30.5%. |
| Net income attributable to Exterran stockholders | $98.2 million | $123.2 million | Down 20%; includes $72.7 million of discontinued-operations income. |
| Continuing-operations income attributable to stockholders | $25.5 million | $59.2 million | Continuing-operations diluted EPS was $0.36, versus $0.89. |
| Adjusted EBITDA (non-GAAP) | $658.8 million | $633.9 million | Up 4%. |
| Cash from operating activities | $379.4 million | $355.7 million | Up; annual capital expenditures were $541.7 million. |
| Cash and working capital at year-end | $39.7 million; $655.0 million | $35.7 million; $580.4 million | Working capital increased. |
| Consolidated long-term debt | $2.027 billion | $1.502 billion | Increased primarily with acquisition-related borrowing and financing. |
Q4 2014 revenue was $793.6 million, quarterly gross profit was $175.7 million, and net income attributable to Exterran stockholders was $19.1 million ($0.28 basic and $0.27 diluted EPS). Quarterly gross profit uses a different definition from the annual non-GAAP gross margin above.
At year-end, total operating horsepower was 4.676 million, versus 3.870 million a year earlier; utilization was 86%, versus 83%. Fabrication backlog was $953.2 million, up from $679.9 million.
Material changes versus the prior comparable period
- North America contract operations revenue and gross margin increased, supported by higher operating horsepower, rates, and the two MidCon acquisitions. International contract operations also improved gross margin.
- Fabrication revenue and gross margin declined, though the segment’s gross-margin percentage improved to 18% from 15%. Results included a warranty accrual in 2014 and cost overruns on large turnkey projects in 2013.
- Depreciation and amortization increased 18% to $386.1 million; long-lived asset impairment rose to $46.7 million from $28.6 million. The 2014 impairment included $33.3 million for approximately 310 idle compressor units and $12.7 million on previously culled units.
- Investing cash outflow increased to $929.9 million, including $494.8 million paid for the MidCon acquisitions. Financing cash flow was $558.5 million positive, including $512.8 million of net borrowings and $169.5 million of Partnership unit-sale proceeds.
- The Partnership acquired compression assets for $352.9 million in April and $130.1 million in August 2014. The acquired fleets included long-term service arrangements with Williams/Access and BHP Billiton.
Outlook, risks, contingencies and unusual items
- Management planned 2015 net capital expenditures of approximately $475–$525 million, including $300–$350 million for contract-operations growth and $100–$110 million for contract-operations maintenance. It expected operating cash flow and available credit to fund operations, capital spending, scheduled debt service, and anticipated dividends through 2015, while noting additional financing might be needed.
- Management anticipated more international and less North America contract-operations capital spending in 2015, driven by multi-year projects scheduled to begin generating revenue in 2015–2016. It also warned that falling oil and gas prices and reduced producer budgets could weaken activity, pricing, and fabrication bookings.
- The proposed tax-free spinoff of international contract operations, international aftermarket services, and global fabrication was targeted for the second half of 2015, subject to approvals and other conditions; completion and timing were not assured. Spinco debt proceeds were expected to help repay some Exterran debt.
- Exterran recorded a $12.1 million 2014 ad valorem tax benefit under disputed Texas heavy-equipment rules; $20.7 million of the cumulative $26.9 million benefit recorded since 2012 remained contested. An adverse outcome could require repayment, penalties, and interest and reduce future earnings and cash flow.
- Approximately $142 million of principal remained due from PDVSA Gas for previously nationalized Venezuelan assets, in installments through 2016. The filing highlights Venezuelan payment and political risks. Argentina’s currency controls restrict repatriation; a peso-related bond investment resulted in a $6.5 million loss in 2014.
- Other risks include high consolidated debt, short cancellable North America service contracts, customer concentration tied to Williams/Access (about 15% of Partnership revenue on a combined 2014 basis), fixed-price project overruns, foreign-exchange exposure, and environmental and safety regulation. A 1% increase in rates on debt effectively exposed to floating rates was estimated to add about $5.9 million in annual interest expense.
- 2014 included $7.6 million of restructuring charges, including spinoff costs and make-ready shop centralization. Exterran paid $0.60 per share in dividends for 2014; future dividends remained discretionary. The company reported compliance with debt covenants, and the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the issuer and security: this source is Exterran Holdings, Inc. (EXH), despite the Archrock metadata.
- Separate continuing-operations performance from discontinued-operations income, especially Venezuelan installment receipts, when assessing earnings quality and recurring cash generation.
- Review the debt structure, Partnership leverage and distributions, credit availability, and maturities; consolidated debt includes Partnership obligations.
- Track oil and gas prices, customer activity, contract renewals, fabrication bookings, backlog conversion, and 2015 capital-spending plans.
- Monitor the spinoff’s tax opinion, approvals, separation costs, Spinco financing, and intended debt repayment, as well as the Texas tax litigation and PDVSA installment collections.